Reasons to care about our American health care crisis – 300 million personal and 3 trillion dollars of them

Image result for healthcare as percentage of gdp projections graph

Image result for healthcare as percentage of gdp projections graph

The Compelling Case for Change

Every individual in this country has a personal story of how they have witnessed dysfunction and brokenness in our American health care system. All 300 million+ Americans have in the very least suffered a really screwed up and indecipherable bill (or set of bills from an uncoordinated system for the same service) with little price transparency and with lack of clarity on what services were actually offered and why. Many of us have been subjected to the extremely frustrating lack of coordination across systems, forcing us to attempt to connect the pieces together. A depressing amount of us have even witnessed ourselves or a loved one being harmed by a medical error or a health system acquired infection. A doleful companion to these visible operational challenges is the fact that we are all increasingly paying inordinately growing sums, over $3 trillion and counting, into health care, while getting increasingly little in return.  The 18th Century Scottish philosopher, economist, and essayist David Hume once observed of public debt that, “It must, indeed, be one of these two events; either the nation must destroy the public credit, or public credit will destroy the nation. It is impossible that they both can subsist, after the manner they have been hitherto managed…” One can easily substitute Hume’s concerns with public debt to its modern American equivalent of health expenditures to develop the same sense of urgency. In fact, as the above graphs on cumulative projections of American health care costs and government spending on health entitlements reveals, public credit and health care expenditures are inextricably linked, unsustainable, and crowding out all other areas of government expenditure as well as crowding out what we as consumers would otherwise prefer to spend our dollars on.  As will be discussed later, the great tragedy is that we are pouring money into reactive systems of care that do little ultimately to increase our quality of life and life span. It is largely non-value added money that is siphoned off from other valuable areas of the economy. This has to change.

We have a crisis on our hands, and it will take a concerted and united effort combined with a sense of urgency to destroy it. Lately, I have been drawing a tremendous amount of inspiration and sense of personal urgency through the reading of David Goldhill’s Catastrophic Care: Why Everything We Think We Know about Health Care Is Wrong.  For those like myself who are industry insiders, consider this a scathing and devastating indictment that we need to absorb, comprehend, and become devoted in our own little corners to remedying. Think of this book as the prosecution’s case against our industry. Do we have a defense? If not, how do we respond? Otherwise, I am afraid that the unsustainable industry as it stands today will be forced to deal with remarkable disruption and disintermediation when consumers and/or governments finally do revolt and demand change of a significant magnitude that will by then be required. Complacency should cease to be an option. For those who believe they are woefully inadequate to the task of understanding the complexity of health care (this group does not have to be mutually exclusive from the previously mentioned one of industry insiders), consider this book a remarkably easy layman’s guide that details what ails our health care system and why it should matter to you. In short, I find this book to be highly accessible and critical for all Americans to read. If it does not apply to you as a prosecution’s case, then it should easily apply to you as an easy to read and understand textbook that covers the range of issues that you as a consumer and voter should be familiar with as it relates to our broken health care systems.

The Prosecution’s Case

In of itself, Goldhill’s introduction is packed with enough vignettes and charges to make one think and feel deeply about the industry. Beginning with the visceral experiences, he presents his own personal stories of fears, frustration, and loss in the forms of how his son and father experienced health care. The former is a tragicomic string of inefficiencies, complacency, and poorly performing systems through an appendectomy, the latter a much more unfortunate set of circumstances that culminated in a hospital acquired infection and ultimately death. Along the way, Goldhill observes both technical and life-saving brilliance incongruously combined with administrative and operational incompetence. His pointed question, which should be our industry-wide challenging refrain is, “why does therapeutic excellence often exist side by side with such backwardness?”

It isn’t just the performance aspects of our health care system that causes alarm. The other side of the formula is the price of health care. It would be one thing if we could say, “sure, it’s bad, but at least it’s cheap!” But with health care creeping up on 20% of GDP, that is appallingly and depressingly not the case. Here is a thought experiment: what would be going on in the streets and in the media if we woke up tomorrow to $15.00 per gallon gasoline prices? I dare say this would inevitably become the subject for major political and social upheaval. And yet, this is exactly the type of inflation that has occurred over the last few decades in American health care. The critical distinction is that the dramatic inflation has been hidden from us, even though it still has just as significant of an impact to our bottom-line, take-home cash. In the book, Goldhill uses the simple example of a woman named Becky who works at his company: “Becky will actually contribute over $10,000 into American’s health care system this year – most of it through payments she is not aware of…even if we somehow tame the explosive growth in health care costs (literally reducing cost growth to zero), our system already assumes that Becky will pay well more than $1.2 million over her lifetime. And that’s assuming she never has a major illness, in which case she will almost certainly pay much more. Becky is pouring far more money into our health care system than she imagines.” Indeed, I would add that this out of sight and out of mind aspect of funding health care access is the primary reason we have increasing take home pay inequality in America, as I covered in a separate blog post.

“Why does therapeutic excellence often exist side by side with such backwardness?”

The Foundational Industry/Government Error

Goldhill articulates what he believes to be the primary culprit in our combined system of rising costs and operational backwardness – a funding and care selection model he indicates is defined by what he calls “Surrogates.” In this group, you could lump commercial insurers as well as government models such as Medicare and Medicaid. Goldhill observes that, “The dominant health insurance model requires us to turn over our role as consumers to what I call Surrogates: private insurers, Medicare, and Medicaid. The theory is that only the Surrogates have enough knowledge to control excess care, enough market power to discipline rising prices, and enough vested interest in our health to drive greater safety and quality. But the past fifty years suggest the theory is wrong; the Surrogates themselves create many of the incentives for bad behavior in health care…American health care relentlessly expands the definition of medical need, engages in administratively complex and nontransparent practices, and overinvests in expensive technologies because these actually serve the institutional (and financial) needs of the Surrogates. Conversely, the health care industry underinvests in service, safety, and efficiency, because these are not the Surrogates’ priorities (even if they are our priorities).” Of course, there is a lengthy history here on how we got to this point of over-reliance on Surrogates, some of which is covered in a separate post, where I will admit to relying heavily on Milton Friedman, and another separate post where I borrow heavily from Dr. Michael Accad’s wonderful  Alert and Oriented blog.

