Obama?s plan for universal healthcare follows a premise that is difficult to argue with. Give vital medical care to anyone who needs it. This is an admirable goal and aims to meet a genuine need that nearly everyone can identify with.
To justify the institution of such an immense government program a lot of data has been collected and published: Cost of healthcare insurance has doubled in the last eight years and is forecast to continue its growth, half of all personal bankruptcies are the result of medical bills, most insurance plans have coverage caps leaving the ?insured? still highly vulnerable, twenty five percent of medical costs are administrative.
The spiraling cost of healthcare is certainly worrisome and certainly warrants government action, however, the future of the current government plan is looking less than certain.
To understand how we got here, (and to explain how I arrived at my current viewpoint) let?s rewind the clock to the 1920s. At this time we were just discovering that oxygen diffuses from lungs to blood, that insulin can help diabetics immensely and that a new product called the ?Band-Aid? genuinely helped the healing of scratches and scrapes. In 1921 the total cost of healthcare was estimated at 1.4 billion by the Public Health Service or $12.33 per person per year, translated into 2009 dollars (using Oregon State?s table of CPI conversion factors) this equates to about $16.7 billion and $147 respectively. For reference the population of America was around 107 million, literacy rates had reached 94% and life expectancy was 54 years for men and 55 years for women. Current (2009) figures put the population at around 310 million, literacy at 98% and life expectancy at 74 years for males and 80 years for females. The average American now lives about 23 years longer. The average American also spends over five thousand percent more on healthcare (after adjustment for inflation), or $7,900.00 per year (2008 figure). This places total healthcare spending at 2.4 trillion in 2008 or 17% of America?s GDP. Spending an extra $7,753.00 a year on healthcare, however, may seem like a reasonable price to pay for 23 extra years on this earth.
Comparison to other countries (in an effort to gauge room for improvement) is in some ways difficult and in some ways easy. Difficult, because the US is the only major industrialized nation that does not have universal healthcare, easy because despite different operational paradigms data from other major countries that is both relevant and directly equivalent to American metrics is available. America spends more on healthcare per capita than any other major nation. As previously mentioned, America spends 17% of its GDP on healthcare, for reference, Japan spends 8.2% Canada spends 10.6% Australia spends 8.8% and the UK spends 8.4%. All of these countries have higher life expectancies and lower infant mortality rates which are regarded as key indicators of systemic effectiveness by the World Health Organization (WHO). These numbers tell us that there is significant room for improvement in the American system, and that the current system can reasonably be regarded as broken.
Reliable data for Canada and Japan is not available for the whole timescale, Canada transitioned to universal healthcare between 1946 and 1966.
So what?s broken? Unfortunately the current state of our system is the result of widely accepted business practices interacting with well intentioned government policies, on a more fundamental level; it is the result of legal, but unethical business practices. The combination of ?cash is king? business, and government induced obstacles to competition, is proving to be disastrous
As documented by Terree P. Wasley in his remarkably prescient 1993 paper detailing (and extrapolating) the history of American medicine in the twentieth century, the rise of insurance gradually removed the usual incentives that businesses have to compete with each other on price and also removed the natural tendency of consumers (patients) to find the most cost effective option.
The competitive incentive for healthcare providers was removed by the cost-plus reimbursement structure of insurance companies. That is, the hospital was paid for its total costs for a given treatment and then paid a predetermined percentage on top of those costs. Eventually, money paid to the hospitals came almost exclusively through the insurers, this produced what Wasley describes as ?a perverse incentive for hospitals to increase costs? because increased costs meant increased profit due to the static relationship between costs and profits (profits: the ?plus? part of ?cost plus?). While the insurance companies paid the hospitals based on costs, they also calculated insurance premiums based on those costs. Because the consumer now paid costs monthly instead of up front, the relationship between accepting expensive treatment options, and increased premiums was blurred. Actions (expensive treatment) were divorced from reactions (increased premiums) muddying the waters of reason and contributing to the rise in costs.
