Best article I’ve read on health care reform yet

Categories: Politics & Economics

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David Goldhill’s “How American Health Care Killed My Father” at the Atlantic is probably the best overall analysis of the flaws of the American health care system I’ve read so far. The teaser/abstract explains:

After the needless death of his father, the author, a business executive, began a personal exploration of a health-care industry that for years has delivered poor service and irregular quality at astonishingly high cost. It is a system, he argues, that is not worth preserving in anything like its current form. And the health-care reform now being contemplated will not fix it. Here’s a radical solution to an agonizing problem.

It’s an exceptionally long article, so I’ll summarize a few of the main points.The article starts by recounting how the author’s father (otherwise healthy) had checked into the hospital with pneumonia, developed sepsis and other hospital-bourne infections, and died in the ICU five weeks later. The author points out that the over 100,000 hospital-infection related deaths are “more than double the number of people killed in car crashes, five times the number killed in homicides, 20 times the total number of our armed forces killed in Iraq and Afghanistan.” He then recounts how he learned of a doctor (Peter Provonost) traveling nationwide pushing “a simple list of ICU protocols governing physician hand-washing and other basic sterilization procedures” that had been shown to reduce hospital infections by two-thirds within months of adoption. The problem? Provonost was having great difficulty persuading hospitals to implement these protocols! Goldhill observes,

How was it possible that Pronovost needed to beg hospitals to adopt an essentially cost-free idea that saved so many lives? Here’s an industry that loudly protests the high cost of liability insurance and the injustice of our tort system and yet needs extensive lobbying to embrace a simple technique to save up to 100,000 people.

And that’s not all—he points to a WSJ story revealing that post-op blood clots kill another ~200,000 people per year—an astonishing statistic. The author then explains his approach in this article and lays out his basic thesis:

Why, in other words, has this technologically advanced hospital missed out on the revolution in quality control and customer service that has swept all other consumer-facing industries in the past two generations?

I’m a businessman, and in no sense a health-care expert. But the persistence of bad industry practices—from long lines at the doctor’s office to ever-rising prices to astonishing numbers of preventable deaths—seems beyond all normal logic, and must have an underlying cause. There needs to be a business reason why an industry, year in and year out, would be able to get away with poor customer service, unaffordable prices, and uneven results—a reason my father and so many others are unnecessarily killed.

I’m a Democrat, and have long been concerned about America’s lack of a health safety net. But based on my own work experience, I also believe that unless we fix the problems at the foundation of our health system—largely problems of incentives—our reforms won’t do much good, and may do harm. To achieve maximum coverage at acceptable cost with acceptable quality, health care will need to become subject to the same forces that have boosted efficiency and value throughout the economy. We will need to reduce, rather than expand, the role of insurance; focus the government’s role exclusively on things that only government can do (protect the poor, cover us against true catastrophe, enforce safety standards, and ensure provider competition); overcome our addiction to Ponzi-scheme financing, hidden subsidies, manipulated prices, and undisclosed results; and rely more on ourselves, the consumers, as the ultimate guarantors of good service, reasonable prices, and sensible trade-offs between health-care spending and spending on all the other good things money can buy.

These ideas stand well outside the emerging political consensus about reform. So before exploring alternative policies, let’s reexamine our basic assumptions about health care—what it actually is, how it’s financed, its accountability to patients, and finally its relationship to the eternal laws of supply and demand. Everyone I know has at least one personal story about how screwed up our health-care system is; before spending (another) $1trillion or so on reform, we need a much clearer understanding of the causes of the problems we all experience.

From here, he illustrates the chief problems plaguing American health care today:

  1. A wasteful insurance system: The comprehensive health insurance model we now have is the equivalent of “paying for gas with our auto-insurance policy, or for our electric bills with our homeowners insurance.”

    The reason for financing at least some of our health care with an insurance system is obvious. We all worry that a serious illness or an accident might one day require urgent, extensive care, imposing an extreme financial burden on us. In this sense, health-care insurance is just like all other forms of insurance—life, property, liability—where the many who face a risk share the cost incurred by the few who actually suffer a loss.

