Category Archives: Health Care Finance

How we pay for health care

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Health Expenditures by Payer What is the most efficient way to pay for health care?

Proponents of a single-payer governmental system content that patients should not have to pay the cost of their health care decisions and that the government can effectively control costs through top-down mandates.

On the other hand, opponents of such a system maintain that the most effective way to curb costs is to have patients bear a portion of their health care costs — such as routine expenses — and that the government canít efficiently control costs without rationing care.

In a recent JAMA op-ed, Dr. John Ford provided this graph (H/T Jeff Miron) to reflect the increase in third-party payment of health care expenses over the past half-century and the decrease in patient payment of expenses over the same span. Health care costs have skyrocketed over the same period.

Why should anyone believe that reform that continues the trend toward more third party payment of health care expenditures is going to result in meaningful reduction of health care costs?

How will Obamacare ration care?

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homer_beer During the latter stages of the debate over reform of the American health finance system, one of the key issues that seemed to fade amidst the rhetoric was the question of how the revamped health finance system will ration care (see also here). Inasmuch as it is still not clear to me how care will be rationed under Obamacare, this recent Happy Hospitalist post caught my eye:

I’m down in the ER the other day when I see a chief complaint fly by on the radar.  What is that chief complaint you ask? ìRefused by Detox.î

The patient was so drunk, even the community detox center refused them.  So how did this play out?  The patient was taken by ambulance from his home to a small town community ER for altered mental status.  There, he was  booked into the ER and seen by a small town community ER physician family practice resident or PA or NP.  Diagnosis you ask? ìAcute alcohol intoxication. Plan:  Discharge to community detox center.î

The patient was then transported to detox  by a cop where he was promptly refused by detox for being too drunk. Too drunk for detox.  How sad is that.  At this point another ambulance was called and the small town hospital refused to accept him back because he was "too drunk" for them to handle if he became comatose and critically ill.

So the ambulance drove him 75 miles to Happy’s hospital which has to accept him, where he was promptly booked into the emergency department in front of the 28 year old with heart burn, the 19 year old looking to get a pregnancy test and the 14 year old who’s mother brought her in because she just had her first period.  What happened with our drunk?  He was promptly placed in a room where stat lab confirmed what everyone else had suspected.  He was drunk.  The big city ER doctor billing $500 an hour proudly made his diagnosis and disposition plans known to the world: ìAcute alcohol intoxication. Plan: Discharge to community detox.î

By now, the patient’s alcohol level was down to 320 and he was awake, responsive and asking for a samich as the cops show up to take him away. Let’s conservatively add it up:

  • Two ambulance rides $1,000
  • Two ER visits $3,000
  • Two ER physician visits $500

Almost $5,000 to take care of a drunk in which doing nothing would have given you the same result.  And you wonder why Medicaid is going bankrupt.

The Hospitalist goes on to point out how expenses such as the foregoing is eventually going to lead to failure of many inner-city hospitalists. But an equally troubling issue is whether anything will change in regard to future opportunities for misallocation of expenses under an increasingly subsidized health care system?

Frankly, I doubt it.

Thoughts on health care finance reform

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stethoscope_3 Inasmuch as Americaís fractured health care finance system has been a common topic on this blog since early 2004, many friends and readers have asked my thoughts about the health care reform legislation that was passed yesterday. So here goes.

The legislation is fundamentally flawed because it imprudently foists a top-down reorganization plan on something as complex and disparate as financing health care. But frankly, I have no idea whether it will result in a worse finance system than the current one, which is pretty bad.

My biggest criticism with both the current system and the one contemplated by Obamacare is that the patient is not the customer, at least as it relates to non-catastrophic illness and injury. Without cost control ñ and customer decision-making is the most efficient one available – neither the current system nor Obamacare will be able to maintain delivery of high-quality care to an increasingly aging population.

However, the reality is that we now have two solid generations of Americans now who enjoy having someone else pay for their health care. So, itís unrealistic to think that such a societal shift is going to change anytime soon. But itís still important to understand how we got to this point.