An anomalous trend emerged in health insurance companies in the early 1990s when IT technology was taking the business world by storm and ?middle managers? were being replaced by software to cut administrative costs. While the administrative costs of most companies were falling, the costs of operating an insurance company mysteriously grew. The percentage of total medical costs that went to fund insurance providers increased from about 5% in 1993, to as much as 20% in 2005 according to the PricewaterhouseCoopers? Health Research Institute. The reasons for this increase could be attributed to: a rise in legal activity and associated costs, a rise in paperwork required due to increasing government requirements such as the Resource Based Relative Value Scale implementation in 1992 and HIPAA (which would be ironic) in 1996. More likely, however, is that the insurance companies were simply doing what all organisms naturally do when able, grow. Ideally an insurance company would be actively self-limiting and aggressively pursuing lower internal costs per customer to reduce the costs to the consumer; sound unrealistic? Of course it does, on top of their suppression of competition insurance companies by their very nature aid and abet the spiraling costs of healthcare by adding the cost of their operations to the cost of the service; they have little incentive to operate efficiently. Health Insurance companies were started during the great depression to make things fairer for patients, government intervention was supposed to make things fairer for the poor and the elderly. But as a country, is cradling a system that has lower effectiveness and double the price tag of equivalent systems really fair to anyone? In a complicated attempt to be fair to everyone, we have become fair to no one. Hello government.
While our current predicament developed slowly, the end result of a service with highly inelastic demand being insulated from competition is easily predictable. How did we fail to see this developing? Maybe it was a simple lack of recognition that the nature of man is not sufficiently noble to maintain integrity when there is no short-term tangible reward for doing the right thing and no legal consequence for doing the wrong thing, or maybe the scrutiny directed at the situation was insufficient to reveal that the conflict of interests existed. Whatever the case, it is now inconsequential, save for its value as a lesson in the history books. The important thing now is that the ?new? system eliminates the critical flaws described above.
Summary of Primary Problems:
1. Limited competition between healthcare providers leading to irresponsible cost control
2. Limited consumer ability/motivation to make cost effective choices
3. The additional cost leached by insurance companies from the consumer
The current mix of private practice with government programs and regulation has been tweaked many times to no avail, this system is fatally flawed. The two clearest, best alternatives would both involve extremely painful transitions. Let?s examine them.
1. Socialized healthcare: In what will almost certainly be viewed by many as ?oppressive? government action, the government could annex healthcare from the public realm, and reform it with salaries for medical workers and taxes instead of insurance. Essentially this would mirror the systems (to a degree) in other western nations.
ADVANTAGES: Problem 1 would be solved by separating the setters of prices from the beneficiaries of those prices. Problem 2 would remain but its importance would be greatly reduced by the fact that competition would cease being the intended driver of efficiency. Problem 3 could be eliminated, in such a system there would not be a need for insurance companies, though that does not preclude their existence. In summary, costs could be controlled provided the government maintained the will to control them; the system would have the additional advantage of ensuring that all Americans have access to healthcare.
DISADVANTAGES: Reduction in treatment options, large potential for governmental inefficiencies and special interest group influences to de-rail a streamlined system and bring us back to square one. This transition would likely be unacceptably painful. Assuming that we were able to create a system that is only as efficient as Canada?s we would still be eliminating more than a trillion dollars worth of jobs. This is ?desirable? from a long-term national standpoint but if you are one of those losing your job or getting a pay cut you probably wouldn?t agree. Legislating insurance companies out of existence would be fought tooth and nail but the loss of jobs and initial instability would almost CERTAINLY be outweighed by the long term benefits of a system that is sustainable (or at least significantly more sustainable). While the implementation of this system would flow with metaphorical blood it is important to conclude that the end result would ALMOST CERTAINLY BE BETTER THAN WHAT WE HAVE NOW.
2. True Free market: In a massive restructuring effort the healthcare industry could be transformed into a true free market. Doing this would require strict limits on the size of medical institutions and strong antitrust regulations, these limitations would be unique to the healthcare system because the inelasticity of demand and relative scarcity of large facilities creates greater potential for anticompetitive behavior. The system of medical insurance would have to be shifted back to its original (circa 1929) form. That is, insurance would have to be an integral part of the health care provider (not a separate entity) so that insurance becomes as much a subject of competitive pressure as every other part of the health care delivery system. Competition requires multiple players and this is why it is critical that healthcare institutions are prevented from collaborating on prices in any way. It would be natural for alliances to form between healthcare providers and if they do Problem 1 will put us back in square one, or close to it.
