Houston's Clear Thinkers

January 7, 2010

What killed F.D.R.?

This interesting Lawrence Altman/NY Times article examines the theory that that an undiagnosed melanoma contributed to the death of President Franklin Delano Roosevent in 1945.

Of course, regular readers of this blog know that another killer disease -- the dire implications of which were not well-known in 1945 -- was probably the main cause of FDR's death.

But despite the historical curiosity, the most important point to glean from FDR's demise is the importance of continued investment in clinical and scientific research.

We sometimes forget that it was the generation of doctors and researchers who came of age after World War II who embraced the optimistic view of therapeutic intervention in the practice of medicine, which was a fundamental change from the sense of therapeutic powerlessness that was taught to these men by their pre-WWII professors. In short, it has not been that long since medical science has understood that it could cure disease and prolong life.

For example, if FDR's doctors had known in 1945 what specialists in hypertension discovered in the two following decades, then those doctors would never have allowed FDR to be subjected to the stress of the Yalta Conference that doomed Eastern Europe to almost 50 years of totalitarianism and economic deprivation.

Stated simply, earlier discovery of the research into the implications of hypertension could well have changed the course of human history.

In fact, we all tend to under-appreciate the advancements in medicine since World War II. For male babies born in the U.S. in 1960, the life expectancy was about 66.5 years and for female babies a tad over 73 years. By 2005, the live expectancies had increased to over 75 and 80 years respectively. Although medical advances don't account for all of those gains, newly-discovered drugs and medical devices -- as well as enhanced understanding of disease -- have had an enormous impact on improving the quality of life of most Americans.

Thus, as Congress considers reforming the U.S. health care finance system, it is important for citizens to understand that American medical care and research remains the hope of the world. The current health care finance system has generated enormous investment in that medical innovation, which has been a crucial and treasured export of America to the rest of the world.

Let's think hard before radically changing a system that generated the investment that produced those benefits for us and the rest of the world.

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December 30, 2009

The risks of health care finance

A ran across a couple of particularly good articles yesterday regarding the current national debate over reform of the American health care finance system.

First, Canadian Mark Steyn does not believe that Obamacare's drift toward universal coverage will even be as effective as the underachieving Canadian model:

.  .  . Government health care turns out to be all government and no health care. Adding up the zillions of new taxes and bureaucracies and regulations it imposes on the citizenry, one might almost think that was the only point of the exercise.

That's why I believe America's belated embrace of government health care will be far more expensive and disastrous than the Euro-Canadian models. Whatever one's philosophical objection to the Canadian health system, it is, broadly, fair: Unless you are a Cabinet minister or a big-time hockey player, you'll enjoy the same equality of crappiness and universal lack of access that everybody else does.

But, even before it's up and running, Pelosi-Reid-Obamacare is an impenetrable thicket of contradictory boondoggles, shameless payoffs and arbitrary shakedowns.  .  .  .

Meanwhile, the WSJ's Anna Wilde Mathews provides this distressing analysis of the difficulties that a self-employed Phoenix businessman named James Mannett faced in tapping into catastrophic insurance coverage after being diagnosed with a particularly aggressive cancer:

In September 2005, Mr. Mannett felt a sharp pain in his abdomen. At the emergency room of Phoenix's St. Joseph's Hospital and Medical Center, a scan revealed a five-centimeter tumor on his small intestine, and three tennis-ball-size tumors in his liver. The doctor told him he likely had only two years to live.   .  .  .

Doctors removed the tumor on his small intestine and a third of his colon. He went home a week later, accompanied by his mother and a cousin, a nurse, who had come to care for him.

As Mr. Mannett recovered, the bills stacked up. Assurant (his health insurance company) wasn't making any payments, he says. Instead, the insurer demanded from Mr. Mannett the names and addresses of every doctor he'd seen for the previous five years, so it could verify that he hadn't concealed his cancer when he bought the policy. The investigation dragged on for months, until, according to Mr. Mannett, he called the insurer and warned that the next contact would be from his lawyer. Soon after, he says, Assurant paid the hospital more than $29,000, as well as several other bills.

Mannett's experience is the ugly side of the private health care insurance industry, which has a responsibility to shareholders to limit claims and maximize profits.

This dynamic is why I have always believed that a substantial governmental component -- preferably as a re-insurer on catastrophic policies provided by the private sector -- would be necessary in any well-structured health care finance system.

For all its virtues in terms of encouraging innovation and providing top-notch care, the current health care finance system simply does not deal well with the cost of catastrophic illness or injury, particularly where the cost exceeds private insurance limits.

Of course, resolving that issue necessarily involves tough choices, which is something that continues to be largely ignored in Congress during the current health care policy debate.

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December 1, 2009

Kay Bailey's health care finance confusion

What exactly is Texas Senator Kay Bailey Hutchison's political appeal?

She has never seemed to me to have a particularly good grasp of even basic issues. But I never dreamed that she actually supported universal health insurance even while mimicking the GOP party line against such a mandate all these years.

Uwe Reinhardt provides the Senate subcommittee context for Hutchinson's revelation:

[Hutchison] was proposing that women should not have to decide between spending $250 of their own money to get a mammogram or go without it, and that the key here is to get someone else — either public or private health insurance — to pay for it.

I cannot recall a clearer statement of unreserved support for universal and comprehensive health insurance for America and a more straightforward definition of rationing health care.

I am sure that she would extend her remarkable dictum on rationing to cover routine screening for other cancers as well — e.g., to colonoscopies for colon cancer, to P.S.A. tests and biopsies for prostate cancer or to regular examinations for thyroid cancer.

Furthermore, I would assume that her concern for timely medical attention extends even beyond cancer to the prevention of all serious illnesses — e.g., the control of blood pressure for Americans with hypertension through drug therapy or the prevention of diabetes.

In a nutshell, whether she realized it or not, hers is a clear clarion call for comprehensive, universal health insurance in America.

I don't agree with Senator Hutchison's viewpoint regarding universal coverage. However, I understand it and acknowledge that it's not an unreasonable position. I just don't think it's the best way to control the cost of health care services and products.

But why isn't she honest about her true position?

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November 20, 2009

The headline says it all

The fundamental problem with the American health care finance system is that reliance on tax-deductible, employer-based health insurance and government subsidized insurance (such as Medicaid, Medicare) created a culture since WWII in which consumers of health care at the point of delivery expect to pay none (or only a small fraction) of the cost of that health care.

That culture has led to highly inefficient consumption of health care services and product. Some folks consume too much because they have no financial incentive to be prudent about their purchases, while many others who really need services and products go without.

So, reforming the system should start with changing the culture, right?

So much for that:

US wealthy should pay for health care overhaul, poll finds

Data could boost House plan to tax top-tier earners

WASHINGTON - Americans don’t want to shoulder the cost of President Obama’s health care overhaul themselves. They think the rich should pay for it.

That’s the finding from a new Associated Press poll, and it could be a boost for House Democrats, whose plan approved this month proposed taxing upper-income people to fund their sweeping remake of the medical system.  .  .  .

Thus, rather than true reform, Congress simply debates transferring payments from one group to another. Reminds me of the observation that the late Milton Friedman used to make about spending money:

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you're doing, and you try to get the most for your money.

Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I'm not so careful about the content of the present, but I'm very careful about the cost.

Then, I can spend somebody else's money on myself. And if I spend somebody else's money on myself, then I'm sure going to have a good lunch!

Finally, I can spend somebody else's money on somebody else. And if I spend somebody else's money on somebody else, I'm not concerned about how much it is, and I'm not concerned about what I get.

And that's government.   .   .

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November 5, 2009

A European's view of American health care finance reform

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October 7, 2009

Fat chance

A couple of interesting health care-related items caught my eye today.

First, I went by my internist's office for my annual physical and noticed that another group of doctors had leased a much larger office across the hall from my doctor's office.

I peaked inside the new doctors' office window and noticed that the reception area was nicely furnished with plush leather sofas and chairs, flat screen TV's, handsome hardwood flooring and tasteful Persian rugs.

The opulence of the office prompted me to find out what kind of doctors were apparently doing so well, so I grabbed one of the doctor's cards from the reception area. It read (not the real name):

"John Smith, M.D., Laparoscopic Obesity Surgery"

Meanwhile, this NY Times article reveals the utterly unsurprising fact that New York City regulations requiring fast food restaurants to post the caloric content of their food did not induce obese consumers from eating less:

A study of New York City’s pioneering law on posting calories in restaurant chains suggests that when it comes to deciding what to order, people’s stomachs are more powerful than their brains.

The study, by several professors at New York University and Yale, tracked customers at four fast-food chains — McDonald’s, Wendy’s, Burger King and Kentucky Fried Chicken — in poor neighborhoods of New York City where there are high rates of obesity.

It found that about half the customers noticed the calorie counts, which were prominently posted on menu boards. About 28 percent of those who noticed them said the information had influenced their ordering, and 9 out of 10 of those said they had made healthier choices as a result.

But when the researchers checked receipts afterward, they found that people had, in fact, ordered slightly more calories than the typical customer had before the labeling law went into effect, in July 2008.

The findings, to be published Tuesday in the online version of the journal Health Affairs come amid the spreading popularity of calorie-counting proposals as a way to improve public health across the country.

“I think it does show us that labels are not enough,” Brian Elbel, an assistant professor at the New York University School of Medicine and the lead author of the study, said in an interview.

"Labels are not enough?" Makes one wonder what regulation Professor Elbel will suggest next -- maybe governmental rationing of fast food?

The argument in favor of these types of absurd governmental intrusions into our lives is that government subsidizes medical insurance, so government should attempt through regulation to decrease obesity, which unfairly heaps a portion of health-care costs relating to obesity on tax-paying citizens who are not obese.

But putting aside for a moment the debatable notion of whether obesity really increases health-care costs all that much, the far more effective regulation to decrease obesity would be to provide a financial incentive for citizens to lose weight. Namely, reduce the governmental subsidy of medical insurance for those who choose to remain obese.

Fat chance of that happening.

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August 6, 2009

The health care finance wedge

Writing in the Wall Street Journal, Arthur Laffer lucidly identifies one of the key obstructions to controlling costs in America's health care finance system:

Consumers are receiving quality medical care at little direct cost to themselves. This creates runaway costs that have to be addressed. But ill-advised reforms can make things much worse.

An effective cure begins with an accurate diagnosis, which is sorely lacking in most policy circles. The proposals currently on offer fail to address the fundamental driver of health-care costs: the health-care wedge.

The health-care wedge is an economic term that reflects the difference between what health-care costs the specific provider and what the patient actually pays. When health care is subsidized, no one should be surprised that people demand more of it and that the costs to produce it increase. Mr. Obama’s health-care plan does nothing to address the gap between the price paid and the price received. Instead, it’s like a negative tax: Costs rise and people demand more than they need. [.  .  .]

The bottom line is that when the government spends money on health care, the patient does not. The patient is then separated from the transaction in the sense that costs are no longer his concern. And when the patient doesn’t care about costs, only those who want higher costs—like doctors and drug companies—care.

I have an interesting perspective on the health-care wedge. For 20 years from 1980-2000, I was involved in negotiating group health care insurance policies for my law firm.

Over the past decade in my solo practice, I have essentially self-insured by paying health-care costs out of pocket while taking out a family health-care policy with a large deductible to protect against catastrophic injury or illness.

During the earlier period when I was negotiating group policies for my firm, I had a good understanding of the cost of premiums for those policies, but I had no clue about the true cost of medical services and products.

However, since becoming self-insured, I have a very good understanding of the cost of most medical services and products.

Funny how that works, isn't it?

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July 22, 2009

Rationing and health care finance reform

The video below (H/T Professor Bainbridge) of a Milton Friedman lecture on the health care finance system is as timely now as it was in 1978 when he gave it at the Mayo Clinic. I was reminded of the Friedman lecture when a doctor friend of mine passed along the following front-line observations triggered by this article reporting on the recentt death of a young British man who died while waiting on a liver transplant:

Unless we, as a society, decide that we are going to pay for everything for everybody, there will have to be some form of rationing of health care services. And, into the 21st century, we now can do so much (with some having questionable efficacy) that we can no longer afford to do everything for everybody.

We can ration by age -- this is what Obama was suggesting when he said that "maybe you're better off not having the surgery, but taking the painkiller". No more knee or hip replacements if you're over a certain age. Perhaps the first step toward a "Soylent Green" society?

Or we can ration by disease, which is what happened in the UK to the fellow who died awaiting a liver transplant and here we get into morals and away from science. It's kind of like the game we played in psychology courses in high school or college -- you're stuck on a desert island with a bunch of folks who represent a cross culture of society, so who do you choose to get on the life raft? Medical care actually was easier when we did not have the technology to do things like liver transplants. Folks such as this guy just died. 

Now, as a society, with the finite resources we are willing to spend on health care, we have to decide if we want to spend $250K to give this guy a new liver (which he may or may not trash through further drinking), to which is added the $25K per year for his follow up care and (very expensive) anti-rejection drugs. Or, do we decide that it would be better to treat 1,000 people who have hypertension by giving them cheap generic meds for $250 per year each?  Who is more deserving of a "second chance", as the referenced patient's mother asks -- the one or the thousand?  There are no right or wrong answers, but remember, it's now a zero-sum game. When you spend money on one group of patients, there will be less to spend on others.

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July 1, 2009

The tough choices of health care finance reform

Following on a point made in this recent post, this Avery Johnson/WSJ article addresses one of the tough issues that must be addressed if there is going to be any meaningful reform of the U.S. health care finance system:

The widespread use of expensive cancer drugs to prolong patients’ lives by just weeks or months was called into question by an article published Monday in the Journal of the National Cancer Institute.

Crunching data from published studies, the authors found that treating a lung-cancer patient with Erbitux, a drug that costs $80,000 for an 18-week regimen, prolongs survival by only 1.2 months.

Based on that estimate, extending the lives of the 550,000 Americans who die of cancer annually by one year would then cost $440 billion, they extrapolated.

How to control escalating spending on end-of-life care is one of the thorniest questions facing lawmakers working on the overhaul of the U.S. health-care system. [.  .  .]

“Many Americans would not regard a 1.2-month survival advantage as ‘significant’ progress,” the authors wrote. “But would an individual patient disagree? Although we lack the answer to that question, we would suggest that the death of a mother of four at age 37 years would be no less painful were it to occur at age 37 years and 1 month, nor would the passing of a 67-year-old who planned to travel after retiring be any less difficult for the spouse were it to have occurred one month later.”

While some policy experts consider the rationing of health-care resources inevitable in the quest to control medical spending, many Americans have long resisted putting the collective fiscal good over their individual health.  .   .   .

Read the entire article. I have many reservations about the direction of the Obama Administration's proposed reforms of the U.S. health care finance system. But that the proposed reforms are triggering discussion of key issues such as the one set forth above is not one of them.

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June 15, 2009

Will Obama address this key health care finance issue?

Marginal Revolution's Tyler Cowen penned this insightful NY times op-ed over the weekend that addresses the problem of the elephant in the parlor in regard to Obama's proposed reform of America's dysfunctional health care finance system:

MEDICARE expenditures threaten to crush the federal budget, yet the Obama administration is proposing that we start by spending more now so we can spend less later.

This runs the risk of becoming the new voodoo economics. If we can’t realize significant savings in health care costs now, don’t expect savings in the future, either.

It’s not the profits of the drug companies or the overhead of the insurance companies that make American health care so expensive, but the financial incentives for doctors and medical institutions to recommend more procedures, whether or not they are effective. So far, the American people have been unwilling to say no.

Drawing upon the ideas of the Harvard economist David Cutler, the Obama administration talks of empowering an independent board of experts to judge the comparative effectiveness of health care expenditures; the goal is to limit or withdraw Medicare support for ineffective ones. This idea is long overdue, and the critics who contend that it amounts to “rationing” or “the government telling you which medical treatments you can have” are missing the point. The motivating idea is the old conservative chestnut that not every private-sector expenditure deserves a government subsidy.

Nonetheless, this principle is radical in its implications and has met with resistance. In particular, Congress has not been willing to give up its power over what is perhaps the government’s single most important program, nor should we expect such a surrender of power in the future. There is already a Medicare Advisory Payment Commission, but it isn’t allowed to actually cut costs. [. . .]

Those cuts alone will not solve the fiscal problem, but if we aren’t willing to take even limited steps to conserve resources, we shouldn’t be spending any more money elsewhere. [.  .  .]

The demand for universal coverage sounds like a moral imperative to “take care of everybody,” but in reality it would make only a marginal difference when it comes to the overall health of the American population. The sober reality is that universal coverage is another way to spend money, which may or may not be a good idea.

The most likely possibility is that the government will spend more on health care today, promise to realize savings tomorrow and never succeed in lowering costs. It is rare that governments successfully cut costs by first spending more money.

Mr. Obama has pledged to be a fiscally responsible president. This is the biggest chance so far to see whether he means it.

Read the entire op-ed. Any reform of the U.S. health care finance system will not be successful in controlling costs unless or until a consensus is reached on a fundamental issue that most Americans do not even want to discuss -- that is, what is the basic level of health care that every individual in the U.S. is entitled to receive regardless of cost? For example, what level of care is an insolvent, uninsured, illegal immigrant entitled to receive? How much care should we be willing to subsidize to extend the life of a seriously-ill 90 year-old?  A terminally-ill 50 year-old? These are thorny issues, but they must be addressed if we are ever going to achieve a coherently-financed health care system.

As Arnold Kling has been saying for years, many of us live under the delusion that we cannot possibly afford health care if we pay for it individually, but of course we can afford it if we pay for it collectively. For those of you who think that the government can magically make health care more affordable, just remember what happened after the government directed Fannie Mae and Freddie Mac to make home ownership more affordable.

Update:Charles Kenny makes a good point that better health care is not necessarily expensive.

Update II: Steve Chapman chimes in with a timely observation:

There are only three ways to pay for this expansion of health insurance coverage: increased taxes, reduced benefits, or shiny gold ingots falling out of the sky. Voters emphatically prefer the latter option, so that is the one most likely to be embraced by Congress and the administration.

Update III: Arnold Kling notes the problems with Obama's "dessert now, spinach later" approach.

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May 6, 2009

A big risk of health care finance reform

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April 20, 2009

Clear Thinking to begin the week

Former Cardinals and Pirates outfielder Andy Van Slyke from this recent interview ($) in Baseball Prospectus:

"Well, [former Astros pitcher] Mike Scott, to me, is the best pitcher to ever pitch in the big leagues. I went 1-for-38 against him.  .  .  . Mike Scott, when he was at the apex of his career, was actually cheating very well. When he threw that forkball, and he scuffed it all up... he threw 97-98 mph, and then he'd throw a forkball that was in the 90s and I just couldn't hit him."

Q: Were there a lot of guys "cheating very well" in your era?

"I think there was more of it going on back then than there is today. You don't really see guys scuffing balls—you don't see guys with sandpaper—but it was very prevalent when I came to the big leagues. The guys... everybody knew who was doing it. It was just hard to catch them."

Arnold Kling on an upcoming debate that he will be having with Robert Kuttner regarding health care finance:

The debate should be about how the cost-benefit trade-offs and rationing will take place. I will argue that most health care spending should be paid for out of pocket, with insurance reimbursement only for very large expenses over a multi-year period. With consumers paying out of pocket, they will take price into account in making their choices, and they will self-ration. The alternative is to have government officials make the choices about what treatments people are to obtain. I do not think that this is a one-sided debate, in which one position is clearly better than the other. But I hope that Kuttner and I can have this debate, rather than go off into red herrings like drug company profits.

The Financial Times' Clive Cook chimes in on America's intractable but nonsensical drug prohibition policy ($) (other posts on drug prohibition are here):

How much misery can a policy cause before it is acknowledged as a failure and reversed?

The US “war on drugs” suggests there is no upper limit. The country’s implacable blend of prohibition and punitive criminal justice is wrong-headed in every way: immoral in principle, since it prosecutes victimless crimes, and in practice a disaster of remarkable proportions. Yet for a US politician to suggest wholesale reform of this brainless regime is still seen as an act of reckless self-harm. [.  .  .]

Strict enforcement,  .   .   .  has reduced drug use only modestly – supposing for the moment that this is even a legitimate objective. The collateral damage is of a different order altogether. Violence related to drug crimes has surged in Mexico and in US cities close to the border, giving rise to renewed interest in the topic.  .  .  . [.  .  .]

Few policies manage to fail so comprehensively, and what makes it all the odder is that the US has seen it all before. Everybody understands that alcohol prohibition in the 1920s suffered from many of the same pathologies – albeit on a smaller scale – and was eventually abandoned. [.  .  .]

Is an outbreak of common sense on this subject likely? Unfortunately, no. Only the most daring politicians seem willing to think about it seriously.  .  .   . [.  .  .]

Somebody in the White House should take a look. This national calamity is no laughing matter.

And finally, Mark Steyn notes the insidious nature of encroaching government regulation over citizens:

The proper response of free men to the trivial but degrading impositions of the state is to answer as [gun owner] Pierre Lemieux did. But it requires a kind of 24/7 tenacity few can muster - and the machinery of bureaucracy barely pauses to scoff: In an age of mass communication and computer records, the screen blips for the merest nano-second, and your gun rights disappear. The remorseless, incremental annexation of "individual existence" by technologically all-pervasive micro-regulation is a profound threat to free peoples. But do we have the will to resist it?

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April 15, 2009

Defining Health Insurance

All sorts of interesting debates regarding reform of the American health care finance are breaking out across the blogosphere, which is a good thing.

Those discussions prompted one of the best thinkers on health care finance reform -- Clear Thinkers favorite Arnold Kling -- to provide a particularly lucid explanation of the illusory nature of American health insurance and, in so doing, highlight one of the key issues to implementing reform of the current system:

Let me offer two choices:

(a) Health insurance is the collective provision of all health care.

(b) Health insurance is the sharing of extreme risk in health care spending.

In my view, (a) represents what most people think of as good health insurance. For example, I have a friend who says her health insurance is great because she can get new eyeglasses every year for everyone in her family for a co-payment of only $10.

We have never observed (b). (b) would mean something where you only make a claim when your expenses are going to run into the tens of thousands of dollars. Claims would be rare and large, as in fire insurance. Premiums would be low, as in fire insurance.

Since we never have observed (b), we do not know whether it is something that could be provided by the market or would have to be provided by government. I am willing to concede that it may be the latter. However, what most people mean by universal health coverage is (a), which has some pretty obvious incentive problems. [.  .  .]

The bottom line is that what we think of as health insurance is not going to survive if we are going to get control of health care costs. Either health insurance is going to become very intrusive about our choices of medical services (the top-down, government option, under the guise of "health care quality"), or we are going to see much higher deductibles and co-payments (the bottom-up option).