The Insulated Island of Health Care

A large part of the appeal and readability of Goldhill’s account is that his analogies, connections, and consistently simplistic and relatable terms he coins keeps the reader engaged and understanding of typically complex themes. One such term is “The Island of Health Care.” Any time you see this, you know you are entering into the zone of incomprehensible and nonsensical ways of doing and defending the ways in which health care operates. On this topic, Goldhill levels these charges:

Health care experts often make confident, absolutist assertions that appear truly ridiculous when held up to the mirror of the world outside health care. For example, they write about how technology is inexorably driving up the cost of care, often while working on a powerful laptop for which they paid a few hundred dollars. The secretary of health and human services says that catastrophic health insurance isn’t real insurance because it doesn’t pay for routine expenses; apparently, she’s never had an auto or homeowner’s policy. Truly brilliant analysts argue that health care can never be a normal industry because the need for care is so concentrated that in any given year roughly 70 percent of care is used by only 10 percent of the population. But a far greater concentration of spending in any given year is the rule for almost every other universally-consumed expensive good or service; surely, they know that we don’t use insurance to pay for purchases of homes, cars, weddings, and college educations?…
…Sure a person hit by a bus or having a heart attack has a unique ‘demand curve’ for medical services. But the fact that some health care is truly urgent doesn’t mean that all of it is…most care is no longer of this type; the biggest share we spend on health care now goes toward identifying and managing long-term conditions…Yet this new reality as barely intruded into the way we think about, pay for, and manage care. It’s like organizing the entire care-service business to protect us against only the possibility of a tire blowout on a highway…
…Forget the rhetoric: our health care system isn’t an example of ‘socialism’ or ‘profit-driven medicine.’ In fact, it is such a strange beast, I’m not even sure we have an appropriate label for it. The best analogy might be the Galapagos Islands, set so far offshore from the mainland of industry evolution and economic laws that is has produced odd, anomalous creatures of policy and regulation.
All I can say to this litany is “Indeed!”

The “Imperial” Health System

“Imperial Health System” is another one of Goldhill’s lexicographical innovations. What I enjoy most about this section is his focus on what actually matters to our health, largely forgotten and neglected in all of our political rhetoric and tug of war – our society and our lifestyles. This is what health care industry parlance is increasingly calling “Population Health,” although a fair amount of this term is still very much being used for inside the four walls of the hospital activities. Speaking of the Imperial Health System, Goldhill states that, “of the 34 rich countries in the OECD, the United States ranks a low 27 in life expectancy. Whenever a new study on comparative life span is published, most commentators draw conclusions about the weaknesses of our health care system, especially our unique lack of guaranteed universal access. Many note that we rank low in life expectancy (and other measures of general health) ‘despite’ spending so much more on care than any other country. This casual and universal conflation of health care and health represents the greatest triumph of imperial health care – a true hijacking of language. Despite all truly extraordinary achievements of medicine – and its promise for our future – health care remains a relatively small factor in determining life spans. We know what really matters in both length of life and physical well-being: income and education; minimization of smoking and substance abuse; diet and exercise; family life and public safety. The reason Swedes, Japanese, and Italians live so long isn’t their (very different) health care systems; it’s that they live like Swedes, Japanese, and Italians. And the reason Americans and Britons are on the lower end of longevity rankings isn’t our (again very different) health care systems. It’s that we live – and eat and exercise – like Americans and Britons.”

One interesting tidbit that Goldhill serves up is the fact that although he is a lifelong Democrat, his stance on the Affordable Care Act is that it doubled down on everything that already existed that was wrong with health care. His skepticism is made evident when he indicates that, “The whole bill is based on the fundamentally weird (but apparently bi-partisan) idea that ever more expensive health care can somehow be made affordable to all by clever financial engineering. The ACA is less a reform of our health care system than an extension of its past principles to their logical end.”

Like it or not, health care is an industry…

It may seem jarring and unseemly to think of institutions chartered with providing life-giving and life-saving care as also an industry focused on making money, but this is a reality and I would argue is a benevolent, not a malevolent force and we need to use it even more and in more transparent and consumer-driven ways. I could do a whole section on the fact that industry combines the virtue of profit-making prudence with many other virtues such as generosity, justice, mercy, etc., but for expediency I direct the interested reader to check out Deirdre McCloskey’s book Bourgeois Virtues for more on that topic. For his part, Goldhill states that, “We may not like thinking of health care as an industry, but it is one. Roughly 15 million Americans now earn their living from health care; forty-eight of the Fortune 500 largest companies are in the health business. The majority of people in this industry are motivated by a desire to do good, to help others. But they are also driven by their economic incentives. As a business, health care has done very well by the conventional wisdom that care is fundamentally different from everything else (can you imagine anyone proposing with a straight face that antitrust laws be suspended so that a region’s oil producers, refiners, and distributors be allowed to cooperate to achieve lower prices? Well, that’s essentially the premise behind Accountable Care Organizations, a key structural reform in the ACA

The reason Swedes, Japanese, and Italians live so long isn’t their (very different) health care systems; it’s that they live like Swedes, Japanese, and Italians. And the reason Americans and Britons are on the lower end of longevity rankings isn’t our (again very different) health care systems. It’s that we live – and eat and exercise – like Americans and Britons.”