ADVANTAGES: The free market system has a higher potential for efficiency than any other system. Problems 1 and 2 would be addressed by opening the market back up to intense competition and eliminating the provider?s incentive to increase costs while increasing the consumer?s motivation to decrease costs. Problem 3 would be addressed by merging insurance with the healthcare entities, combining financial incentive and competitive pressure to lower the impact that the insurance silo has on the bottom line.
DISADVANTAGES: It is very possible that excessive competition could reduce the quality of healthcare and it is likely that levels of healthcare could come to parallel socio-economic lines, with the rich receiving outstanding care and the poor receiving none. It is also possible that limiting the size of healthcare providers could negatively impact research in the medical field. The transition to this system would be painful for the same reasons as the above socialized system. Insurance companies would have to be liquidated or drastically reshaped and the increased efficiency would create a massive system-wide contraction resulting in north of a trillion dollars in lost jobs (ironically the more efficient the new system is, the more catastrophic the initial contraction will be). Like the socialized system, implementation of this system would be painful, but again, it is important to conclude that the end result would ALMOST CERTAINLY BE BETTER THAN WHAT WE HAVE NOW.
Additional notes: It is easy to ask ?why can?t either of the above systems be built without the loss of job value?? the answer is simply that doing so would create the same base of inefficiency that is the current problem. Both of the above systems are capable of being even more wasteful than the current one, but they will not be unless we intentionally make them so or manage them in a grossly negligent fashion.
All the talk of cost pressures and healthcare brings up a very sticky issue. Is it ethical to bring anything but the absolute best to the hospital bed? Is it possible for saving a person?s life to be impractical? Is it worth a million dollars to save someone?s life? How about a billion dollars? How about a trillion dollars? Does your answer change if this money only buys the person one extra year? How about if it buys them only an extra day? Most will distance themselves from this train of thought by saying ?life is invaluable, its value can?t be described with numbers? which is true. But? The government must answer this question because the government does have access to a trillion dollars and there are situations that could potentially require if not a trillion still an unbelievable sum. Preventative healthcare could be taken to an incredibly costly level for everyone and it would have measurable benefits. The average person on this planet is on track to make about half a million over the course of their life which is not an uncommon figure in the world of healthcare? I will not put a number on the value of life but I do believe that currency has a moral component and that living a life with the sole goal of extending your life as long as possible is ignoble. Just like organizations, when a person?s primary mission becomes preserving themselves, the resulting narrowing of focus squeezes out room for the things that make life worth living, this is followed by a long, slow, decay culminating in death. So what level of self preservation is rational/natural and at what point does it become an inhibition to living life? This question will have to be answered eventually, likely in this century, because regardless of how healthcare is reformed, costs will inevitably grow as is happening in every industrialized nation on the planet.
The current plan (detailed in the 1000 page H.R. 3200 bill) involves creating a government health care system that will ?compete? with other providers. Opponents of the bill have accused it of being a ?Trojan horse?, a vehicle for government to ?competitively? acquire the industry. Honestly I hope that this is the case because if it is not, then the existing system will continue to sap our ability to compete on the international stage and the bill will likely become yet another example of failed government intervention. In its current form the bill has several disturbing facets. All of them involve an eerie degree of government control over the individual. I?ll stop short of picking at the details but the current plan can be broadly viewed as an attempt at hybridizing the socialized system with the current system which does not bode particularly well, it is possible however that the government does indeed intend this to be a Trojan horse, the gradual death of the government's competitors would be less shocking to the system than an outright socialization and would ameliorate the pain of transition described above (to a degree). Only time will tell, but the outlook for bill H.R. 3200 is looking dicey.
Sources:
H.R. 3200 http://www.capwiz.com/afanet/w.../query/z?c111:H.R.3200:
Canadian medical association http://www.cmaj.ca/cgi/content/full/177/1/51/F118
NCHC http://www.nchc.org/facts/cost.shtml
UN Statistics Division http://data.un.org/
Wasley http://findarticles.com/p/arti...4930/?tag=content;col1
Kaiser Family Foundation http://www.kff.org/insurance/snapshot/chcm010307oth.cfm
The Case for Healthcare Reform http://www.whitehouse.gov/asse...Health_Care_Report.pdf
Igor Volsky http://wonkroom.thinkprogress....making-too-much-money/
edit: Changed "model" to "premise" to better represent my thoughts in the first paragraph.