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April 1, 2009

The Postrel Health Care Finance Articles

Clear Thinkers favorite Virginia Postrel (previous posts here) is well-known in health care finance circles for her authorship of a reasoned critique of one-payor, centralized health care plans back in the 1990's. She now writes for The Atlantic.

Over the past year or so, Virginia has been experiencing serious health care issues, so she has recently penned two extraordinary articles in The Atlantic (here and here) chronicling her personal experience with America's Byzantine health care finance system. Both articles are must-reads for anyone interested in these important issues, but here are a couple of snippets from the second article that are representative of the wisdom that Virginia provides:

Mr. Daily [a critic] shares a common belief, expressed less dramatically in other letters, that there is somewhere a pot of money dedicated to “health care” which “society” divides between winners and losers. In the United States, at least, there is no health care pot, any more than there is a pot for housing or education or magazine subscriptions. There is simply an economy, which includes health care among other goods, and the amount we spend on health care grows out of the largely decentralized decisions made by individuals and organizations. As productivity increases and prices drop in some areas—food, clothes, entertainment—we can afford to spend more on health care (even without overall economic growth or increased health-care efficiency). [.  .  .]

.  .  . We do not currently treat health care as a right. That we don’t is, in fact, what most letter writers are objecting to. Neither do we regard it exactly as a privilege, to be allocated to the worthy few or even to be limited to those who can afford to pay for it, directly or indirectly. Rather, it is a good, produced and purchased in a complex marketplace through a combination of individual, organizational, and political decisions.

Even this formulation is misleading, however. Health care isn’t a single good, nor, like food, is it easily defined in terms of a minimum to sustain life. Studying other countries’ supposedly universal systems only demonstrates how fraught the concept of “health care” is: one bundle of services in British Columbia and a less-generous one in Nova Scotia, one in England and another in Scotland, one in New Zealand before the election and another afterwards. Arguably the U.S. already has universal care, in the sense that everyone can get some care—if only from an emergency room—for some things, and that citizens (a critical word in this context) without money are covered by Medicaid.

The real issue is how you define “health care.” What gets included is a matter not only of medicine and economics but of culture and politics.

What limitations on health care are Americans willing to accept in return for universal coverage? That is one of the core issues that those who are currently crafting health care finance reform are assiduously avoiding. But true reform will never occur without addressing that issue.

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January 23, 2009

Thinking about Ted Kennedy's health care

As the Obama Adminstration begins exploring how to reform America's broken health care finance system, Kevin Pho makes an insightful observation regarding the current medical treatment of one of the leading reformers:

As we know, Massachusetts Senator Ted Kennedy has an advanced stage brain tumor, and was recently hospitalized for a seizure.

Seizures are a common side effect of malignant brain tumors, and often controlled with a variety of anti-seizure medications. There will be times where seizures can break through medication control, leading to the frightening episode that occurred on Inauguration Day.

Family physician Doug Farrago asks some pointed questions about the stellar care that the Senator receives, observing that "he travels around with a team of physicians," and, "most patients in [Senator Kennedy's condition] usually are in hospice care."

Senator Kennedy should be commended for his efforts to bring about health care reform. But is the care he is receiving, including instant opinions and access from revered institutions like Massachusetts General Hospital and Duke University Medical Center, representative of the kind of care he's advocating for the American public?

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October 26, 2008

Moneyball for American health care finance

Billy Beane, Newt Gingrich and John Kerry ask why not?

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October 3, 2008

Following up on my concierge health care experience

This post from about a year ago explored the reasons why my friend and personal physician -- internist Bill Lent, MD -- decided to convert his internal medicine practice to a concierge practice in which he limited his practice to 600 patients who pay $1,500 per year to retain his services. Inasmuch as I am blessed with good health, the only time I see Bill in most years is for my annual physical, which was this past week. As always, it was good to catch up with him and hear his thoughts about the first year of a concierge practice.

In short, Bill's experience has been overwhelmingly positive. The funds generated through his patients' retainer payments have relieved Bill of the financial pressure that had been mounting over the past decade to increase patient visits as Medicare and private medical insurers systematically reduced the amount paid to doctors for such visits. Released from that pressure, Bill is now able to spend more time with each patient, which Bill believes provides the patient with better quality service. The response from Bill's patients has been uniformly positive.

Although Bill's workload has been reduced from the standpoint that he no longer feels compelled to see more and more patients to maintain revenue levels in the face of reduced insurance payments, Bill has had to spend quite a bit of time over the past year in the process of computerizing his patients records. Part of the deal for patients in signing up for the concierge service is that their records are digitized so that the patient, Bill or any other doctor who the patient retains can review the records from anywhere via the Web. That perk has required a considerable expenditure of effort over the past year in digitizing those records, but now that the process is largely complete, Bill will spend far less time in future years as he simply amends a patient's computerized record with each visit.

There have been a number of pleasant surprises in Bill's first year of the concierge practice. For example, Bill was initially concerned that a number of his less affluent patients would opt not to participate because of the retainer payment. Surprisingly, however, his patient base has remained quite diverse from a socioeconomic standpoint -- even a large number of his elderly patients on Medicare elected to participate despite the fact that Medicare doesn't cover any of the retainer payment.

One of those is a long-time patient who is a retired bus driver with a host of medical problems that Bill has helped control for years. Rather than taking the risk of moving on to another physician, the retired bus driver's five children decided to split payment of the retainer between themselves so that their father could remain one of Bill's patients.

But the most pleasant aspect of the concierge practice is that Bill is back to doing what he loves to do -- taking the requisite amount of time to visit with patients about their symptoms and then diagnosing the nature of the problem. He no longer feels rushed to complete a patient visit so that he can move on to the next patient in an effort to fill his quota for the day.

Bill did have one foreboding experience in the transition to a concierge practice. Being the kind of fellow that he is, Bill offered at no cost to his former patients who opted out of the concierge practice to help them find another internist to replace him as their personal physician. Many of Bill's former patients took him up on his offer and he accommodated each of them. However, in so doing, Bill discovered that a growing number of internists and family practitioners in the Houston area are no longer accepting patients on Medicare because of the economic constraints of taking on such patients. As the number of primary care physicians continues to decline across the country, where are patients on Medicare going to find a primary care physician if this trend continues?

So, one of Houston's best internists was successful in saving his practice from the perverse impact of America's Byzantine health care finance system. As I noted in the previous post, if such entrepreneurial spirit can succeed in reviving a doctor's practice in the current highly-regulated health care finance system, then imagins/2008/10/another_cost_of.asp#comments">Comments (1) | TrackBack (0)

July 31, 2008

Thoma v. Kling on health care finance

Mark Thoma started the discussion, then Arnold Kling took issue, then Thoma responded to Kling and then Kling responded to Thoma (Megan McArdle chimes in, too). Before you know it, the posts provide a very good overview and debate of the basic issues confronting health care finance reform in the U.S. Ah, the wonders of the blogosphere!

Several additional observations:

1. By and large, American consumers of health care are woefully ignorant regarding the true cost of health care. Call it the legacy of two generations that embraced employer-financed, third-party payment of health care costs. That legacy has largely insulated the consumer from shopping for the basic health care services that fits their particular budget and circumstances. Any health care finance reform that does not rely at least in part on the consumer market to control costs will likely be even costlier and less satisfying than the current system.

2. Due to the risk of loss inherent in the private health insurance market, a substantial government-finance component is always going to be necessary in even a health care finance system that relies on large amounts of private health insurance. Pre-existing conditions, costs beyond even catastrophic illness and injury, the need for mobility in labor markets and cost of private insurance for the elderly are just a few of the risks that are difficult (perhaps even impossible) for private insurers to hedge and still provide an affordable product. Government-financed insurance and reinsurance fills in these gaps.

3. Any reform of the health care finance system will not be successful in controlling costs unless or until a consensus is reached on a fundamental issue that most Americans do not even want to discuss -- i.e., the basic level of health care that every individual in the U.S. is entitled to receive regardless of cost. What level of care is an insolvent, uninsured, illegal immigrant entitled to receive? How much care should we be willing to subsidize to extend the life of a seriously-ill 90 year-old?  A terminally-ill 50 year-old? These are thorny issues, but they must be addressed if we are ever going to achieve a coherently-financed health care system.

You can rest assured that the questions addressed in subparagraph 3 above will not be topics in any Presidential debate this fall.

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April 18, 2008

Providing good doughnuts in health care

A frequent topic on this blog over the years has been the increasingly dysfunctional nature of the third-party payor health care finance system in the United States. This post from last year examined how my primary care physician changed his medical practice to a concierge model because of the financial risks involved in continuing to rely primarily on health insurance for his revenue stream, and this subsequent post touched on the developing crisis that is occurring in the financing of primary care practices around the country.

Albert Fuchs, a Beverly Hills internist, understands the problem quite well and has a straightforward solution: primary care physicians should require payments from their patients and not third party insurers:

For more than a year, I haven't received a single dollar from any insurance company. I work for my patients. A few hundred doctors across the country are working the same way, some in blue-collar towns. Routine care should be affordable to the middle class, and as more doctors and more patients form relationships that exclude insurance companies, prices will drop. Insurance doesn't make routine care affordable; it makes it more expensive by adding a middleman. I know that some patients can afford nothing, so two afternoons a month I volunteer at a clinic that cares for indigent patients, which I could not have done with the huge patient volume I was seeing a few years ago.

When doctors break free from the shackles of insurance companies, they can practice medicine the way they always hoped they could. And they can get back to the customer service model in which the paramount incentive is providing the best care. Only then can doctors reclaim the simple dignity of any businessman: These are my doughnuts; only I and my customers can determine their worth. (At the end of each week, I will donate some to the needy, but I will not let a third party set the price.)

Read the entire op-ed. Medical insurance should be true insurance from a catastrophic ailment or injury, not financial insulation from the routine costs of health care. Jonathan Kellerman, a clinical professor of pediatrics and psychology at USC's Keck School of Medicine, advances the same idea in this recent W$J op-ed:

Physicians and other providers need to liberate themselves from the Faustian bargain they've cut with the Mephistophelian suits who now run their professional lives. Because many doctors are loath to talk about money, they allowed themselves to perpetuate the fantasy that "insurance is paying." It isn't. There is no free lunch and no free physical exam.

If substantial numbers of health-care providers shook off the insurance monkey on their back, en masse, and the supply of providers was substantially increased by opening more medical schools, the result would be a more honest, cost-effective system benefiting everyone. Except the insurance companies.

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April 13, 2008

The block of the chip passes away

Arnold Kling of EconLog has long been a Clear Thinkers favorite, particularly in the area of health care finance. That was the subject of this recent post regarding Arnold's coordination of health care for his elderly father, Merle Kling, who passed away on Tuesday.

Take a moment to read Arnold's touching post on his father, who was quite a remarkable fellow. Arnold is a chip off a very solid old block.

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January 30, 2008

Arnold Kling's Medicare experience

As I've noted many times, EconLog's Arnold Kling is doing some of the best writing and thinking about health care and health care finance issues in the U.S. right now. In his latest TCS op-ed, Kling describes the care received recently by his elderly father (who sounds as if he should have been a patient of my late father) and observes:

Medicare is wonderful for relieving the elderly from the burden of worrying about health care expenses. By the same token, it is wonderful for relieving doctors of the burden of worrying about the elderly as customers. You get paid for understanding the billing system, not for understanding your patients.

Read the entire op-ed. An update post is here.

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January 16, 2008

Becker on health care finance reform

Gary Becker proposes four common sense reforms for the American health care finance system, one of which is unassailable:

Eliminate the link between employment and the tax advantage of private health insurance. Since much of the spending on health are investments in human capital, there is good reason to exempt these expenditures, along with other investments, from income taxes. However, this employment link is inequitable because it does not provide the same tax advantages to families without employment-based insurance. It also encourages expensive employer health plans that have significant consumption components since the government picks up much of the cost of such coverage.

Posted by Tom at 12:02 AM | Comments (0) | TrackBack (0)

January 13, 2008

The People's Republic of Massachusetts

The development of in-store health care centers over the past decade has unquestionably been a positive development for the American health care system. They provide relatively inexpensive primary care and take some of the burden off of over-crowded emergency rooms that are currently required to provide non-emergency care to folks who have no other conduit to the health care system.

So, in the face of this important service that the in-store health centers are providing to people and communities, what does the Mayor of Boston want to do? Stop them from making money! (H/T Radley Balko):

Mayor Thomas M. Menino embarked on a highly public campaign yesterday to block CVS Corp. and other retailers from opening medical clinics inside their stores, . . . Menino blasted state regulators for paving the way Wednesday for the in-store clinics, which are designed to provide treatment for sore throats, poison ivy, and other minor illnesses.

The decision by the state Public Health Council, "jeopardizes patient safety," Menino said in a written statement. "Limited service medical clinics run by merchants in for-profit corporations will seriously compromise quality of care and hygiene. Allowing retailers to make money off of sick people is wrong."

In a separate letter, Menino urged members of the city's Public Health Commission to consider barring the clinics from Boston.

Meanwhile, W$J columnist David Wessel writes "The business model for big U.S. banks is broken. . . . Banks and Wall Street could devise a better business model. But they'd best hurry. If they don't act, regulators will. And if regulators don't, House Financial Services Committee Chairman Barney Frank and the other Democrats in Congress will."

Wessel's column and Frank's usual anti-business antics prompted Andrew Morriss to write a letter to the WSJ, which Don Boudreaux passes along over at Cafe Hayek:

Mr. Wessel is correct that most banks’ business models are not currently producing profits, but this is not cause for concern for anyone but their shareholders. Markets are a discovery process, with firms and investors learning as they try new ideas and react to changed conditions. What markets need is a stable regulatory environment, in which every dip in the market does not produce a new set of rules.

Unfortunately, there is little evidence that Rep. Frank and his comrades on the House Financial Services Committee understand this, making it virtually certain that they will rush to “solve” the banking crisis with new legislation. The best assistance Rep. Frank could offer would be to commit his committee to resolute inaction for an extended period of time, offering both banks and investors the assurance that the rules of the game would remain unchanged and allowing them to learn from their experience in the market place.

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December 18, 2007

That governmental Ponzi scheme

At the end of this common sense post that mostly points out that no useful public policy is served by the government denying grandparents the right to establish Health Savings Accounts for the benefit of their grandchildren, the always entertaining Art DeVany makes the following observation about a common topic on this blog -- Social Security reform (previous posts are here):

By the way, there is no such thing as social security. There are only people who are more or less secure against contingencies. They might pool their risks against these contingencies, but there is no effective way for a society to avoid risk. As a program for risk pooling, Social Security is very ineffective. It is not insurance, it is redistribution among generations. It is a Ponzi scheme because the risk pool is allocated from one generation to another. And, it is fraught with demographic risk and political risk. It will eventually go under or have to be modified substantially by disavowing the contract between generations because it is not sustainable.

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December 4, 2007

The government and health care finance reform

EconLog's Arnold Kling is one of America's best thinkers on economic issues relating to the U.S. health care finance system (previous posts here), so this recent TCS Daily op-ed is required reading for anyone interested in the proper role of government in a reformed health care finance system. In so doing, Kling summarizes well the current state of stress in the U.S. health care finance system:

All of our health care finance systems are under stress. The government system is completely unsound--the Titanic headed toward the iceberg of unfunded liabilities. Employer-provided health insurance is a questionable concept in theory that is unraveling in practice. The individual insurance market is a disaster, with something like 3/4 of all families who do not get insurance through work or government electing to remain uninsured.

Kling sums up his view of the proper role of governement in reforming the health care finance system in the following manner:

I believe that there are things that government can do to enhance access, improve quality, and lower the cost of health care. However, I believe that we would be best served by having government focus on the policies that I put into the "good" category--clinics in poor neighborhoods, vouchers, high-risk pools, and better information on the effectiveness of services and the performance of providers. If we look to government to take a larger role in running our health care system, then my prediction is that things will get ugly.

Posted by Tom at 12:05 AM | Comments (0) | TrackBack (0)

November 8, 2007

An expensive illusion

As I've noted several times previously, EconLog's Arnold Kling is among the clearest thinkers in the U.S. on reform of the health care finance system. He has been addressing health care finance issues again this week, first in this podcast interview with Russ Roberts, and also in posts here and here addressing issues raised by Greg Mankiw's NY Times article on the misleading nature of certain statistics that are frequently tossed around in the health care finance debates. But the most insightful Kling health care finance post this week was this Cato-at-Liberty post in which he analogizes the third party payor health care finance system to subsidized prostitution:

Suppose we were 20-year-old guys who hung out together, and one of our friends was down on his luck with women. He’s really depressed about it. We decide–not necessarily the brightest idea–to hire him a prostitute. We don’t want him to know she’s a prostitute, so we all chip in and pay her, tell her to meet our friend at a bar, and make him feel better about himself.

Next morning, we ask him how it went. He says, “Great. I really feel better about myself. In fact, I’m going to see her again tonight.”

As friends of the guy, we look at each other and realize that he will be devastated if he learns the truth. So we chip in again and pay the prostitute to make our friend feel better about himself. This keeps happening day after day, and eventually maintaining our friend’s illusion about his love life gets to be really expensive.

Similarly, free health care is an attractive illusion. It’s just gotten to be really expensive to maintain the illusion.

Before the blogosphere, discussion and analysis of health care finance -- which has become one of the key domestic issues of our time -- was largely buried in technical books, economic or medical journals and an occasional op-ed on the editorial pages. As a result, health care finance was largely misunderstood by the public and even a large segment of the medical profession. Now, through the leadership of economic bloggers such as Kling, the important issues relating to health care finance reform are instantly available for the world to review as a virtual cornucopia of economic bloggers has emerged to provide commentary and insight. That's a wonderful legacy for Kling, and one for which we should all be appreciative.

Posted by Tom at 12:10 AM | Comments (2) | TrackBack (0)

October 26, 2007

My concierge health care experience

Bill Lent is one of Houston's finest internists. How do I know this? Well, because I know who trained him (my late father) and he has been my personal physician for the past 15 years or so. Having been blessed with good health, the only medical service that I buy from Dr. Lent in most years is my annual physical, which I generally schedule for about this time each year. I always enjoy catching up with Dr. Lent, who provides me with "on the front line" information regarding the horrific cost of health care regulations, which are literally strangling the market for primary care physicians in the U.S.

It's been particularly interesting watching the evolution over the years of Dr. Lent's internal medicine practice, from one in which Dr. Lent provided an unusually high level of personal care to his patients (something my father emphasized in his teaching) to a high volume, impersonal practice that virtually all primary care practices have been required to adopt to remain even marginally profitable under the present U.S. health care finance system. Over the past ten years or so, Dr. Lent has continually confided to me during our annual visits that he was uncomfortable with the direction of his practice.

So, I was pleased to learn when I scheduled my physical a couple of weeks ago that Dr. Lent is doing something about it. Starting next month, Dr. Lent is commencing a concierge health care practice, administered by MDVIP out of Boca Raton, in which he is limiting his practice to about 600 patients who will pay Dr. Lent $1,500 annually for the benefit of receiving his personalized style of service. Coincidentally, this Wall Street Journal ($) article earlier this week described the proliferation of pre-paid health care plans, which is sort of a lower-priced form of what Dr. Lent is doing. The WSJ article essentially describes how many primary care physicians are simply dropping out of insurance plans -- both public and private -- in favor of prepaid plans that offer unlimited access to basic health care for set monthly fees.

Inasmuch as the employer-based health insurance system typically offers low-copays and deductibles for the vast majority of health care services, a substantial amount of the American health care finance system is basically prepaid health care already. In order to maintain profitability in a highly-regulated market, insurance companies compensate for these low usage fees by charging higher monthly premiums, lowballing doctors' fees, and challenging claims continually. The result has been the evolution of a primary care system that is incredibly bureaucratic (have you ever tried to figure out how your insurance pays claims?) and literally breaking down.

The MDVIP model treats primary care service similar to a health club membership. The model focuses on the delivery of relatively inexpensive, protocol-driven care than can be offered at a relatively low cost while still providing patients more overall access. MDVIP's model is relatively expensive, so low-income patients will have a difficult time affording the fee. However, providing a tax deduction for individual health insurance would make such pre-paid plans more affordable for low-income patients, while providing Medicaid patients with vouchers for prepaid health care would have a similar impact.

Who will be threatened from the proliferation of these plans under the current health care finance system? Well, it's a bit early to speculate, but my sense is that insurance companies with big stakes in employer-based health insurance will not enjoy the competition from MDVIP-type practices. Similarly, speciality providers who depend on state regulatory mandates in comprehensive insurance plans to subsidize their practices will also feel the competitive pressure if these types of plans catch on in a big way.

So, I'm going to enjoy learning about how Dr. Lent's practice changes over the next year under the MDVIP structure. If it is successful, as I suspect it will be, it makes you wonder -- if such entrepreneurial spirit can be generated even in the current highly-regulated health care finance system, then imagine what could happen if we unleashed the power of the marketplace to reform the delivery of health care and the health care finance system?

Posted by Tom at 12:10 AM | Comments (5) | TrackBack (0)

October 18, 2007

The end of socialized medicine

Peter Huber is a Manhattan Institute senior fellow, an MIT-trained engineer and a lawyer who has authored several books, including Hard Green: Saving the Environment from the Environmentalists and Galileo’s Revenge: Junk Science in the Courtroom. In this provocative City Journal article, Huber observes that the complexity of modern diseases virtually assures that a "one-size-fits-all" socialized medical system will fail:

That is the real crisis in health care—not medicine that’s too expensive for the poor but medicine that’s too expensive for the rich, too expensive ever to get to market at all. Human-ity is still waiting for countless more Lipitors to treat incurable cancers, Alzheimer’s, arthritis, cystic fibrosis, multiple sclerosis, Parkinson’s, and a heartbreakingly long list of other dreadful but less common afflictions. Each new billion-dollar Lipitor will be delivered—if at all—by the lure of a multibillion-dollar patent. The only way to get three-cent pills to the poor is first to sell three-dollar pills to the rich.

With almost $30 trillion under management, Wall Street could easily double the couple of trillion it currently has invested in molecular medicine. The fastest way for Washington to deliver more health, more cheaply, to more people would be to unleash that capital by reaffirming patents and stepping out of the way.

On the other side of the pill, molecular medicine can only be propelled by the informed, disciplined consumer. Any scheme to weaken his role will end up doing more harm than good. Foggy promises of one-size, universal care maintain the illusion that the authorities will take good care of everyone. They reaffirm the obsolete and false view that health care begins somewhere out there, not somewhere in here.