…so we need to create true consumers for the industry to function properly 

This post has the great risk of parting the reader into a natural left versus right camp, but one benefit of Goldhill’s book is that I sincerely believe he is trying to find and articulate a consumer-driven solution that might appeal to both the sides of the left/right political spectrum.  Goldhill consistently returns to the necessary role of consumers making decisions in the market in any industry, and no less so than in health care. He holds up the example of Singapore above all as the health care model he appreciates the most. There is a role for insurers there, but they are not the comprehensive surrogates that they have become in America. In other words, they actually function like insurance companies. Singapore subsidizes health care funding for the poor, but the consumers themselves make decisions on how to spend those dollars across all income spectrums. The contemporary equivalent of this in American policy debates would be funded health savings accounts for Medicare and Medicaid. To these ends, Goldhill strikes his balance between left and right forces here, and adds his observations on just how bad for consumers this market is today. Here is one health care consumer analogy that Goldhill pulls out that would be amusing if it were not so tragically true of how health care interacts with consumers: “Can you imagine taking your care to a body shop and, moths later, receiving a separate bill from the guy who reattached the fender? And the shop saying it couldn’t discuss the matter with you? The real premise behind restoring the primacy of customers is to force providers to chase us with lower prices, fewer errors, and better service. On the Mainland, we actually do relatively shopping around; sellers offering discounts and better service find us. It’s our current Surrogate-driven system that forces us to do the work and get pre-approval for reimbursement, to discover which facility is good at which treatments, to find a doctor, to coordinate the work of specialists, to negotiate price, to uncover safety records. Simply put, health care performs badly because it can get away with it.”

I really like this point about sellers here. Too often, health care experts make the point that consumers are not educated enough to make their own decisions. This assumes that consumers have to be perfectly informed, and since they can’t be, they might as well rely entirely on the Surrogates. Goldhill makes the point that we don’t have to be perfectly informed for a functioning market. In a consumer-driven market, sellers will be forced to innovate on the marketing and outreach and customer services aspects as well on the actual performance of their business. They will have it in their interests (of survival) to educate and inform the consumers. Competition will be driven by pricing and outcomes transparency. Only in this type of market paradigm will we see prices hurtle down and outcomes increase.

The ACA is less a reform of our health care system than an extension of its past principles to their logical end.

The Policy and Industry Changes Required

The health care mess is so complex and is several layers thick that there are many ways to propose consumer-driven corrections. Many of these that I am personally favorable to were highlighted in the early days of Paul Ryan’s “Better Way” set of plans for health care reform. Goldhill lays out his own proposals that I think have the merits of threading the left/right needle that might make it politically feasible. Much remains to be seen on what will come out of the united GOP’s ACA repeal and replace plans, and Goldhill’s ideas preceded the contemporary debates by a few years and may not have any impact on the debate. Still, given the choice between the status quo (assuming failure of the GOP to move replace all the way through), I would take Goldhill’s prescriptions, including government oversight and management of some forms of catastrophic insurance, any day of the week. The important factor is that the majority of the market should move to consumer-driven decision-making, which is the benefit of a Health Savings Account driven reform model. In Goldhill’s words, “…to recognize that change is inevitable and unpredictable; choice, dynamism, and competition of ideas (and business models) are essential to progress. Ironically, in the one service where the potential human benefit from innovation is greatest – health care – all our impulses have been to enact policies that impede choice, competition, and all the dynamism they unleash….Creating a more prominent role for consumers doesn’t mean eliminating that of the government’s: it means making consumers, rather than industry, the government’s partner in pursuing health policy. Even in Singapore, government plays an essential role in health care. Critics often label this attempt to rebalance forces as ‘free-market health care.’ Well, this book proposes national cradle-to-grave catastrophic health insurance, mandatory health savings accounts, large-scale health grants for the needy, rigorous enforcement of price transparency and antitrust legislation, and a national health database. Only on the Island of Health Care could this be described as ‘free market.'”

This effectively means allowing government a role in ensuring that the person who has that urgent accident or that fatal disease are well-taken care of. It also means that the much more significant impact consumer, the one with diabetes and heart failure, begins to be a conscious consumer of how they interact with and the value they get out of the health system. Furthermore, it starts to provide the much-needed incentives to both consumers and health care industry players to actively seek and reward healthy lifestyle choices in much more meaningful ways than the current policy of tinkering at the margins with value-based payments.

For the industry’s part, much of the current market direction and focus is on interoperability of systems, cognitive computing/artificial intelligence, predictive analytics, and preventive care. Let’s hope that the bulk of these efforts and industry innovation focuses less around volume targeting and billing/revenue optimization (where much of “innovation” has occurred in the recent past) and more around the health, wellness, and fabric of our community/social determinants of health that matter. Let Americans become more like the Japanese and Swedish, and let’s slay this health care monster, before it slays us.

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A Fatuous Defense of the Affordable Care Act

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“There are three kinds of lies: lies, damned lies, and statistics.” – Benjamin Disraeli

The L.A. Times provides a nice set of cherry picked data to justify the Affordable Care Act. The author is also fond of the word fatuous to describe Republican plans to repeal and replace Obamacare, so I feel compelled to maintain usage of the word my thoughts on the matter.Ignoring the long descent that healthcare has been on for decades now, and then claiming that slowing the growth rate of healthcare spend, while it still moves above the general rate of inflation and much of the decrease in observed to expected growth is related to the recession, is analogous to giving a kid a blindfold and a bat and told to hit the piñata in the tree in your backyard, meantime you have tied the piñata to a forest in the park two miles away. When the kid swings and misses, you take the blindfold off and tell him to try again, and declare success when he at least swings level at the air. The point being, even if Obamacare impacted these selective statistics, it is still miles from being where it needs to be.

To wit, there is many citations of costs decreasing, but the author conveniently ignores that those costs are going back up and projected to once again hit their stride of 6% a year, double the rate of inflation, for the foreseeable future. The recession was a temporary halt in healthcare spend, so it is really convenient to leave that fact out. Consider that in 1946 the average inflation adjusted hospital stay was $30 per day whereas today it is an astounding $2,200, a 70-fold increase. Trumpeting a modest decrease in this awful record is quite a bit like missing the forest for the trees.

