The healthcare reform debate has generated much heat but very little light.  (And it’s also getting a lot of coverage, so there’s very little else to report about this week.)

I wrote a couple of months ago my opinion of two simple (but unpopular) steps that would make high-quality healthcare affordable to virtually everyone: abolishing the employer tax deduction for health insurance, and slowly phasing out Medicare.  The entire national debate is going in the opposite direction, with one party offering Medicare (or something like it) to everyone, and the other party opposing this because it would threaten Medicare.

In this hullabaloo, there is one word being shouted that I think deserves more explanation: rationing.

Classical economics is founded on a rule called the principle of scarcity which states that the sum of everything that everyone wants exceeds everything that exists.  People want more stuff than all the stuff in the world.  That means that some desires go unmet.  Every economic system is essentially a system to address scarcity by establishing rules that determine who gets what – which needs are met and which are not.  That is the definition of rationing: a method of distributing stuff in a world of finite resources and infinite demands.

That means that every economic system that has ever existed has used rationing in one way or another.  In a feudal system, the local lord distributed land to his vassals.  In centrally planned economies the government allocates all goods and sets prices.

Free economies have rationing too.  In free economies virtually all transactions are voluntary.  No one is forced to buy or sell a good or service, and the price depends only on the consent of the involved parties.  No one is forced to sell me apples, I don’t have to buy apples, and the price of apples can be whatever I and the grocer both agree to.  This is also a kind of rationing; it is rationing by price.

Rationing by price has lots of advantages.  The first is that I ultimately decide which of my desires are met and which are not by choosing what I will buy in exchange for my finite dollars.  Since everyone has different values, preferences and goals, there is no better way of getting the most for your dollars than in making these decisions yourself.

Rationing by price also results in the best products and services at the cheapest prices.  Suppliers, forced to compete with each other for customers, can only survive by continually making better stuff cheaper.

Now, there are some goods and services that, by their nature, just can’t be distributed through free markets because they are delivered to entire groups, not to individuals.  For example clean air, local law enforcement and national defense couldn’t be pragmatically purchased by each individual citizen in whatever quantity she chooses.  But for the vast majority of other goods and services, rationing by price has led to better products at cheaper prices than any other method.  Moreover, in a history marked almost entirely by grinding poverty, free markets and rationing by price is the only method that has produced societies with any degree of comfort and affluence for its average citizens.

If healthcare is important, maybe we should consider distributing it the way that works best – by each of us spending what we can afford to get what we believe we need.  There would still be a role for government programs and private charities in the care of the indigent, but the rest of us would have access to terrific inexpensive care.

Instead we spend our (and our employers’) money on an insurance policy and wait for them to tell us what’s covered, while our elected officials debate whether government should control more of the healthcare marketplace or all of it.

Learn more:

For someone (like me) with virtually no formal background in economics, I know of no better introduction than ”Basic Economics” by Thomas Sowell.

My post in June:  The Healthcare Meltdown – Part IV, A Recipe for Reform

A Recipe for Reform

<< Back to Part I:  How Insurance Works
<< Back to Part II:  How Medical Insurance Was Broken
<< Back to Part III:  Medicare

“Reality is that which, when you stop believing in it, doesn’t go away.”
– Phillip K. Dick

In this last installment I’d like to propose some solutions for policymakers, for doctors and for patients.  My recommendations may be quite politically naïve, in that they are currently unpopular and are not likely to gain favor with politicians.  But I believe they are economically sound.  Popular opinion is fickle, but economic fundamentals are eternal.  So the ideas will wait for an eloquent politician to popularize them, and in the meantime we will race in the opposite direction.

Recommendations for Lawmakers

The employer tax deduction for health insurance should be abolished. This action by itself would have a major positive impact, untying insurance from jobs and unburdening companies from crushing healthcare costs.  Companies would go back to giving employees salaries and employees would do what they already do for houses, cars and food: they would shop around.  Healthcare spending would plummet, so doctors’ lobbies and hospital lobbies are against it.  (Another reason I’m not in the AMA.)  Patients would buy cheap catastrophic policies and get rid of their expensive “everything’s covered” policies, so the insurance companies would oppose it.  But patients and taxpayers would be much better off.  Who represents them?

