With experience in both the healthcare delivery industry and in the healthcare finance industry, Dr. Brian Jacobs shares with the Madison County GOP his insight on Obamacare, also known as HR3200.
Like most Americans, I have spent this August reading and thinking about healthcare. However, unlike most Americans, this is what I have been doing for most of my adult life.
Not surprisingly, however, the rhetoric doesn’t match the reality, the “talking points” too often miss the real point, and ultimately, HR3200 doesn’t address the fundamental defects in American healthcare finance.
So just what are those defects?
There are three basic structural problems in our healthcare non-system. Any “reform” that fails to address them won’t improve matters, and might make things worse.
1. Americans want the best healthcare someone else’s money will buy
MORAL HAZARD is a term economists use to describe the phenomenon that it is easier to spend someone else’s money than your own. I think of it as “free pizza syndrome.” Most people would eat a different amount of pizza when it is “free” than when it costs $5 per slice, and healthcare too often approximates free pizza as far as the eye can see. This causes overconsumption, because at the margin while the utility of consuming additional or higher-tech units of healthcare may be small, the costs to the user are smaller still, and in some cases, $0. If consumers have more “skin in the game” they will be more prudent with their consumption.
For an example, let us consider Smith and Jones. Smith has a health plan with a small deductible of $100 a co-pay of $10 for office visits and prescriptions. Jones has a $5000 deductible, and is responsible for the full cost below that deductible (naturally, Jones’ health plan is FAR less expensive than Smith’s).
Let’s say that one day both Smith and Jones wake up with a cough and a sniffle…symptoms that often resolve on their own in 3 or 4 days if left untreated. It only costs Smith $10 to run to the doctor, but it might cost Jones $100. Who is more likely to consume healthcare of marginal utility?
To continue the example, assume that 4 days have passed, and both Smith and Jones go to see Doc Williams who tells each one that he has sinusitis, and would benefit from an antibiotic. Doc Williams explains that Drug A works 50% of the time and costs $10 and drug B works 90% of the time and costs $90. Jones, who will have to pay the full cost of the drug unless he has already met his deductible, might well try drug A. Smith, whose co-pay is the same for each drug would be foolish not to choose drug B.
Further, let’s say that each goes on to develop a fever, and Doc Williams suggests a test to rule out pneumonia. Again, let’s say Doc Williams presents two options: a chest x-ray that detects pneumonia 90% of the time and costs $100, and a chest CT scan that detects pneumonia 99% of the time and costs $500. Jones might well prefer the cheaper plain x-ray. It would be rational for Smith, however, since his co-pay is $10 either way, to prefer the CT scan.
Granted, there are medical services like major surgeries and chemotherapy, which are relatively demand inelastic to price. But in the USA, there are thousands of choices every day like the ones faced by Smith and Jones, and the aggregate cost of our incentive to over-consume is staggering.
Any reform that does not, through proper incentives, put some brakes on the bus will not control costs and is doomed to fail.
2. PERVERSE INCENTIVES
Most healthcare expenses are now paid for by third parties to the transaction like Medicare or private insurance companies. The prices in healthcare are often set by those third parties and they are FIXED. That means that the payment is the same regardless of the quality, service, convenience, experience, or value offered. What is the effect of this policy? Basically, it means that the only financial incentive for those who sell healthcare is volume. And if we create a financial engine that rewards only volume, what is it we expect the machine will produce?
Think of it this way. Let’s say that cars were paid for by third party payers, and just like in healthcare, the payment was fixed regardless of the car or its condition, miles, or features. According to the third party payers, a car is a car is a car. Well, if you sell cars in such a world, are you going to sell rusty ’93 Yugos or shiny new Cadillacs? Or might you just stop selling cars and sell tractors instead?
Clearly, we want more from healthcare than just price. We also want good quality, good service, better convenience, and more innovation. And experience tells us that if we want those things, then the appropriate incentives must be in place.
Any reform that does not repair this basic defect will not decrease utilization and will not improve quality.
3. ADMINISTRATIVE COSTS
Remember those third party payers? How do those who sell healthcare get paid by those payers? They must file claims, either electronically, or on paper. There are two complex sets of codes with which doctors and hospitals try to describe each service provided and condition treated. The healthcare event must be translated into these codes, entered into the proper communication media, and sent to the payer. The payer has to decipher the codes, re-translate them, make a payment determination, send an Explanation of Benefits (EOB) form to the insured and an EOB and usually a check to the vendor. The vendor then must, often 60 or more days after the original episode of care, send the patient a bill for any amount for which the patient is still responsible according to his benefits. Whew.
Oh, and about 20% of claims are rejected, challenged, lost, or delayed. Then the whole process starts over.
Obviously, this is a slow, frustrating, tedious, labor-intensive, and expensive process. And it doesn’t much matter whether the claim is filed with Medicare or Anthem, the process is about the same.
Imagine if we bought oranges in the same way we buy healthcare. First, the consumer wouldn’t know the price of the orange before he would buy it, because neither the consumer nor the grocer knows the price as determined by the orange insurance company or Orangicare. And if the grocer had to have a staff of people to correctly code the orange sold, file claims, send out bills, and so forth, do you think that oranges would be more or less expensive than they are now?
The AMA estimates that the costs of claims filing to be in excess of $210 BILLION annually. To update Sen. Everett Dirksen for the age of TARP, “A hundred billion here, a hundred billion there, and pretty soon you’re talking real money.”
Any reform that doesn’t at least attempt to deal with this problem is like just resigning ourselves as a nation to toss $200 Billion a year into a blast furnace.
Unfortunately, nobody is really talking about these big problems, and certainly none of them are fixed by HR3200.
So how could healthcare be fixed? There is more than one way to skin a cat, but here is one idea:
We must unleash the power of the most potent economic force the world has ever known: the American consumer. We must first put the consumer’s skin in the game to encourage prudent consumption. But that alone is insufficient. We must empower the consumer to comparison shop like she does for everything else she buys. Prices must be 100% transparent, and known to buyer and seller before the transaction just like every other industry. Consumers should have tools to help them gauge healthcare quality…tools like consumer feedback ratings and expert reviews and statistics. We must engage consumers in their health and in their healthcare purchases.
And as a side benefit, a system in which buyers and sellers both know the price ahead of the transaction, and in which most routine transactions would occur under the deductible and would be paid for by the consumer with a debit card linked to an HSA, we could dramatically decrease transaction and administrative costs by eliminating the need for most claims.
Such reform wouldn’t cost the taxpayer $1 Trillion. It would expand, not reduce, healthcare freedom for most Americans. It would improve quality. It would decrease administrative costs. And all without adding a single new government office or bureaucrat.
The uninsured, you ask? In point of fact, that problem isn’t one of the biggest three facing American healthcare. But it is the subject of my next column.
– Dr. Brian Jacobs