    But, Goldhill points out, it’s absurd to use insurance as the means of payment for nearly every health care related expenditure—even our dental cleanings are expected to be at least partially covered by insurance. Even more amazing is his walk through the historical rise of comprehensive insurance policies, which arose largely as an unforseen result of a 1954 tax law, which made employer-paid insurance tax deductible for the employer while being untaxed for the employee. This effectively made paying for insurance a cheaper way for an employer to raise employee wages (while the employee actually received nothing more in-pocket). As a result, comprehensive insurance became the norm, driving up costs. Goldhill concludes:

    Insurance is probably the most complex, costly, and distortional method of financing any activity; that’s why it is otherwise used to fund only rare, unexpected, and large costs. Imagine sending your weekly grocery bill to an insurance clerk for review, and having the grocer reimbursed by the insurer to whom you’ve paid your share. An expensive and wasteful absurdity, no?
    Is this really a big problem for our health-care system? Well, for every two doctors in the U.S., there is now one health-insurance employee—more than 470,000 in total. In 2006, it cost almost $500 per person just to administer health insurance. Much of this enormous cost would simply disappear if we paid routine and predictable health-care expenditures the way we pay for everything else—by ourselves.

  2. Distorted incentives: Because real-world demand isn’t actually governing the costs in the system, imbalances naturally occur. Despite an aging population, we have very few Geriatricians. The basic cause is that Medicare pays more to specialists than Geriatricians, which influences medical students towards the higher pay specialist slots. As a result, the elderly end up overusing specialists, driving costs up further and only encouraging the process to repeat. With a market-driven health care economy, the lack of Geriatricians would be met rather rapidly, as physicians’ pay scales would not be artificially tilted.
  3. A bias toward treatment: As caps are placed on reimbursement rates by insurers and Medicare/Medicaid, the natural response in the health care world (to recoup costs) is “to perform more services, and to steer patients toward higher-priced, more lightly regulated treatments.”
  4. “Moral hazard”: the tendency we all have to change our behavior, becoming spendthrifts and otherwise taking less care with our decisions, when someone else is covering the costs. Since we don’t see the costs of health care expenditures (“someone else” is the insurance company in this case), we tend to be relatively unconcerned with costs (beyond our co-pays and deductibles) for health care, which drives up cost. He notes the $6 billion per year pharmaceuticals spend on advertising as evidence that a large portion of health care expenditures aren’t responses to “unaviodable medical need.” Another example:

    Well, Medicare spends almost twice as much per patient in Dallas, where there are more doctors and care facilities per resident, as it does in Salem, Oregon, where supply is tighter. Why? Because doctors (particularly specialists) in surplus areas order more tests and treatments per capita, and keep their practices busy. Many studies have shown that the patients in areas like Dallas do not benefit in any measurable way from all this extra care. All of the physicians I know are genuinely dedicated to their patients. But at the margin, all of us are at least subconsciously influenced by our own economic interests. The data are clear: in our current system, physician supply often begets patient demand.

  5. Hidden costs and a lack of transparency: Ever try to get a price quote on something like an MRI? It’s unlikely you’ll even be given a price—they’ll only tell you the cost once you’ve gotten the MRI, because the price varies depending on the insurance company or insurance status of the person involved. He points out that insurance-covered procedures like MRIs haven’t dropped in price the way non-insurance-covered procedures like LASIK have, despite MRIs having been around for over 30 years and LASIK only around 15. He observes that new technology in every other field drives prices down but common health care debate assumes the reverse in that field. The real problem is with the lack of competition and the moral hazard phenomenon keeping prices up—and when that hasn’t been enough, intentional reduction in supply (often through government regulation) has served nicely. In addition, when costs start to drop and there is less on the margin, small, low-cost, extra “services” are added into the equation to keep the costs artificially higher.
  6. Curbed competition: This is a biggie.

