A Plan For Fixing Health Care

Several people have asked me to put my thoughts on Obamacare and the current healthcare situation in the US in a single blog.  This is an effort to summarize my thoughts and share my solution for phase one of fixing the current problems.

Most Americans want to help the disadvantaged and the elderly acquire quality healthcare.  No one argues that the current system is not broken.  Yet the solutions being discussed now all fall prey to the same underlying principles, which led to our current healthcare crisis. 

There are primarily three major issues with the current US Healthcare system.  The first is inherent in the basic human response to incentives.  Another is the impact of government price fixing and it's impact on health insurance.  Lastly, defensive medicine is adding costs to those who ultimately pay the price for everyone's health program.

When government or any entity picks up the cost of someone's healthcare, the result is a lack of concern for costs.  People become incentivized to spend.  In many cases, they spend well beyond what they would be willing to pay themselves even if they had the resources.  With no cost barrier, and as the supply demand curve of economics 101 shows, demand exponentially increases as the price falls.  At zero price, or free, demand is infinite. 

Concomitantly, the supply curve falls leading to a significant shortage.  Or, in other words, when there is no cost barrier, there is no end to the demand.  With unlimited demand, there is no supply that can ever meet the demand.

The evidence of this is easy to find by looking at a healthcare system where 100% of people are covered for "free.".  In England, mortality rates for most diseases significantly exceed the US.  Two examples are prostate cancer, mortality is 19% in the US and 56% in the UK, and mortality for breast cancer in the US is 25% while in the UK it is 46%.¹  As demand exceeds supply rationing, or whatever politically correct word you chose, must occur.  The consequence is a system where screening occurs later in life.   Early detection is essential to cure in nearly everything.  A shortage of caregivers will lead to increased mortality and poor quality. 

Current abuse of the emergency department and other visits to physicians for conditions that our grand parents would treat on their own is taxing the system substantially.  Much of the increased costs in our current system are due to unnecessary visits.  For those on "free" or low cost systems, there is no incentive to save, and again no supply that can ever meet the demand.

An additional problem to the current system is the effect on health insurance and other payers when government sets the price so low.  When Medicare and Medicaid say, we will only pay X for this procedure, and X is substantially below the market equilibrium price, one of two things happens.  Either providers stop doing that service, or in economic terms stop supplying that service at the set price.  Or, they increase the price charged to others, a process called cost shifting. 

The effect of cost shifting has devastated the Health Insurance Industry.  As the government pays less, physicians, hospitals and other healthcare entities raise the price for others leading to increased cost of care for those with health insurance.  This increase is then in turn passed to their customers in increased cost.  As the cost escalates, fewer people can purchase health insurance leading to a need for insurance companies to increase prices further.  What followed was a vicious cycle and put us where we are today.

There is a tendency to place the blame on health insurance profits and their executive salaries.  I often as a physician have fallen into that trap only to catch myself.  It is an easy fallacy to get into.  But if you look at Kroger Foods, a company that supplies...food, its net income was $1.18 billion dollars and the CEO was paid $2.78 million.²  How is healthcare so much more essential than food?  Why is the standard any different?  Health insurance reforms of the late 1980's and early 1990 lead to significant reductions is cost as they regulated the use of expensive medications and procedures.  Their involvement in healthcare has decreased not increased costs.  Cost shifting because the government forcibly set the price low is the primary cause of the problem.

Essentially, with Medicare and Medicaid price fixing, the free market in healthcare is dead.  The free market will drive price down for everyone.  LASEK is an excellent example.  LASEK involves a very precise "laser," trimming microns of cornea to reshape the cornea and focus the image on the retina. Health insurance and government medical care do not cover the price of this procedure. Meaning true market forces are setting the price. What has happened? When LASEK was introduced it cost $5,000 to $6,000 dollars. I saw an ad yesterday for LASEK for $499 per eye. Granted the average LASEK procedure is roughly $1,800 dollars, but even this amount is significantly less than where it started. As ophthalmologists competed for the dollars people were willing to spend, the price fell. This year's average was less than last year's. This decrease in the average cost of a surgical procedure on the eye happened in the face of an increase in healthcare costs that was twice the rate of inflation.

An added dimension to the impact this has is the simple fact that health insurance companies are not allowed to compete across state borders.  Meaning BlueCross/Blue Shield operates offices in each state with added costs of doing so.  And with a limited number of competitors, there is no incentive to the insurance companies to reduce costs.  Lifting the ban on interstate competition would significantly incentivize insurance companies to reduce their costs.  Wal-Mart is an excellent example of a company able to decrease costs, and continue to profit because of volume.

