Mon, 31 Aug 2009

Don't Spend More; Spend It Better

Unless you have been lost in the jungles around Manchu Pichu or wandering the Gobi Desert for the last several months, you are almost certainly aware of the great national debate now currently underway in this country regarding the future of the health care system, and how it might be reformed. It's a subject which affects us all, except for those of you who never get sick and who will be perfectly content to die quietly in your beds while you sleep.

But, as is so often the case these days, partisan wrangling on all sides tends to turn opportunities for debate into shouting matches or sloganeering contests. And with the death this past week of Senator Edward Kennedy, for whom health care reform was one of his lifelong legislative priorities, this seems like an opportune time to weigh in with my own observations on what's wrong with the system and how we might go about fixing it.

When I was applying for the mortgage for my house, critical one step in the process involved me being able to provide evidence to the bank that I had homeowner's insurance. And not just any old policy with a de minimus level of coverage -- there were manditory minimum levels of coverage which my policy was required to meet. No insurance? No loan. Similarly, in order to renew my car's registration with the state each year, I am also required to provide evidence that I am maintaining insurance coverage for it.

Why do the banks and the DMV require me to have insurance on my house and my car? For the bank, it's obviously in their interest to have a third party backstopping my ability to pay my mortgage with coverage in case of a major disaster. Similarly, car accidents tend to be either of the "fender bender" variety, or are major incidents involving significant loss of property (cars are often our second most expensive purchases after our homes) and serious injuries to those involved. In both cases, insurance provides some measure of protection against serious accidents or major disaster.

The basic premise of insurance is the notion of pooled liability -- all policyholders pay into the company coffers at a rate each year that will cover the expected number of claims over the same period. The expectation is that genuinely catastrophic losses will be relatively rare -- you may read about a few house fires a year, but that means only a few out of the many thousands of homes in your town will probably be involved. Automobile, life, and most other forms of insurance work the same way.

Except for health insurance. Unlike virtually every other form of insurance, health insurance has two unusual characteristics which differentiate it from other kinds of insurance policies with which most people deal. First, everyone with health insurance will use it during their lives -- unlike my expectation that I will never need to get a check for replacing my house. (I also don't expect to ever need to get a check for replacing my car after an accident. But even though I am a pretty cautious and safe driver, due to the fact that while driving you are not entirely in control of your own destiny and are somewhat subject to the skills and abilities of those driving around you, I am less sure about making a blanket statement like that.) Except for those of us who snuff it quickly and in a cost-effective manner, we will all get sick at some point in our lives. For some fortunate people, their illnesses are not severe; for others, diseases and serious illness crop up unexpectedly and often defy prediction.

Health insurance is the only kind of insurance I know about where people expect to make claims routinely. For every visit to the doctor or dentist, for every referral to a specialist, for every prescription, for every test, for every hospitalization, we expect that our health insurance will pick up most or all of the cost after a relatively small copayment. I can't deny that under circumstances like these, there is certainly a risk of "moral hazard", where people tend to become spendthrifts and take less care of themselves when someone else is covering the bulk of the costs. So we naturally tend to pay less attention to the actual prices of the medical services we use. In turn, physicians generally benefit financially from ordering tests and performing procedures. Because most of us are not in a position to understand or question our doctors' judgments, they can, more or less, create demand for their services whenever they wish. (It's not that I think doctors act in a purely mercenary manner -- in fact, just the opposite: all the doctors I know are genuinely dedicated to their patients' welfare. But there is no denying that all of us, even doctors, are influenced by economic factors at play in our lives.

So unlike other forms of insurance, where the claims of the few are paid for out of the premiums of the many, with health insurance everybody both pays premiums and regularly makes claims. In the end, who actually pays? The policyholders? With tax-advantaged employer-sponsored coverage the norm, certainly not -- the amounts paid in between employer and employee typically don't come close to covering an average person's claims in any given year. Well then, perhaps it's the insurance companies themselves? In an absolute sense that's true -- but let's run some numbers: all the profits from all the health insurance companies would only pay for a few days of health care for the U.S. population as a whole. Add in the ten biggest drug companies' profits, and you've only paid for another week or so. Heck, if you took the entire Fortune 1000 and confiscated their profits, it wouldn't cover a quarter of a year of our health care expenses.

So who is covering the $2.4 trillion bill when it comes due? Well, in a word, we all are. Many people think that their employer is paying for their health insurance, but, truth be told, the employer portion of our insurance premiums essentially comes out of our potential wage increases. Where else could it come from? Employers do not have as their primary purpose being magnanimous to their employees. Their primary purpose is to make money for their shareholders and owners. With health care costs rising far faster than the rate of inflation, companies had to reach into some pocket for pay for them. In essence, they could raise prices to cover these costs, or cut expenses some other way -- and the primary way companies cut costs is by trimming salaries and benefits. In extreme cases -- and more often than people imagine in small or medium-sized businesses -- the only alternative is to drop health insurance altogether.