Most importantly this change would shift the debate from the mirage of universal coverage to ensuring the availability of high-quality affordable care.  Getting everyone insurance isn’t the goal (unless you’re an insurance company).  Getting everyone many choices of healthcare with reasonable prices and good quality is the goal.  We should watch the universal coverage experiment unfold in Massachusetts very carefully before we spring this model on the nation.  Early observations suggest that everyone there is insured and no one can find a doctor.  I hope Part II of this series convinced you that insurance for routine care is the problem, not the solution.

A public debate should be reopened about the justification for Medicare. Why should age alone guarantee government sponsored insurance regardless of income or assets?  Remember, there is already another program (Medicaid) for the indigent and the disabled.  Any effort to limit Medicare benefits will be vigorously opposed by senior-citizen lobbies and by doctors’ and hospital lobbies.  And enough people depend on it currently that simply abolishing it would not give current beneficiaries time to make alternate plans.  My suggestion is that the age for Medicare eligibility should be increased by one year every two years.  That way, no current beneficiary ever loses benefits, but as time goes on the age for enrolment would creep ever higher.  So a current 60 year-old will not be able to enroll until the age of 70, and a current 40 year old will not be able to enroll until he reaches 90 (and will have plenty of time to budget for his health expenses).

In 1965 the first generation of Medicare beneficiaries never paid into the system.  They were already retired and their benefits were supported by the working employees of that time.  Conversely, there will have to be a generation which pays the payroll taxes for Medicare, but never gets the benefits, a generation which makes the financial sacrifice to phase out a destructive and unaffordable program.  Should we accept that burden, or pass it to our children?

Recommendations for Doctors

To the extent that each doctor can afford to do so, doctors should remove themselves from contracts with insurance companies, especially with Medicare. This would force doctors to adopt business practices that are standard in other service industries: transparent reasonable prices, attentive customer service, and competition with other doctors on both quality and price.  Doctors who opt out of Medicare save Medicare money, leaving more money for those with fewer options.

Doctors should donate some of their time to caring for indigent patients.

Doctors should not join physician lobby groups which aim to increase or maintain spending on healthcare.

Recommendations for Patients

To the extent that each patient can afford to do so, patients should buy catastrophic (i.e. high deductible) insurance and pay for routine care themselves.

Retirees should not join lobby groups which aim to increase or maintain spending on Medicare.

The national tide appears to be favoring taking ever more dollars and options away from patients and giving them to insurance companies or to the government.  This promises to worsen the problems we learned about in the previous sections.  Treating patients as customers is the only path forward.

“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence.”
– John Adams

———————————————————————————-

Notes and Sources:

I owe much of my understanding of how insurance companies and doctors could function in free markets and how the healthcare marketplace has been corrupted to an article written in 2001 by Milton Friedman, the Nobel laureate economist, How to Cure Healthcare.  Though its conclusions may not be popular I have not seen its ideas convincingly refuted.  I recommend the article to anyone who wants a more detailed understanding of the economics of American healthcare.

A more thorough description of the American healthcare system and how to fix it is in Dr. David Gratzer’s book The Cure: How Capitalism Can Save American Health Care which I reviewed two years ago.

The fact (in Part III) that Medicare costs doubled every four years between 1966 and 1980 is found on the Wikipedia article on Medicare which has some other important but little-known facts about Medicare.

You can learn more about the effects of Massachusetts’ universal health insurance program in this Wall Street Journal Health Blog post: As Insurance Coverage Increases, ERs Get Busier and in this Wall Street Journal editorial: National Health Preview, The Massachusetts debacle, coming soon to your neighborhood.

Posting will be on hiatus for two weeks and will resume the week of July 13.

Medicare

<< Back to Part I: How Insurance Works
<< Back to Part II: How Medical Insurance Was Broken

Thanks for sticking with the series so far. I know the last section was long and technical and I appreciate you slogging through it. The next parts should be a breeze in comparison.