Neither Pfizer nor Washington can ever stuff health itself into a one-price uniform, One America box—not when health is as personal as ice cream, genes, and pregnancy, not when every mother controls her personal consumption of carbs, cholesterol, Flintstones, and Lipitor. But the thought that government authority can get more bodies in better chemical balance than free markets and free people is more preposterous than anything found in Das Kapital. Freedom is now pursuing a pharmacopoeia as varied, ingenious, complex, flexible, fecund, and personal as life itself, and the pursuit will continue for as long as lifestyles change and marriages mix and match. Given time, efficient markets will deliver a glut of cheap Lipitor for every glut of cheap cholesterol. And given time, free people will find their way to a better mix.

Read the entire article here.

Posted by Tom at 12:10 AM | Comments (2) | TrackBack (0)

October 12, 2007

The Achilles Heel of Health Care Finance Reform

In an interview years ago, the late Milton Friedman summed up the basic problem with a nationalized system of health care finance:

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you're doing, and you try to get the most for your money.

Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I'm not so careful about the content of the present, but I'm very careful about the cost.

Then, I can spend somebody else's money on myself. And if I spend somebody else's money on myself, then I'm sure going to have a good lunch!

Finally, I can spend somebody else's money on somebody else. And if I spend somebody else's money on somebody else, I'm not concerned about how much it is, and I'm not concerned about what I get. And that's government. And that's close to 40% of our national income.

However, even more troublesome than the illusion that A will get top-flight service from B when C is forced by government to pay the bills, who is going to provide the health care under such a system?

Posted by Tom at 12:05 AM | Comments (1) | TrackBack (0)

September 26, 2007

House calls making a comeback?

Despite the drag that America's highly-regulated health care finance system places on the delivery of medical services, glimmers of entrepreneurial hope still shine through occasionally:

A new kind of medical practice is flourishing nationwide that offers to go to where the patients are — whether a home, an office or a hotel — to treat ailments as diverse as a sprained ankle or a bad case of bronchitis. Some services may even wheel in a mobile X-ray machine or an ultrasound machine, depending on the ailment, or perhaps pull out kits to test for strep throat or to draw blood. They may dole out medication on the spot or arrange for pharmacies to deliver prescriptions.

“When you call, you can speak to a doctor in five minutes, and that doctor can be there with you within the hour. Where else do you get that kind of delivery?” said Walter Krause, founder of Inn-House Doctor. The company says it has 40 physicians on call in Boston, Chicago, Dallas, Houston, Las Vegas, Phoenix, Philadelphia and Washington; some of the doctors are in private practice or work in hospitals, and they make house calls during their time off.

The convenience comes at a price. Appointment fees can range from $250 to $450, with additional tests and medication extra. And payment is due at the time of the appointment.

The website for the service is here. Critics will contend that this service amounts to house calls for the rich, but it is nevertheless a good example of how medical service markets will respond to patients controlling the funds that they are willing to spend on medical services. Frankly, my bet is that that this type of service would already be available at a much lower cost but for the fact that most patients have been insulated from the true cost of medical services and the expenditure of their health care dollars for decades now.

Posted by Tom at 12:10 AM | Comments (2) | TrackBack (0)

September 14, 2007

Stossel on "Sicko"

ABC News investigative reporter John Stossel provides this WSJ ($) op-ed in yesterday's paper in preparation for his long-awaited ABC special on America's health care and health care finance system tonight at 9 p.m., CDT:

Mr. [Michael] Moore [in his documentary "Sicko"] claims that because private insurance companies are driven by profit, they will always deny care to deserving patients. For this reason, he argues, profit-making health-insurance companies should be abolished, our health- care dollars turned over to the government, and the U.S. should institute a health-care system like the ones in Canada, Britain or France. [. . .]

Mr. Moore thinks that profit is the enemy and government is the answer. The opposite is true. Profit is what has created the amazing scientific innovations that the U.S. offers to the world. If government takes over, innovation slows, health care is rationed, and spending is controlled by politicians more influenced by the sob story of the moment than by medical science.

Posted by Tom at 12:05 AM | Comments (0) | TrackBack (0)

August 8, 2007

The Universal Distraction

As noted in these earlier posts, Arnold Kling continues to provide an enormous amount of lucid analysis on what ails America's health care finance system. In this TCS Daily op-ed, Kling makes two excellent points, the first regarding tax treatment of health insurance premiums:

I would like to see the abolition of the tax break for company-provided health benefits as well as the tax break for Medical Savings Accounts. Company-provided health benefits ought to be included with personal income and taxed at the personal income rate. There should be no special benefits for savings accounts labeled "medical." (I think that all saving ought to be tax-free, but that's another topic.)

. . . Although I prefer real health insurance to insulation, I do not want to impose my preferences on others. All I ask is that we reform our tax code so that it is neutral.

Second, Kling makes an important point regarding the freedom to buy health insurance and the health care limits that society needs to accept if a person chooses not to do so:

[M]ost of the people who are uninsured today are reasonably healthy. They just do not want to pay for their own health insurance. In my view, they ought to be allowed to make that choice, but they should face the consequences. If they require health care, the cost should not be shifted onto other people who have insurance.

Posted by Tom at 12:15 AM | Comments (7) | TrackBack (0)

July 2, 2007

An important distinction in the health care finance debate

Clear Thinkers favorite Arnold Kling, who appears to be everywhere these days in regard to discussions over reform of America's health care finance system, reminds us in this Washington Times op-ed of an important distinction in the health care finance debate -- despite the problems in health care finance, American medical care and research remains the hope of the world:

On one side of me at the graduation [of my daughter] sat [my wife], a breast cancer survivor. On the other side was my father, whose heart condition and blood pressure threatened to take his life before my daughter was ready to graduate kindergarten, much less college. Finally, there was my daughter herself, who since high school has had a chronic intestinal illness sufficiently contained that she could graduate on schedule.

None of these three stars would have been there without medical treatments that only became available since my daughter was born. New drugs played a significant role in each case. In fact, some pharmaceuticals critical for my daughter only were approved for her condition a few years before she was given them. Drugs in the pipeline are likely to play an important role in her future.

In other countries, would the same state-of-the-art medicines and equipment have been available to my father, my wife and my daughter? Perhaps. But it is a safe bet these technologies were not invented elsewhere.

Much of the medical innovation that the world enjoys comes from America. While as an economist I find much to criticize about our health-care system, America's role in medical innovation is crucial not just for Americans, but for the entire world.

Read the entire op-ed.

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June 30, 2007

More Kling on health care finance

Clear Thinkers favorite Arnold Kling continues in this TCS op-ed to provide his typically insightful analysis on what is needed to reform America's health care finance system. He concludes:

"[R]eal health care reform in the United States will not happen because of some wonk's clever plan. It will not happen as a result of an election. It will only happen when we change some of our beliefs about health care."

Read the entire piece.

Posted by Tom at 12:37 AM | Comments (0) | TrackBack (0)

June 5, 2007

Texas' medical licensing logjam

The number of insurance companies offering medical malpractice insurance policies has dramatically increased and malpractice insurance premiums have substantially decreased since the 2003 legislation enacting medical malpractice caps in Texas, but the med mal caps have contributed to at least one unanticipated problem:

. . . about 2,250 license applications await processing at the Texas Medical Board in Austin. The wait could be as long as a year for some of the more experienced doctors because it takes longer to review their records.

The fear is that some doctors will give up on Texas and go elsewhere instead of waiting. A $1.22 million emergency funding request was approved during the last days of Texas legislative session for the Texas Medical Board, which licenses physicians. That is on top of the $18.3 million regular biennial appropriation, said Jane McFarland, the board's chief of staff.

The board plans to add nine new employees to its 139-member staff, seven of which will help chop away at the backlog of license applications.

Posted by Tom at

The combination of those two factors goes a long way toward explaining why the U.S. spends a ton of money on health care (15 percent of the GDP, compared to 8 percent for Britain and Japan and 10.5 percent for France) and gets relatively mediocre outcomes. . . .

In short, the rest of the industrialized world does a better job of rationing health care than we do.

Which brings me back to my original point. Every presidential candidate is going to talk about controlling health care costs. Most are going to talk about expanding coverage, too. Those goals are impossible unless we can design a system that says "yes" to the most cost-effective care -- even very expensive treatments, provided they have corresponding benefits -- and "no" to treatments with benefits that are too small to justify their costs. In other words, rationing.

Read the entire article. Wheelan doesn't propose any solutions, but he does an excellent job of framing the issue. Stated another way, to what extent is American society willing to underwrite health care costs that individual citizens cannot afford -- or are unwilling -- to pay?

Posted by Tom at 4:09 AM | Comments (0) | TrackBack (0)

February 14, 2007

Five big health care issues

EconLog's Arnold Kling, who is doing some of the best thinking these days on reforming America's dysfunctional health care finance system, identifies in this TCS Daily op-ed the five big questions in health care:

1. What will we do about the large projected deficit in Medicare?

2. What can we do to reduce government subsidies for extravagant use of medical procedures with high costs and low benefits?

3. What should we do about the health care needs of the very poor?

4. What should we do about the health care needs of the very sick?

5. What should we do about a scenario in which both income inequality and the share of average income devoted to health care rise sharply?

Kling goes on to discuss our social fetish with health insurance, which is really not insurance at all:

If you ask me what kind of health insurance I would like for my family, my instinct is to answer, "None." The only reason we have health insurance now is to avoid the stigma of being called "uninsured."

Somehow, health insurance has become a social fetish. I could travel to the far reaches of the globe, and almost everywhere I would find merchants where my credit is good and my dollars are welcome. But here at home, trying to enter a local hospital with nothing but a wad of cash and a credit card would be like urinating on the sidewalk.

Read Kling's entire piece. As the WSJ's ($) Holman Jenkins pointed out awhile back, government policy has exacerbated these issues and is unlikely to solve them through greater involvement in the system:

The tax code is the original hectoring mommy behind our health-care neuroses. It gives the biggest subsidy to those who need it least. It pays the affluent to buy more medical care than they would if they were spending their own money. It prompts them to launder our health spending through an insurance bureaucracy, creating endless paperwork. It prices millions of less-favored taxpayers out of the market for health insurance. It fosters a misconception that health care is free even as workers are perplexed over the failure of their wages to rise.

Posted by Tom at 4:13 AM | Comments (0) | TrackBack (0)

January 31, 2007

Doctoring under an increasingly regulated system

Christopher Tozzo recently articulated a troubling thought about the perverse incentives involved in a one payor, government-administered health care finance system:

A key premise in any call for socialized medicine is that physicians (and nurses and dentists and physical therapists and orderlies and equipment technicians and pharmacists and ...) will continue to do what they do now, as much as they do it now (and where they do it now and as well as they do it now and for as long as they do it now and ...) despite the efforts by government to enslave them. Like a battered spouse, the health care professional will, the bureaucrats presume, simply put up with it forever. [. . .]

If you're smart enough to become a doctor, then you are smart enough to become a lawyer, accountant, investment banker or a dozen other ultra-skilled occupations that are not price capped. The laws of economics are not subject to repeal by any legislature. An artificial price ceiling creates a shortage, regardless of what "noble goals" underlie it. Doctors, especially future doctors, will not be turned into indentured servants without limit.

Tozzo's point is a good one, and reminded me of the following note that I recently from one of my old friends, Dr. Jim Bob Baker. Jim Bob is a first-rate internist who was one of my late father's best and brightest medical students. Jim Bob wrote about a new regulation that is creating similarly-skewed incentives for doctors under the current American health care finance system:

I wanted to let you know about the next new development in the mess that is the U.S. health care finance system. The newest wrinkle is what is being called "P4P", or "Pay for Performance." Ostensibly, the program purports to be a budget-neutral process whereby doctors and hospitals who meet certain guidelines in the provision of healthcare in specific illnesses will be given higher reimbursement, while those who fall below the benchmark will see their payments cut even further.

What we expect will happen has more of an Orwellian flavor. Hospitals and private practitioners are already preparing for the first installment of a scheduled 40% cut in Medicare payments to them that will occur over the next several years. In all likelihood, we will see an across-the-board cut to all providers. Then, if you want to see an "increase" in payment to get a portion of that cut reinstated, you have to jump through the particular hoops mandated by CMS. Those who fall below the standard will see their payments cut even further.

Pay for Performance is a noble idea. The doctors and hospitals treating patients most correctly get a higher payment for that treatment. However, as with most governmental programs, implementation of the noble idea falls woefully short of intended result.

One of the benchmarks for outpatient treatment is for patients with Diabetes. The goal for chronic therapy is to keep the Hemoglobin A1c level below 7% -- this is a measurement of the amount of glucose bound to hemoglobin, which provides a correlation to a patient's average blood glucose level over the past three months. A HgbA1c of 7% implies and average glucose of 150-180. However, it is an imperfect measurement, as 7% would also correlate to glucoses ranging from 50-540, which obviously is not ideal control, but we'll ignore that fact for the time being.

The P4P benchmark for a doctor treating diabetics would be set as a certain percentage of his patients (90% for the sake of argument) with HgbA1c's under 7%. Meet this artificial standard and your payment from Medicare is "increased" as discussed above. Fall below this standard and payment for treating these patients falls further.

Imagine two physicians. Dr. A is a family physician who works in an affluent suburb with educated and motivated diabetics. Dr. B is a diabetes specialist who sees complex and less informed diabetics at an inner city medical center.

Which physician will be more likely to meet the P4P benchmark?

Add to this the likelihood that Dr. A will refer many of his difficult-to-treat patients to Dr. B, because he is the "specialist," further improving Dr. A's statistics and driving down Dr. B's. And this does not take into account the percentage of Dr. B's patients who willfully choose not to follow his recommendations about medications, diet, exercise, etc, which also worsen Dr. B's "performance."

There are many other benchmarks being proposed by the feds for both outpatient and inpatient care, with similar unintended consequences. The worst of these influences from my perspective is the intentional "cherry picking" of patients by physicians with more superficial training or by smaller community hospitals, with the subsequent "turfing" of the more difficult patients (along with the lower reimbursement for taking care of them) to the specialists and medical centers.

Another factor about P4P that is not readily apparent is the expense of producing the data necessary to determine if a doctor or hospital is meeting the benchmarks. Already inundated with regulatory paperwork, providers wanting to continue to feed at the Medicare trough will have to commit even more overhead resources to the process of documenting and transmitting to federal regulators the information necessary to show that they are meeting the guidelines.

This process is already in effect for the hospitals, at least partially so. To maintain eligibility for Medicare dollars, hospitals have to submit to reviews by JCAHO -- the Joint Commission of Accreditation of Healthcare Organizations. The hospital must invite this federal agency to come on site every 2 to 3 years to survey their operation and tell them what they are doing wrong.

Imagine the medical equivalent of boot camp inspection of footlockers by a drill sargeant with a bad attitude. And the hospital has to pay JCAHO for this enjoyment. Failure to do so means loss of accreditation, and with it, loss of Medicare dollars.

With these decreasing payments and increasing regulation, I think that there will be an increasing number of physicians opting out of Medicare in the next several years. Indeed, it would not surprise me if it becomes difficult to find a decent physician who will be willing to accept any Medicare-eligible patient, even with the world's most generous secondary insurance. This is a difficult process to imagine for the Internist -- the vast proportion of patients we care for are on Medicare. But if it costs more to provide the care than we can get reimbursed, then there is no future in seeing these folks. Kinda like the guy who said that even though he lost money on every business transaction, he would try to make up the difference by increasing his volume.

In closing, I think that your rather Walter would be very disappointed with where the practice of medicine is headed today. It is becoming less and less of the art that he practiced and taught. As I reflect on the recent changes I have made in my work situation, I am reminded of a line from the movie, "War Games," the Matthew Broderick film where he plays a teenage computer geek who hacks his way into the national nuclear defense computer network. After getting the super computer to play tic-tac-toe multiple times to a draw, the computer says, speaking about thermonuclear war, that "the only way to win is not to play." I kinda feel the same way about medicine these days.

And that's bad. Because who's going to be left in medicine to take care of you and me when we are in our 70's and 80's?

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January 25, 2007

Gauging the health care finance litmus test

It's looking as if the health care finance litmus test noted earlier this week is already quite revealing. The Washington Post's Steve Pearlstein, who has never been particularly enthusiastic about the Bush Administration, reports:

But the most surprising and encouraging development is that a president who for six years has only nibbled around the edges of health-care issues has weighed in with some bold ideas to expand coverage, rein in costs and bring some fairness to the tax code. And get this: It actually involves raising taxes on the rich and lavishly insured and giving the money to the working poor and the uninsured.

Given that, you'd think Democrats would have welcomed a politically courageous proposal to put a cap on one of the biggest and most regressive features of the individual income-tax code. But instead, they've shifted reflexively into partisan attack mode, mischaracterizing the impacts of the proposal and shamelessly parroting the propaganda from the labor dinosaurs at the AFL-CIO.

"Dead on arrival," declared Rep. Pete Stark (D-Calif.), chairman of a key health subcommittee in the House, hinting at a dark conspiracy to kill off employer-sponsored health insurance.

"A dangerous policy that ultimately shifts cost and risk from employers to employees," said Charlie Rangel, chairman of the House Ways and Means Committee.

Sen. Harry Reid, the majority leader, called it nothing less than an "attack" on American workers.

Worst of all was the five-page memo distributed by Sen. Edward Kennedy to Democratic colleagues that ought to embarrass a man who considers himself the Senate's leading health-care expert -- a compendium of half-truths, unsupported assumptions and outright lies. Kennedy reverted to the hackneyed rhetoric of class warfare, asserting that the president's proposals will do nothing for working families, give new tax breaks to the rich, increase the number of uninsured and encourage everyone to buy less insurance coverage than they should have.

In fact, all of these are almost precisely the opposite of the truth.

The president's health plan would, in fact, put a cap on a $200 billion-a-year tax break that now goes disproportionately to those with the most generous and costly employer-provided health insurance plans. It would redirect a small portion of that break to those who have less generous coverage or those who have to buy their own insurance because their employer does not offer it. For a few million of the roughly 47 million Americans with no insurance, it may also make the difference between being able to afford basic insurance or not.

The fact that some of those who have these rich policies happen to be members of auto or postal unions doesn't change that the president's proposal would make the tax code more progressive, not less. They are the aristocrats of the working class who, like lawyers, investment bankers and journalists, earn more in tax-free benefits each year than uninsured janitors earn in taxable wages. And whatever modest tax increase they might face from the cap on tax-free health benefits, it is certainly less than the tax cuts they got from Bush that Democrats are so eager to rescind.

Almost every health economist agrees that the tax subsidy for employer-paid health insurance is not only unfair but that it also encourages people to buy too much insurance, consume too much health care and pay too much for both. Bush deserves praise for having the political courage to confront the issue.

Now is this the magic bullet that will solve the health-care crisis? Of course not.

Would any real solution also require finding billions of dollars more to subsidize the purchase of health insurance by low-income workers and getting states to reform dysfunctional markets for individual and small group insurance? No doubt about it.

But anyone seriously interested in health reform would welcome the president's proposal as a basis for negotiations, raising public expectations and increasing pressure on the president to embrace more comprehensive reform. Unfortunately, that is not the approach of Messrs. Stark, Rangel, Reid and Kennedy, who apparently prefer demonizing the president and grandstanding on the issue until the next election.

Haven't we had enough of this?

Read the entire piece. President Bush's proposal -- although not an all-encompassing solution to America's dysfunctional health care finance system -- addresses a fundamental problem of system -- tax subsidies that have insulated many Americans from the true cost of health care through employer-based health insurance. The president's plan identifies the problem and responds to it in a common sense way by proposing to negate the distorting subsidy. There are reasonable alternatives that should be examined -- such as removing the tax subsidy of health insurance altogether -- but to castigate the President's proposal in favor of the insulation provided by the current system is the epitome of elevating political form over substance.

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January 22, 2007

A first-rate health care finance proposal

The Bush Administration announced over the weekend that President Bush will propose a common sense reform of the health care finance system during his upcoming State of the Union Address -- extension of the tax deductibility of health coverage to everyone who acquires it outside of the workplace.

As has been noted many times in this blog, the federal government doesn't currently tax employer-provided health insurance benefits but gives no tax breaks to most consumers who buy medical insurance outside the workplace. President Bush will propose to make it easier for consumers who do not have employer-provided health insurance to buy coverage on their own by making the tax incentive for doing similar so simlar to that of homeowners who deduct interest payments on their mortgages. The Bush Administration's plan would also set a cap on the amount of employer-based health care benefit that an employee could receive tax-free.

The Bush Adminstration proposal is particularly sound because it addresses the mindset that has developed over the past couple of generations of Americans who are conditioned to employer-based health insurance -- that is, that health care benefits are some sort of obligation from employers with regard to which employees have little incentive to care much about cost. The Bush plan treats employer-based insurance as compensation (which it is -- such insurance arose as a loophole to get around wage and price controls during WWII), which provides a much sounder basis for assessment of the value of employer-based insurance. In so doing, it addresses the problem of medical "insulation" policies that Arnold Kling and others recently addressed over at Cato Unbound (see here and here).

By the way, this proposal addresses one of the issues that is a wonderful litmus test for political candidates. Although a politician could argue that removing the tax deductibility of all medical insurance makes even more sense than President Bush's proposal, no reasonable argument can be made to support the current disparate tax treatment of employer-based versus individual policies. The Administration's proposal is actually much more progressive than the current state of affairs because the wealthier employees currently benefit the most from not having to declare the value of their employer-based insurance as income.

Thus, if a politician opposes the Bush Administration's proposal, then that politician is probably either ignorant about the issues involved or in the pocket of the large business interests that profit from the current employer-based insurance system. That's a pretty clear indication that such a person should not be in a position of deciding one of the most important economic and social issues facing American society today.

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January 19, 2007

More on health insulation policies

This previous post reported on Arnold Kling's insightful Cato Unbound piece in which he explains how America's health care finance system is being undermined by health "insulation" policies rather than real health insurance.

Kling's article has provoked three excellent responses, including this one from Duke University professor Clark C. Havighurst, who has taught courses and written on health care law and policy, antitrust law, and economic regulation at Duke since 1964. Professor Havighurst explains cogently how the tax subsidy on employer-based health insurance has become a destructive force in the health care finance system and why it survives despite the fact that everyone knows that it is the principal cause of wasteful spending on health care:

The tax subsidy thus introduces new “moral hazards” into health care decision-making. Not only are employers, union leaders, legislators, and courts happy to commit employee-voters’ money in ways that make themselves appear to care about health above all things, but their stake in not having to say “no” to more and better health care also coincides perfectly with the preferences of the politically powerful health care industry. For these reasons, the tax subsidy has survived through political thick and thin even though every policy wonk knows that it is a principal cause of wasteful spending on health services. Liberals, of course, resist proposals to fix this glaring defect in the incentive system that drives health care spending. Why fix incentives to encourage consumers to make more appropriate health care choices when big government stands ready to choose for them?