In this sense, health insurance does not resemble real insurance in the traditional sense -- it's more like a Ponzi scheme where costs are being passed along to those outside the system, or to the taxpayers as a whole.

For reasons I cannot quite fathom, health care is the one industry where the average person has essentially no idea how much any of the treatments, procedures, therapies, equipment, tests, or visits to physicians actually cost. Most people know how exactly much they pay for groceries, or gasoline, or air fares, or hotel rooms, or cars, or hiring someone to cut your lawn and weed the garden, or babysitting, or any of the hundreds (even thousands) of goods and services they routinely use every year. But ask someone how much their last visit to the doctor for their annual physical cost, and you tend to get answers along the lines of, "Well, it didn't cost anything, since my insurance covers annual checkups 100%," or "My copay for an office visit is $20." But remember, answers like these don't talk about cost at all -- what people pay for medical care usually has little to no relation to what the care actually costs.

Have you ever taken a look at the bill you get for a routine visit to the doctor? Most people don't notice or care about most of the numbers on there, focusing just on how much they owe. But, as Yogi Berra said, you can observe a lot just by looking.

One figure will show (ah ha!) what the doctor's charge for the office visit really is. Usually close by is the amount that the insurance company has negotiated to pay (inevitably less, often significantly less). A third figure is what the insurance company actually paid -- the negotiated cost less your own copayment. That leaves the last $20 or $25 (or whatever your copay is) as your contribution to the cost.

But have you ever tried to find out in advance what a medical procedure actually costs? I recall when we moved to our current home several years ago calling several local doctors to ask how much certain things would cost (for example, my wife is asthmatic, so I know that allergy and asthma treatments would be needed regularly). I was routinely answered with the telephonic equivalent of blank stare. "If you tell us what insurance you have, we can tell you what your out-of-pocket charges will be." Fine, but that's not exactly what I was trying to find out. I tried to explain what I was looking for, but I was never really able to get my point across.

Hospitals are even more notorious about obfuscating their actual costs. No doubt everyone has heard the stories of the patient who asks for an itemized bill as their hospital stay is ending, and only then finds out that those Tylenols they were being given four or five times a day were showing up on their bill at $5 a piece. As with individual doctors, hospitals reach negotiated payment schedules with the insurance companies, and anyone without insurance pays a much higher rate for their stay. But hospitals typically don't post their charges for typical "routine" procedures (appendectomies, tonsillectomies, gall bladder removal, routine childbirths, and the like) any place where the public can access them. Most are reluctant to discuss price at all unless you are going through the admissions process (and usually only when you have no insurance).

Keeping prices under wraps is one way hospitals and other institutions try to avoid competition, which is one way to keep prices high. If I don't know what a routine MRI costs in my area, I have no way of knowing if I am being overcharged for one by my local hospital or not.

For most goods and services, I am free to pick and choose from whom I buy and how much I choose to spend. I can buy a car at the local dealer, or go to the next town, or to another state if I want. I can compare prices for books at the local Barnes & Noble to those on Amazon, and order over the Internet if that's what I want. I can insure my house or my car with any company, local or online.

But as usual, health insurance is different. Health insurance is regulated not on a nationwide basis, but on a state-by-state level. Each state has its own rules and regulations, its own approvals process, its own coverages: this state requires that health insurance cover fertility treatments up to X number of attempts, whereas another state will only cover Y such treatments; this state requires coverage for abortions, but that one does not; one state will require that insurers cover treatment for autism, another covers it as part of general mental health coverage, and yet another requires coverage for neither of these things.

People often point up the rather large percentage of health care spending which is consumed by administrative overhead and related costs. But few note that having to custom-tailor coverage for 50 separate markets effectively stymies any efforts to take advantage of efficiencies of scale, not to mention the administrative expense that state governments are forced to take on in order to manage and regulate the health insurers doing business in their states.

Is there any reason why I can't buy a health insurance policy that is avilable in Kentucky but not where I live, if I like the coverage and the price? I don't see how anyone can argue that allowing insurance companies to do business on a nationwide basis would not only foster competition, but would also serve to spread the collective liability over a much larger pool of subscribers. Now I do understand that government regulation of insurance is certainly needed to ensure a minimal level of financial soundness by the companies, and a baseline level of coverage that all would be required to supply. This is one area where I see a critical role for the federal government to step in. Much in the way that Medicare provides a national standard for which treatments are covered and not covered under the program, and similar to the way that Medicare supplement policies are standardized to a set of about half a dozen or so levels of coverage, it seems to me that there is a logical role for government to set national standards and requirements for health insurance. Once a company and its policies receive the necessary impramatur, let them go forth to compete for customers (individuals and businesses) nationwide.