In part II we saw how the employer tax deduction for health insurance tied insurance to jobs, transformed insurance from a protection against disaster to a way to obtain all care at a discount, and led to overutilization of care by shifting costs away from patient payments to premiums taken out of paychecks. Tying health insurance to patients’ jobs created another problem. It left retirees out of the tax subsidy that employees enjoyed. As healthcare became more and more expensive there was increased political pressure to extend affordable coverage to retirees.

(Note again how after World War II the language changed from getting patients high quality affordable care to getting them insurance coverage. Insurance became essentially the only way to access care.)

A simple way to even the playing field for retirees and to undo the myriad problems detailed in the last post would have been to eliminate the employer tax deduction. But doctors and hospitals were not keen on giving up their enormous subsidy. So in 1965 the Social Security Act created Medicare (and Medicaid). Medicare provides health insurance to Americans 65 and older and is funded by a payroll tax.

Medicare magnified many of the problems of the employer tax exemption. By creating a whole group of patients whose care was paid indirectly by all employees, costs were redistributed over even more people, further reducing any incentive to conserve. Utilization and costs rose even faster. The cost of Medicare doubled every four years between 1966 and 1980. This explosion in costs further cemented the fallacy in the minds of most patients that care is something that can only be obtained through insurance.

Now, I take care of lots of Medicare beneficiaries, and I can hear some of you objecting: “I might be able to afford to buy insurance if I didn’t have Medicare, but lots of people couldn’t. Have you seen how much medicines and doctor visits cost? Most people just can’t afford that.”

But that’s just it. Medicines and healthcare are expensive because they’re covered by insurance and patients aren’t exposed to the actual cost. There’s no viable business that produces goods and services that no one can afford. If patients paid directly, prices would plummet and patients (not insurance bureaucrats) would have to make the difficult decisions about how much they wanted to spend for the latest drug when a cheaper one is almost as good, or for the latest unproven surgery, or for the latest unproven scan. The point is that different patients would make different decisions, but many would save a lot of money by consuming less care than they do now. Catastrophic insurance would then be inexpensive and rarely used.

There would always be the truly indigent who can not afford any care at any price. They would rely on Medicaid, county facilities and private charities. But like in other marketplaces such as food, housing and transportation, that would be a tiny fraction of the population. Most people could afford their own care. The miscalculation that the insurance industry wants you to keep making is that insurance is what makes care affordable. Insurance, including Medicare, is what makes care unaffordable.

Next week, I’ll propose some changes that would actually help, though they are less likely to happen than that I am drafted by the Lakers.

Forward to Part IV: A Recipe for Reform >>

How Medical Insurance Was Broken

<< Back to Part I: How Insurance Works

In the last post we learned the legitimate valuable role that insurance plays in collectivizing risk.  In this post I will explain how that model broke for health insurance and how we are still suffering the consequences.

It seems incredible that our current difficulties with healthcare originated in the 1940s, but that is exactly the case.  During World War II the federal government imposed wage and price controls.  Because wages were kept below their market value, companies had a hard time attracting excellent applicants.  So to circumvent the wage cap companies began offering increasingly generous fringe benefits.  One of these benefits was health insurance.  Employer-provided health insurance became so popular that Congress passed a law making it tax deductible.  The wage and price controls were abolished after the war and are long forgotten, but the employer tax deduction for health insurance is with us over six decades later and has thoroughly disfigured the healthcare marketplace.  Let me explain how.

Remember the example of Bob’s Insurance Company in the last post?  Imagine, for example, a world in which employer-provided home insurance became tax deductible.  Everyone would get their home insurance policy through their work.  Let’s also agree, just to keep the numbers simple, that most employees pay about a quarter of their income in taxes.  The homeowner’s policy in the last post cost $1.50 per year, but prior to the tax exemption law each family would have to generate $2 in income to pay 50 cents in tax (25%) and have $1.50 left over to pay as their insurance premium.  After the tax exemption law passes, their boss can buy insurance for each employee for $1.50 pre-tax, leaving the $0.50 for additional salary or other benefits.  But this also completely skews what insurance can and should be used for.  In the last post we explained why insurance was a terrible deal for routine, frequent expenses.  Now, imagine that having a gardening service cost $150 per month.  Prior to the tax exemption, this would require $200 in pre-tax income (since a quarter, or $50 would go to taxes).  But now, Bob has a strong incentive to sell a policy that pays for gardening.  He can offer the policy for $175 per month, which the employer can deduct from the employee’s salary.  Since employers can get the insurance with pre-tax dollars, it’s suddenly cheaper to hire a gardener through your job-offered home insurance than directly.  Everyone wins in the short term:  Bob can pay the gardener $150 and still make $25 in profit.  The employee gets a gardener for $175 rather than $200, and the employer saves on payroll taxes.