To justify the institution of such an immense government program a lot of data has been collected and published: Cost of healthcare insurance has doubled in the last eight years and is forecast to continue its growth, half of all personal bankruptcies are the result of medical bills, most insurance plans have coverage caps leaving the ?insured? still highly vulnerable, twenty five percent of medical costs are administrative.
The spiraling cost of healthcare is certainly worrisome and certainly warrants government action, however, the future of the current government plan is looking less than certain.
To understand how we got here, (and to explain how I arrived at my current viewpoint) let?s rewind the clock to the 1920s. At this time we were just discovering that oxygen diffuses from lungs to blood, that insulin can help diabetics immensely and that a new product called the ?Band-Aid? genuinely helped the healing of scratches and scrapes. In 1921 the total cost of healthcare was estimated at 1.4 billion by the Public Health Service or $12.33 per person per year, translated into 2009 dollars (using Oregon State?s table of CPI conversion factors) this equates to about $16.7 billion and $147 respectively. For reference the population of America was around 107 million, literacy rates had reached 94% and life expectancy was 54 years for men and 55 years for women. Current (2009) figures put the population at around 310 million, literacy at 98% and life expectancy at 74 years for males and 80 years for females. The average American now lives about 23 years longer. The average American also spends over five thousand percent more on healthcare (after adjustment for inflation), or $7,900.00 per year (2008 figure). This places total healthcare spending at 2.4 trillion in 2008 or 17% of America?s GDP. Spending an extra $7,753.00 a year on healthcare, however, may seem like a reasonable price to pay for 23 extra years on this earth.
Comparison to other countries (in an effort to gauge room for improvement) is in some ways difficult and in some ways easy. Difficult, because the US is the only major industrialized nation that does not have universal healthcare, easy because despite different operational paradigms data from other major countries that is both relevant and directly equivalent to American metrics is available. America spends more on healthcare per capita than any other major nation. As previously mentioned, America spends 17% of its GDP on healthcare, for reference, Japan spends 8.2% Canada spends 10.6% Australia spends 8.8% and the UK spends 8.4%. All of these countries have higher life expectancies and lower infant mortality rates which are regarded as key indicators of systemic effectiveness by the World Health Organization (WHO). These numbers tell us that there is significant room for improvement in the American system, and that the current system can reasonably be regarded as broken.
Reliable data for Canada and Japan is not available for the whole timescale, Canada transitioned to universal healthcare between 1946 and 1966.
So what?s broken? Unfortunately the current state of our system is the result of widely accepted business practices interacting with well intentioned government policies, on a more fundamental level; it is the result of legal, but unethical business practices. The combination of ?cash is king? business, and government induced obstacles to competition, is proving to be disastrous
As documented by Terree P. Wasley in his remarkably prescient 1993 paper detailing (and extrapolating) the history of American medicine in the twentieth century, the rise of insurance gradually removed the usual incentives that businesses have to compete with each other on price and also removed the natural tendency of consumers (patients) to find the most cost effective option.
The competitive incentive for healthcare providers was removed by the cost-plus reimbursement structure of insurance companies. That is, the hospital was paid for its total costs for a given treatment and then paid a predetermined percentage on top of those costs. Eventually, money paid to the hospitals came almost exclusively through the insurers, this produced what Wasley describes as ?a perverse incentive for hospitals to increase costs? because increased costs meant increased profit due to the static relationship between costs and profits (profits: the ?plus? part of ?cost plus?). While the insurance companies paid the hospitals based on costs, they also calculated insurance premiums based on those costs. Because the consumer now paid costs monthly instead of up front, the relationship between accepting expensive treatment options, and increased premiums was blurred. Actions (expensive treatment) were divorced from reactions (increased premiums) muddying the waters of reason and contributing to the rise in costs.
