Wednesday, September 2, 2009

Another Red Herring

This cover story in the current Atlantic "How American Health Care Killed My Father" by David Goldhill has attracted a lot of attention. David Brooks in the NY Times in a September 2 column even calls it "brilliant." But I find its conclusions about required steps to be misleading and adding to the confusion about health care reforms.

It has some nuggets of insight. Like health insurance is currently not just insuring against unforeseen events as other kinds typically do, but generally paying for almost all care however routine or minor. Or that patients don't concern themselves with expenses or limit needless treatment, when someone else (the insurer) is picking up the tab. Or that hospitals restrict competition by lobbying against new entrants and through consolidation, and deliberately overprice emergency room care to inflate their charitable services component. Or that for hospitals and providers, the real customer is not the patient - it's the payer of their bills.

Goldhill summarizes at one point: "A wasteful insurance system; distorted incentives; a bias toward treatment; moral hazard; hidden costs and a lack of transparency; curbed competition; service to the wrong customer. These are the problems at the foundation of our health-care system, resulting in a slow rot and requiring more and more money just to keep the system from collapsing. "

Goldhill then suggests starting completely afresh, taking a lot more time to think and plan, and "to move away from comprehensive health insurance as the single model for financing care. And a guiding principle of any reform should be to put the consumer, not the insurer or the government, at the center of the system." His outlined solution is to essentially tweak the marginally successful system of individual consumer health savings accounts (HSA) coupled with catastrophic insurance that has been in place since 2005.

Even some smart and logical people seem to have been swayed by Goodhill's logic. Here for example is the reaction of Hari, a seasoned Silicon Valley engineer:

"Despite some flaws in the solution the author proposes, I actually agree with his description of the fundamental problem of why medical costs are so high, medical care is not commensurate with cost and all solutions from insurance to government will eventually lead to cost overruns. I actually think that a combination of private HSA savings account, catastrophic-only insurance and government maintenance of Medicaid is the way to go..."

Why is this HSA approach so deficient? Jonathan Starr, also an engineer and a single payer advocate, gave this apt response to Hari that captures a lot of my thinking as well:
"The author identifies some important concerns regarding cost-control, good-practice, and accountability. But, I do not agree with the solutions he offered, such as the ones you mention.

Regarding reliance on HSA accounts as a major part of paying for health care:
1) Assuming these are tax-deductible accounts, they are inherently regressive. The higher a person's income, the more that person can afford to put into such a tax-sheltered account. The higher the person's marginal tax-bracket, the larger the tax-deduction that person receives for any amount put into that account.
2) For most people, it is impossible to predict future medical needs, and how much they will cost, so it is impossible to determine how much any particular person should put into an HSA account.
3) Insurance, single-payer or otherwise, pools risk to make coverage available when some members of the pool need it. By pooling the financial resources of a large group, most of whom at any one time are healthy enough not to need to draw significantly on those resources, those who do need to draw heavily on the pooled resources are able to do so. With HSA accounts, there is no pooling of risk. Resources are distributed in as fragmented a manner as possible. So, financial resources in most accounts may sit around unused, while those people who need health care service exhaust their own little financial pool quickly. Pooling of risk through some type of insurance is a great innovation with enormous public benefit, all of which relying on HSA accounts forgoes.
4) Individual customers, with just their own HSA accounts, have little leverage, or expertise, for negotiating for favorable prices and rates for pharmaceuticals, medical equipment, and health care. Large aggregations of resources, such as in insurance plans (again, single-payer or otherwise), can have far greater expertise and leverage in negotiating and pressuring for such cost-reductions.
5) Fragmenting the customer pool reduces the capacity for aggregating information about health care outcomes and for advocating and enforcing best-practices.

In short, there is great power in numbers for controlling costs through bulk-purchasing and negotiation, and for gathering, evaluating, and distributing information and requirements about best-practices to control costs and improve outcomes. This is increased with large insurance programs, and maximized with a single-payer program; in contrast, it is minimized through reliance on individual HSA accounts, which maximize the fragmentation of the pool of end-users.