Plus, while there is a lot of current debate about the tactics of repeal and replace given the slim Senate majority and how to use arcane Senate rules on budget reconciliation, Paul Ryan and others have come up with plans on replacing Obamacare, all under the banner of the Better Way moniker, which I detail in further detail elsewhere. Apparently this journalist is too lazy to look that up. But yes, I do hope that Republicans don’t take the risk of getting repeal without replace and do both at once. I honestly am not holding my breath given Republican ineptitude in the past.

It’s nice that the uninsured rate is going down, but of course a federal mandate to buy health insurance upon pain of hefty tax penalties is going to increase insurance rates. Would you praise a parent who upon their child spilling a drink or dropping food forced them to do 40 push-ups before eating again and then declaring to Facebook, “my child can do 40 pushups!”? No, I think not. At any rate, the real question is whether this metric on its own is the most important one and decoupled from the irrefutable evidence that healthcare costs and insurance premiums continue to skyrocket at a double-digit pace. Plus, recent research from economist Mark Warshawsky indicates that skyrocketing health insurance premiums have held down take home wages, as health insurance coverage has gone up for the lower and middle classes as a percentage of their total compensation from 4% to 12% in just a couple of decades – meaning they are not getting raises in take home pay because it is getting swallowed up in health insurance. Since inequality is a focus these days, look at the failures in our government run healthcare system as a main culprit.

If we are concerned with people not seeing the doctor, providing a stipend for catastrophic insurance and flexible Health savings accounts would have done the same thing without the enormous bureaucratic bloat that has led to skyrocketing premiums. And uncompensated care is an important gap to close, but this is all a bunch of cost shifting. What used to be covered through disproportionate share payments at the county and state levels, where great board oversight could be applied with local knowledge, is now being soaked up by cross-subsidies through the federal tax code – out of sight, out of mind, no accountability, and requiring hospitals to create a new administrative burden to work through the ACA and all its complexity.

This also ignores the many blatant failures of Obamacare, which I helpfully capture here. https://wordpress.com/post/gymnasiumsite.wordpress.com/117

“Medicaid reform, the elephant in the room”

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The American Enterprise Institute recently published a thought-provoking and helpfully brief primer on how Medicaid funding works, what it means to shift to state block grants, and why politically such a move will be tremendously challenging.

Alas, something much more radical would actually give the poor better access and would drive the competition in the marketplace that would start to incent health care delivery systems and insurers to compete for their dollars. To wit, why not simply focus on an individual income basis and fund catastrophic insurance for unexpected events (what insurance is designed to do in every other industry save healthcare) complemented with funding for a flexible with annual rollover features Health Savings Account? This seems to me to be the ultimate path out of Medicaid and all of its challenges, such as those raised in this post. It would provide purchasing power directly to individuals, get them out of narrow networks defined by states, and remove the massive costs of administering programs through federal and state bureaucracies.

 

“How to Cure Health Care” – Milton Friedman’s 2001 essay on the subject is still remarkably relevant

If I suddenly discovered that I had a serious disease and was handed a medicine concocted in 2001 as the only antidote available, I would very likely panic, despairing that surely something more timely and up to date could have been developed in the intervening 15-16 years. Alas, it seems that America’s healthcare system has been stuck in a reverse funhouse of distorting mirrors for so long, that it is equal parts amazing and depressing to read an essay from Milton Friedman on the subject and discover that the same advice he had for healthcare in 2001 is precisely the advice that would have cured our ailments if only we had followed it. Unfortunately, as he predicted, we did just the opposite, just how we have been doing it for decades since World War II. Thus, for this particular disease, hand me that vial from 2001, because everything else from then on has been cooked up by quacks and witch doctors. The hard medicine from 2001 might be painful to swallow, but it is the right palliative for the long-run.

In the essay, Friedman begins by noting the most important features of modern healthcare. First, there have been major advances in technology and science, which is no bad thing. Second, for several decades we have witnessed rising costs in healthcare relative to overall economic growth on an inflation-adjusted basis. Finally, healthcare features a decreasing satisfaction level amongst both consumers and producers. Within this feature set, Friedman notes that healthcare is unique amongst many other industries in not catalyzing technological advancement to actually lower per unit costs over time.

What distinguishes health care from these industries? Friedman has the answer – government involvement. Unique amongst all industries, healthcare is the only industry in which government plays such a dominating role in the production, financing, and delivering of medical services. And despite the role of the nominal private insurers in the market, I would point out that government finances, whether directly through Medicare and Medicaid, or indirectly through subsidies, a critical mass of over 50% of healthcare finance. Where the government leads on payment models, commercial players, largely structured in local monopolies, inevitably follow, making a mockery of any claims that this is a “market” in any sense of the word. Commercial insurers are not much different than government directed contractors.

The role of third party payment models
Within this doleful narrative, we can firmly point the finger at third party healthcare payment models as the culprit for the out of control expenditures and the mess of unintended consequences we have found ourselves in. And how we got third party payments is another lesson in how one muddled government intervention leads to the need for yet another, building an unsustainable house of cards that always needs one more card stacked on top. In this case, wage controls in the World War II era led employers to provide medical coverage as a benefit to get around controls and to more effectively compete for talent. By the time the IRS got wind of it and attempted to tax these benefits, they had become so popular that Congress intervened to make them a non-taxable benefit. Here is the catch though- the tax exemption was only provided to employers. Any consumer out on the marketplace buying insurance on their own receives no such benefit. Thus, people are conditioned and majorly incented to look for health coverage from their employer. Friedman summarizes the ill logic behind reliance on third party payment models and employer-based insurance:

We have become so accustomed to employer-provided medical care that we regard it as part of the natural order. Yet it is thoroughly illogical. Why single out medical care? Food is more essential to life than medical care. Why not exempt the cost of food from taxes if provided by the employer? Why not return to the much-reviled company store when workers were in effect paid in kind rather than in cash?

The major perverse impacts of employer-based insurance are that people delegate their healthcare provisioning and decision making to entities and individuals ill-equipped to perform those responsibilities. Furthermore, employees inevitably give up the ability to achieve in direct wages what is now siphoned off to healthcare coverage.