An anomalous trend emerged in health insurance companies in the early 1990s when IT technology was taking the business world by storm and ?middle managers? were being replaced by software to cut administrative costs. While the administrative costs of most companies were falling, the costs of operating an insurance company mysteriously grew. The percentage of total medical costs that went to fund insurance providers increased from about 5% in 1993, to as much as 20% in 2005 according to the PricewaterhouseCoopers? Health Research Institute. The reasons for this increase could be attributed to: a rise in legal activity and associated costs, a rise in paperwork required due to increasing government requirements such as the Resource Based Relative Value Scale implementation in 1992 and HIPAA (which would be ironic) in 1996. More likely, however, is that the insurance companies were simply doing what all organisms naturally do when able, grow. Ideally an insurance company would be actively self-limiting and aggressively pursuing lower internal costs per customer to reduce the costs to the consumer; sound unrealistic? Of course it does, on top of their suppression of competition insurance companies by their very nature aid and abet the spiraling costs of healthcare by adding the cost of their operations to the cost of the service; they have little incentive to operate efficiently. Health Insurance companies were started during the great depression to make things fairer for patients, government intervention was supposed to make things fairer for the poor and the elderly. But as a country, is cradling a system that has lower effectiveness and double the price tag of equivalent systems really fair to anyone? In a complicated attempt to be fair to everyone, we have become fair to no one. Hello government.
While our current predicament developed slowly, the end result of a service with highly inelastic demand being insulated from competition is easily predictable. How did we fail to see this developing? Maybe it was a simple lack of recognition that the nature of man is not sufficiently noble to maintain integrity when there is no short-term tangible reward for doing the right thing and no legal consequence for doing the wrong thing, or maybe the scrutiny directed at the situation was insufficient to reveal that the conflict of interests existed. Whatever the case, it is now inconsequential, save for its value as a lesson in the history books. The important thing now is that the ?new? system eliminates the critical flaws described above.
Summary of Primary Problems:
1. Limited competition between healthcare providers leading to irresponsible cost control
2. Limited consumer ability/motivation to make cost effective choices
3. The additional cost leached by insurance companies from the consumer
The current mix of private practice with government programs and regulation has been tweaked many times to no avail, this system is fatally flawed. The two clearest, best alternatives would both involve extremely painful transitions. Let?s examine them.
1. Socialized healthcare: In what will almost certainly be viewed by many as ?oppressive? government action, the government could annex healthcare from the public realm, and reform it with salaries for medical workers and taxes instead of insurance. Essentially this would mirror the systems (to a degree) in other western nations.
ADVANTAGES: Problem 1 would be solved by separating the setters of prices from the beneficiaries of those prices. Problem 2 would remain but its importance would be greatly reduced by the fact that competition would cease being the intended driver of efficiency. Problem 3 could be eliminated, in such a system there would not be a need for insurance companies, though that does not preclude their existence. In summary, costs could be controlled provided the government maintained the will to control them; the system would have the additional advantage of ensuring that all Americans have access to healthcare.
DISADVANTAGES: Reduction in treatment options, large potential for governmental inefficiencies and special interest group influences to de-rail a streamlined system and bring us back to square one. This transition would likely be unacceptably painful. Assuming that we were able to create a system that is only as efficient as Canada?s we would still be eliminating more than a trillion dollars worth of jobs. This is ?desirable? from a long-term national standpoint but if you are one of those losing your job or getting a pay cut you probably wouldn?t agree. Legislating insurance companies out of existence would be fought tooth and nail but the loss of jobs and initial instability would almost CERTAINLY be outweighed by the long term benefits of a system that is sustainable (or at least significantly more sustainable). While the implementation of this system would flow with metaphorical blood it is important to conclude that the end result would ALMOST CERTAINLY BE BETTER THAN WHAT WE HAVE NOW.
2. True Free market: In a massive restructuring effort the healthcare industry could be transformed into a true free market. Doing this would require strict limits on the size of medical institutions and strong antitrust regulations, these limitations would be unique to the healthcare system because the inelasticity of demand and relative scarcity of large facilities creates greater potential for anticompetitive behavior. The system of medical insurance would have to be shifted back to its original (circa 1929) form. That is, insurance would have to be an integral part of the health care provider (not a separate entity) so that insurance becomes as much a subject of competitive pressure as every other part of the health care delivery system. Competition requires multiple players and this is why it is critical that healthcare institutions are prevented from collaborating on prices in any way. It would be natural for alliances to form between healthcare providers and if they do Problem 1 will put us back in square one, or close to it.