Read the entire Havighurst piece, as well as this one by Jonathan Cohn, (a New Republic senior editor and the author of Sick: The Untold Story of America's Health Care Crisis — and the People Who Pay the Price, which will be published by HarperCollins later year) and this one by Matthew Holt (author of the Health Care Blog), both of whom favor a universal care, one-payor system administered by government. Holt, in particular, provides a pithy explanation of why meaningful reform of the health care finance system is so difficult to achieve:

[T]he political strength of the health care system actors combined with the disaggregated weakness of the consumers and those paying the bill — intermediated by the costs of health care being hidden within overall employment compensation and buried in the murky finances of the federal government — has meant that the system has chewed up and spat out any serious attempt to reform it since the 1930s.

Update: All of the authors have now responded to each other pieces in this cyber-conversation.

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January 10, 2007

Health "insulation" policies are the problem

EconLog's Arnold Kling is doing some of the best thinking and writing on America's broken health care finance system these days. In this lucid Cato Unbound article, Kling channels one of this thoughts from his book Crisis of Abundance: Rethinking How We Pay for Health Care (Cato 2006):

The health coverage most Americans have is what I call “insulation,” not insurance. Rather than insuring them against risk, most families’ health plans insulate them from paying for most health care bills, large and small. [. . .]

Real insurance would pay for treatments that are unavoidable, prohibitively expensive, or for illnesses that occur relatively rarely. Instead, insulation reimburses even relatively low-cost services, such as a test for strep throat or a new pair of eyeglasses. Insulation pays for treatment even if it is commonplace or discretionary.

For health care providers, insulation is a bonanza. Because consumers are not spending their own money, they accept doctors’ recommendations for services without questioning them and without concern for cost. Faced with an insured patient, a health care provider is like a restaurant catering to convention-goers with unlimited expense accounts. The customer will gladly take the most high-end recommendation and not worry about the price.

Consumers are happy as well. Insulation relieves the patient of the stress of making decisions about treatment. The patient also does not have to worry about shopping around for the best price.

The problem with insulation is that it is not a sustainable form of health care finance. Individuals, employers, and government are all under stress. [. . .]

Today it is fairly deeply ingrained with most Americans that health care services are something that you should not have to pay for yourself. Insulation is the norm, and real health insurance as I would define it is almost nonexistent.

Ultimately, I think we are headed for a collision of cultural values. We prefer insulation to real insurance. We expect services to be readily available, without the supply limitations or waiting lists that exist in countries where government is responsible for more health care funding. And yet we are growing increasingly concerned over the expansion of health care spending that takes place in a system that lacks constraints on either supply or demand.

Real health insurance may not be popular now. But when Americans see that the providers of insulation, including Medicare, have to turn to the rationing of health care services in order to meet budgetary constraints, real health insurance may start to look like a good alternative.

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October 19, 2006

A big hurdle to health care finance reform

Don Boudreaux, chairman of the economics department at George Mason University and the driver of Cafe Hayek, authored this Christian Science Monitor op-ed that addresses a fundamental problem with reforming the American health care finance system -- the expectation of most Americans that health care is a basic human right and entitlement. Boudreaux explains the fallacy of that attitude:

But not everything that is highly desirable is a right. Most rights simply oblige us to respect one another's freedoms; they do not oblige us to pay for others to exercise these freedoms. Respecting rights such as freedom of speech and of worship does not impose huge demands upon taxpayers.

Healthcare, although highly desirable, differs fundamentally from these rights. Because providing healthcare takes scarce resources, offering it free at the point of delivery would raise its cost and reduce its availability. [. . ]

Medicare, Medicaid, and tax-deductibility of employer-provided health insurance created a system in which patients at the point of delivery now pay only a small fraction of their medical bills out of pocket.

This situation leads to monstrously inefficient consumption of healthcare. Some people consume too much, while many others with more pressing needs do without.

Because the wasteful consumption caused by heavily subsidized access drives up healthcare costs, taxpayers must pay more and more to fund Medicare and Medicaid, while private insurers must continually raise premiums. The sad and perverse result is that increasing numbers of people go without health insurance.

Employer-based health insurance -- which proliferated as a means to attract scarce labor during the wage and price controls of World War II -- triggered the societal shift in attitude regarding payment of health care costs. Milton Friedman summed up the basic problem during an interview several years ago:

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you're doing, and you try to get the most for your money.

Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I'm not so careful about the content of the present, but I'm very careful about the cost.

Then, I can spend somebody else's money on myself. And if I spend somebody else's money on myself, then I'm sure going to have a good lunch!

Finally, I can spend somebody else's money on somebody else. And if I spend somebody else's money on somebody else, I'm not concerned about how much it is, and I'm not concerned about what I get. And that's government. And that's close to 40% of our national income.

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October 17, 2006

Trials and tribulations at UTMB

Baylor College of Medicine's struggle to define its future in the choppy waters of America's health care finance system has been a frequent topic on this blog. But Baylor is far from the only medical school that is struggling with such problems. This Kevin Moran/Houston Chronicle article reports on the recent troubles at Texas' oldest medical school, the University of Texas Medical Branch at Galveston. Those troubles were alluded to in this earlier post.

In a year when this island city has avoided even the threat of a major natural storm, its largest and oldest employer — the University of Texas Medical Branch — is experiencing an unprecedented financial, employment and political tempest.

Facing a $20 million deficit and aiming to cut $130 million in spending in 2007, the 13,000-employee medical center started the year by hiring a consulting firm to heavily reduce expenses.

Faculty and staff feared that any solution involved a massive layoff. Morale dropped precipitously when UTMB announced in June it would cut 1,000 jobs. Next came a storm of dissatisfaction when administrators unveiled plans to cut salaries of tenured faculty, physicians, researchers and others.

The article goes on to report on how UTMB's initiatives to generate more income is being opposed by competing physicians and how little of UTMB's professional services are compensated through proceeds of health insurance. Although somewhat different from Baylor's problems because UTMB operates its own hospital in Galveston, UTMB's difficulties are another reflection of the cascading problems that are resulting from the federal and state governments' failure to address America's broken health care finance system. The risks of that broken system are a decline in the quality of physician training and medical care, which is something that should concern us all.

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September 24, 2006

Declining Texas medical malpractice premiums

This Ft. Worth Star-Telegram article from about a month ago reports that, since enactment of the Texas Medical Malpractice and Tort Reform Act of 2003, medical malpractice lawsuits in Tarrant and Dallas Counties have been reduced by as much as 60%. A couple of weeks later, this Austin Business Journal article and this PIAA press release report that Texas doctors are enjoying one of the steepest declines in malpractice insurance premiums rates in recent history -- almost 30% over the past four years.

Pretty hard to argue that the parallel reduction in lawsuits and insurance premiums are a coincidence.

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May 20, 2006

The true cause of rising medical malpractice premiums

Alex Tabarrok of Marginal Revolution fame is studying the causes of rising medical malpractice premiums, which is a subject explored in the recent book that he co-authored with Eric Helland, Judge and Jury: American Tort Law on Trial (Independent Institute, 2006).

In this excellent Wall Street Journal ($) op-ed, Professor Tabarrok takes on the canard that rising medical malpractice premiums are primarily the result of price-gouging by greedy insurance companies:

On its face, price gouging is a peculiar explanation for recent increases in insurance premiums. Is greed new to the world? Were insurance companies followers of Mother Teresa just a few years ago? If greed and gouging are the explanations for rising premiums, why did the St. Paul group -- one of the nation's largest suppliers of medical malpractice insurance -- pull out of the market in 2001? Were the profits from all that gouging just too much for St. Paul's guilty conscience? And consider that almost half of doctors are insured through mutual, i.e., doctor-owned, insurance companies. Are the doctors gouging themselves?

Professor Tabarrok then cogently explains the primary element in how insurance companies establish medical malpractice premiums -- i.e., attempting to predict the future:

Over the long run, insurance companies must cover their costs, so increases in premiums track increases in tort awards. As we show in our study, during the last 30 years every dollar increase in awards has led to a dollar increase in premiums. But tort awards are very difficult to predict because past awards tell us very little about future awards. Insurance companies, therefore, have a difficult job: They must predict future awards based on just a handful of the most recent awards. Was the latest multimillion dollar award a signal of permanently higher costs, or was it just a blip? Is tort reform working or were the more reasonable awards of the last year just a pause in the long upward trend?

Given the difficulty of forecasting awards, it's no surprise that insurance companies sometimes make mistakes. As a result, insurance companies can price premiums based upon a projection of future awards that are too low.

You never hear critics of the industry complaining of low prices, but we now know that prices in the 1990s were not high enough to cover the increase in tort awards. Recent increases in premiums are simply a belated recognition of the reality of what appears to be permanently higher medical malpractice awards. Since the insurance cycle is a function of the uncertainty of tort awards, not an independent cause of higher prices, the best way to dampen premium variation is to make tort awards more predictable.

Of particular interest to Texans is the effect that Texas' dubious system of electing judges has on medical malpractice premiums:

States with partisan elected judges, for example, have medical malpractice awards per claim that are $36,000 higher than in other states.

Professor Tabarrok concludes with this common sense advice:

The way to fix broken medical malpractice systems . . . is to address the underlying problems of the tort system -- whether through federal statute, state legislation or judicial oversight. Pointing fingers at the insurance industry for price gouging or mismanagement may help trial lawyers block reform, but these accusations make little sense and are not supported by the data. As Daniel Patrick Moynihan famously said, "While all men are entitled to their own opinions, they are not entitled to their own facts."

Read the entire op-ed. Definite clear thinking.

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May 8, 2006

Self-help dentistry

This NY Sunday Times article explores Britain's state-financed dental system and finds that the lines for treatment are so long that some citizens simply opt to treating themselves:

Britain has too few public dentists for too many people. At the beginning of the year, just 49 percent of the adults and 63 percent of the children in England and Wales were registered with public dentists.

And now, discouraged by what they say is the assembly-line nature of the job and by a new contract that pays them to perform a set number of "units of dental activity" per year, even more dentists are abandoning the health service and going into private practice — some 2,000 in April alone, the British Dental Association says.

How does this affect the teeth of the nation? [ . . .]

"I snapped it out myself," said William Kelly, 43, describing his most recent dental procedure, the autoextraction of one of his upper teeth.

Now it is a jagged black stump, and the pain gnawing at Mr. Kelly's mouth has transferred itself to a different tooth, mottled and rickety, on the other side of his mouth. "I'm in the middle of pulling that one out, too," he said. [ . . .]

A recent Guardian newspaper article about the company titled "D.I.Y. Dentistry" (meaning Do It Yourself) said that the previous week British drugstores had sold 6,000 jars of the filling replacement, and 6,000 of the crown-and-cap replacement.

Keep this article handy to show to the next person who advocates a state-funded health care finance system for the U.S.

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February 27, 2006

Canadian health care finance system implosion?

Following on this post from last week regarding the Veterans Administration as a model for a government-sponsored health care finance system, this NY Times article reports that the Canadian government-administered health care finance system -- which has been widely-heralded as a model for a similar U.S. system -- is showing signs of imploding as a result of a recent Canadian Supreme Court decision:

Canada remains the only industrialized country that outlaws privately financed purchases of core medical services. Prime Minister Stephen Harper and other politicians remain reluctant to openly propose sweeping changes even though costs for the national and provincial governments are exploding and some cancer patients are waiting months for diagnostic tests and treatment.

But a Supreme Court ruling last June — it found that a Quebec provincial ban on private health insurance was unconstitutional when patients were suffering and even dying on waiting lists — appears to have become a turning point for the entire country.

"The prohibition on obtaining private health insurance is not constitutional where the public system fails to deliver reasonable services," the court ruled.

The Times article goes on to report that the Canadian Supreme Court decision is spurring the markets to respond to the deficiencies in the Canadian government-administered system:

The country's publicly financed health insurance system — frequently described as the third rail of its political system and a core value of its national identity — is gradually breaking down. Private clinics are opening around the country by an estimated one a week, and private insurance companies are about to find a gold mine.

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February 23, 2006

The V.A. as a reform model for the health care finance system?

My late father had extensive experience in providing and administering medical care in the Veterans Administration system, which he used to characterize as a good example of an unnecessary governmental program that perpetuated itself because of the vested interests of those who administer and profit from the system. "It's a reasonably competent system for dispensing penicillen," he once observed to me. "But you wouldn't want to have gall bladder surgery over there."

Thus, imagine my surprise a few weeks ago when NY Times columnist Paul Krugman, in his generally informative series on America's broken health care finance system, authored this Times Select ($) column in which he touts the VA system as a model for a single-payor, government-administered health care finance system in the US:

American health care is desperately in need of reform. But what form should change take? Are there any useful examples we can turn to for guidance?

Well, I know about a health care system that has been highly successful in containing costs, yet provides excellent care. And the story of this system's success provides a helpful corrective to anti-government ideology. For the government doesn't just pay the bills in this system -- it runs the hospitals and clinics.

No, I'm not talking about some faraway country. The system in question is our very own Veterans Health Administration, whose success story is one of the best-kept secrets in the American policy debate.

Krugman goes on to extol the virtues of the VA's integrated system, which includes the government's superior ability to "bargain hard with medical suppliers, and pay far less for drugs than most private insurers."

Clear Thinkers favorite Peter Gordon sums up what my father's opinion of Krugman's analysis almost certainly would be:

This is very cool. I imagine that nearly everything could be obtained cheaply if only the federal government were put in charge to "bargain hard."

Silly me. I fear that the government is an expensive middleman. I fear that it is a highly politicized middleman. And I fear that with enough hard bargaining, suppliers will leave the industry -- as many have ever since Medicare and Medicaid began to "bargain hard."

Think of the many readers of the NY Times op-ed page, many predisposed to this silliness, who get their public policy economics from Krugman.

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January 27, 2006

We have seen the enemy, and it is us

The Washington Post's Robert J. Samuelson has seen the problem with the American health care finance system -- it's us:

Americans generally want their health care system to do three things: (1) provide needed care to all people, regardless of income; (2) maintain our freedom to pick doctors and their freedom to recommend the best care for us; and (3) control costs. The trouble is that these laudable goals aren't compatible. We can have any two of them, but not all three. Everyone can get care with complete choice -- but costs will explode, because patients and doctors have no reason to control them. We can control costs but only by denying care or limiting choices.

Disliking the inconsistencies, we hide them -- to individuals. We subsidize employer-paid health insurance by excluding it from income taxes (the 2006 cost to government: an estimated $126 billion). Most workers don't see the full costs of their health care; a reported Bush proposal to add new tax subsidies would magnify the effect. A similar blindness applies to Medicare recipients, whose costs are paid mainly by other people's payroll taxes. Despite complaints about rising co-payments and deductibles, out-of-pocket costs are still falling as a share of all health spending. In 2004, they were 12.5 percent; in 1993, they were 15.8 percent.

We're living in a fantasy world.

Given our inconsistent expectations, no health care system -- not one completely run by government or one following "market" principles -- can satisfy public opinion. Politicians and pundits can score cheap points by emphasizing one goal or another (insure the uninsured, cover drugs for Medicare recipients, expand "choice") without facing the harder job: finding a better balance among competing goals.

. . . [Thus] the real problem is us. We demand the impossible. The changes we truly need are political. We need to reconnect people with the public consequences of their private acts. We should curb the subsidization of private insurance. Medicare recipients, especially wealthier ones, should pay more of their bills. But these changes won't happen because people don't want to see the costs. We don't have the health care system we need, but we do have the one we deserve.

Mr. Samuelson is spot on, so read his entire piece. My sense is that making care available to people regardless of income is an achievable goal, although American society will probably always struggle with the problem of inducing an optimal number of citizens to take personal responsibility for preventive care. But what really makes health care finance reform difficult is the political preoccupation with keeping citizens insulated from the true cost of health care through providing subsidies in the guise of health "insurance." Until that changes, Samuelson is right -- politicians will continue to play political football with the perks of the existing disjointed health care finance system without facing the knotty problem of balancing the competing goals of a well-conceived system.

Posted by Tom at 7:17 AM | Comments (3) | TrackBack (0)

December 19, 2005

Economic ripples from the tax subsidy for employer-based health insurance

Following on prior posts here, here, here and here, this NY Times article addresses the unhealthy economic effect of the favored tax treatment of employer-based health insurance. As opposed to individual health insurance policies, employer-based health insurance is a tax deductible expense of the employer and employees are not required to report the economic benefit of that policy as taxable income on their individual returns. The amount of the subsidy (in foregone tax collections) is about $150 billion and is expected to increase to $180 billion by 2010. As Harvard economist David Cutler notes: "If you had $150 billion to play with, you could come very close to universal coverage."

Nevertheless, making employed taxpayers pay income tax on the value of their employer-based health insurance would be enormously unpopular politically, and the Times article reports that MIT economist Jonathan Gruber sees other problems as well:

As soon as the tax break was eliminated, company-provided health insurance would be likely to disappear, too. So some mechanism would be needed to pool groups of people and to avoid leaving higher-risk people to face enormous insurance costs. Such a mechanism would probably make health insurance affordable for all. And to make it universal, a mandate would be needed to make people buy it.

This isn't communism. The changes could happen under a public health care system or one that is privately run.

Despite the knotty political problems involved in ending the tax subsidy for employer-based health insurance, the article notes the clear benefits from doing so:

[T]he fiscal incentive isn't helping many of the people who need it most. A report by the Kaiser Family Foundation says two-thirds of the 45.5 million Americans who lacked health insurance in 2004 earned less than twice what the federal government defines as poverty. (For a family of four, the poverty line is about $19,300.) In four of every five cases, the uninsured made less than three times the poverty level.

In addition to going to the wrong people, the subsidy as designed promotes wasteful medical spending, encouraging the wealthy to buy more insurance and to use more health services than they need, according to the president's tax panel. And it may bolster premiums across the board.

Altogether, the health insurance tax break exacerbates America's medical dystopia: while the nation has the highest per-capita spending on health in the world - about $5,400 in 2002 - 18 percent of the population under 65 remains uninsured.

Read the entire article.

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December 15, 2005

We don't really want true health insurance

Clear Thinkers favorite Arnold Kling has been doing extensive research on health care finance issues over the past couple of years and, as noted in this insightful TCS Daily op-ed, he is coming to the conclusion that one of the main problems with the U.S. health care finance system is that most Americans simply do not want to pay for true health insurance:

What we are left with, then, is that people do not want real health insurance. I would gladly take a health insurance policy with a $10,000 deductible per individual, and I suspect that many of my wise, risk-averse TCS readers would, too. But we are in a tiny minority! Most people do not want to be responsible for the first $10,000 in medical expenses, and most people believe that an insurance policy that is expected to pay no claims 95 percent of the time is a bad deal.

I am willing to claim that no insurance market in history ever arose because of spontaneous demand on the part of consumers. Maritime insurance, which was one of the first forms of insurance, was demanded by creditors as a condition for lending money to shippers. Life insurance also initially arose to meet the needs of creditors who were lending money to pensioners. Homeowners' insurance is standard because it protects mortgage lenders. Collision insurance for autos is optional if you own yours free and clear, but not if you still owe money to the finance company. . .

What we call health insurance also arose to meet the needs of creditors. In this case, the creditors were doctors and hospitals, who wanted assurance that they would be paid for service. Comprehensive, first-dollar health coverage, which is not really health insurance, protects suppliers, not consumers.

For the most part, people buy insurance because it is mandated by others. Insurance does not have a large natural market.

Read the entire piece, in which Kling goes on to endorse mandatory catastrophic health insurance, but concedes that most Americans will not embrace such a proposal because they mistakenly continue to believe that employer-based health insurance provides them something for free or at least at far lesser cost than they would pay directly.

Meanwhile, over at the Journal Report, Joseph Antos, who was former assistant director for health and human resources at the Congressional Budget Office, John C. Goodman, founder and president of the National Center for Policy Analysis, and Robert Reischauer, president of the Urban Institute and vice chair of the Medicare Payment Advisory Commission discuss the issue of whether introducing wide-scale consumer choice back into the health care finance industry can have a large beneficial effect on the current inefficiencies in that system. I highly recommend both Kling's piece and the Journal Report for provocative thoughts on the problems confronting America's creaking system of health care finance.

Posted by Tom at 8:01 AM | Comments (4) | TrackBack (0)

October 31, 2005

Wal-Mart's health care finance problem

One of the often overlooked historical aspects of America's health care finance crisis is that employer-based medical insurance was largely non-existent until World War II. During the war, governmental wage and price controls prompted employers to offer medical insurance as a means to attract scarce labor without violating the wage controls. Employers quickly realized that such insurance was a cheaper way to attract labor than increasing wages, so the concept of employer-based medical insurance became a standard component of many American employers' compensation plans for employees over the past generation.

Well, as this NY Times article notes, the market distortion of substituting medical insurance for direct employee compensation has generally benefitted employers, but now rising health care costs are making employer-based medical insurance more expensive than simply paying employees direct compensation. The Times article notes the following about Wal-Mart, which employs a large number of low wage earners:

The Wal-Mart work force reflects a growing fear of many employers that the people who work for them are increasingly at risk for health problems. Many of Wal-Mart's employees are obese, the company says, and a result is rapidly rising numbers of cases of diabetes or heart disease. The prevalence of these diseases among Wal-Mart employees is increasing much faster than the national average, it says.

"The low-income population generally is not as healthy and does not engage as much in preventive care," said Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured. A risk that a company like Wal-Mart faces, especially when it competes with smaller retailers that offer no insurance at all, Ms. Rowland said, is attracting too many workers who want the job primarily for the health coverage.

Inasmuch as Wal-Mart pays its employees relatively low wages but provides a good employee medical insurance plan, the company is experiencing what economists call "adverse selection" -- as the value of the wage component of the Wal-Mart employee compensation package has declined relative to the value of the health insurance component, Wal-Mart is attracting an unhealthier class of workers who apply for job at Wal-Mart primarily for the generous medical insurance. Wal-Mart's management is attempting to reverse this trend by seeking to attract a healthier type of worker who is not seeking the job primarily for the medical insurance.

Nevertheless, the core of Wal-Mart's problem is the market distortion in the employee compensation system that derives from substituting employer-based medical insurance for direct compensation. Couple that market distortion with the equally misleading economic impact of having third-party insurers pay for most health care choices and you have gone a long way towards understanding the basis of America's flawed health care finance system. Alex Tabarrok has more on the issue over at Marginal Revolution.

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August 25, 2005

Key questions on American health care

Malcolm Gladwell's recent New Yorker polemic regarding the state of American health care prompts Marginal Revolution's Tyler Cowen to post this handy list of observations on the key issues facing the American health care system. One point that Tyler makes is particularly important:

The U.S. health care system probably is the world's best for some class of people, namely the well-off and I don't mean just the super-rich. Trying to extend those benefits -- however this might be accomplished -- is a better approach than nationalizing the sector.