Then in the 1960s the U.S. Government enacted Medicare and Medicaid, driving third party payment models across even more populations. What is the logical impact? As Friedman notes, “nobody spends money from someone else as frugally as his own.” The third party administration of healthcare costs means no incentives for the individual to control those costs. As Friedman observes:

Enactment of Medicare and Medicaid provided a direct subsidy for medical care. The cost grew much more rapidly than originally estimated—as the cost of any handout invariably does. Legislation cannot repeal the nonlegislated law of demand and supply: the lower the price, the greater the quantity demanded; at a zero price, the quantity demanded becomes infinite. Some method of rationing must be substituted for price, which invariably means administrative rationing.

Astoundingly, healthcare as a share of our national income has risen from 3 percent in 1919 to close to 20 percent in 2016. To put this in perspective, Friedman comments that in 1946 seven times as much was spent on food, beverages, and tobacco than on healthcare. By 1996, healthcare had passed these collective categories.

What is Insurance? In healthcare, it bears little resemblance to what it typically means

In every other aspect of our lives, insurance means coverage for the catastrophic, long tail events that we never expect to happen but which would wipe us out financially if they did occur. It is the hurricane that reduces our house to rubble or the wreck that totals someone else’s car and puts them in a hospital. In healthcare, government meddling has forced this to become coverage for everything, however routine the expense. Much of this is based upon the employer incentives to move compensation into healthcare coverage, but even more pernicious is government mandates on what health plans must cover. It is analogous to auto insurance covering oil changes by force of government mandates. In this event, we would not marvel at oil change prices spiraling out of control. Similarly, it is little wonder that healthcare costs have exploded; between third party payment obfuscation, administrative bloat, and mandated coverages of all healthcare expenses, it would be an economical gravity defying miracle if costs didn’t explode.

“The Black Hole of Bureaucratization” 

One malignant outcome of third-party based payment systems is the concomitant growth in administrative functions, be it comprised of the administrative state for government programs or administrative bloat from commercial insurers required to finance, provision, deliver, and indeed ration medical care. As Friedman indicates, since the patient no longer has an incentive to care about healthcare costs and since the provider of health services has to worry about whether a certain service is covered by the third-party payer, a middle layer is required. In this model, the physician becomes little more than an employee of the insurer or the government, taking their guidance on what can be performed for the patient. In turn, the patient’s voice is squelched, as they are merely told what can be done within the confines of their plans.

Here is where Friedman delivers what I believe to be one of his most innovative economics insights, what he calls Gammon’s Law – which is defined as bureaucratization that causes both a rise in inputs and expense alongside a decrease in outputs and outcomes. Gammon’s Law is based upon observations of a British physician named Max Gammon, who performed an extensive study of the British National Health Service and noted that in this bureaucratic system that there was both an increase in expenditure as well as a fall in production. He noted that such systems behave like ‘black holes,’ ‘sucking in resources’ and ‘shrinking in terms of emitted production.’

There are some astounding statistics from the U.S. healthcare system that I believe are so shocking that their true gravity is hard for the human mind to grasp and that demonstrates Gammon’s Law at work. Friedman observes that inflation adjusted costs per patient day since 1946 have increased from $30 to $1,200 in 1996. A more recent update for this from the Kaiser Foundation updates this number to $2,200. This is a stonking seventyfold increase! Further highlighting Gammon’s Law at work, hospital staff per bed increased ninefold from 1946 to 1996. Given other trends in the industry, I highly doubt that this force has dissipated in the intervening 20 years. This Hospital Staffing Ratio from Statistica suggests a great amount of staffing per bed in the U.S.

In order to head off any common simplistic conjectures that medical science and technological progress are the reasons for the dramatic increase in inputs and expenditures, Friedman observes the following:

….True, medical machines have become more complex. However, in other areas where there has been great technical progress—whether it be agriculture or telephones or steel or automobiles or aviation or, most recently, computers and the Internet—progress has led to a reduction, not an increase, in cost per unit of output. Why is medicine an exception? Gammon’s law, not medical miracles, was clearly at work. The provision of medical care as an untaxed fringe benefit by employers, and then the federal government’s assumption of responsibility for hospital and medical care of the elderly and the poor, provided a fresh pool of money. And there was no shortage of takers. Growing costs, in turn, led to more regulation of hospitals and medical care, further increasing administrative costs and leading to the bureaucratization that is so prominent a feature of medical care today.

Friedman turns to the important question of what outputs are we getting for this increase in inputs? His answer is that it is almost impossible to tell given overall improvements in diet, clothing, housing, hygiene, sanitation, general improvements in public health, better diagnosis and treatment of conditions, etc. In short, while life span and life expectancy have increased, little of that is likely attributable to the increase in health system spend. In fact, the number of days people spend in a hospital have gone down over time. While obviously that can be a good outcome and a result of better care within the walls of a hospital, it is also directly correlated to cost pressures hospitals face – pressure that leads to a maniacal pursuit of getting patients out of beds and out of the door. In summary, we can’t point to any discernible improvements we have achieved in outcomes to pair with the seventyfold increase in expenditures. Again, Gammon’s Law of the black hole in all of its fearsome gravity sucking power.

Conclusions

In a comparison between the U.S. and other developed (OECD) countries, Friedman articulates that the hybrid system that America employs is particularly bad at controlling costs. In this respect alone, the U.S. has a relative disadvantage compared to peers such as the U.K. and Canada that have single-payer and monopoly over delivery systems. Of course, there is a tradeoff with these systems in access and innovation. Following the previously mentioned maxim on infinite demand when a good is effectively zero, the inherent tradeoff is administrative controlled rationing and inevitable queuing. Another major disadvantage of these systems is that the incentives push politicians to focus less on delivering best-in-class care to a primary focus on controlling costs.