ADVANTAGES: The free market system has a higher potential for efficiency than any other system. Problems 1 and 2 would be addressed by opening the market back up to intense competition and eliminating the provider?s incentive to increase costs while increasing the consumer?s motivation to decrease costs. Problem 3 would be addressed by merging insurance with the healthcare entities, combining financial incentive and competitive pressure to lower the impact that the insurance silo has on the bottom line.
DISADVANTAGES: It is very possible that excessive competition could reduce the quality of healthcare and it is likely that levels of healthcare could come to parallel socio-economic lines, with the rich receiving outstanding care and the poor receiving none. It is also possible that limiting the size of healthcare providers could negatively impact research in the medical field. The transition to this system would be painful for the same reasons as the above socialized system. Insurance companies would have to be liquidated or drastically reshaped and the increased efficiency would create a massive system-wide contraction resulting in north of a trillion dollars in lost jobs (ironically the more efficient the new system is, the more catastrophic the initial contraction will be). Like the socialized system, implementation of this system would be painful, but again, it is important to conclude that the end result would ALMOST CERTAINLY BE BETTER THAN WHAT WE HAVE NOW.
Additional notes: It is easy to ask ?why can?t either of the above systems be built without the loss of job value?? the answer is simply that doing so would create the same base of inefficiency that is the current problem. Both of the above systems are capable of being even more wasteful than the current one, but they will not be unless we intentionally make them so or manage them in a grossly negligent fashion.
All the talk of cost pressures and healthcare brings up a very sticky issue. Is it ethical to bring anything but the absolute best to the hospital bed? Is it possible for saving a person?s life to be impractical? Is it worth a million dollars to save someone?s life? How about a billion dollars? How about a trillion dollars? Does your answer change if this money only buys the person one extra year? How about if it buys them only an extra day? Most will distance themselves from this train of thought by saying ?life is invaluable, its value can?t be described with numbers? which is true. But? The government must answer this question because the government does have access to a trillion dollars and there are situations that could potentially require if not a trillion still an unbelievable sum. Preventative healthcare could be taken to an incredibly costly level for everyone and it would have measurable benefits. The average person on this planet is on track to make about half a million over the course of their life which is not an uncommon figure in the world of healthcare? I will not put a number on the value of life but I do believe that currency has a moral component and that living a life with the sole goal of extending your life as long as possible is ignoble. Just like organizations, when a person?s primary mission becomes preserving themselves, the resulting narrowing of focus squeezes out room for the things that make life worth living, this is followed by a long, slow, decay culminating in death. So what level of self preservation is rational/natural and at what point does it become an inhibition to living life? This question will have to be answered eventually, likely in this century, because regardless of how healthcare is reformed, costs will inevitably grow as is happening in every industrialized nation on the planet.
The current plan (detailed in the 1000 page H.R. 3200 bill) involves creating a government health care system that will ?compete? with other providers. Opponents of the bill have accused it of being a ?Trojan horse?, a vehicle for government to ?competitively? acquire the industry. Honestly I hope that this is the case because if it is not, then the existing system will continue to sap our ability to compete on the international stage and the bill will likely become yet another example of failed government intervention. In its current form the bill has several disturbing facets. All of them involve an eerie degree of government control over the individual. I?ll stop short of picking at the details but the current plan can be broadly viewed as an attempt at hybridizing the socialized system with the current system which does not bode particularly well, it is possible however that the government does indeed intend this to be a Trojan horse, the gradual death of the government's competitors would be less shocking to the system than an outright socialization and would ameliorate the pain of transition described above (to a degree). Only time will tell, but the outlook for bill H.R. 3200 is looking dicey.
Sources:
H.R. 3200 http://www.capwiz.com/afanet/w.../query/z?c111:H.R.3200:
Canadian medical association http://www.cmaj.ca/cgi/content/full/177/1/51/F118
NCHC http://www.nchc.org/facts/cost.shtml
UN Statistics Division http://data.un.org/
Wasley http://findarticles.com/p/arti...4930/?tag=content;col1
Kaiser Family Foundation http://www.kff.org/insurance/snapshot/chcm010307oth.cfm
The Case for Healthcare Reform http://www.whitehouse.gov/asse...Health_Care_Report.pdf
Igor Volsky http://wonkroom.thinkprogress....making-too-much-money/
edit: Changed "model" to "premise" to better represent my thoughts in the first paragraph.