Mr. Gladwell's piece falls into the common trap of blurring the issues relating to the quality of American health care -- which is quite good -- with the issues pertaining to the way in which America finances health care, which is not so good. Tyler's post does a much better job of delineating that key distinction.

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August 19, 2005

Merck gets hammered

As anticipated by this prior post, a Brazoria County jury found that Merck & Co. was liable for $253 million in damages ($24 million in actual damages, plus $229 million in punitive damages) as a result of its negligence in the death of a 59-year-old Robert Ernst, who at the time of death was taking Merck's prescription painkiller Vioxx that over 20 million Americans took regularly before it was pulled from the market last year over concern that it might cause increased risk of strokes and heart attacks. The prior posts on the Merck/Vioxx trial are here, here, and here.

Inasmuch as Merck is currently facing another 4,200 Vioxx lawsuits, the verdict is not exactly a rousing start for Merck in the defense of the lawsuits. Merck's defense in the lawsuit seemed to be reasonably strong -- that is, Mr. Ernst, who had only taken Vioxx for eight months, died of arrhythmia that Vioxx has not been shown to cause. However, the Brazoria County coroner testified -- over Merck's strenuous objection because of the plaintiff's failure to designate the coroner as an expert prior to trial -- that Mr. Ernst's arrhythmia could have been caused by a heart attack. That testimony seemed to hurt Merck badly, as the Chronicle interviewed an alternate juror who had been dismissed from the trial immediately before deliberations began who remarked that Merck "wasn't doing the right thing by marketing the drug the way they were." Plaintiff's lawyer Mark Lanier accused Merck of dragging its feet after the Food and Drug Administration told it in late 2001 to put a label on Vioxx warning of potential heart risks, and during closing arguments, Mr. Lanier contended that Merck saved $229 million by waiting months to add the warning label. Not surprisingly, that's the amount of of punitive damages awarded by the jury.

Estimates of Merck's potential liability in the Vioxx cases range from $4 billion to $20 billion, which could be as large as a third of Merck's market capitalization. Although the price of Merck's shares dropped 8% today on the news of the verdict, that's not as bad as the 25% plus decline that occurred last September on the day Merck withdrew Vioxx from the market. Moreover, media reports on the jury's verdict have not differentiated between the plaintiff's economic and non-economic damages, but that distinction will be important to Merck's ultimate liability in this case when the court applies Texas' statutory cap on punitive damages to the jury verdict. You can be reasonably certain that the ultimate amount recovered will be far less than the jury verdict. Given that, and in view of the fact that Brazoria County is going to be one of the more plaintiff-friendly jurisdictions for a Vioxx trial, the market may be overreacting a bit to the verdict, although that's about the best spin that Merck can put on this result.

As usual, Professor Ribstein has insightful comments on the absurdity of all this, as does Ted Frank, Professor Bainbridge, Kevin M.D., Derek Lowe, Jonathon Wilson, and Walter Olsen.

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August 9, 2005

The politics of charity in the world of health care

Wealthy Houston plaintiff's lawyer John O'Quinn (earlier posts here and here) recently proposed to donate $25 million to St. Luke's Episcopal Hospital -- the largest gift in the hospital's 50 year history -- in return for renaming the hospital's highly-recognizable medical tower the "O'Quinn Medical Tower at St. Luke's."

Well, the Chronicle's Todd Ackerman, who does a fine job of staying on top of Medical Center stories, reports in this article that the St. Luke's board's decision to accept the donation from Mr. O'Quinn is not going over well with a number of St. Luke's doctors:

The plan to rename the edifice after John O'Quinn in recognition of a $25 million donation by his foundation has infuriated many St. Luke's doctors, who last week began circulating a petition against it and Monday night convened an emergency meeting of the medical executive committee.

"Perhaps you are unaware of the intensity of feelings held by many physicians about Mr. John O'Quinn," says the petition, which is addressed to the Rev. Don Wimberly, bishop of the Episcopal Diocese of Texas and chairman of the St. Luke's Episcopal Health System board of directors. "The primary source of his financial success has been representing plaintiffs in medical liability and products liability cases, many of them groundless."

Dr. Priscilla Ray, a psychiatrist who wrote the petition, said that even though doctors were let out of the breast-implant litigation, it was onerous because they had to hire lawyers, prepare for trial and be deposed.

"The bottom line is, Mr. O'Quinn has contributed toward the litigious environment in which doctors work, toward the changed relationship between doctors and patients," said Ray. "Now, doctors have to fight not to see each patient as potential plaintiff, and patients might have impaired confidence in their doctor."

"It offends us to have money we earned � and which he took by suing us � going to name after him a medical building in which we work each day," says the petition. "The naming of buildings at the law school or perhaps at a medical liability carrier seems much more appropriate."

Well, the University of Houston is way ahead of the docs on that idea, as the law school has already named its library after Mr. O'Quinn. But now that idea on the medical liability carrier building . . .

Despite the current hub-bub, my sense is that this will die down soon and the board's decision to accept the donation will not be changed. Raising funds is too important in the dog-eat-dog worlds of academic medicine and health care finance to let little things such as principle stand in the way of a big donation.

Posted by Tom at 6:21 AM | Comments (2) | TrackBack (2)

July 26, 2005

The essential problem with third party payor health care finance

This outstanding Washington Post article (first in a series of three) on Medicare nails the key problem with reliance on third party payor health care finance systems:

In Medicare's upside-down reimbursement system, hospitals and doctors who order unnecessary tests, provide poor care or even injure patients often receive higher payments than those who provide efficient, high-quality medicine. . .

Researchers at Dartmouth Medical School, who have been studying Medicare's performance for three decades, estimate that as much as $1 of every $3 is wasted on unnecessary or inappropriate care. Other analysts put the figure as high as 40 percent.

Medicare has difficulty controlling waste because of deficiencies in the way it monitors and enforces quality standards. Its oversight system is fragmented, underfunded and marred by conflicts of interest, records and interviews show . . .

Read the entire article, including the sidebar containing related articles and graphs and the subsequent articles here and here. It's a first rate series.

Posted by Tom at 6:21 AM | Comments (0) | TrackBack (0)

July 11, 2005

The first Vioxx trial

Jury selection begins today in Angleton, Texas in the first personal injury/wrongful death trial against Merck & Co. for alleged non-disclosure of the risks of taking the pain relieving drug Vioxx. Angleton is a small town in a plaintiff-friendly county about an hour south of downtown Houston. Talented Houston-based personal injury trial lawyer Mark Lanier has been receiving quite a bit of free publicity about the upcoming trial (here is the NY Times article and an earlier WSJ ($) article is here), and here are several previous posts on Merck and Vioxx.

Mr. Lanier's effectiveness as a trial lawyer is in no small part attributable to the fact that he is a devout Christian who regularly teaches a Bible Study class at his church in Houston. Such familiarity with the Bible typically resonates with jurors in small Texas towns, who often rationalize tenuous liability and damage issues through Biblical associations.

Curiously, as Professor Ribstein has pointed out, Mr. Lanier's case against Merck is based largely on the very un-Biblical concept of resentment and not the truth. Merck pulled Vioxx from the market in October, 2004 after a study showed that it increased the risk of heart attack or stoke, but not necessarily the risk of death. That move prompted Cleveland Clinic cardiologist Eric Topol to go postal over Merck's handling of the drug, contending that Vioxx resulted in 15 cases of heart attack or stroke per 1,000 patients.

Unfortunately, what Dr. Topol failed to mention is that the foregoing number of cases relating to Vioxx was precisely seven more cases of heart attack or stroke per 1,000 patients taking the similar medication, Naprosyn. Moreover, as MedPundit points out, Dr. Topol neglected to mention that aspirin -- which is regularly prescribed without controversy for heart attack and stroke prevention -- results in a clinically significant case of bleeding in every 3 out of 1,000 patients. Thankfully, aspirin has not been pulled from the market, at least yet.

Moreover, the statistical bungling got even worse. David Graham, the associate director for science in FDA's office of drug safety, took the results of these studies and without any sub-group analysis calculated that 27,785 heart attacks may have occurred between 1999 and 2003 as a result of Vioxx use based on the number of Vioxx prescriptions. That was music to the ears of the plaintiffs personal injury bar, but the music was a bit tinny given that his conclusion was not based on the number of Vioxx users who truly should have been counted. Rather, it is based on the the number of patients who were on Vioxx continuously for more than 18 months as indicated in the studies that showed an increased risk of cardiovascular problems. Thus, the statistical evidence is quite shaky that short-term or periodic use of Vioxx contributes to an increase risk of cardiovascular problems. Not surprisingly, the initial trials of Vioxx were all shorter than 18 months and they did not find any meaningful evidence of increased risk.

As my late father often observed, the truth is that medicines are toxins that have side effects that sometimes kill people. Vioxx was developed to address the problem of patients who regularly die as a result of the use of non-steroidal anti-inflammatory medications for chronic pain. Studies reflect that about 16,500 patients die and another 100,000 are hospitalized annually as a result gastrointestinal bleeding from the use of these NSAID medications for chronic pain. The number of people who have suffered heart attacks and strokes as a result of the long-term use of Vioxx pale in comparison to these numbers.

The foregoing is not meant to be a defense of Merck or other drug companies. It's simply to point out that Vioxx is not unusual -- most medications have potentially serious side effects. Perhaps there should be more rigorous FDA approval process for new drugs and maybe the FDA should be given the power to require drug companies to fund research to evaluate possible side effects that emerge after a drug is approved and large numbers of patients begin using it. However, those moves are more likely to result in a longer approval process for new drugs and even higher cost for most medications than better patient safety. Moreover, increased regulation raises the sticky issue of establishing parameters to decide if and when a certain side effect in a new drug would require pulling that drug from the market. Stated another way, just when do the risks of a medication outweigh the benefits of the drug in treating a certain disease or medical condition?

Thus, these are the issues that we need to be discussing in regard to medications such as Vioxx. However, the reality is that analysis of such issues is unlikely to be anywhere near as appealing to the jury in Angleton as Mr. Lanier's morality play. Where is the Biblical justification for that?

Posted by Tom at 5:40 AM | Comments (3) | TrackBack (5)

July 7, 2005

Huge health insurer grows even larger

Minnetonka, Minn.-based UnitedHealth Group Inc., the second largest health insurer in the U.S., announced yesterday that it had agreed to acquire Cypress, Calif.-based PacifiCare Health Systems Inc. for $8.1 billion in cash and stock. The huge deal is the latest in a series of consolidations that is reshaping the U.S. employer health insurance industry, a trend that affects thousands of workers in the large medical services sector of Houston's economy.

The consolidation trend in the employer health insurance is noteworthy also because traditional employer health insurance has been losing market share over the past 15 years because of rising costs. Although almost 80% of U.S. workers in the private sector were covered by traditional employer health insurance in 1990, only 56% of of those workers were covered by such insurance in 2003, and the decline has accelerated over the past five years. The deal also narrows the gap in subscriber bases between UnitedHealth and the largest U.S. health insurer -- WellPoint Inc (formerly Anthem) -- which has 28.5 members.

UnitedHealth's strongest subscriber bases are in the East, Midwest and South, and it has been raising premiums and doing well financially over the past several years. The company's earnings per share have grown at least 30% annually over each of the past four years while the value of the company's shares have tripled over that period. Over that same period, UnitedHealth has has gained nearly five million members from acquisition of other health insurers alone. Under the proposed merger, UnitedHealth would exchange 1.1 of its shares plus $21.50 in cash for each PacifiCare share, which means that the total consideration for the merger would be approximately 111.6 million shares and $2.2 billion in cash. If the deal closes, PacifiCare's 3 million health-plan members would join UnitedHealth's 23 million member base and increase UnitedHealth's presence in three key markets -- California, senior citizens under Medicare, and specialty benefits, such as vision and dental benefits.

Interestingly, the acquisition reflects a big bet that UnitedHealth is making on the Medicare market. PacifiCare has been an industry leader in positioning itself to take advantage of new Medicare opportunities set to begin in 2006 -- including a new government-funded prescription-drug benefit for seniors -- while emphasizing commercial health plans for individual and small group markets in California and other western states.

Posted by Tom at 4:30 AM | Comments (0) | TrackBack (0)

June 9, 2005

Comparing the British and American health care systems

David Asman is an anchor at the Fox News Channel and host of "Forbes on Fox." In this must read piece for anyone interested in the differences between a centralized and a decentralized health care finance system, Mr. Asman compares the care and cost that his wife received in the British and American health care systems earlier this year after she suffered a serious stroke during a vacation in London. The entire op-ed is interesting, but I found the following observation particularly telling:

When I received the bill for my wife's one-month stay at Queen's Square [Hospital, in London], I thought there was a mistake. The bill included all doctors' costs, two MRI scans, more than a dozen physical therapy sessions, numerous blood and pathology tests, and of course room and board in the hospital for a month. And perhaps most important, it included the loving care of the finest nurses we'd encountered anywhere. The total cost: $25,752. That ain't chump change. But to put this in context, the cost of just 10 physical therapy sessions at New York's Cornell University Hospital came to $27,000--greater than the entire bill from British Health Service!

There is something seriously out of whack about 10 therapy sessions that cost more than a month's worth of hospital bills in England. Still, while costs in U.S. hospitals might well have become exorbitant because of too few incentives to keep costs down, the British system has simply lost sight of costs and incentives altogether.

Meanwhile, Washington Post business columnist Steve Pearlstein contends in this column that most Americans are willing to dispense with market allocation in regard to health care:

For most Americans, providing health care ought to be different from selling soap; they won't tolerate doctors acting like commissioned salesmen and investment bankers. And if that means having less market competition and more regulation in the health care system, it seems to be a trade-off they're willing to make.

H'mm, I'm not so sure about that. Hat tip to Arnold Kling for the links to the articles.

Posted by Tom at 6:02 AM | Comments (8) | TrackBack (0)

May 23, 2005

The potential effect of the human genome on health insurance

Doctor and author Robin Cook has re-evaluated his view on universal health insurance based on advances in academic understanding of the human genome. In this NY Times op-ed, Dr. Cook notes the following:

In this dawning era of genomic medicine, the result may be that the concept of private health insurance, which is based on actuarially pooling risk within specified, fragmented groups, will become obsolete since risk cannot be pooled if it can be determined for individual policyholders. Genetically determined predilection for disease will become the modern equivalent of the "pre-existing condition" that private insurers have stringently avoided.

As a doctor I have always been against health insurance except for catastrophic care and for the very poor. It has been my experience that the doctor-patient relationship is the most personal and rewarding for both the patient and the doctor when a clear, direct fiduciary relationship exists. In such a circumstance, both individuals value the encounter more, which invariably leads to more time, more attention to potentially important details, and a higher level of patient compliance and satisfaction - all of which invariably result in a better outcome.

But with the end of pooling risk within defined groups, there is only one solution to the problem of paying for health care in the United States: to pool risk for the entire nation. (Under the rubric of health care I mean a comprehensive package that includes preventive care, acute care and catastrophic care.) Although I never thought I'd advocate a government-sponsored, obviously non-profit, tax-supported, universal access, single-payer plan, I've changed my mind: the sooner we move to such a system, the better off we will be. Only with universal health care will we be able to pool risk for the entire country and share what nature has dealt us; only then will there be no motivation for anyone or any organization to ferret out an individual's confidential, genetic makeup.

Hat tip to the HealthLawProf Blog for the link.

Posted by Tom at 5:29 AM | Comments (2) | TrackBack (0)

March 14, 2005

Refining ideas on health care finance

David Cutler is a Harvard economist who was involved in the failed Clinton Administration initiative in the early 1990's to reform America's health care finance system. This NY Times Sunday Magazine article examines Professor Cutler's evolving views on health care finance reform, and a number of them are quite interesting:

Cutler's approach is radically different. He says that most health-care spending is actually good. Spending has been rising, he says, because it delivers positive, and measurable, economic value, and because it can do more things that Americans want. Therefore, Cutler says, we should focus on improving the quality of care rather than on reducing our consumption of it. Rather than pay less, he wants to pay more wisely -- to encourage health-care providers to do more of what they should and less of what is wasteful.

A tweedy, self-effacing 39-year-old, Cutler is a seriously modified lefty. He envisions a system in which everyone could get insurance while free-market incentives would motivate health-care providers to be more effective as well as more efficient. Instead of suppressing the market by rationing care, restraining prices or regulating doctors, he wants to liberate it. It is neither Clinton nor Bush -- but closer to Bill Bradley, whose 2000 campaign Cutler advised.

To make coverage universal, Cutler advocates a $6,000 credit for poor families (and less, on a sliding scale, for others, tapering off to a small credit for people earning $50,000 and up). The credits would be redeemable as a sort of health-insurance voucher. Significantly, Cutler would extend credits to everyone -- even to people who are covered now. Many employers, for competitive reasons, would still offer coverage, but access to care would no longer depend on either employment status or age.

The problem is that most health care finance policy wonks believe that health care spending is "out of control" and, thus, Professor Cutler's approach would make that spiral worse. However, the wonk solution -- a single payor government system -- simply creates even worse problems. Professor Cutler's focus on the qualitative side of the problems is refreshing and merits serious consideration.

Finally, note that Professor Cutler's ideas are similar in several ways to the ideas addressed in this previous post on business theorist Michael Porter's views on reforming the health care finance system.

Posted by Tom at 6:38 AM | Comments (0) | TrackBack (0)

March 10, 2005

More on those pesky medical malpractice premiums

Following on this post from a couple of weeks ago, this NY Times op-ed by University of Texas law professors Bernard Black and Charles Silver, University of Illinois law professor David Hyman, and Columbia law professor William Sage contends that there recent study of malpractice awards in Texas indicates that there is scant evidence that a crisis in states' tort systems is the driving force behind the increases in medical malpractice insurance premiums. Here is how they summarize the results of their review of all closed claims in Texas between 1988 and 2002, which was the year before the Texas Legislature enacted sweeping tort reform measures:

Large claims (with payouts of at least $25,000 in 1988 dollars) were roughly constant in frequency.

The percentage of claims with payments of more than $1 million remained steady at about 6 percent of all large claims.

The number of total paid claims per 100 practicing physicians per year fell to fewer than five in 2002 from greater than six in 1990-92.

Mean and median payouts per large paid claim were roughly constant.

Jury verdicts in favor of plaintiffs showed no trend over time.

The total cost of large malpractice claims was both stable and a small fraction (less than 1 percent) of total health care expenditures in Texas.

In short, as far as medical malpractice cases are concerned, for 15 years the Texas tort system has been remarkably stable.

The authors conclude as follows:

Malpractice premiums have risen sharply in Texas and many other states. But, at least in Texas, the sharp spikes in insurance prices reflect forces operating outside the tort system.

The medical malpractice system has many problems, but a crisis in claims, payouts and jury verdicts is not among them. Thus, the federal "solution" that Mr. Bush proposes is both overbroad and directed at the wrong problem.

Unfortunately, this is not an unusual approach for the Bush Administration to follow in enacting legislation, as reflected by this legislation.

Posted by Tom at 8:36 AM | Comments (1) | TrackBack (0)

February 23, 2005

The pesky reality of high medical malpractice premiums

This New York Times article entitled "Behind Those Medical Malpractice Rates" addresses the myth that Bush Administration and Republican Party-fueled propaganda campaigns continue to promote in their quest to limit for damage-limit legislation:

[F]or all the worry over higher medical expenses, legal costs do not seem to be at the root of the recent increase in malpractice insurance premiums. Government and industry data show only a modest rise in malpractice claims over the last decade. And last year, the trend in payments for malpractice claims against doctors and other medical professionals turned sharply downward, falling 8.9 percent, to a nationwide total of $4.6 billion, according to data.

Lawsuits against doctors are just one of several factors that have driven up the cost of malpractice insurance, specialists say. Lately, the more important factors appear to be the declining investment earnings of insurance companies and the changing nature of competition in the industry. The recent spike in premiums - which is now showing signs of steadying - says more about the insurance business than it does about the judicial system.

Even the connection limiting damages and reducing costs for doctors is not even well-established:

[S]ome researchers are skeptical that caps ultimately reduce costs for doctors. Mr. Weiss of Weiss Ratings and researchers at Dartmouth College, who separately studied data on premiums and payouts for medical mistakes in the 1990's and early 2000's, said they were unable to find a meaningful link between claims payments by insurers and the prices they charged doctors.

"We didn't see it," said Amitabh Chandra, an assistant professor of economics at Dartmouth. "Surprisingly, there appears to be a fairly weak relationship.

The Times article reiterates many of the same points that are made in the June 2003 GAO report entitled Medical Malpractice Insurance: Multiple Factors Have Contributed to Premium Rate Increases and this subsequent August 2004 Congressional testimony of GAO researchers on the same topic.

Make a note of the Times article and the these GAO resources the next time that you hear a demagouge declare that legislative caps on damages will reduce high medical malpractice premiums. Appealing to public bias against unpopular plaintiffs' lawyers by promoting such legislation as a cure for high malpractice premiums amounts to rearranging the deck chairs on the Titanic. High medical malpractice premiums are a result of America's broken health care finance system, and until we force our politicians to address the problems in that system, medical malpractice rates will continue to rise.

Hat tip to the HealthCareProf Blog for the links to the GAO resources.

Update: For a critique of the Times article's conclusions, check out this Walter Olson post and this subsequent post over at the PointofLaw.com.

Posted by Tom at 7:32 AM | Comments (3) | TrackBack (1)

February 22, 2005

Novartis rocks medical community with $8.4 billion expansion of generic drug empire

Swiss pharmaceuticals giant Novartis AG announced over the weekend an $8.4 billion expansion of its generic drug holdings in a move that is widely viewed in the drug and medical communities as the continuation of trend toward consolidation in the generic drug sector. As a result of the deal, Novartis will become the world's largest seller of generic drugs at a time when it is already the top seller of branded drugs. Novartis had total world-wide sales last year of just under $30 billion.

Novartis will pay $7.4 billion to buy Hexal AG of Germany and 68% of Eon Labs Inc., which are two generic-drug makers that are controlled by Germany's wealthy Str�ngmann family. As a part of the deal, Novartis will also launch a tender offer to acquire the balance of Eon shares for about another billion.

The generic drug industry has exploded in growth since the 1980s when U.S. law was modified to make it easier for drug companies to copy successful branded drugs. As a result, the generic drug industry became increasingly aggressive at challenging the legality of branded drug patents in court, which has often resulted in patents being overturned years ahead of the normal term.

Nevertheless, the sector has always been highly fragmented and now its profits are being squeezed by brutal price competition. Thus, these difficult market conditions are prompting consolidations in the generics business, and the Novartis deal reflects that the branded drug companies are going to be involved in the consolidation in a big way.