At long last, we have arrived at the palliative against Gammon’s Law in healthcare. Of course, every classical liberal, of which Friedman is an apostle, a veritable “hero of the faith” whom we study and revere, dreams of a healthcare system that becomes as efficient and as consumer-centric as the likes of Amazon. We should be able to get on an intuitive dashboard and observe ratings of physicians and systems on the value that they drive. We should be able to observe both their pricing and outcomes, including being able to drill into the details by condition and procedure of concern to us in that moment. Competition should drive them to provide meaningful information to consumers in order to capture market share. We should have great care-based (not insurance-based) relationships with our primary care providers and other care planners and providers. A classical liberal is going to logically deduce, as does Friedman, that the idealistic path to get there is to eradicate Medicare and Medicaid, remove the tax exemption for employer-based coverage (in return for lower tax rates directly to consumers, of course) and a return of insurance to its proper role of covering catastrophes. Friedman observes that since these are going to be politically impossible in the short-run, we should aim for the next best thing – flexible health savings accounts. Friedman concludes his essay by outlining his policy proposals further:

A medical savings account enables individuals to deposit tax-free funds in an account usable only for medical expense, provided they have a high-deductible insurance policy that limits the maximum out-of-pocket expense. As noted earlier, it eliminates third-party payment except for major medical expenses and is thus a movement very much in the right direction…

…Medical savings accounts offer one way to resolve the growing financial and administrative problems of Medicare and Medicaid. It seems clear from private experience that a program along these lines would be less expensive and bureaucratic than the current system and more satisfactory to the participants. In effect, it would be a way to voucherize Medicare and Medicaid. It would enable participants to spend their own money on themselves for routine medical care and medical problems, rather than having to go through HMOs and insurance companies, while at the same time providing protection against medical catastrophes.

A more radical reform would, first, end both Medicare and Medicaid, at least for new entrants, and replace them by providing every family in the United States with catastrophic insurance (i.e., a major medical policy with a high deductible). Second, it would end tax exemption of employer-provided medical care. And, third, it would remove the restrictive regulations that are now imposed on medical insurance—hard to justify with universal catastrophic insurance.

This reform would solve the problem of the currently medically uninsured, eliminate most of the bureaucratic structure, free medical practitioners from an increasingly heavy burden of paperwork and regulation, and lead many employers and employees to convert employer-provided medical care into a higher cash wage. The taxpayer would save money because total government costs would plummet. The family would be relieved of one of its major concerns—the possibility of being impoverished by a major medical catastrophe—and most could readily finance the remaining medical costs. Families would once again have an incentive to monitor the providers of medical care and to establish the kind of personal relations with them that were once customary. The demonstrated efficiency of private enterprise would have a chance to improve the quality and lower the cost of medical care. The first question asked of a patient entering a hospital might once again become “What’s wrong?” not “What’s your insurance?”

In the aftermath of the surprise election putting Trump in charge of a unified GOP Congress, it is encouraging that the policy proposals developed under the moniker of “Better Way” produced by Paul Ryan and other Republicans in Congress make incremental gains in these areas. I have summarized these policy proposals in another post, and while they don’t go nearly as far as Friedman or I would want, it at least has the advantage of incremental gains, particularly in the area of health savings accounts. Given that Obamacare went even further in the wrong direction compared to Friedman’s prescriptions, further exacerbating the decades of bad decisions full of unintended consequences that is the hallmark of U.S. healthcare policy, getting at least a portion of that proverbial 2001 antidote vial is good momentum. Of course, Trump is the ultimate wild card on where he intends to take healthcare reform, but I hope he looks no further than some of the sensible plans that are already there. The ball is being handed off right in the gut. Don’t fumble it, Mr. President.

As bonus material, it is always a personal pleasure to observe the affable and remarkably quick on his feet Friedman address some of these questions and issues directly. Here are some great videos on this very subject.

Let’s repeal Obamacare and replace it with something more consumer-centric

At long last, Republicans have started to coalesce their various one-off healthcare reform ideas from the past 6 years into a semblance of a comprehensive Obamacare repeal and replace proposal. There is much to appreciate in this proposal, which includes oft-repeated catchy taglines of, “a better way,” “patient-centered,” and my personal favorite, “backpack.” I will discuss more on the backpack later. The whole presentation, which I have linked above, can be watched in a recent AEI video.

What this proposal does not promote is my own personal preferences of a drastically reduced role for health insurance, a product that should be beaten back into its proper place for coverage of catastrophes only. The price-obfuscating impacts of coverage for every service and the price-decreasing impact that would ensue if consumers were able to see prices and outcomes more transparently by paying more directly out of their pockets is not part of this proposal. Nor does it address the supply-side needed reforms such as lifting the competition stifling (and therefore price increasing) impacts of the various regulatory mandates and rent-seeking political lobbying of regional monopoly hospitals that prevent new hospitals and clinics from opening. Finally, while it promotes Medicare and Medicaid reform, it leaves Medicare, which is mostly a middle class welfare and wealth transfer that has a naturally price inflating impact, largely intact. These are my caveats for why I don’t consider this a perfect proposal. That being said, the main themes presented certainly stanch the government takeover of healthcare bleeding and presents significant and politically feasible patient-centric reforms in place of the current construct of byzantine, dizzying, and unsustainable complex web of government controls and mandates. For this fact alone, this substantial reform proposal should be applauded and supported as a significant improvement to the status quo that just might get enough electoral support if Americans pay attention to it and can keep from being distracted by the ongoing Trump/Clinton circus. As a former boss of mine used to tell me, “don’t let perfect be the enemy of good.”