Another related area in which the federal government should have a role in health insurance is in the area of tort reform. Now I have no idea which side's claims to believe on the subject -- either greedy trial lawyers are putting physicians out of business by bringing outrageous medical lawsuits and thus driving up the price of malpractice insurance, or greedy doctors are wanting to insulate themselves from the just punishments for their mistakes by severely limiting or even eliminating people's access to courts or to sue for damages. Part of the problem, as I see it, is that there are no generally recognized standards of treatment for many conditions. So here, in much the same way that Medicare describes accepted treatments, a set of federal guidelines could be developed -- based on evidence of clinical effectiveness, not lobbying by the lawyers or the doctors either way -- which would describe acceptable treatment standards for various conditions. Courts, in turn, would use these national standards as an acceptable basis for limited immunity from malpractice suits: a doctor who demonstrated that he or she had followed the treatment standards would de facto be presumed to be not guilty of medical malpractice. In particular, if a doctor followed the proscribed treatment standards, and given the many uncertainties involved in any sort of medical treatment, an unfavorable outcome would not automatically be presumed to be the result of negligence. The courts would still be available to adjudicate cases involving things like instruments left inside the patient, removing the healthy kidney instead of the diseased one, and other forms of real medical malpractice. This would drastically reduce the number of frivolous lawsuits and should thus go a long way to holding down the legal costs associated with medical treatment.

I strongly feel that basic health care is something that all citizens should have available to them at a reasonable cost. This is not some kind of vaguely-reasoned "right", but is more of an imperative from both a financial and a moral perspective. No reasonable person can disagree with President Obama's statement that the system as it currently exists is untenable. So the question becomes what to do.

The most important thing we should do to reform the health care system in this country is to put the consumer at the center of the system -- not the insurance companies, and not the government. The goals should be to empower and support consumers by making more information available to them, by fostering competition among health care providers and related companies, and to provide direct subsidies to people who can't afford care on their own.

To accomplish these goals, the health care system needs to abandon the notion of health insurance as the way everyone pays for health care. I don't expect my auto insurance to pay for the gas, oil, and routine maintenance on my car, nor do I make a claim on my homeowners insurance to pay for primer and paint, or to have my gutters cleaned, or to fix a leaky faucet. Health care should be paid for in different ways for under different circumstances: routine expenses like checkups and immunizations should be paid out of my own pocket; major, predictable expenses (like end-of-life treatments) should be paid for out of savings or on credit; sudden, unpredictable, catastrophic expenses should be paid for by health insurance.

We need to abandon the idea of insurance being primarily based on employment -- certainly in these tough economic times, it's obvious that too many people are at the mercy of the economic tides in terms of suddenly losing their medical coverage. There should be one program of catastrophic insurance coverage open to all (in fact, everyone would be required to buy in to the plan) with premiums based on age, much like life insurance is today. Granted, a lot of debate is still needed as to the exact definition of "catastrophic". In order to work like a real insurance plan, we would have to restrict coverage to true catastrophes, so that, much as I expect that my house won't be the one that burns to the ground, I should expect that only an actuarially-expected number of people would ever need to make claims under these policies.

To promote savings for larger expenses, everyone should be required to have a Health Savings Account, and to contribute some set percentage of their after-tax income. Much like income tax rates go up with income, this percentage would generally go up over the course of one's life, hand in hand with wages and wealth.

People too poor to fund their insurance premiums or minimum HSA contributions should have their contributions supplemented by the government, up to 100% of the cost for the poorest among us. To keep people from neglecting basic preventative care, the government could provide vouchers for a checkup every two years, and for an annual dental exam.

And how to pay for all of this? This system would eventually replace Medicare, Medicaid, and private health insurance. The transition would obviously take time. Many of us have been paying in to the current system for years, expecting that our future health care bills would be paid by the system, so it would probably take at least a generation to transition from Medicare for most and Medicaid for the poor to universal catastrophic insurance and subsidized savings accounts. The sooner we start, the lower this transition will eventually cost.

But the current proposals being circulated on Capital Hill today don't go anywhere near the level needed to truly reform the system we have today. Rather than settling for band-aid fixes (no pun intended), shouldn't we take advantage of the opportunity to make real, substantive changes, which will empower all of us health care consumers in the future?

Posted Aug 31, 2009 at 02:28 UTC, 3233 words,  [/rich]  Permalink