Posted by Tom at 8:30 AM | Comments (1) | TrackBack (0)

February 10, 2005

Latest Econoblog -- Reform of health care finance

Don't miss the latest segment (no subscription required for this series) in the Wall Street Journal's Econoblog series, in which economist John Irons and George Mason University economics professor Russ Roberts discuss America's broken health care finance system.

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February 9, 2005

GM's big problem

Alan Murray's column today in the Wall Street Journal ($) reports on the subject of General Motors CEO Rick Wagoner's speech tomorrow to the Chicago Economic Club.

What do you think it would be? International trade barriers? GM's bonds being rated at junk levels? Declining GM profits?

None of the above.

Instead, [Mr. Wagoner will] focus on fixing the U.S. health-care system.

[Mr. Wagoner] runs not only the world's largest auto maker (a position threatened by Toyota Motor), but also the nation's largest private health-care purchaser (a position threatened by no one.) He's responsible for the health of some 1.1 million people, most of them retirees and their families, and paid $5.2 billion last year for the privilege. The cost of health care now adds more than $1,500 to every vehicle sold, and is rising at double-digit rates. . . To cure what ails General Motors, he has to cure what ails America: a very sick health-care system.

Mr. Murray then frames the issue nicely:

The U.S. spends a fortune on health care -- 15% of its total output, compared with 10% in Germany and 8% in Japan. But it gets a lousy return on that money. Forty-five million Americans lack health insurance. . .

Curing the problem won't be easy -- which may be why the White House has put it on a back burner. . . fixing health care ultimately is more important to the nation's future than overhauling Social Security, rewriting the tax code or cutting discretionary spending. But Mr. Bush wrestled with health care in his first term, and has decided to give these other issues top billing in his second. That means there's little chance he'll have the time or energy to give serious attention to health care again before leaving office.

If costs continue to rise at their current pace, however, you can expect Mr. Wagoner and his business buddies to join forces with beleaguered state governors and insist that health care become the issue of the 2008 presidential campaign.

Meanwhile, Harvard Law and former University of Texas law professor Elizabeth Warren pens this Washington Post op-ed today in which she addresses the recent Harvard study that found that half of the nearly 1,800 study participants interviewed admitted that medical costs had been the primary cause of their bankruptcy filing. As Professor Warren notes:

The problem is not in the bankruptcy laws. The problem is in the health care finance system and in chronic debates about reforming it. The Harvard study shows:

� Health insurance isn't an on-off switch, giving full protection to everyone who has it. There is real coverage and there is faux coverage. Policies that can be canceled when you need them most are often useless. So is bare-bones coverage like the Utah Medicaid program pioneered by new Health and Human Services Secretary Mike Leavitt; it pays for primary care visits but not specialists or hospital care. We need to talk about quality, durable coverage, not just about how to get more names listed on nearly-useless insurance policies.

� The link between jobs and health insurance is strained beyond the breaking point. A harsh fact of life in America is that illness leads to job loss, and that can mean a double kick when people lose their insurance. Promising them high-priced coverage through COBRA is meaningless if they can't afford to pay. Comprehensive health insurance is the only real solution, not just for the poor but for middle-class Americans as well.

Without better coverage, millions more Americans will be hit by medical bankruptcy over the next decade. It will not be limited to the poorly educated, the barely employed or the uninsured. The people financially devastated by a serious illness are at the heart of the middle class.

As noted in this post on the funding crisis in Medicaid, the failure to address the true crisis in this country -- i.e., the broken down system of financing health care -- is not only a daunting failure of the Bush Administration and the Republican Party, but a huge political opportunity for the Democratic Party.

If the Dems can resist their normal temptation to address the problem through nationalizing the entire health care finance system, then the Democrats could establish a political foothold that could cut across normal party lines and provide the party with the basis for a comeback in the 2006 and 2008 elections.

Posted by Tom at 6:58 AM | Comments (3) | TrackBack (0)

February 7, 2005

The looming fiscal crisis over Medicaid

This Wall Street Journal ($) article is an excellent overview of how subsidizing Medicaid is overwhelming state budgets across the country. The article uses the state of Mississippi as an example, where federal and state funding of the program has doubled from $1.8 billion to $3.5 billion over the past five years:

In the current fiscal year, which ends June 30, Medicaid is projected to cost $268 million more than the state budgeted. Officials are now warning that the program will run out of money by the end of this month unless the legislature passes an emergency appropriation. To open up funds for Medicaid, the state has slashed road construction and may delay plans to raise the salaries of public-school teachers who earn an average of about $35,000 a year.

Forty years ago, Congress, as an afterthought to the Medicare program for the elderly, created Medicaid to help pay for the medical needs of about four million low-income people. Today, the program covers 53 million people -- nearly one in every six Americans -- and costs $300 billion a year in federal and state funds, recently surpassing spending on the federal Medicare program. In some states, Medicaid accounts for one-third of the budget.

The article is quite good in describing the many facets of the dilemma, including the issue of how to ration care, the under-representation of poor people who truly need some type of subsidy for medical costs, and the knotty problem of trying to make a flawed government program more efficient:

As states try to slash costs under current rules, they run into many roadblocks. Federal law mandates that states must cover many types of care, such as pregnancy care for certain low-income women. Reducing the number of beneficiaries is hard because they often have nowhere else to turn. What's more, because Medicaid is a "fee for service" program that pays doctors and hospitals every time they treat a fever or patch up a cut, it's difficult to encourage efficiency.

Patients, too, have little incentive to ration their own care because they pay at most a small sum to see the doctor. "When something is free, people don't care what it costs," says [Governor Haley] Barbour in Mississippi.

Which reminds me of an observation that Milton Friedman made in an interview awhile back about the inefficiency of federal programs that interfere in the market's allocation of services and products:

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you're doing, and you try to get the most for your money.

Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I'm not so careful about the content of the present, but I'm very careful about the cost.

Then, I can spend somebody else's money on myself. And if I spend somebody else's money on myself, then I'm sure going to have a good lunch!

Finally, I can spend somebody else's money on somebody else. And if I spend somebody else's money on somebody else, I'm not concerned about how much it is, and I'm not concerned about what I get. And that's government. And that's close to 40% of our national income.

Read the entire article. As with the entire employer insurance-based, third party payor system of American health care finance, the Medicaid program has grown into a hulking mess largely because of the skewed economic incentives involved. Absent addressing the fundamental problem -- i.e., the subversion of market forces in the allocation of health care -- reforming the Medicaid program will be akin to rearranging the deck chairs on the Titanic.

Social Security reform is necessary over the long term, but the more pressing need in his country is the reform of the health care finance system. The introduction of Health Savings Accounts is a good start, but the Bush Administration and Republican Party's reluntance to address the fundamental problems in our society's third party payor system of financing health care may doom our children and grandchildren to the worst of all results -- that is, socialized health care finance by default.

Posted by Tom at 5:20 AM | Comments (0) | TrackBack (0)

January 18, 2005

The developing infrastructure to service HSA's

Health Savings Accounts ("HSA's") are still a new concept in health care finance, but McKinsey & Company partners Paul Mango and Vivian Riefberg write in this Wall Street Journal ($) article that there are promising developments in the insurance infrastructure that suggest that HSA's are going to have a larger effect on America's broken down third party payor system of health care finance than many experts are currently predicting.

The authors point out that the quickly emerging financial industry surrounding HSA's will eventually compete effectively with typical third party payor health insurance and that this competition will force traditional insurers to improve their performance or suffer. After describing four areas of the financial service industry that are developing in regard to HSA's, the authors observe the following:

In each of these four businesses, incumbent health insurers' positions are open to attack from new entrants. They will need to decide whether to try to build the new skills themselves, acquire them, or partner with others. The growth and popularity of the new HSAs is exceeding expectations, so resolving these questions quickly will be vital. Insurers, asset managers and banks have already announced several key acquisitions and alliances that will exclude others from locking up the best partnerships.

The smart money is already moving fast to stake out its place in the new marketplace. Hold on for what promises to be an interesting ride.

Could several large traditional health insurers that fail to adapt to the changing marketplace in health care finance turn into the health care insurance equivalent of legacy airlines? Stay tuned.

Posted by Tom at 7:33 AM | Comments (0) | TrackBack (0)

January 17, 2005

Gingrich takes on health care issues

This NY Times article reports on former House speaker Newt Gingrich's interest in reforming American health care and health care finance. Nothing earth shattering here, but it's good to see a leading conservative thinker examining issues -- particularly in the health care finance field -- that desperately need attention.

Posted by Tom at 7:01 AM | Comments (0) | TrackBack (0)

January 1, 2005

Top health care finance articles of 2004

The excellent HealthLawProf Blog provides this post that lists the 25 most read health care finance articles from Health Affairs, which is the preeminent journal on health policy and economics. The ten most read articles may be reviewed for free from the Health Affairs website through January 11.

Posted by Tom at 7:51 AM | Comments (0) | TrackBack (0)

December 8, 2004

Make consumer health insurance tax deductible

In this Wall Street Journal ($) op-ed, economists John Cogan, Glenn Hubbard and Daniel Kessler make their pitch to make all health insurance tax deductible, not just employer-provided health insurance. This earlier post noted Messrs. Cogan, Hubbard, and Kessler's earlier proposal on this topic, and it is a simple and common sense component of any overhaul of the American health care finance system. That's probably why we did not hear either candidate propose it during the just completed Presidential campaign.

Messrs. Cogan, Hubbard, and Kessler note that the discrimination in the tax laws regarding health insurance has the following negative market effect:

The most important effect of tax deductibility would be to reduce unproductive health spending. Under current law, medical care purchased through an employer's insurance plan is tax-free, while direct medical care purchased by patients must be made with after-tax income. As we and many others have observed, this tax preference has given patients the incentive to purchase care through low-deductible, low-copayment insurance instead of out-of-pocket, which in turn leads to cost-unconsciousness and wasteful medical practices. In addition, the tax preference for insurance creates incentives for the health-care system to rely on gatekeepers rather than deductibles and copayments when it does try to control costs. The cost of gatekeepers are financed out of insurance premiums that are paid with before-tax dollars; deductibles and copayments are paid with after-tax dollars.

On the other hand, Arnold Kling notes that providing a tax deduction for individual health insurance policies may simply change the problem. By allowing individuals to deduct health care expenses, a trend would likely occur toward disintermediation in health insurance -- that is, more young and healthy workers will opt out of company-provided health insurance, which will leave businesses covering a relatively high-risk population that cannot afford individual policies.

Posted by Tom at 6:34 AM | Comments (1) | TrackBack (0)

November 23, 2004

Unleashing the power of markets in health care

Regular readers of this blog know of my skepticism that the costs attributable to America's reliance on third party payors in its health care finance system are commensurate with the benefits of paying for medical service in that fashion.

Following up on that thought, Alex Tabarrok over at Marginal Revolution notes in this post that one of the most popular types of medical procedure has declined in cost recently precisely because it is not generally covered under America's third party payor system:

Everywhere we look it seems that health care is more expensive: prescription drug prices are increasing, costs to visit the doctor are up, the price of health insurance is rising. But look closer, even closer, closer still. Don't see it yet? Perhaps you should have your eyes corrected at a Lasik vision center.

Laser eye surgery has the highest patient satisfaction ratings of any surgery, it has been performed more than 3 million times in the past decade, it is new, it is high-tech, it has gotten better over time and... laser eye surgery has fallen in price. In 1998 the average price of laser eye surgery was about $2200 per eye. Today the average price is $1350, that's a decline of 38 percent in nominal terms and slightly more than that after taking into account inflation.

Why the price decline in this market and not others? Could it have something to do with the fact that laser eye surgery is not covered by insurance, not covered by Medicaid or Medicare, and not heavily regulated? Laser eye surgery is one of the few health procedures sold in a free market with price advertising, competition and consumer driven purchases. I'm seeing things more clearly already.

Touche!

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November 1, 2004

The future of American health care finance

This NY Sunday Times article profiles Kaiser Permanente, the huge health maintenance organization. The article suggests that those who are reviewing ways to revamp the American health care finance system should follow Kaiser's lead in attempting to increase the quality of care and to spend health dollars more wisely by using technology and incentives tailored to those goals. The entire article is well worth reading, but I was particularly drawn to the following summary of the American system of health care finance, which is spot on:

Health care systems in most industrialized countries are in crises of one form or another. But the American system is characterized by both feast and famine: it leads the world in delivering high-tech medical miracles but leaves 45 million people uninsured. The United States spends more on health care than any other country - $6,167 a person a year - yet it is a laggard among wealthy nations under basic health measures like life expectancy. In a nutshell, America's health care system, according to many experts, is a nonsystem. "It's like the worst market system you could devise, just a mess," said Neelam Sekhri, a health policy specialist at the World Health Organization in Geneva.

Read the entire article.

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October 18, 2004

Primer on health care finance issues

Uwe Reinhardt is the James Madison Professor of Political Economy at Princeton University. He has written this Primer for Journalists on health care finance issues, and it is quite helpful for anyone wanting to understand the issues that we are confronting in the area of health care finance. Check it out.

Posted by Tom at 7:10 AM | Comments (0) | TrackBack (0)

October 14, 2004

Hiding the true cost of health care

In his latest WSJ ($) Business World column, Holman Jenkins, Jr. again addresses America's broken health care finance system. Mr. Jenkins is an unusually gifted writer on business issues, and his prior columns in this area (here, here and here) have been typically insightful. In this week's column, Mr. Jenkins addresses one of the main economic problems with America's health care finance system that is dominated by third party payors for health care services and products -- i.e., the system's propensity to hide the true cost of such services and products from the consumer:

The problem is we hide from consumers what their health care is costing them, though hiding the cost in no way relieves them of having to pay the cost.

This is not the fruit of anybody's design but of dumb acceptance of a system that has evolved unplanned over half a century. In 1940's, the IRS allowed companies to pay their workers in untaxed health-care benefits, a subsidy that means a high-end worker now gets a 40% discount on health insurance and a low-end worker gets nothing. Then there's Medicare, now grown out of all expectations, in which the richest generation of seniors in history gets "free money" to spend on health care, though the free money is actually provided by the involuntary contributions of workers.

Mr. Jenkins then points out that politicians, being adaptable sorts, have come to embrace the third party payor system as a means for political handouts and cost shifting:

Though a product of nobody's explicit plan, politicians have learned to love the incentives implicit in this hidden-cost economics. To take an example more or less at random, Connecticut legislators recently voted to mandate that health insurers cover at least $350 a year in wigs for chemotherapy patients. Who wouldn't want chemotherapy patients to have wigs? But now everybody in Connecticut who wants health insurance has to pay for wig coverage.

Duke University's Clark Havighurst, one of the true sages of the health-care debate, has noted that "the systematic hiding of health-care costs from those who pay them" gives rise to the ultimate "moral hazard," allowing politicians to spend the public's money on health care in ways the public would never choose for itself either in the marketplace or the voting booth. "The consequence of the shell game in which costs are moved wherever employees/consumers/voters are not looking" is that health care is regulated in ways "that make sense only because price tags have been generally removed. Several whole percentage points of the nation's gross domestic product are thus diverted wastefully to health care from other uses."

He also notes the seldom-emphasized regressive nature of the transfer: "The United States has structured things so that lower and middle-income premium payers bear heavy burdens so that the elite classes can continue to enjoy the style of health care to which they are accustomed."

You don't hear this much from policy wonks and health-care economists. Treating cost as a factor in medical choices is considered somehow illiberal, though it's the poor who've been priced out of the health-insurance market. But, say it again, in the final analysis there's nobody to "shift" costs to. The health-care bill always comes home to working Americans in the form of higher taxes, lower take-home pay or unaffordable health care.

Indeed, Mr. Jenkins points out that the current political discourse over health care finance in the Presidential campaign reflects the politicians' intransigence in changing the third party payor system:

Democrat John Kerry's plan is astonishingly banal in the way it re-enacts the original sin, throwing yet more tax money at health spending while avowing disingenuously that "the rich" will pay for it. But our indictment here is of the conditioned cowardice of the health-care policy community at large. How can you expect better of Mr. Kerry when the arbiters of good policy (like, say, a recent Washington Post editorial) judge candidate health plans by a single criterion: Which would commit the most resources to health care?

There not being unlimited funds to spend on health care, Mr. Kerry's plan would only speed the day when politicians, no longer able to write blank checks with the private sector's money, would face directly the choice of whether to curb consumption or raise taxes to pay for it. That's the job description of Europe's national health systems, which are not exercises in beautiful egalitarianism but exercises in rationing for those not rich enough to jet off to a private clinic and get the treatment they seek.

Yet the same health-care wonks who mumble around the real problem of hidden costs are happy to be quoted finding fault with Health Savings Accounts, the heart of the Bush approach, which has the intolerable advantage of actually being aimed at the problem.

Better than HSAs, in our view, would have been flatly eliminating the tax deductibility of employer-paid health insurance and letting the system adjust. But HSAs are a much-better-than-nothing strategy, a way of rebalancing the tax incentives to encourage consumers to buy some or all of their health care directly from providers, demanding value for money.

An example of the type of mainstream skepticism toward HSA's that Mr. Jenkins mentions above is this recent NY Times article. Although insurance will always be a substantial component of America's health care finance system, Mr. Jenkins is correct that the current system's failure to allow consumers to shop and determine what health care services and products to purchase is at the root of our spiraling health care costs.

Along these lines, I shook my head in amazement as I read President Bush's comments on health care finance from last night's debate. He started out pretty well:

I think government- run health will lead to poor-quality health, will lead to rationing, will lead to less choice. Once a health-care program ends up in a line item in the federal government budget, it leads to more controls.

And just look at other countries that have tried to have federally controlled health care. They have poor-quality health care.

Our health-care system is the envy of the world because we believe in making sure that the decisions are made by doctors and patients, not by officials in the nation's capital.

But then, in response to Kerry's promises of gifts to various voter groups, the President reverses field and touts his administration's own give-aways:

We've increased VA funding by $22 billion in the four years since I've been president. That's twice the amount that my predecessor increased VA funding. Of course we're meeting our obligation to our veterans, and the veterans know that.

We're expanding veterans' health care throughout the country. We're aligning facilities where the veterans live now. Veterans are getting very good health care under my administration. . .

Which only serves to underscore Mr. Jenkins' point -- so long as we continue to allow the health care finance system to mask the true cost of health care services and products to the public, the more the politicians will manipulate that system to troll for votes. Hat tip to Alex Tabarrok of Marginal Revolution for pointing out the above contradiction.

Posted by Tom at 6:01 AM | Comments (4) | TrackBack (1)

October 11, 2004

Nice primer on health care finance

For those of you looking for an explanation of the sometimes numbing concepts used in discussions of health care finance issues, check out this useful Introduction to Health Economics.

Posted by Tom at 6:38 AM | Comments (2) | TrackBack (0)

September 1, 2004

Tax policy and health care finance reform

The Wall Street Journal's Holman W. Jenkins, Jr. addresses health care finance reform in his column today, and he makes the salient point that the Tax Code is a big part of the problem:

This is surprising only to those who never understood why the tax code was the problem in the first place. Notice that the typical family policy doled out by companies to their employees represents a total price-tag of about $9,086 a year. If you're in the top tax bracket, the effective after-tax cost to you is about $5,500. If you're in the working-poor bracket (i.e. pay no federal income tax), it's $9,086.

In fact, it's doubtful that such an insurance product would even exist in the marketplace in the absence of a massive tax subsidy, given the built-in incentives that naturally drive costs out of sight. Certainly you wouldn't buy gold-plated, first-dollar health insurance if you faced the full tab alone.

Then, Mr. Jenkins cuts to the heart of the main problem with America's health care finance system -- overreliance on the third party (i.e., insurer) payor system:

No serious person doubts that our overreliance on third-party payment is the problem that will be solved -- or will lead to a government-run, single-payer system that controls costs by denying care. In our information-rich economy, the medical industry doesn't even publish price lists. Is this not downright weird and a sign change is desperately needed? (The exception is cosmetic surgery, where, as health economist John Goodman points out, consumers pay out-of-pocket and competition has meant prices are flat or falling).

Alas, a bold proposal for health care finance reform is subject to the shifting winds of the current political campaign:

Some in the Bush camp were prepared to go deeper than even the HSA [explained here] kludge, totally revamping the tax system. The idea was to help Americans shift their expectations: No longer will they send their tax money to government and hope government will take care of them in old age. Now they will have ownership of the assets that will take care of them in old age.

Hope for such boldness on Thursday night probably vanished the moment it became clear John Kerry was going backward in the polls. It may be just as well. The HSA revolution suggests that simply offering taxpayers a better choice may be the stealthy way to reform entitlements (and let's admit that the tax deductibility of employer health care is a giant middle-class entitlement) without frightening swing voters with any Big Bang-like proposals.

Posted by Tom at 5:54 AM | Comments (0) | TrackBack (1)

August 26, 2004

Father of HSA's condemns Kerrycare

John C. Goodman is a health care finance expert who was one of the leading advocates of Health Savings Accounts (explained here), which is one of the only positive pieces of health care finance legislation that has been enacted in years.

In this Wall Street Journal op-ed, Mr. Goodman reviews the Kerry Campaign's health care plan, and he is singulalry unimpressed with what he sees:

Mr. Kerry is seeking to completely transform the health-care system. The changes are far more radical than even he has let on. If he is successful, millions of middle-income families will enroll in Medicaid, the federal-state health program for the poor. Millions more will get their insurance through a system of managed competition, similar to what Hillary Clinton proposed more than a decade ago. Most people would be unable to remain in the private health plan they have today.

Mr. Goodman then reviews the goals of Kerrycare and how it proposes to achieve them:

The ostensible purpose of the proposal is to insure the uninsured. By some estimates, as many as 44 million people lack health insurance at any one time. The Kerry goal is to insure about two-thirds of them.

How well will all of this work? More than half the money in this plan will be spent expanding Medicaid and the S-CHIP program (for low-income children). Emory University professor Kenneth Thorpe, Mr. Kerry's health adviser, estimates that as many as 26 million new people will be enrolled. However, as the public sector expands, the private sector will surely contract.

Even Mr. Kerry assumes that for every 10 people who sign up, three people will lose private insurance from an employer; and it could be much worse. Studies in the 1990s found that every additional dollar spent on Medicaid led to a reduction in private insurance of 50 to 75 cents. More recent evidence suggests that private sector crowd-out is approaching one-to-one: Each new Medicaid enrollee is offset by one less person with private insurance. Moreover, most of the private sector subsidies will go to people who are already insured; and employers get their subsidies even if they fail to insure a single additional employee. Bottom line: It is entirely possible to spend $1 trillion and achieve no reduction in the number of uninsured!

And Mr. Goodman is not sanguine about the quality of care that would result from Kerrycare:

Quality of care will suffer under the Kerry proposal. People who go from employer plans to Medicaid will have fewer choices of doctors, longer waits for care, and inevitable health-care rationing. Those who join the system of managed competition will experience a different problem: Health plans will face perverse incentives to overprovide to the healthy and underprovide to the sick.