See what’s happened?  The tax deduction has made it cheaper to buy something through pre-tax insurance than to buy the same thing directly with post-tax wages.  Suddenly the insurance company has been transformed from a protection against unpredictable and unaffordable disaster to a way to get routine services at a discount.

Obviously, in the real world the tax deduction was for health insurance not home insurance.  Now we begin to understand why health insurance has become so dysfunctional, even though most other types of insurance (think of life, auto, home…) are relatively inexpensive and almost never used.  The reason is that it became cheaper for all of us to get routine care through our employer-provided insurance rather than to pay for it ourselves.

But this had other destructive consequences.  First of all, it ties our ability to obtain routine healthcare to our job.  Unlike equally important goods and services, like food and housing, if one loses one’s job in this new system, one usually loses access to healthcare.  In the old system healthcare was just like food and housing – your employer gave you a salary and you shopped for the quality and price that was right for you.  If you lost your job you might have less money, but you were still in control of what you wanted to spend your money on.  You could still afford a doctor’s visit.  Even if you briefly lost your insurance, that wouldn’t have been as big a loss as it is today, since insurance only covered a disaster.  Now, insurance is the key to the doctor’s waiting room.

This handcuffing of employees to their jobs would have been bad enough, but the tax deduction had other perverse incentives.  For the employee, it made healthcare expenditures cheaper than general household expenses.  Using the simple example of 25% taxes, $400 in income can be used to either buy $400 in additional health insurance or $300 in other household expenses (after paying $100 in taxes).  So this scheme encourages more spending on healthcare and less on everything else.  Of course, doctors and hospitals didn’t complain as this amounted to a huge (but hidden) tax subsidy of the healthcare industry.

But a bigger problem caused by the tax exemption was that suddenly routine care was “covered”.  To individual patients/employees that meant that their employer was paying for their routine care by paying for their insurance and that their out-of-pocket expense for any specific item of care was very low.  This encouraged over-utilization.  Any economics student knows that when anything gets cheaper consumers will demand more of it.  Routine care became cheaper to the patient, so patients wanted more.  But remember what we learned in part I.  Redistributing cost through insurance doesn’t make anything cheaper.  It adds a layer of expense since the insurance company keeps some of the money as profit.  But this additional expense isn’t paid by the patient at the time care is delivered.  It’s siphoned out of his paycheck whether he goes to the doctor or not.  Each visit is cheap to the patient, so there is no incentive to conserve; the only incentive is to consume.

Predictably, utilization of healthcare and prices for services exploded.  In fact, since World War II healthcare has consistently risen in price more than the general inflation.

This led to efforts to control costs and utilization through increasingly complex bureaucracy.  Managed care was born.  Physicians had to comply with progressively more onerous rules about what was covered and what wasn’t.  Increasingly physicians worked for a boss other than their patient who dictated the quality and the reimbursement for the care they delivered.  Patients found themselves unable to demand quality and shop for a better price (like they could in every other marketplace) while the amount taken out of their paycheck for their insurance continued to climb.

To summarize, the employer tax-deduction for healthcare led directly (though unintentionally) to a system in which

• Employees lose access to care when they lose their job,
• There is a bias toward spending on healthcare versus other household expenses,
• All care (rather than just catastrophic care) is purchased through insurance,
• Utilization and costs are not constrained by price and must be constrained bureaucratically, and
• Doctors are increasingly paid by, regulated by, and answerable to third-party payers, not patients.