Employer-based health insurance became popular during World War II because it was initially exempted from gross income as a way to circumvent wartime wage and price controls. After the war, marginal income tax rates were high and individual medical expenses were tax deductible, so at least some rational incentives were returned to the medical marketplace.

But all this changed in 1986 when the Reagan Administration made concessions to achieve bipartisan tax reform. Individual medical expenses were no longer deductible until they reached 7.5% of gross income, which virtually eliminated individual incentives in the medical marketplace. Not surprisingly, everyone was incentivized after tax reform to move all medical expenses to third-party-payor health insurance. As a result, individual out-of-pocket expenses in the health care market dropped from 22% in 1985 to less than than 10% of the market now.

So, in essence, the Reagan Administration horse-traded personal tax deductibility of medical expenses away, but figured that was acceptable because at least employer health insurance remained tax-free benefit. Iím sure if we could ask him now, President Reagan would tell you that he expected a future Congress would fix such perverse incentives after the dust settled on the benefits of tax reform. But alas, that never happened.

What happens now? The only certainly is that special interests will be descending upon Washington in droves to do their bidding over the transfers of wealth that will occur under the new legislation. At least it will be entertaining to watch who wins and loses.

But there are two big points that everyone should remember as we embark on this new world of health care finance.

First, the Obama Administrationís rationalization of future cuts in Medicare spending as a funding source for the health care legislation is utterly disingenuous, as Arnold Kling artfully explains:

Imagine that your crazy uncle Fred had bought a dozen cars on credit. As a result, he faces car payments far in excess of what he can afford. He comes to you and says he has a plan that in a couple of years will reduce his car payments by a few thousand dollars. "Now I have the money for a down payment on a boat!" he exclaims, as he runs off to the boat dealer.

The equivalent is for Congress to treat future cuts in Medicare as if they were a newfound source of wealth to be tapped. Once they adopt this precedent, they can increase spending on whatever they want, in unlimited amounts, while claiming deficit neutrality. Future Medicare spending is so high that you can always come up with cuts, as long as they deferred.

Second, as Greg Mankiw notes, projected Medicare cuts in payment rates for physician services portend the rationing of medical services that the promoters of the current legislation contend wonít occur. Because few consumers actually pay for their health care, most folks donít realize that Medicare and Medicaid payment rates for physician services have already been cut by around 30% since the late 1990ís. That has led many doctors to limit substantially the number of Medicare and Medicaid patients who they are willing to treat in their practices. In my view, that trend is likely to continue under the new legislation. Who will tend to the medical needs of consumers who elect to rely on such insurance in the future?

Supporters of Obamacare generally argue that the legislation offers more equality through expanded insurance and redistribution of benefits. But the wealthy will always find ways to get around the rationing and other restrictions of a government-run health care system. On the other hand, the poor will have no choice but to accept the government health care, which is unlikely to be as high a quality as what the rich folks obtain from their private doctors. Accordingly, although the distribution of health care may be a bit more equal in the short term, I’m not sure that means more equality in health care in the long run.

Which leads me to this question: How long will it be before the federal government requires physicians, as a condition to being allowed to engage in private practice, to accept a certain number of patients under government-sponsored insurance plans that limit payments to the physicians far below what the physicians would otherwise accept?

Making good on Baylor Med’s bad bet

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27937 The Chronicleís Todd Ackerman and Loren Steffy did a good job in this weekend article of chronicling the series of bad bets that Baylor College of Medicineís Board of Trusteeís made in the wake of the schoolís unfortunate 2004 divorce from The Methodist Hospital. Baylor Medís travails have been a regular topic on this blog, most recently here.

The elephant in the parlor of Baylor’ Medís financial problems is the $600 million in bond debt that Baylor Med incurred in connection with its currently mothballed hospital project. Indeed, the difference between the total bond debt and the value of the underlying collateral would gobble up a large chunk of Baylorís endowment, which is currently a tad under a billion dollars. That was enough to scare off Rice University, although I question whether that was the right long-term decision for Rice.