The focus is clearly on consumer choice, portability, decentralization of decisions to state and local levels, and sustainability of Medicare. It is this concept of portability that is referenced as a backpack of items that will allow consumers to move across companies and states and maintain their same coverage and access to health services. Paul Ryan opened the session indicating that Obamacare is singularly focused on quantity of people insured, while ignoring the staggering costs in the system that Obamacare caused that are, in his words, causing the act to collapse under its own weight. Not to mention the tremendous loss of individual freedom and choice that resulted from centralized decision making and mounds of mandates arising out of D.C. Allowed to blossom, these are salient points that I believe will resonate with a public that has been remarkably skeptical and loathing of Obamacare. The marketing pitch is clear – consumers, take back your choice and freedom to choose the health plans that are right for you and not dictated by a government bureaucrat. Perhaps it is more appropriate to say take it back from thousands of bureaucrats, as one Congressman indicates in the video, there are fully 159 agencies and commissions currently involved in interpreting and implementing the dictates of Obamacare.  Several congressmen, including Budget Committee Chairman Tom Price (R-GA), Education and the Workforce Committee Chairman John Kline (R-MN), Energy & Commerce Committee Chairman Fred Upton (R-MI), and Ways & Means Committee Chairman Kevin Brady (R-TX) took turns articulating the proposal once Ryan got off the dais. Below, I have summarized the important components of the proposal, ranked in order of my opinion on which are the most important to least important.

  • Extending the health insurance tax break to individuals that businesses currently receive, and capping the amount that businesses can receive tax breaks. This concept will sever the link that causes Americans to be solely dependent on their employer for health insurance and promotes portability and accessibility of insurance. Hopefully, it results in more people taking the initiative to get insurance on their own and subsequently bargaining for higher direct compensation from their employers. The capping of tax breaks for businesses is intended to serve as a cost inflation and “over-insurance” containment provisions. Coupled with the ending of specific coverage mandates, also part of the proposal, this could go a long way towards incenting people to get more affordable coverage that makes sense for their life situation and promote innovative models such as high deductible plans, insurance coupled with wellness programs that promote actual health and wellness, and insurance that covers catastrophes only complemented with health savings accounts. These forces could make a major dent in insurance cost inflation and concomitantly overall health cost inflation.
  • Free up insurance purchasing across state lines – this simple and sensible act will drive up competition and will do much more to drive consumer choice and put downward pressure on prices than the continually failing exchanges and insurance co-ops (most of which have declared bankruptcy by now) could ever do, even though that was their ostensible original purpose. The challenge is that it is impossible to drive choice and cost containment when you also force standardized minimum levels of coverage and mandated cross-subsidization of high risk individuals.
  • Promotion of Health Savings Accounts – Provisions of Obamacare amazingly and wrong headedly penalize HSAs through the tax codes. This proposal would wisely end those disincentives and work to actively promote their use. HSAs are popular despite their government created disadvantages.. Furthermore, usage of HSAs promotes pricing transparency and healthcare service usage portability and flexibility.
  • Medicare Reform – The proposal kills off the unpopular and unaccountable Independent Payment Advisory Board and promotes consumer choice through expansion of the popular Medicare Advantage Program.
  • Provide state block grants for Medicaid – this will provide greater flexibility at the state level to craft cost saving programs at the localized level.
  • Provide for ability of Small Business Group Purchasing Associations – the proposal would allow for small businesses to band together for group purchasing of insurance coverage. While I prefer a high degree of an individualized market(which hopefully the tax breaks to consumers will promote), the fact is that most employees now expect and HR departments like to offer health insurance as a hiring incentive. Allowing small businesses to band together and to receive the same tax incentives as larger businesses will promote further consumer access with the nice boon to small business employment. Currently, Obamacare punishes small businesses through a web of complex rules that force them to either cover employees on increasingly expensive and bloated plans or pay a tax penalty per employee that they do not cover.
  • Protection of Pre-Existing conditions coupled with state incentives to create risk pools. While I would submit that a free-market system that promoted insurance for catastrophic conditions only would solve for this without the need for regulatory enforcement, this provision that is currently part of Obamacare is one of the few things that is actually politically popular. Thus, it is important from a politically feasible standpoint to keep it. One way of potentially holding down cross-subsidization amongst premiums and spiking premium costs for the average holder is to also create risk pools for certain conditions as a backstop to insurance coverage. The concept of risk pools is also promoted in the proposal.

These are simply the highlights. I will need to dig into the documented details of the plan to provide additional thoughts, but I certainly appreciate the direction this is heading.

A brief history of how the American healthcare system became high cost and low performance

In two separate but connected articles posted on the Mises Institute website, Part 1 covering the pre-World War II construct of American healthcare and Part 2 covering the explosion in healthcare costs and our current system development post World War II, Dr. Michael Accad, a Cardiologist with an impressive resume and who has a tremendously insightful blog, provides a remarkable yet succinct overview of how we got to where we are today, which can be briefly described as a costly and underperforming health system.

In just a few minutes, the reader will witness the 100+ year descent into the 7th layer of hell that is our healthcare system and all the errors and paternalistic hubris that got us there. Begin with the status of healthcare in the 19th century, which while far from ideal (this is the era when bloodletting, blistering, and toxic purgatives were common, after all), was beginning to witness the emergence of competitive and innovative medical reforms under a scientific and competitive basis under the guide of the free market invisible hand. For example, germ theory and surgical advancements, and the formation of high-performing health systems such as Mayo Clinic that practiced care on these scientific foundations, were beginning to blossom in the late 19th century without the meddling hand of government agencies and regulations that are prevalent today. But then everything changed when in the early 1900s, a sensational report on the inadequacies of the health system penned by Abraham Flexner resulted in reforms in more onerous physician licensing and health education that remain largely intact to the modern-day. The offshoot was a tremendous narrowing of diversity in medical approaches and education models and medical practices. Everything outside of the Flexner dogma was ostracized and shunned. The challenge with this paternalistic approach is that licensing led to self-serving restrictions on the supply of physicians, leading to spiked costs.