This sounds horrific enough, but in 1965 we demonstrated that no marketplace is so terrible that we can’t make it worse.  That will be the subject of next week’s post in part III.  In two weeks the series will conclude with my suggestions of some ways out of this mess.

Forward to Part III: Medicare >>
Forward to Part IV: A Recipe for Reform >>

I beg your indulgence this week as I ignore medical news and offer some personal reflections.

Unless you’ve been avoiding all news sources for the last few weeks, you know that a lot of people all over the world are scared.  Today’s headlines scream about the worst week ever on Wall Street, with trillions of dollars of assets evaporating.  No one is sure when the housing and credit markets will stop falling.  No one is sure whether the actions of the U.S. and other governments to keep credit flowing will work.

And this calamity did not befall an otherwise tranquil world.  Those who were paying attention had plenty of other reasons for anxiety, from a nuclear-armed Pakistan that always seems one election away from anarchy to our federal budget becoming an unworkable fantasy as the baby boom retires.

The sky really seems to be falling.

I’m not an economist, and I can’t predict when or how this will end.  I certainly won’t minimize the very real harm that’s been done.  The staggering numbers aren’t just theoretical paper losses.  They represent the vanishing of retirement plans, the loss of homes, and the destruction of years of gains.

All I can do is remind us that the world will not end.  At some price buyers will want houses again.  At some interest rate lenders will write loans again.  If governments keep their currencies stable, markets will eventually hit bottom and stabilize.  The engine for economic growth after all is that people want stuff that they don’t have, and that they are willing to work and spend for it.  That hasn’t changed.  The sun will come up tomorrow.

So to quote Douglas Adams, don’t panic.  Take a walk, preferably with someone you care about.  Listen to some music that has survived over a century.  And take a big breath.

For the last couple of years I’ve made a commitment to donate blood every month or two at Cedars-Sinai.  Though I must admit the first few times I was scared by the whole experience, I almost look forward to it now.  The nurses treat the regulars like old friends, and the donors are treated to a mandatory break from their busy lives.  Since we can’t be productive, we listen to music, or watch TV, or pick a movie from their eclectic selection.  (Oddly enough, I’ve found that gory horror movies are my favorite when I’m donating.  Nothing distracts me more effectively from the fact that I’m being bled than a good vampire movie!)

I was donating last week when a nurse told me that their blood supply has been very low.  Several of the Metrolink crash survivors are at Cedars-Sinai and have used a lot of blood products.  That’s when I realized that it’s been two years since I last begged all of you to donate.

So please contact the Cedars-Sinai Blood Donor Facility and schedule an appointment to donate a little bag of liquid life.  If donating at Cedars is inconvenient, go to the Red Cross blood donation website and find a donation center near you.  You’ll be rewarded with juice and cookies and the best feeling you’ve had in a while.

Someone you’ll never meet is counting on it.

The New England Journal of Medicine and the Massachusetts Medical Society released a video this week of a panel discussion on U.S. health policy.  I thought it was a fascinating and intelligent discussion by representatives of all the stakeholders in the debate.  The discussion covers many topics critical to American healthcare, including the dwindling numbers of primary care physicians, adoption of electronic medical records, providing care to the tens of millions of uninsured, and the escalating costs of healthcare.

This is a handy primer on a topic that will become increasingly important in the next decade.

The video is about an hour long, and is open to non-subscribers.

Shattuck Lecture:  Health of the Nation – Coverage for All Americans

Many patients have been told to take antibiotics before dental procedures.  This recommendation was made to prevent an infection of the lining or valves of the heart called infective endocarditis (IE).  Patients who had leaky heart valves or other heart conditions that were thought to increase the risk of IE were told to take antibiotics before seeing the dentist.

Last week the American Heart Association published new guidelines about which patients should receive antibiotics to prevent IE.  These guidelines are based on the realization that in most patients, dental and other medical procedures are exceedingly unlikely to result in IE, and that antibiotics are more likely to cause harm than benefit in all patients except in those at highest risk for IE.