Which leads to the $64,000 question: How much will Kerrycare cost? Mr. Goodman comments:

In order to keep spending down in the latest 10-year projection, the Kerry team delays implementation for one year, so the first year's costs can be zero. They also claim phantom savings that basically amount to the perennial promise to eliminate waste and inefficiency.

Counting the first full 10 years in operation and only savings that seem likely to be real, I put the actual cost in excess of $1 trillion, almost $1,000 per year for every household in America. Versus the budget Mr. Kerry has promised to balance, this cost is more than three times the new revenue Mr. Kerry hopes to get from high-income earners.

This estimate may be low. The reason: People will face perverse incentives to overinsure and overconsume. For example, faced with virtually no out-of-pocket costs, the 26 million new enrollees in Medicaid will have no reason to show restraint. The bills all go to someone else. Premium caps mean that a poverty enrollee under managed competition will pay no more than $600 or $700 a year, with the remainder paid by Uncle Sam. If they insure at all, they will tend to pick the most expensive plan. Why choose a Volkswagen when you can have an Aston Martin at no extra cost?

Whatever the cost, the plan will almost certainly lead to a new round of health-care inflation. Federal spending alone will increase by more than $100 billion a year. But since there will be no increase in supply, the bulk of this new spending will buy higher prices rather than more health care.

Mr. Goodman then asks the following common sense questions regarding Kerrycare:

A major problem with the current system is that tax subsidies for health insurance are arbitrary and unfair. But rather than move to a fairer system that treats equals equally, Mr. Kerry would create a slew of new subsidies that would make the system even more arbitrary.

The structure of the Kerry health plans raises a number of intriguing questions:

� Why spend billions on subsidies to small businesses if they join an insurance system that doesn't even exist yet, while denying them those same subsidies if they buy insurance that is readily available in the marketplace?

� Why pay the cost of premium caps and other subsidies to individuals if they buy insurance that doesn't yet exist, while denying them any relief if they buy insurance that is already available?

� And why spend billions enrolling middle-income families in Medicaid instead of using those same dollars to help them enroll in employer plans and individually-owned policies which they would probably much prefer?

Mr. Goodman concludes that there is only one logical answer to these questions:

The real purpose of this plan is not to insure the uninsured. The real purpose is to radically change our health- care system.

Read the whole piece.

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August 24, 2004

The claimed results of Bush and Kerry's health care finance plans

Ceci Connolly of the Washington Post is one of the best reporters on health care finance issues. This article in yesterday's edition reviews the dubious financial projections behind the Bush Administration's health care finance proposals:

If the Republican-controlled Congress enacted President Bush's entire health care agenda, as many as 10 million people who lack health insurance would be covered at a cost of $102 billion over the next decade, according to his campaign aides.

But when the Bush-Cheney team was asked to provide documentation, the hard data fell far short of the claims, a gap supported by several independent analyses.

Projections by the Congressional Budget Office, the Treasury Department, academics and the campaign's Web site suggest that under the best circumstances, Bush's plans for health care would extend coverage to no more than 6 million people over the next decade and possibly as few as 2 million.

"There's little reason to expect that there would be any reduction in the overall numbers of Americans without health insurance," Brookings Institution health policy expert Henry J. Aaron said. "We're swimming against a rather swift current in our efforts to reduce the number of uninsured, and the power of President Bush's proposals to move against that current is, it seems to me, very, very limited."

On the other hand, the article notes that the credibility of the Kerry campaign's health care finance projections is not particularly compelling, either:

Sen. John F. Kerry (Mass.), has released a health care agenda that is more ambitious and more expensive, with plans to expand government health programs, offer tax credits similar to Bush's and reimburse businesses for some of their most costly catastrophic cases.

Forecasting the cost and impact of policy proposals is always complicated, and both presidential campaigns try to spin the numbers to their advantage. Kerry, for example, estimates his health care proposals would cover 27 million people at a 10-year cost of $653 billion. But that assumes $300 billion in "savings" that the Bush team says might prove elusive. Without the savings, the cost of the Kerry package jumps to nearly $1 trillion.

Sigh.

Posted by Tom at 7:17 AM | Comments (0) | TrackBack (0)

August 15, 2004

Interview with Professor Porter on health care finance

Following up on this earlier post, this NY Times piece interviews Michael E. Porter, who is one of America's foremost business theorists and who has been recently studying America's dysfunctional health care finance system. This is interesting reading on one of the most important domestic issues in American politics today.

Posted by Tom at 2:12 PM | Comments (0) | TrackBack (0)

August 9, 2004

Fix the tax code in regard to health care finance

Wall Street Journal Editorial Board member Susan Lee proposes in today's WSJ ($) that the U.S. tax code be overhauled to mitigate the negative effects of the third party payor system that most Americans use to pay for health care:

Anybody who gives a few hours of thought to the current health-care system can identify the mother of these problems -- the widespread existence of a third-party payer system. Third party-payers come in the form of government, employers (who self-insure) or insurance companies. This arrangement insulates consumers of health care from its true cost and encourages overconsumption.

And as Ms. Lee notes, such an inefficient system makes perfect sense under the current U.S. Tax Code:

This kind of employer-sponsored plan actually makes sense since employer payments are excluded from taxes while direct, or out-of-pocket, payments by employees are made with after-tax dollars. In fact, the tax exclusion is the chief reason that employers pay $5 out of every $6 spent in the private market.

Inasmuch as the tax system causes the unfortunate third party payor system, Ms. Lee touts a reform that economists John Cogan, Glenn Hubbard and Daniel Kessler have proposed -- expand tax deductibility to out-of-pocket expenses and individually purchased health insurance. The syllabus for their proposal is here, and incorporates the recent legislation creating Health Savings Accounts ("HSA's), which are more fully explained in this previous post. Ms. Lee points out that the Messrs. Cogan, Hubbard, and Kessler's study indicates that such a proposal would have two effects:

The expansion of tax deductibility would have two effects. First would be the commonsense -- and perverse -- impact of increasing consumption and costs. Expanding tax deductibility would lower overall health care prices to consumers and thus increase demand.

But the second effect goes the other way, reducing heath-care consumption and costs. Currently, by making employer plans cheaper than individually purchased ones, the tax exclusion creates a bias toward employer plans and away from direct purchase. So extending the tax exclusion to direct purchases of health care would level the playing field. . .

For both the self-employed and those with employer-provided insurance, making out-of-pocket costs deductible will lower the price of direct health-care purchases relative to purchases made through insurance. Thus, insurance with higher deductibles and coinsurance, and fewer covered services -- that requires lower premiums -- will become more attractive. The shift will reduce the consumption of health- care services and reduce costs.

Lower premium prices are the key to this shift. When out-of-pocket costs are reduced by the proposed tax deduction, it will make less economic sense to pay the higher premiums charged for high deductible, high coinsurance policies. And, as it turns out, premium costs are very sensitive to the level of deductions and coinsurance.

Since low coinsurance and deductions are the engine behind rocketing costs and wasteful medical practices, providing consumers with the incentive to shift to policies with high coinsurance and deductibles is an elegant remedy. Extending the tax deductibility will do just that. Better yet, it is done without resorting to a larger government role in the health-care system.

The probable financial benefits of such a move are not insubstantial:

Although the theoretical impact of these two effects are ambiguous, the economists' empirical work demonstrates that the second effect will very likely overwhelm the first. For the first effect -- extension of the tax deduction will increase consumption and costs -- the economists estimate that it will cause annual health care spending to rise by about $5 billion. Then add another $1 billion in the increased coverage coming from those who are currently uninsured, and the total increase comes to $6 billion.

As for the second effect -- extension of the tax deduction will decrease costs because people shift to higher deductible, higher coinsurance policies -- the economists estimate that if the average deductible rises from $250 to $500, health-care spending would decline by $43 billion. If coinsurance rates also rise to 25%, health care spending would decline by $69 billion.

The bottom line is that the net reduction of spending on health care would be $63 billion a year.

Ms. Lee then notes a study by Kaiser Permenante Institute for Health Policy staff economists Laura Tollen and Jason Lee that indicates that higher coinsurance and deductibles make health care consumers more aware of the true cost of medical services and thus, will reduce non-essential heath-care utilization. Stated simply, when consumers have more "skin in the game," they will become more cost conscious and make better choices.

Finally, Ms. Lee notes that decreasing reliance on the employer funded health insurance system -- a system that arose during World War II to attract scare labor during a time of wage controls -- would have another fringe benefit:

But extending the tax exclusion has another nice effect. Under the current system, health insurance is a form of compensation to employees. That is, money wages are reduced by the amount of insurance the employer provides. Once the tax exclusion is extended, however, workers no longer have an incentive to take compensation in the form of pricey health insurance. They will shift to plans with higher deductibles and coinsurance and -- given a competitive market -- the savings from lower insurance premiums will be passed on to them in the form of higher money wages.

I have only one question regarding the foregoing commen sense proposal: Why isn't either Presidential candidate embracing such a commen sense proposal?

Posted by Tom at 5:57 AM | Comments (0) | TrackBack (0)

August 4, 2004

Clear thinking on Social Security and Health Care Finance

In this TCS Central piece, Arnold Kling addresses what he would like to hear President Bush say in his upcoming speech accepting the Republican nomination for President. On the key issue of financing Social Security and health care, Mr. Kling advises Mr. Bush to say the following:

Going forward, the most important issues are Social Security and the government's role in health care. The Administration should focus on pursuing modernization and reform in those two areas.

On Social Security, the President should say that the system works for today's seniors, but it does not work for younger people. As important as it is to keep our promises to those who are in retirement or close to it, it is just as important that we not leave Social Security as it is for people in their 20's, 30's, and 40's.

The American people need to know that the money that workers put into Social Security now does not belong to them, but instead goes into the general Treasury, where Congress spends it as it pleases. You might think that the money you put into Social Security goes into an account where it belongs to you and nobody else can touch it. However, it does not work that way. It can work that way. It should work that way. It will work that way once reforms are enacted. Privatization is the ultimate lockbox.

Social Security also needs to be more flexible. Our existing system was designed when reaching the age of 65 meant that your active life was probably over, and you were likely to die within a decade. Going forward, we need a system that can accommodate everything from early retirement to seniors taking on second careers and new challenges in their 80's. Personal accounts are the key to giving people more options as they age.

Then, Mr. Kling turns to financing health care:

On health care, reforms should adhere to some basic principles. These principles will promote personal choice and continued innovation.

The first principle is to give as much decision-making authority as possible to patients and doctors. Today, treatment choices can be distorted by Medicare regulations, fear of lawsuits, and other mechanisms. Reform should aim to minimize such sources of distortion.

The second principle is that taxes should be used to pay for health care only for those who truly need assistance. To the extent that the government pays health care expenses for everyone, your medical bills will go down but your tax bills will go up by much more. We need only limited paternalism.

A good start would be enhancing the recently established Health Savings Accounts, which are addressed in this prior post.

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July 22, 2004

Kling on health care finance reform

Arnold Kling is thinking about health care finance again, and that's a good thing. The entire article is well worth reviewing, as Mr. Kling does a particluarly good job of summarizing the defects in the America's health care finance system:

* Many people lack health insurance. This includes Do-Nots as well as have-nots.

* Poor people, although covered by government programs, are not able to access health care providers in a timely fashion. They obtain too little preventive care and consequently make too much use of hospitalization. In order to improve on certain key health care indicators, such as infant mortality, the United States has to find a way to bring poor people under the umbrella of our health care system.

* The system of employer-provided health insurance distorts choices. It makes it costly for people to change jobs, especially to become "free agents." It puts ordinary firms in the health insurance business, penalizing small firms, for which this is more of a burden. It injects ordinary corporations into the decision-making process of consumers with regard to choice of insurance and even (through "preferred-provider" systems) with regard to choice of doctor.

* Our system tends to subsidize "first-dollar" coverage rather than catastrophic coverage. Catastrophic coverage is like auto insurance that pays in the case of an accident. First-dollar coverage is like auto insurance that pays for gas and tolls. First-dollar coverage results in more paperwork and reduced incentives to control costs.

* People with break-the-bank illnesses, such as diabetes or cancer, cannot switch insurance companies.

* Consumers have little incentive to take responsibility for their health. Smoking and obesity make little or no difference to insurance premiums.

* Consumers have little incentive to take financial responsibility for health insurance. Instead of encouraging consumers to save to pay for the high cost of insurance when they are older, we tell them that they can count on Medicare.

Mr. Kling does not view increasing government's role in health care finance as a viable option. Rather, he views government's best role as that of a facilitator of consumer choice:

However, the solution is not to enlarge government's role. What I would like to see is a role for government in health care that is streamlined, rationalized, and bounded. I call this approach "limited paternalism."

My belief is that most consumers are capable of making the best decisions about health care most of the time. The buzzword for this is consumer-driven health care.

Mr. Kling's consumer-driven health care finance system would have the following components:

* Direct provision of health care services to the poor. For example, government-subsidized clinics in poor neighborhoods with nominal charges (say, $10 per visit).

* Aim to switch from a system of employer-provided health insurance to consumer-purchased health insurance, by ending the tax deductibility of insurance for corporations and eliminating requirements that companies provide health insurance.

* Mandatory catastrophic health insurance for all families not eligible for Medicaid. Rather than expand Medicaid and other government programs upward to the middle class, as some Democrats propose, tighten eligibility for these programs and require co-payments for all but the poorest participants. Eventually, phase out Medicaid and replace it with health care vouchers.

* Phase Out Medicare, and instead mandate health care savings accounts (explained in this earlier post). This would change the medical portion of retirement security from a defined-benefit plan, which Congress will tend to pack with benefits that it cannot pay for, to a defined-contribution plan, which is much sounder financially and much fairer generationally.

* Institute government-provided "catastrophic reinsurance" for very high medical expenses. The Kerry campaign has proposed this for expenses of over $50,000 per year. The purpose of catastrophic re-insurance is to enable private insurance companies to compete for business without having to screen out high-cost individuals. Of all the mechanisms for spreading the cost of break-the-bank illnesses among the general public, catastrophic reinsurance would involve the government in the least number of individuals and the least number of medical decisions. While the rest of the Kerry health care plan tends to be the opposite of what I would like to see, this proposal strikes me as a good plank in any health care reform platform.

Read the entire piece as well as Mr. Kling's follow up blog post on the article. I believe that the Bush Administration and the Republican-controlled Congress' failure to address health care finance reform in a meaningful fashion is one of the big reasons undermining independent voters' confidence in the Administration during this political season.

Posted by Tom at 6:58 AM | Comments (4) | TrackBack (0)

July 13, 2004

Pitney Bowes battles America's broken health care finance system

This Wall Street Journal ($) article provides an excellent analysis of what Pitney Bowes -- the mailing service and equipment company -- learned regarding the question of why health costs keep rising relentlessly in America: A dysfunctional market creates few incentives for any of its participants to deliver efficient care. In fact, competition among insurers, health-care providers and producers of drugs and equipment often led to higher, rather than lower, prices.

Although the Bush Administration continues to ignore the problem, the struggle by American businesses to rein in health-care costs is nearing crisis levels. American employers still pay the majority of health-care costs for more than 130 million Americans and have borne the brunt of double-digit annual increases in benefit costs. Companies as large as General Motors Corp. reports that it spends "significantly" more on health care than steel, and recent data suggests that health care costs to employers could rise as much as 10% next year. Even a big company with an entire team dedicated to rooting out the source of rising health-care costs has little power to change these dynamics.

Pitney-Bowes has an internal team that aggressively pursues ways to contain ballooning health costs. But such a solution is easier wished for then achieved:

Last year, [the Pitney-Bowes team] scored a small victory. Employees who went to a hospital in 2003 stayed for an average of 3.7 days, unchanged from a year earlier. The overall number of admissions didn't rise, either.

So Pitney Bowes was startled to nonetheless discover that the average cost of each hospital visit jumped 9% to $10,600. The average cost per day jumped 17%. One of the biggest culprits? Increasingly powerful hospital groups in California, whose price increases pushed the company's average cost of a hospital admission in that state to $20,500, twice what it paid elsewhere.

By combing through claims data from its 46,000 U.S. employees and their dependents, Pitney Bowes can pinpoint some of the big contributors to the nation's surging health-care bill: Local hospital mergers; entrepreneurial doctors prescribing costly MRIs and CT-scans at their own private clinics; marketing for expensive drugs such as the heartburn medicine Nexium, which became Pitney Bowes's third-highest drug expenditure last year after an advertising blitz by maker AstraZeneca PLC.

Indeed, despite the Pitney-Bowes team's efforts, health care costs at the company continue to skyrocket:

. . . the total cost of claims Pitney Bowes paid directly -- covering about 80% of its employees -- rose 11.5%, more than it expected. About 20% of Pitney Bowes's employees are covered by health-maintenance organizations, for which the company pays a simple premium. That brings the average increase in prices for the entire company down to 7.5%. Pitney Bowes also managed to reduce its overall costs by increasing employee contributions and winning discounts on certain drugs and services.

The Pitney Bowes team . . . has helped moderate the expansion in Pitney Bowes's $135 million health-care budget. But despite its most vigilant efforts, Pitney Bowes's health-care costs continue to climb faster than the rate of inflation and faster than increases in most other business expenses.

Read the entire article because it provides an excellent overview of the economic pressures that will continue to drive health care prices higher in America's health care finance system that is predominated by private third party payors. As noted on this blog before, unless or until the payment of health costs are placed back in the hands of the consumer, these market anamolies that continually drive up costs and limit competition in certain sectors of health care administration will continue to proliferate. The failure of the Bush Adminstration and the Republican-controlled Congress to address this key issue in a meaningful fashion remains a glaring weakness that the Democrats can exploit in the upcoming Presidential election.

Posted by Tom at 6:20 AM | Comments (2) | TrackBack (0)

July 7, 2004

Inquiry finds that chief Medicare actuary threatened over disclosure of true cost of prescription drug plan

This NY Times article reports on the finding of an internal Department of Health and Human Services investigation that Thomas A. Scully, the former top Medicare administrator, threatened to fire Richard S. Foster, the program's chief actuary, if Mr. Foster told Congress the true probable cost of the drug benefits to be provided under the Bush Administration's Medicare prescription drug benefit legislation passed last year. Here is an earlier post on this flap.

Interestingly, the report concluded that neither the threat nor the withholding of information violated any criminal law. The report accepted the Justice Department's view that Mr. Scully had the final authority to determine the flow of information to Congress and that the actuary had no independent authority to disclose information to Congress. Mr. Scully, who resigned in December, 2003, denied threatening Mr. Foster but acknowledged having told him to withhold the information from Congress.

Posted by Tom at 5:59 AM | Comments (0) | TrackBack (0)

June 15, 2004

Saving Medicare

Laurence Kotlikoff writes this rather ominous Tech Central Station piece regarding the financing debacle related to Medicare, in which he observes the following:

Buried deep in the bowels of the recently released Medicare Trustees' Report is the first-ever official estimate of Medicare's true long-run costs. Previous reports have considered only short- and medium-term costs. The new "infinite horizon" estimate adds up all future costs, telling us the amount of money we'd need today to cover Medicare's commitments. This present value bill is unimaginably large -- $73.6 trillion to be precise! It's almost seven times GDP, twice the size of private net wealth, and 14 times official federal debt.

Can we pay this colossal sum? Medicare's trust fund is a paltry $256 billion. And the present value of its future payroll taxes is only $12.0 trillion. Historically, we've used general revenues to cover the gap between Medicare's expenditures and receipts. But continuing to do so will require a 50 percent immediate and permanent hike in federal income taxes! Alternatively, we can wait and raise taxes by an even larger percentage in the future.

Professor Kotlikoff's solution is to limit benefit growth, and here is how he proposes to do it:

All Medicare participants would receive individual-specific vouchers on October 1st of each year to purchase insurance coverage for the following calendar year. The size of the voucher would be based on the participant's current medical condition (an idea first suggested by Peter Ferrara of the Institute for Policy Innovation and John Goodman of the National Center for Policy Analysis). A healthy 67 year-old might get a voucher for $7,500, whereas an 85 year old with pancreatic cancer might get a voucher for $85,000. The vouchers would take account of the participant's age, region, sex, and other factors that affect health costs. Because those in the worst medical shape would get the largest vouchers, insurance carriers would be happy to sign them up.

All insurance carriers would have to cover a basic set of medical services and prescription drugs. But Medicare participants would be free to pay out of pocket for additional coverage. The government would keep up-to-date records about each participant's health status, release this information to insurance companies at the participant's request, and assign insurers for those who don't sign up on their own.

The government would cap total MSS voucher expenditures so that expenditures per beneficiary grow no faster than wages. Medicare participants would see their real medical benefits rise, just not as fast as in the past. And they'd realize that no matter how sick they got, they'd always receive a voucher large enough to purchase insurance coverage for the following year.

Compare Professor Kotlikoff's plan with the one that John Kerry is proposing. And then compare it to the one that the Bush Administration is proposing . . . er, except that the Bush Administration is not proposing any reform for this mess. Rather, the current administration's idea of reform is its dubious Medicare prescription drug legislation of last year.

Posted by Tom at 7:46 AM | Comments (0) | TrackBack (0)

June 9, 2004

Professor Porter tackles health care finance

Michael E. Porter is one of 15 current University Professors at Harvard and one of America's foremost business theorists. This Boston Globe article reports on Professor Porter's latest research project -- America's dysfunctional health care finance system.

In a long essay in the June edition of Harvard Business Review, the 57-year-old Porter argues for redefining healthcare competition on the level of specific diseases and treatments, rather than on the level of health plans, networks, or hospital groups. ''The wrong kinds of competition have made a mess of the American healthcare system," contend Porter and his coauthor, Elizabeth Olmsted Teisberg of the University of Virginia. ''The right kind of competition can straighten it out."

The article notes that the health care finance problem is the type of particularly knarly issue that Professor Porter enjoys taking on:

What attracted Porter to the healthcare sector, in fact, was its standing as a competitive industry that seemed to defy the laws of competition. In properly functioning businesses, from personal computers to mobile phones, product and process improvements drive down prices and costs, quality rises, markets expand, and uncompetitive players go out of business. In healthcare, costs are forever climbing, services are restricted or rationed, many patients receive poor care, preventable medical errors persist, and there are wide discrepancies in costs and quality among providers and across geographic areas.

Professor Porter and his collegue, Elizabeth Olmsted Teisberg of the University of Virginia, note that the antidote to what ails the health care finance industry is simple:

Porter and Teisberg have a deceptively simple diagnosis: Healthcare competition today works on the wrong level. The players -- health plans, payers, providers, and doctors -- engage in what the authors call ''zero-sum competition," dividing value rather than creating it. They seek to transfer costs onto one another, limit access to care, hoard information, and stifle innovation, all to the detriment of patients.