Also, the low-hanging fruit reducing health care costs is in reducing administrative overhead. Hospitals and other care-providers must pay large costs to handle the billing of innumerable insurance policies. If instead, they have to bill an exponentially larger number of individual people and HSA plans, that makes this administrative overhead even higher. Furthermore, care-providers must build into their price-structure higher fees to those who do pay in order to cover those who do not. If every person is being billed individually, the number who ultimately do not pay undoubtedly will increase. This not only increases the costs for collection, it also inevitably raises the fees that must be paid by those who do pay.

In a single-payer system, the need for such billing overhead is drastically reduced. There is a single program to deal with, instead of innumerable policies, or even more innumerable individuals. Furthermore, payment by single-payer systems are reliable, so that fees do not need to be padded to cover those who do not pay. In practice, one of the reasons doctors and other care-providers have been willing to accept the lower-than-market-rate fees paid by Medicare is precisely this reliability of payment.

If the HSA-based system still includes reliance on, or even just availability of, private insurance, then not only is there the administrative overhead that must be built into healthcare costs, there is also the profit, marketing, billing, lobbying, and administrative costs of the insurance companies themselves. This is more money that is paid nominally for healthcare, but actually goes to something else, which adds to the cost of the system.

Also, providing insurance, or even just administering HSA accounts, is a competitive burden on American companies. With a single-payer system, this burden is relieved; with everyone having HSA accounts, it instead could be increased."


President Obama is (finally) set to exercise leadership and press his own specific proposals for health care reforms for Congress to pass, rather than passively let a bill bubble out for him to sign. That's the good news. But he has already failed to strongly speak out for a strong public option (if not an outright single payer system) so that public support has eroded due to the propaganda and misinformation by reform opponents. There are signs that he's willing to drop insistence on this option that is vital to cost containment. If that happens it may be a big indicator not only of his success on health reforms, but of his vision and overall ability to lead.

8 comments:

Anonymous said...

There's a good article this week in "Barrons" on Medical Tourism. Further, you should consider a brain replacement for opposing HSA's. To top it off please get a hip replacement because you position about healthcare is no longer hip:))

The way our healthcare insurance system is set up is too much emphasis on small stuff without worrying about the catastrophic. If this were the auto insurance biz it would be like worrying about providing oil changes where the big worry is about a big accident. Therefore HSA's address that. Why must liberals always want to impose a one size fits all, giant corrupt single payor system? If I need a high deductible plan because I don't want to pay big premiums then I should be allowed to do it. But if my kids go to the doctor every month with a cold and want an HMO then they should get it also.

HSA's allow choice. I'm for freedom. Get a shoe size that fits. The word "Liberals" are such a misnomer coz they really want to take away liberty.

Kenrod

Sandip Madan said...

Let me be clear, Kenrod. I have no problems with, and even welcome, HSAs as a choice. Just let there also be a robust public option offered, also as a choice.

My issue is with reform opponents trying to pass off these HSAs as a panacea and a substitute for far more useful measures that would adversely affect the special interests. HSAs have been in existence since 2005 and have been of little help.

Anonymous said...

Jim McTague in Barrons has talked to Goldenhill, who is a blazing Democrat. His conclusion is that HSA's has to be a big component of the reform package because people have to stop thinking small stuff.

As far as I can see, Public option is just a trojan horse for single payor. PO will not increase competition but stifle it. How can a company with unlimited check writing company compete against private companies that have to balance their books? The answer is not PO but allowing companies to sell across statelines to increase competition. Let market forces work instead of tying their hands. PO will also stifle innovation coz everyone will have to come to one standard. It like GM, Ford, Toyota all making the same car of the same color.

And my last conclusion is that we will visit this whole debate again yrs later unless we get off the employer based health care system. It's ludicrous for companies to offer one-size-fits-all plans for their employees. It's like an open bar during a wedding where guests drink to excess because they don't know the cost. Likewise employees are choosing the richest plans coz they don't know how much the company is paying for healthcare. If individuals rather than companies got the deduction we'd be much better off.

Kenrod

Sandip Madan said...

I looked up the Barrons online article of 9/7/09 I think you refer to: http://online.barrons.com/article/SB125210397079287579.html

I'm not impressed as the writer uses Goldhill's flawed position to bolster his own claims without other convincing substantiation.