The only patients for whom preventive antibiotics are now recommended are those with

artificial heart valves
a history of having had IE
certain specific, serious congenital (present from birth) heart conditions, including:
- unrepaired or incompletely repaired cyanotic congenital heart disease, including those with palliative shunts and conduits
- a completely repaired congenital heart defect with prosthetic material or device, whether placed by surgery or by catheter interventions, during the first six months after the procedure
-any repaired congenital heart defect with residual defect at the site or adjacent to the site of a prosthetic patch or prosthetic device
a cardiac transplant which develops a problem in a heart valve

That means the vast majority of the people taking antibiotics before dental procedures can stop.  Obviously, if you’re not sure if this applies to you, check with your doctor.

Thanks to Dr. Yaron Elad for pointing me to the new recommendations.

With the end of 2006 a few days away many of us turn our thoughts to the New Year and seize the opportunity to rededicate ourselves to healthier habits. I personally know all too well how easy it is to stop exercising and how hard it is to start again. I also know how insidious inactivity can be. In the last month alone, I’ve had to tell three of my patients that they were in the earliest stages of developing diabetes. For them, the need to exercise and to pay compulsive attention to their diet has suddenly become mandatory.

So I’ve decided to encourage all my patients to become more physically active in 2007 by organizing a contest called the Pedometer Project. Here’s how it works.

I will provide a pedometer (a little device that you keep in your pocket that counts how many steps you walk) for all of my patients. Several patients have told me that using a pedometer has made them much more aware of how much they are walking, and that they found themselves walking more even when they didn’t deliberately set out to do so. Non-patients are welcomed to join the contest if they are referred by patients. Periodically contestants will email me the number of steps they’ve walked. (This is obviously done on the honor system. You can cheat, but why would you?) Every month I’ll announce new winners in three different categories.

• The Walker of the Month – whoever accumulates the most steps that month
• Most Improved – whoever increases his / her walking the most from the first week to the last week of the month
• Weight Loss – anyone who is overweight and loses at least 10 pounds

What do winners get? In honor of every winner I will either donate platelets at Cedars-Sinai Medical Center or donate an afternoon at the Simms/Mann Clinic, a clinic that cares for indigent patients. I’ll inform each winner when their donation happens, and if I have their permission, will congratulate them by name on my web site. Winners can only win once, so that everyone else has a chance the following months.

So by becoming more active, your steps make a difference to your health, to blood recipients at Cedars-Sinai, and to patients who could otherwise afford no healthcare at all.

Let me know if you’d like to participate.

I wish all of you a happy, healthy and active 2007!

A generation ago, in the bad old days, physicians were thought of as unquestioned experts who dispensed orders rather than advice, and expected dutiful compliance from their patients.  Fortunately those days are long gone, and today the patient and the physician see each other as partners in the patient’s healthcare, with the patient able to question and even challenge the doctor’s recommendations.  This keeps doctors smart and honest and keeps patients ultimately in control of their health.  But with the loss of our perceived infallibility of a generation ago, physicians also seem to have lost the ability to loudly and with confidence distinguish between good medicine and quackery.  Myriad ineffective supplements and health-related gizmos are advertised and sold to our patients constantly, but we mostly say nothing, afraid that we’ll offend our patients, or be thought of as narrow minded.  We end up thinking something like “Our patients want magnetic bracelets (or Echinacea, or vitamins…) so who are we to stand in their way?”  Even the word “quackery” has fallen into disuse, replaced now by less judgmental terms like “alternative medicine” or “homeopathic” (a word that used to mean something specific, but no longer does).  In a culture in which “judgmental” is a pejorative adjective, how can we continue to dispense sound judgment?

So I was delighted to read in this week’s LA Times health section an article warning us of the many shady, useless, and even potentially hazardous health products being sold to us every day: Step right up, folks!  (The LA Times site requires registration, but it’s free.)  If you have a few minutes, please read it.

Another valuable resource that I found recently is Quackwatch, a website dedicated to exposing quackery and health fraud.

Please, help me revive the word “quackery”.  Use it the next time you’re driving and hear an ad for a weight loss product, or your neighbor tells you about the herbs he takes for his cold.  The next generation of physicians will thank you.

Tangential Miscellany:

I wish all my Jewish patients and readers a bright and joyous Chanukah!