The right kind of competition should occur at the level of preventing, identifying, and treating patients' conditions and diseases, Porter and Teisberg assert. They call for collecting and disseminating information about the outcome of medical procedures, so patients can make intelligent choices about physicians and hospitals. They also recommend transparency in billing and pricing to reduce cost shifting, discrimination, and other inefficiencies. And they propose increased specialization by healthcare providers, resulting in more centers of excellence in conditions and treatments that compete for patients.

''There's only one kind of competition that's directly connected to healthcare value," Porter maintained in an interview. ''And that's the competition about who can do the best job of your prostate surgery, with the least complications and the best recovery records. That's where the competition needs to be. Yet that kind of competition has been all but eliminated in the system, in a misguided effort to save costs."

Although the Porter-Teisberg model reduces the government's role in the health care finance system, the government would nevertheless have an important policing role:

Government would have a role, not as a ''single payer" or an insurer of last resort, but by blocking network restrictions, hospital consolidation, and multiple hospitalization bills, and helping to set a framework for reform through its Medicare program. The role of health plans, meanwhile, would be more akin to that of coaches and advisers, helping their members navigate the system and find the best care.

And what does Professor Porter think about the current level of debate over health care finance reform in the Presidential campaign?:

''The debate now is totally about cost shifting and not value creation" in healthcare. Could his proposal influence that debate?

''I hope so," Porter said. ''I would love to challenge both candidates to see what they're going to do to engage these issues."

The type of innovative approach that the Porter-Treisberg model advocates --along with such concepts as the Health Savings Accounts described in this earlier post -- is what is necessary to overhaul the increasingly obsolescent American health care finance system. Inasmuch as that system already accounts for almost 20% of federal expenditures and those expenditures are increasing rapidly, my sense is that we all would be better advised to require our Presidential candidates to address these tough issues rather than the relatively unimportant but trendier business issues such as "outsourcing" and "energy independence."

Hat tip to Tom Mayo's HealthLawBlog for the link to the article on the Porter-Teisberg study.

Posted by Tom at 9:04 AM | Comments (3) | TrackBack (0)

June 4, 2004

Brad DeLong on the Kerry health care finance plan

In this post, Cal-Berkeley economics professor Brad DeLong examines an interesting aspect of John Kerry's health care finance plan:

[T]he Kerry campaign has dusted off and brought forward a very clever idea from Brandeis's Stuart Altman to not eliminate but at least diminish the magnitude of these two ways that market-based health-care reforms self-destruct. The idea? Have the government take its task of social insurance seriously, and reinsure private insurers and HMOs: construct a 'premium rebate' pool to pay annual health-care bills over $50,000. This greatly diminishes the cost to insurers and HMOs of covering the really sick. The cost of treating the really sick will then be on the taxpayer rather than on the insurance-purchasing consumer. Insurance rates will fall. And the incentive for the young without many assets to go naked and uninsured will diminish as well.

Thus two of the big problems with our health care system become smaller problems. If this plan is enacted, we will no longer have to worry as much (i) adverse selection--the enormous financial incentives HMOs and insurance companies have to figure out some way not to cover the sick people--and (ii) cost shifting--the fact that those who buy insurance have to pay not only their own routine costs and their own catastrophic costs but the catastropic costs of others and the uninsured as well. The first means that--often--those who need health care the most have a hard time getting it. The second means that--often--those who could afford or would buy insurance if it were priced at its fair actuarial value don't because of this cost shifting.

This is an interesting proposal. In short, the government would offer reinsurance for catastrophic health care costs. In so doing, this would reduce the incentive for health insurance companies to avoid providing insurance for high-risk applicants. At least in theory, the cost of health insurance should decline, which would make it more attractive to consumers. In effect, the Kerry proposal would make the government's role in health insurance similar to its role in automobile insurance, where the government subsidizes coverage for the highest-risk applicants.

Indeed, as Professor DeLong points out, the Kerry proposal is consistent with the interests of the Bush Administration's approach to health care finance. Why then has not the Administration adopted such a proposal? Simply another example of the void of creative policy development that is currently taking place under this Administration.

Posted by Tom at 8:57 AM | Comments (0) | TrackBack (0)

May 14, 2004

Kerry's health care finance plan

David Wessels over at the Wall Street Journal ($) has this column in yesterday's edition that focuses on John Kerry's health care finance plan. The entire column is well worth reading, and here are a few snippets:

But Mr. Kerry knows that for many American workers and businesses, the big worry is cost. So he has added another dish to his health-care table. He proposes that the federal government shoulder most of the cost when someone gets really sick. It would pay 75% of medical bills over $50,000 a year for any person covered by an eligible (more on that later) private employer. He says this would cut premiums for employers and employees by 10% or, as he boasts on the stump, by $1,000 per family.

The notion is so old it sounds novel. The Kerry campaign credits Stuart Altman, a veteran health-policy wonk at Brandeis University, for the plan. Mr. Altman drew it from memories of his years as a Nixon administration bureaucrat. A similar scheme was written into an ultimately unsuccessful bill in 1974 by Wilbur Mills, then chairman of the U.S. House Ways and Means Committee.

The concept is simple: Government becomes the ultimate reinsurance company, spreading the risk of expensive illness among taxpayers instead of sticking it with an unlucky employer. "We're always worried that insurers will dump sick people," notes David Cutler, a Harvard University health economist. "So the idea is that we won't make them pay for really sick people."

If Mr. Kerry wants to spend money so employers and insured workers pay less, then subsidizing firms that employ sicker and, often, older workers is reasonable.

But ...

It's expensive: $257 billion over 10 years, estimates Kenneth Thorpe, a former Clinton administration health economist now at Emory University.

It doesn't save society any money and does nothing to restrain the American appetite for more drugs, more tests and more exams, whether or not they're worthwhile. It simply shifts some costs now paid by employers and employees to taxpayers.

Mr. Wessels then closes by focusing in on one of the key issues, one that is sadly not a part of the usual public debate on health care finance:

If the proposal becomes law, Mr. Kerry and his advisers may discover it could do something they haven't anticipated: provoke a broad public debate over how much health care is enough.

If the government starts picking up the tab for the one-half of 1% of privately insured Americans whose medical bills exceed $50,000, it will open the door to questions -- and possibly rules -- about whether such care is wise in every case. Should stomach-stapling surgery be covered? How about bypass surgery in 90-year-olds? Who decides when to pull the plug?

As The Wall Street Journal illustrated in articles last year, decisions in the U.S. on who gets expensive care and who doesn't are made quietly and differently by intensive-care coordinators, transplant schedulers, and insurance bureaucrats. This Kerry proposal could break that debate wide open.

As Brad DeLong points out in this insightful post and as noted in this earlier post here on Health Savings Accounts, this key issue and others relating to the overhaul of America's flawed health care finance system desperately need to be addressed in this campaign season. Although I have reservations about the Kerry plan's reliance on third party payor systems as the primary mechanism for controlling health care costs, I agree with Professor DeLong that Kerry should be complimented for facilitating the debate of these key issues that the Bush Administration has largely ignored.

Posted by Tom at 10:28 AM | Comments (0) | TrackBack (0)

May 10, 2004

Radical prescriptions

This Wall Street Journal ($) article reports on innovative techniques that several corporate health care finance departments are undertaking in an attempt to mitigate the adverse effects that the third party payor system has on the consumer's decision regarding health care choices. The entire article is well worth reading, and here is one of the strategies noted:

In the fall of 2001, Pitney Bowes Inc.'s corporate medical director, John Mahoney, proposed an unusual experiment: Slash the amount that employees pay for diabetes and asthma drugs, and see what happens.

On its face, the proposal seemed it would only add to the company's escalating health-care costs. But there was a simple logic to Dr. Mahoney's theory: If diabetic or asthmatic employees found drugs more affordable, they might take them more regularly. Over time, taking better care of their chronic conditions might reduce expensive complications.

But Dr. Mahoney says even he didn't expect the dramatic savings that resulted. Since 2001, the median medical cost for a Pitney Bowes employee with diabetes has fallen 12% from about $1,000 a year. The median cost for a patient with asthma has dropped 15% from $900 annually. Overall, the company says it will save at least $1 million in 2004, with continued savings in future years.

Pitney Bowes's move is indeed radical. Amid health-care cost increases of 11% to 15% annually, many employers are taking the more obvious approach: have employees shoulder some of the financial burden by raising premiums, deductibles and co-pays. Such moves appear to be helping to slow health-care cost increases in the short term. But Pitney Bowes's experience shows that spending more upfront to make it easier -- and cheaper -- for employees to manage some chronic illnesses may actually bring about greater savings in the long run.

"There's a reluctance among many people to take this kind of a chance because conventional wisdom says it's going to increase your costs," says Dr. Mahoney, a former White House physician in the Ford administration.

"But health care is kind of like a balloon. When you squeeze costs in one place, they often pop up in another."

Posted by Tom at 6:52 AM | Comments (1) | TrackBack (0)

April 28, 2004

America's health care finance mentality

Holman Jenkins of the Wall Street Journal ($) has some interesting observations about America's health care finance mentality today in his weekly Business World column. The subject of the column is the rather inane political issue involved in the importation of government subsidized prescription drugs from Canada, but Mr. Jenkins uses the subject to clear up some common misconceptions regarding how American drug companies finance development of drugs and how America's health care finance mentality affects such development.

Inasmuch as American drug company profit margins are relatively high, some politicians who are in favor of imports from Canada suggest that American drug prices are too high and that the companies are greedy, which Mr. Jenkins quickly debunks:

What can it possibly mean to call an industry "greedy"? Drug companies are said to be an unconscionable exception because their profits are comparatively high, 15.4%, when measured as a percentage of sales. But here's a question: Grocery stores have a measly return on sales of 1.4%, and liquor stores an even measlier 1%. So why does anybody invest in these businesses rather than the drug business? Last time we looked, the grocery industry and liquor stores still existed.

Such indictments of the drug industry overlook the fact that profits are a cost -- the cost of a company's capital. Nobody pays back their investors more than they are obligated to. By the same token, if your capital costs are 15.4% of your total costs, profits had better be 15.4% of your revenues or you won't be in business long. Measures of profitability, in short, tell you a lot more about an industry's need for capital than about its "greed."

And how about the demagogues' allegation that the excessive amount of money that drug companies spend on advertising is proof that they make too much money? Mr. Jenkins explains:

Wrong. Companies spend money on advertising because it generates profits, not because it consumes them. You've spent 10 years and $500 million to develop a new product and haven't rung up your first sale yet. What could be a smarter investment than spending a few dollars more to let the world know the product exists? Advertising actually makes companies more willing to invest in R&D. Capital can be earned back faster; fixed costs can be spread over a larger number of customers, allowing each to be charged a lower price.

But then Mr. Jenkins bears down on the real problem relating to financing of prescription drug development -- America's health care finance mentality:

America's real problem is that drugs have been roped into the same perverse incentives that govern most health care spending. Consumers don't weigh cost vs. benefit; drug companies focus their development efforts on drugs aimed at large populations of price-insensitive, insured patients. At the same time, consumers who don't have drug insurance and pay out of their own pockets scream bloody murder because drugs seem like a violation of a natural order in which medical care is increasingly perceived as a costless entitlement.

Think we exaggerate? Everybody noticed when HCA, the big hospital chain, earlier this month put aside $700 million to cover the bad debts of uninsured patients, who are typically good for only seven cents on the dollar. Little noticed was the fact the company also has to cover the bad debts of insured patients, who routinely skip out on their co-payments and deductibles. Nowadays these people are good for only 45 cents on the dollar on average.

Medical bills seem to have become optional to Americans when deciding which envelopes to toss in the trash unopened at the end of the month. "Hospitals are ninth" on the payment list, HCA's Chief Jack Bovender told Reuters in February, well behind mortgages, car payments and cable-TV bills. "The only thing people pay worse is the student loan program."

Read the entire column. Good stuff again from Mr. Jenkins.

Posted by Tom at 6:52 AM | Comments (0) | TrackBack (1)

April 23, 2004

The hidden costs of nationalized health insurance

Pierre Lemieux, who is an economist with the University of Quebec in Outaouais and with the Independent Institute in California, has written a revealing op-ed in today�s Wall Street Journal ($) regarding the hidden costs of Canada�s nationalized health care finance system and the devastating effect those costs are having on the quality and timeliness of Canadian health care:

The Canadian system is built around a compulsory public-insurance regime that provides most medical and hospital services free. Of course, it is not free for the taxpayer, who finances the system at a rate of 22% of all taxes raised in Canada. The Canadian government pays about 71% of total Canadian health care expenditures, compared to 44% paid by the government in the U.S. This translates into public health expenditures of 6% of GDP in Canada and 7% in the U.S. � a rather small difference. More than three-quarters of the difference in total expenditures is due to higher private expenditures in the U.S. Why are private health expenditures so low in Canada? The main reason is that they are illegal, which gets us to the heart of the system's hidden costs.

Canadian public health insurance is not only compulsory, it is also monopolistic. The system is administered by provincial governments under strict guidelines imposed by federal law and federal subsidies. Private insurance covering publicly insured services is illegal. Physicians are forbidden to accept private payments above the fees billed to the government. Hospitals are public or non-profit, and tightly regulated. Physicians' fees are determined -- or "negotiated" -- by provincial agencies. Prices of drugs are controlled. In short, the public supply of medical services is rationed, and there is little private alternative. Hence the apparent low cost of the system.

The hidden costs include the poor quality of services, and the costs imposed on customers (aptly called "patients" in this case) who have to wait in queues.

Quality is subjective and can only be evaluated through consumer choices, but the government won't let consumers make choices and vote with their feet if they are not satisfied. Anecdotal evidence of questionable quality is everywhere. In a recent piece in Montreal's Gazette, a Canadian related her own experience, and contrasted the "kindness, discretion and professionalism" of staff in U.S. hospitals, with the frequent rudeness of unionized personnel in the Canadian system.

Long waiting lines are a fixture of the system. The Fraser Institute, a Vancouver think tank, has calculated that in 2003, the average waiting time from referral by a general practitioner to actual treatment was more than four months. Waiting times vary among specialties (and, less wildly, among provinces), but remain high even for critical diseases: The shortest median wait is 6.1 weeks for oncology treatment; excluding radiation, which is longer. Extreme cases include more than a year's median wait for neurosurgery in New Brunswick. The median wait for an MRI is three months. Since 1993, waiting times have increased by 90%.

Waiting lines impose a real cost, which is approximated by what individuals would be willing to pay to avoid them. Waiting costs include health risk, lost time (especially for individuals whose time is most valuable), pain and anguish. Socialist systems are notoriously oblivious to anguish, discomfort, humiliation and other subjective factors which bureaucrats cannot measure or don't value the same way as the patient does.
* * *
Liberalization proposals are met by the "two-tier system" bogey man -- that if choice is allowed an unequal system will develop. But if directly paying a doctor is illegal, there are legal ways to jump the queues. As pointed out by Professor Livio Di Matteo of Lakehead University in Ontario, what now exists is a three-tier system. The very rich (like Robert Bourassa, the late Premier of Qu�bec) go to the U.S. for rapid, personalized, high-tech treatments. The second tier is made of "the well informed and aggressive, who can push their way to the front of the treatment line." The poor and those with no connections get stuck in the queue.

At least two Indian groups are now considering building private clinics or hospitals on their land � just as other sorts of illegal-elsewhere trade thrive on Indian reserves. Yet, Canadians who patronized such clinics would still be prohibited from purchasing private insurance to cover the service, leaving the opportunity only to the wealthiest.

As noted by Harvard professor Patricia Dantzon, another hidden cost of the Canadian system comes "from forcing everyone to have the same level and type of insurance," whatever their individual preferences are.

One last cost should not be ignored: the loss of personal responsibility and the habit of dependence on the state. Opinion polls show that Canadians are generally proud of their public health insurance. Indeed, for most people, any basis for comparison has been made illegal. Auberon Herbert, a libertarian Member of Parliament in late 19th century England wrote, "If government half a century ago had provided us all with dinners and breakfasts, it would be the practice of our orators today to assume the impossibility of our providing for ourselves."

This insightful piece dovetails with a discussion that I have been having with fellow Houston blogger Milton over at Trivial Pursuits regarding the flaws in America�s health care finance system and how self-insurance could be deployed to improve competition between health insurance products currently in the marketplace. One example of self-insurance that is an attractive alternative to many current health insurance products is the woefully underpublicized Health Savings Account (�HSA�) concept that was enacted into law last year. To introduce the concept, it is helpful to review how American health care costs are currently financed.

Every dollar that an employer pays in employee health insurance premiums avoids income and payroll taxes. For the employee with average income, this generous tax subsidy means that government is effectively paying for almost half the cost of the employee�s health insurance.

On the other hand, if the same employer tries to deposit that same dollar into a savings account for the benefit of the employee from which the employee could control the payment of medical expenses, then the government taxes the dollar and grabs almost half of it before it reaches the savings account.

Accordingly, America�s tax laws provide a generous subsidy for third-party insurance and none for individual self-insurance. In so doing, our tax laws promote use of third-party bureaucracies to pay for even minor discretionary health care expenses despite the fact that such expenses would be managed much more efficiently if patients paid them on their own.

The new health savings accounts address this defect in the health care finance system, at least to an extent. The legislation gives deposits into HSAs the same tax advantages as those granted to an employer�s health-insurance premiums. In so doing, individual self-insurance can now compete with third-party insurance on the same financial basis and individuals can now control some of their financial investment in health-care without a tax penalty.

However, even more importantly, the HSA legislation addresses in a rational manner the knotty social issue -- that is, how do we allocate dollars between health care and other goods and services? Or stated another way, how do we decide which medical procedures are worthwhile and which ones are not? There are basically three ways:

● In countries such as Canada with nationalized health insurance, government makes the decisions (either directly or indirectly) in an arbitrary, inefficient, and often unfair manner;

● The second method is to restrain spending using the techniques of managed care. Over the past 15 years of increasing managed care in the American health care finance system, most of us have experienced, at best, the irritation, and, at worst, the capriciousness of having employers and large insurers ration health care for us; and

● Finally, the third option is to allow individuals to make their own choices between health care and other uses of their money through vehicles such as HSAs.

In that connection, the HSA is the most flexible health care finance product currently on the market. HSAs allow individuals and their employers to make deposits each year equal to their health insurance deductible (there is currently a limit on the size of the deductible and a supplemental insurance policy is required to cover catastrophic illness or injury expense in excess of the amounts deposited in the HSA). The funds in the HSA grow tax free and the funds may be used to pay such things as health care expenses that would not otherwise be covered by third party insurance, insurance premiums while the owner of the account is changing jobs, and health expenses during retirement.

However, the new law is not perfect. For example, as noted above, the maximum amount that can be deposited into an HSA in any year is currently somewhat limited. Consequently, the combined cost of depositing funds in the HSA and paying for the supplemental insurance that is required can turn out to be more expensive than simply buying a third party policy with a relatively high deductible.

Moreover, products such as HSAs are only part of the solution to the problems in America�s health care finance system. From my vantage point, some sort of nationalized insurance or federally-backed private insurance is still going to be necessary for people who simply cannot afford to fund HSAs or buy private insurance, and for people with severe medical problems who cannot afford the costs attendant to those problems. In regard to these groups, the tough issue is how do you ration the health care? Or, stated another way, there must eventually be a political consensus on the limitations of such federally-insured health care. Otherwise, we simply have created another federal program that balloons into yet another governmental financial debacle.

However, for those of us fortunate to be reasonably healthy and productive, the concept of HSAs is a viable alternative to higher cost private health insurance. I encourage you to examine the product as an alternative to your current health insurance policy.

Posted by Tom at 10:11 AM | Comments (0) | TrackBack (1)

April 21, 2004

Why Health Care Has No Wal-Mart

This short BusinessWeek Online story does a good job of summarizing the reasons why America's health care finance system hinders the decline in prices in health care that Americans have enjoyed in many other sectors of the economy, most notably retail sales (ala the Wal-Mart reference). One big reason noted:

Sometimes, however, Americans use more care because they think it's free, or almost free. And that's one big reason why health care hasn't become Wal-Mart-ized. When you buy that DVD player, you whip out your credit card and pay with your own money. That makes you want to comparison shop for the best deal. But when it comes to buying drugs, consumers have little incentive to shop around. If you have good insurance, you're going to pay the same $10 or $15 whether you need the most expensive drugs or not.

A recent study that looked at drugs used to treat arthritis pain provides some insight. Arthritis sufferers can buy relatively inexpensive over-the-counter treatments, such as Motrin or similar generics, or much more costly prescription medications called cox-2 inhibitors, such as Celebrex or Vioxx. Both kinds provide equal pain relief, but the cox-2 drugs may reduce the chances of stomach bleeding or ulcers.

The study concluded that people with good drug insurance were twice as likely to get the more expensive drugs than those without insurance, whether they were at risk for bleeding or not. If someone else -- the insurance company -- is paying, price doesn't matter.

Hat tip to the Mises Economics Blog for the line to this article.

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Is American health care more productive?

Tyler Cowan over at Marginal Revolution and Jane Galt at Asymmetrical Information have interesting posts on the productivity of American health care, health care cost, and related statistics. Mr. Cowan concludes that Americans pay more for health care than other countries, but get better health care in return. We die sooner than people in other countries because we eat too much and exercise too little, among other facts. Similarly, Ms. Galt points out that many of the outcomes measured in the health care debate are both difficult to measure between countries, primarily because many have non-health-care contributing factors. Both posts are insightful and well worth reading.

As each of these posts reflect, generalized nationalized health care is no panacea for the problems that we face in America's health care finance system.

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March 23, 2004

New Medicare projections

This NY Times article reports on the Medicare trustees' report today that Medicare will need to dip into its trust fund this year to pay increasing expenditures and that the program will become insolvent by 2019 unless changes are made in the program. The 2019 go-broke date for the Medicare trust fund is seven years sooner than what the trustees projected last year.

Here is a copy of the entire report.

The trustees report that Medicare's deteriorating financial condition is largely the result of the new Medicare prescription drug law that will increase costs by more than $500 billion over the next 10 years. The trustees also noted that projected lower tax receipts devoted to the program and higher expenditures for inpatient hospital care also are contributing to the growing financial problem.

Thomas Saving, a distinguished economics professor at Texas A&M University is one of the Medicare trustees who figures prominently in the report.

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February 3, 2004

Health Care Finance Concerns Continue

The New York Times carries a front page story today regarding the increasing trend of employers to restrict health insurance coverage for their retirees. In my view, the failure of the Bush Administration to address the spiraling problems in the health care finance system in the United States is an issue that will cause President Bush trouble in the upcoming Presidential Campaign.

Posted by Tom at 7:54 PM | Comments (0)