Sure, a good public option will lead to many people (perhaps 80% - 90% of those eligible)jumping to it and severely hurting private insurers. You say it's because private insurers can't compete. I agree, because theirs is a far more wasteful and inefficient model. But public policy is primarily meant to serve consumers and the general citizenry, not artificially bolster profits of private entities.

Those remaining 10% - 20% of people wanting gold-plated plans will still be able to have them (may be at thrice the cost or premium of the public option) from private insurers that may have shrunk to a third of their size.

I agree with you that this employer based insurance is largely suboptimal, and tends to discourage hiring. It should ideally be replaced by a different system. Medicare-for-all is one such option though you aren't a fan of it. :-)

Anonymous said...

The common misconception is that Medicare is efficient becoz their admin is only 3% whereas private insurers' run at 15%. That's because Medicare is just a payer and don't analyze data which causes their fraud rate to be sky high. They simply pay and try to recollect the fraud later. By their own admission the fraud rate is 10% which means it's probably 15%. The fraud rate for private insurers is only at 3%.

Medicare could reduce their admin costs to 1% if they simply put all their claims into a computer and spit out the checks to the providers. There is no innovation, no analysis as to which drugs or procedures will reduce future costs. It's just a bureaucracy.

If Medicare is so great why is it in so much red ink? Unfunded liablities are 37 trillion. The US economy is 14 trillion per annum. Now you want to add 47 million to the PO?

Sandip Madan said...

Actually, the two points you raise are part of popular misinformation presumably stoked by private insurers and reform opponents.

Of course there is Medicare fraud. Yet in spite of it privately administered Medicare plans cost 17% more in subsidy, now reduced to 12%. Yet only a fraction of seniors opt for these private Medicare Advantage plans. The new proposals intend to eliminate this subsidy, and many expect private insurers will then be unable to continue with these plans. Also keep in mind that criminal penalties for Medicare fraud are stringent, including stiff prison sentences and revocation of license to practice for doctors. That's a strong deterrent.

About Medicare being in the red, that's simply a matter of allocating less money than is spent. For example, if Medicare spends $100 for a treatment, and collects $90 it is in the red. If a private insurer spends $140 for the same service but manages to collect $150 from customers it is in the black.

Anonymous said...

But the whole idea of Medicare is like the analogy I used earlier. An open bar during a wedding. People will drink to excess because they don't care about the costs. They will seek treatments where they don't need them. I've know seniors who visit the doctor coz they have no one to talk to. And that's why it will continue to escalate unless we seek to just cover catastrophic incidences.

Private carriers, on the other hand, must make a profit to survive. And unlike your silly accusation that they profit excessively, the major companies like Wellpoint, United... have below trendlines of the rest of the SP 500 for the last decade.

Yes, there needs to be reform in the insurance biz in that they have to be stopped from dropping people when they get sick. There has to be community ratings. But excess profits is not something you can accuse them of.

In fact, you do need a brain transplant if you do think the PO will compete on a level playing field. How can it? It has the unlimited printing press of the federal govt. It has the Congress to write the laws for it. It doesn't have to make a profit for its shareholders. It doesn't have to innovate but duplicate everything the private sector does and then, just use the power of the feds to hammer down prices. You don't call that competition. You call that bullying. Sandip, you're clearly not presenting an objective view of the debate.

Kenrod

Sandip Madan said...

The "open bar" misuse you describe cannot be a huge factor - Europe has that system and yet manages better health outcomes at less than half the US cost. Moreover, the system can be tweaked through de facto rationing to limit abuse.

This is not the forum for discussing basic economic theory, but your (and reform opponents') talk of a "level playing field" turns the justification of capitalism and private enterprise on its head. Proponents advanced the concept arguing that it broadly benefits consumers, the society at large, and enhances efficiency, i.e., it's a means to a desirable end. Now instead you espouse making the consumers and the system overpay by refusing to let there be a public option, simply to enable private insurers to profit, and to exist.

Private enterprise benefits consumers in very many areas, but not all. Exceptions where public services clearly do better include the army, the police force, fire fighting, and so on. Evidence increasingly points to adding health care financing (not necessarily delivery) to the list.