Part 2 of the series covers the evolution of the American health system into what we know today. With increased costs came a decrease in demand. With excess hospital and physician capacity, leaders in healthcare began crafting strategies to increase collective payment models that would blunt the direct cost impact on consumers and thereby increase demand in line with existing capacity. While a European national health system seemed politically out of the question, pilot models in which employees of a Dallas school system were part of a collective payment system seemed to offer the best model to emulate more broadly in order to bring up hospital service demand as well as mitigate adverse selection of the sickest patients opting into insurance plans. Intuitively, people who are able to work are typically healthier than the average American. Legislation promoting insurance plans duly followed, with favorable reserve requirements for Blue Cross and Blue Shield Programs compared to other types of commercial insurance as well as tax exemptions for employers who offered health insurance coverage through the 1942 Stabilization Act. My own editorializing is that the reader should bear in mind that this legislation was a compounding error in the sense that it was meant to address a challenge with employers being able to compete for employees given pricing and wage controls that were persistent in that era. Allowing employers to de facto increase their wages by offering health plans was a backdoor sop allowing them to more effectively compete for labor. The unintended consequences that we are still living with today is that we are collectively highly dependent upon employers for health coverage, which has its own perverse effects of holding people hostage to jobs as well as decreasing our direct take-home pay. The more immediate impact of this in the mid-century was a rapid increase in medical utilization and price inflation. I wish a magic time machine would allow me to just go remove the insidious price and wage controls in the first place.

Dr. Accad focuses heavily on the paternalism of the system that drove us inexorably towards the vicious cycle conclusion that government must take an active role in providing insurance, at great risk and ignorance of the ensuing moral hazards of over-using healthcare services that such an approach entails, which further leads to a whack a mole approach of controlling costs. Better to have not created the holes and brought in the moles in the first place, but I digress. Through a Question and Answer method, Dr. Accad elaborates on two aspects of moral hazard and how this most important of economic concepts impact health care:

Q:  What are the two aspects of moral hazard?

A: The first one, which matches the negative connotation of the term, is the aspect imported from other insurance settings. For example, in the case of car insurance, the term moral hazard refers to the fact that someone with car insurance might drive less carefully than someone without coverage. In a way, that person may be “taking advantage” of the insurance company.

In health care, that aspect of moral hazard probably exists, but may not be very important. For example, it’s conceivable that people who have insurance are more likely to engage in more dangerous sports activity. But this kind of moral hazard can probably be accounted for by the insurer and be factored into the actuarial analysis to determine premium prices.

The other aspect of moral hazard stems from the fact that every single medical encounter or medical act can be said to be ordered toward the preservation of life or toward the well-being of the person. This by itself presents a strong incentive to use medical services, and the behavior should not have the same negative connotation as in the first aspect of moral hazard. In fact, economist John Nyman has argued that the behavior by which insured people would use more health care is a social good.

The bottom line is that one does not need to be sick to utilize medical services and that all that is needed is a plausible argument that if a medical action is taken, life may be prolonged or enhanced. Such plausible arguments are not hard to come by, especially in a health care system where doctors and hospitals are largely paid on a fee-for-service basis. There is no objective limit on what can be considered “desirable care,” and if cost is not a consideration, more medical actions will be taken.

Of course, when consumers are shielded from direct costs, there is little to stop inflation. Insurance premium inflation has consistently outpaced general inflation since the 1950s. Stop and think about how remarkable that factoid is. Dr. Accad addresses this as well, and I love the comparison of health insurance to a harmful drug:

Q: Didn’t the increasing cost of insurance hurt employers?

A: To the extent that it did, there was not much employers could do about it. With rising medical prices, the need to have health insurance would become more and more acute. Employee discontent would have been too great to abandon health insurance as a benefit. Executives themselves also benefited from the group rate, so the idea that health insurance should be abandoned could not be entertained seriously.

Q: People were hooked!

A: Health insurance is a seriously addictive and harmful social drug.

Once medical price inflation occurs for those who are covered, those who are not covered begin to get priced out of the market. During those times, it tended to be the poor, the aged, and unemployed who were left in the lurch, and that brings us to Medicare and Medicaid:

Q:  How was the situation addressed?

A: With the enactment of Medicare and Medicaid in 1965. The government provided generous health insurance benefits to the most politically influential class, the elderly, which also happens to be the class whose needs for medical care are naturally the highest.

The terms of Medicare insurance were also very generous to physicians and hospitals since, to secure their cooperation, the government decided to pay them their “usual and customary rate,” which means that, for a time, the government had no way of controlling costs.

Q: I can see things spiraling out of control…

A:  As a matter of fact, once Medicare was introduced, medical prices became completely “unhinged.” Within a few years, Medicare expenditures were quadruple what had been anticipated.

The demand for medical services was so high there was an acute shortage of doctors. Immigration laws were adjusted to allow a rapid influx of physicians from abroad. There was a boom in hospital construction. Incredible facilities and health care complexes were built.

Naturally, with skyrocketing medical prices, insurance premiums had to increase correspondingly. This began to really affect employers.

The rest of Dr. Accad’s journey through the American health system history concludes with the modern-day challenges to restrain the predictable cost increases that ensued with Medicare – from the Managed Care Organizations that were designed in the 1970s to the various pay for performance schemes, Accountable Care Organizations, and shifts from fee for service that we see today. Some of these are likely steps in the right direction, and it is certainly better to pay physicians based upon outcomes and quality rather than volume of services. That being said, with all of the recent mandates and focus on payments for an entire episode of care that has and will incent mergers and consolidation, I am not sure the incentives will truly be great for newly minted local monopolies to increase quality and pass on cost savings to consumers.

It would be far more effective to implement policies that end onerous licensing and task performance restrictions (i.e. by allowing nurses to perform tasks they are perfectly capable of), end supply side restrictions (it is near impossible to open a new hospital in an area due to hospital political lobbying and political connections at the local and state level), end reliance on insurance that covers everything, which obfuscates health care prices, provide individuals with the same tax advantages that employers receive for health service coverage, shift employer based coverage to portable and widely usable health savings accounts, and replace health insurance subsidization for the poor with directly funded health savings accounts similar those enjoyed by their better off peers. Such a model would drive greater innovation, better customer service, and more transparency around outcomes and costs. All of these combined would tame cost inflation while at the same time increasing health outcomes.