So, the future is bit cloudy for Baylor. But what Iím wondering is whether there is a local partnership that could bail Baylor out of most of current problems while providing an essential benefit for the Houston community?

The last time I look into the issue, estimates in the Houston metro area has one of the largest percentages of uninsured residents in the U.S. (over 30% versus a national average of about 16%). The Harris County Hospital District ultimately ends up with the issues involved with financing indigent care as well as ensuring that adequate medical facilities exist for local citizens.

Given the HCHDís projected need for facilities to keep up with the growth of the Houston area, it makes sense for the HCHD to engage Baylor in discussions over a partnership in which HCHD would make an investment in the hospital in return for Baylorís agreement to staff the institution as its primary teaching facility.

Baylor and the HCHD already work closely in connection with the staffing of the Ben Taub Hospital trauma unit in the Texas Medical Center. A pure teaching hospital for Baylor would provide a quasi-public, low-cost alternative to the Med Centerís impressive but expensive array of private hospitals.

Sure, the details would have to be worked out, such as management of the facility. But doesnít such an investment by the county make sense, particularly when compared to ones such as this?

An interesting health care finance contrast

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health_insurance This Sean P. Murphy/Boston Globe article details how local government-subsidized health insulation ìinsuranceî plans are crippling municipal budgets throughout Massachusetts.

On the other hand, this WSJ op-ed by Indiana Governor Mitch Daniels explains how the state is saving $20 million of health care expenses in 2010 through the introduction of a highly-popular state employee health finance plan based upon Heath Savings Accounts.

This is not surprising. The most efficient way to spend less on health care is to consume less of it. As a result, someone ñ be it the consumer, an insurer or the government ñ at some point has to say no to the consumption of more health care. As Steve Lansburg recently pointed out, that eating more cake diet just doesnít work. The WSJ’s Holman Jenkins agrees.

Unfortunately, the present U.S. employer and government-based, third-party payor health care finance system provides powerful incentives to consume more health care. And, as Milton Friedman was fond of saying, consumers will consume as much health care as they can so long as someone else is paying for it.

Until we change the reliance on such consumer insulation from health care decisions, the dynamic of rising costs is unlikely to cease.

How much is “affordable” health care?

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image Uwe Reinhardt posted this insightful Economix post last week in which he bores in on the key issue to be resolved in reforming the U.S. health care finance system:

I could easily offer every American family a health insurance policy it could afford, simply by varying judiciously the annual deductible, the coinsurance rate, upper limits on items ostensibly covered by the policy and exclusions from coverage of sundry services or products ó for example, mental health services or certain specialty drugs.

The policy might be a sham; but it sure would be cheap.

Health insurance is just a means by which needed health care can be made ìaffordableî to Americans when they fall ill. Therefore the proper target of health policy should be the familyís total outlay on health care, including out-of-pocket spending. That total outlay on ìneeded health careî should be made ìaffordable.î

Which requires us to define concretely, for practical purposes, what we mean by ìhealth careî and ìaffordable,î pedantic as that may sound. Politicians should be forced to be utterly clear about it. [.  .  .]

President Obama could make this idea practical by using a visual device such as the table [above]. In that table ìdisposable incomeî is defined as all personal income from whatever source minus all personal income tax payments and other government deductions. The numbers are annual.  .   .   .

Professor Reinhardt makes a good point about the disingenuous nature of health insurance. As I noted here, most forms of health insurance ñ particularly the employer-based kind — insulate consumers from understanding the truce cost of their health care choices. As a result, most consumers ñ and virtually all legislators in Washington ñ have no idea on what amount of health care costs are ìaffordable.î Most insureds are pleased that someone else is footing the bill and simply donít want to lose that perk.

Health insurance is largely the product of bad governmental policy (wage controls during World War II) and, as is often the case with such policies, there are unintended consequences that are even worse than the misdirected governmental policy. In this case, we have two generations of Americans who have been largely insulated from needing to know the true cost of some of their most fundamental choices and needs in life.

Such ignorance is now hindering reform of the fractured U.S. health care finance system.  But any health care finance reform that does not rely at least in part on reigniting a consumer market to control costs will likely be even more expensive and less satisfying than the current system.