We need to compel the government to stop fixing the price.  The free market will adjust itself and with competition find a price at a supply demand equilibrium point.  Great examples are rent control.  Whenever states repeal rent control laws, the supply of housing increases and the price actually falls.  This new healthcare equilibrium price will no doubt be significantly less than what the insurance companies are providing.  This will, with allowed competition, significantly decrease the price of health insurance and thus increase the pool of people able to afford it.  And with appropriate incentives detailed below, would decrease the misuse and thus cost of unnecessary medicine.  This would free government dollars to pay the slightly higher market price for necessary procedures.

Liability reform is a major area for saving billions of dollars. No one wants to be sued. In some states, like Florida, three suits and you lose your license; there is a defined limit on the number of lawsuits you are allowed. Further, who wants to endure the costs in life sacrifice and money to get through medical school only to lose it all in a single settlement? A recent lawsuit paid a patient $60 million dollars when the plastic surgeon botched her thigh lift.³ Frivolous lawsuits and exorbitant awards cost providers and their insurance companies millions of dollars in insurance premiums. Those costs are forwarded on to the patients in increased healthcare costs and thus increased insurance premiums. But what does it do to the doctors? We go crazy ordering CAT scans and labs to make certain that once we are on the stand, we can say we did everything we could. Those additional studies intended to keep my colleagues and I out of the courtroom, are the heart of defensive medicine.

In a recent poll of emergency physicians, 65% said that they could save over $500 per 8-hour shift by decreasing unnecessary tests as a part of their defensive practice. Another 16% felt they could save between $200 and $500 dollars.⁴ I run a fairly large Level 2 trauma center that will see 75,000 patients this year. I staff it with 9, 10 and 12-hour shifts a day. If we assume a conservative savings per shift of $400 dollars, less than a single CAT scan, then in my emergency department alone, stopping the defensive practice of medicine would save (365 x 9 x $400) $1,314,000.00. There are over 5,000 emergency departments in the country.

But how can you have a government run program to help people who need assistance, and yet allow free market practices set the price?  The government already has a program in place that does just that. 

The food stamp program, now called the Supplemental Nutrition Assistance Program, or SNAP, is where 31.5 million Americans receive assistance to purchase food. This program is an excellent paradigm for healthcare. People who qualify are given a debit card and allowed to purchase the food they desire. The market price for food remains unchanged for the most part because the consumer is choosing how to allocate the resources he or she has. The consumer recognizes there is a limited amount and thus chooses prudently on how to spend the money. If they foolishly buy filet mignon, they have little to nothing else for the remainder of the month.

Healthcare credits via a debit card would place the decision-making back in the hands of the consumer. We have the actuarial data and can calculate the exact amounts needed to be kept in reserve for catastrophic care.  The money used for routine visits as well as non-emergent use of the emergency department can be allocated to the health debit cards.  The government would issue qualifying personnel a set amount yearly in conjunction with a catastrophic health plan. The individual would chose to save money by waiting to go to a primary care doctor instead of an emergency department and thus have money remaining for preventative care should they desire it. The individual has a choice, the market forces of supply and demand are thus reinstated and assuredly the right price will surface. As more people pay for their care, and make wise choices in regards to their care, cost shifting will stop and, for competition's sake, could even reverse itself.

Additionally, other incentives would include, all unused healthcare credits at year end could roll over into an IRA, or other vehicles which further incentivize the individual to not abuse healthcare, specifically the emergency department for routine care. Or, the unused amount could be applied for at tax time much like an earned income credit or child credit is received.  With the financial incentive to decrease the cost of a person's healthcare, some people would decrease their risk as well, eating better and perhaps ending a nicotine habit. Why not, if they don't get sick, they get the financial reward.

This system reverses the current incentive to spend regardless of the cost.  It would remove the government from price fixing and thus allow the market and competition to push the price down.  Lastly, coupled with real tort reform, physician defensive practices would decrease and significantly enhance savings.  What are we waiting for.

Mark

1Healthcare Here and Over There, Investor's Business Daily.http://www.ibdeditorials.com/IBDArticles.aspx?id=334968219359127

2http://finance.yahoo.com/q/pr?s=KR

3"Defensive Medicine is Real," Emergency Medicine Physician Monthly, volume 16, number 9, September 2009. Page 22.

4"What Emergency Physicians think about health care reform," Emergency Medicine Physician Monthly, volume 16, number 9, September 2009. Page 24.