    In competitive markets, high profits serve an important social purpose: encouraging capital to flow to the production of a service not adequately supplied. But as long as our government shovels ever-greater resources into health care with one hand, while with the other restricting competition that would ensure those resources are used efficiently, sustained high profits will be the rule.
    Health care is an exceptionally heavily regulated industry. Health-insurance companies are regulated by states, which limits interstate competition. And many of the materials, machines, and even software programs used by health-care facilities must be licensed by state or federal authorities, or approved for use by Medicare; these requirements form large barriers to entry for both new facilities and new vendors that could equip and supply them.

    Goldhill points out that hospitals are less and less efficient, while specialized clinics, which are often substantially more efficient, are kept in the cold by policies favoring hospitals. He questions whether hospitals are even all that important, beyond the emergency room, which itself could potentially be better run in another environment.

  7. Service to the wrong customer: Goldhill expresses amazement that “My dry cleaner uses a more elaborate system to track shirts than this hospital [the one that killed his father] used to track treatment.” Any other business would have upgraded its information technology long ago to improve efficiency and customer satisfaction. But since the patients aren’t paying the bills, they’re not the customer. In the case of his father, Medicare was the customer, and there is no incentive to improve quality for (an impersonal payment system like) Medicare’s sake. He notes the irony that “because my dad got sepsis in the hospital, and had to spend weeks there before his death, the hospital was able to charge a lot more for his care than if it had successfully treated his pneumonia and sent him home in days.” In fact, the hospital charged a disgusting $636,687.75 for his father’s fatal hospital stay—only $992 of which his mother was responsible for paying. Goldhill wonders aloud what difference there would have been had the hospital been forced to charge such a sum, not to Medicare, but to the bereaved wife. “Do you really believe,” he asks, “that the hospital—forced to face the victim of its poor-quality service, forced to collect the bill from the real customer—wouldn’t have figured out how to make its doctors wash their hands?”

Goldhill’s potential solutions are a little more controversial, but I think there’s some good reasoning in here, even if I don’t agree with the whole system he sets up:

  1. “First, we should replace our current web of employer- and government-based insurance with a single program of catastrophic insurance open to all Americans—indeed, all Americans should be required to buy it—with fixed premiums based solely on age. This program would be best run as a single national pool, without underwriting for specific risk factors, and would ultimately replace Medicare, Medicaid, and private insurance. All Americans would be insured against catastrophic illness, throughout their lives.” He admits that the word “catastrophic” would need to be carefully defined in this case to avoid abuse (suggesting “in excess of $50,000” as a placeholder for thinking about it at present).
  2. Health care savings accounts would then be the primary means of paying everyday or routine health care costs. Once a healthy person got his/her account to an appropriate balance, the excess in the account could be used for other purposes than health care.
  3. Other major, non-catastrophic costs (like childbirth, appendectomies, etc.) that exceeded the balance of the HSA would be paid via credit. He suggests a government source for that credit, something I’m not as keen on.
  4. For especially low-income folks, the government could help meet the costs of keeping their HSAs to an appropriate level—something he sees as a much cheaper way to ensure everyone has access to routine care than the present “public option” suggestions.
  5. To encourage regular care (instead of people putting off regular checkups because they don’t want to spend the money), “the government could provide vouchers to all Americans for a free checkup every two years. If everyone participated, the annual cost would be about $30 billion—a small fraction of the government’s current spending on care.”
  6. In order to move from our current system to his proposed system, he concedes it would take a lot of time. But he outlines a brief timeline for how it could be phased in, with the present system phased out.

Goldhill’s suggestions aren’t perfect, but he has done a fantastic job outlining the basic flaws of the system. And without properly understanding the problems, any “fix” is only going to exacerbate the systemic flaws already present. Unfortunately, I don’t think Washington has the nerve to actually institute such far-reaching reform. Instead, they’ll simply push forward a “reform” that will simply be more of the same, much as the present “reform” proposal is.

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