More misdirected Nanny energy

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obesity_4 Does anyone really think for a moment that this legislation is going to have any meaningful impact on its intended purpose:

The Obama administration will begin a drive this week to expel Pepsi, French fries and Snickers bars from the nationís schools in hopes of reducing the number of children who get fat during their school years.

In legislation, soon to be introduced, candy and sugary beverages would be banned and many schools would be required to offer more nutritious fare. [.   .   .]

The legislation would reauthorize the governmentís school breakfast and lunch programs. It aims to transform the eating habits of many of the nationís children and teenagers,  .   .   . 

No word yet on whether the legislation is also going to attempt to bar students from going to the neighborhood grocery or burger stand after school and buy the Pepsi, French fries and Snickers that the do-gooders wonít let them buy during school.

On the other hand, an initiative that really might generate some beneficial health changes ñ such as providing each studentís family lower health insurance premiums in return for family members maintaining a non-obese weight ñ remains illegal under applicable governmental regulatory schemes.

We really do find creative ways to waste time and energy, donít we?

Did Rice blow it?

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RiceU_BaylorCollegeMedicine So, Rice University last week finally decided to pass on the proposed merger with Baylor College of Medicine.

In theory, the deal makes sense. Both are top-notch academic institutions with campuses within a stoneís throw of each other. Each institution would have given the other something that it needs. Baylor would have gotten the financial support of Riceís multi-billion dollar endowment, while Rice would have landed a strong scientific research and clinical care center in one of the nationís leading medical institutions, the Texas Medical Center.

Although Rice President David Leebron supported the merger, large segments of the Rice faculty and alumni opposed the deal, primarily on financial and cultural grounds. Indeed, my sense is that Leebron quit pushing the Rice Board of Trustees to approve the deal when it became apparent that a consensus of Rice constituencies were opposed to the marriage.

And Baylor clearly finds itself in precarious financial condition, not completely of its own doing. After its 54-year teaching hospital relationship with Methodist Hospital soured in 2004, and a subsequent deal with St. Lukeís Episcopal Hospital did not work out, BCM decided on a plan to go it alone and build its own teaching hospital.

However, the ambitious deal has been pretty much a disaster from the start. After floating almost $900 million in bonds to finance construction of the hospital, Baylor announced last year that it was temporarily suspending construction of the hospitalís interior as it works through its financial problems.

Meanwhile, BCM has lost over $300 million since the split with Methodist. Inasmuch as Baylorís endowment is less than a billion, those kinds of losses have placed BCMís financial condition at risk. Already in in technical default on multiple bond covenants, BCM is now facing the prospect of hiring a bondholder-required ìchief implementation officerî to oversee an overall financial reorganization. That would have been avoided if the Rice merger had succeeded.

Thus, Rice certainly had understandable reasons for passing on the deal.

Nevertheless, I wonder ñ did Rice make the right decision?

Despite its financial woes, BCM remains one of the elite medical and research institutions in the U.S. The merger would have undoubtedly brought a substantial increase in research funds in such fields as bioengineering, neurobiology, nano-biotechnology, stem cell biology and gene therapy. Although Rice would have been subsidizing BCMís financial problems in the short term, my sense is that the increase in research resources flowing to Rice over the years would ultimately make that bailout well worth it.

But even more importantly, Rice passed on an opportunity to take a calculated risk that could well have elevated Rice, BCM, the Texas Medical Center and Houston to the forefront of medical and scientific research in the world.

Despite the risks, that kind of upside doesnít come around very often. Failing to realize that is one of the key reasons why Texas has lagged badly behind states such as California and New York in the development of Tier 1 research institutions and all the benefits that such institutions provide to the state and its communities.

Thus, Rice is keeping its chips and betting that it can develop its scientific research just fine without BCM. But if I were to place a bet on which institution is closer to the cutting edge of such research after the next 25 years, Iím still putting my chips on Baylor.

What killed F.D.R.?

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doctors

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.

The risks of health care finance

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health_insurance 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.