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XMFHelical (< 20)

Healthcare incentives - $640 Billion problem



May 19, 2011 – Comments (8)

The New England Journal of Medicine just published another one of its excellent brief perspective pieces that looks at the incentives in health care and why cost improvements realized in one place don't propigate through the industry, like they do in others.

The $640 Billion Question — Why Does Cost-Effective Care Diffuse So Slowly?

"There are, however, individual U.S. physicians and health care organizations that deliver high-quality care at a cost roughly 20% lower than the average. If the rest of the U.S. health care industry followed their example, health care spending would drop from 17% of the gross domestic product to 13%. Though that would still be well above the spending level in other high-income countries, $640 billion would become available for addressing other important public- and private-sector needs. Why don’t cost-effective models diffuse rapidly in health care, as they do in other industries? The answers to this $640 billion question lie in the perceptions and behaviors of the major participants in health care."

The article goes on to discuss many of the conflicting incentives that all tend to drive care up in cost or at least work against driving it down.  Here they do well.  However the article concludes with some (well, really one) suggestion:

"Do these barriers condemn the United States to financial Armageddon or diminished health care for less-affluent Americans? One escape route is tax-supported universal coverage, the finance method that works best in most other high-income countries. Another is disciplined managed competition among health insurers, enhanced by national harmonization of the way in which commercial insurers, the Centers for Medicare and Medicaid Services, and other payers compare providers on value and of the weight they place on value when tiering network providers and paying them. Both solutions require payment reform. Neither solution is politically feasible without robust physician support ..."

Tax supported universal coverage is a non-starter in the US, as it should be in my opinion, though I would not be opposed to a default government option. Disciplined competition wouldn't solve some of the issues laid out in the article, primarily the lack of incentive of employers to communicate cost importance to individuals.

In my opinion (not often welcome), we need to move from an employer sponsored health care system to an employer reimbursed one.  The government only has one incentive string to pull (or push) and that is tax code, so such a program would have to be based on tax incentives.  To engage consumers into the costs of care, they have to be aware of them, and an annual letter letting them know how much their employer is paying for the service is far from engaging.  This means the health-care benefit should become taxable (yes controversial and a tough sell), but with a generous offset deduction.  The consumer has to be aware they bear the cost of healthcare, as they do now invisibly.  Employers too need to have an incentive, probably in the form of a reduced tax rate, to reimburse for health-care costs (probably through payroll deduction for offered or any plans).  Opting out to receive additional income should not be an option i.e. if you don't pick a plan, you don't get the reimbursement from your employer, and the income deduction isn't available to you either.   The consumer psychology of healthcare costs has to move from an impression that 'it’s a free benefit' to one of 'I'm leaving money on the table if I don't have basic care'.


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8 Comments – Post Your Own

#1) On May 19, 2011 at 2:36 PM, buffalonate (56.14) wrote:

You can reform our system and maybe get 15% to 20% savings but we would still be paying 40% more than everyone else in the world.  A govt run system takes the profit incentive out of the equation.  Hospitals and doctors no longer have any reason to do unnecessary or questionable treatments to make a few extra bucks.  A govt run system also gets rid of the vast majority of the bureacracy.  Instead of having dozens of insurance companies with totally different billing systems you have 1 entity that just pays the doctor or hospital and the people who handle the billing are no longer needed.  Doctors and hospitals also would receive more money by getting bonuses for creating better patient outcomes versus doing more tests and procedures to increase revenue.  It is done all over the world except here. 

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#2) On May 19, 2011 at 6:16 PM, devoish (77.59) wrote:

The United States spend more per capita on health care than do other developed countries, with broad outcomes no better than those of its peers (see graph).

Are we now prepared to discuss healthcare accpting the idea that that the Government paid healthcare systems in Europe are delivering better quality healthcare than we have in the United States?

I bet not.

Best wishes,


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#3) On May 19, 2011 at 7:39 PM, XMFHelical (< 20) wrote:

buffalonate - I don't believe government is the most efficient way of doing anything, but it can help avoid some incentive problems (like tragedy of the commons).  I do want a government plan for core service, but for only basic services, not full care coverage.  I'd use the school system analogy, where government mandate (and provision for) core early education is important to have, but public / private competition is alive and well at the college level (and perhaps should be earlier as well).  I want to be able to pay more for better care than one can get on a government plan, and then decide if I will or not (and how much).  It is capitalistic and American.

devoish - Sure, we can discuss it, but the data argues in its favor.  In terms of outcomes, government plans are just as good and often times better.  We don't like them as much, but they deliver just as well.  Here are some OECD statistics

We (the US) believe we are among the healthiest.

Percieved Health Status 

But in measurables like life expectancy past age 65, we aren't any better than middle of the road.

Life Expectancy at Age 65

And this vaunted US system really doesn't really do us any great favors in terms of better acute services (such as heart attack) either.

Fatality rates following acute care hospitalization

We pay far and away the most for our care, but see well below average out of pocket costs.



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#4) On May 19, 2011 at 9:32 PM, devoish (77.59) wrote:


I agree with the idea that overall healthcare quality in the United States is poor compared to most European countries. I have spent a lot of time one the subject and found that conclusion to be indisputable but also learned that some will dispute anything.

We are certainly not "well below average" in out of pocket costs. Average is 3%, we are at 2.8% and the scale goes from a high of 5.9% down to 1.2%. Far from "well below average" we are about as average as it gets. Based upon the chart of "out of pocket costs" I would suggest that "out of pocket costs" are an insignificant factor in healthcare costs due to the simple fact that every country with either higher (14) or lower (12) or equal (4) "out of pocket costs" than ours have lower costs overall. In fact out of the thirty countries in the "out of pocket costs" chart only two could be considered more average than we are.


Higher out of pocket costs is probably not a valid statistic regardless. For example, if you forgoe treatment because you cannot afford your portion of it what would you report as your out of pocket cost? Probably zero, because that is what you paid. I do not believe you would estimate the entire cost of the treatment you did not get and give the amount for the treatment you still need.

Also comparisons between different Countries is notoriously difficult. For example, concerning out of pocket expenditures the WHO reports;

In some cases the terminology was rather vague, with categories as ‘health and care’, ‘modern medicine and health services’, ‘treatments’, ‘diagnosing and treating illness’, ‘chronic disease care’. Furthermore, some surveys asked respondents to include the cost of transportation and/or gifts to doctors (informal payments) while others did not. In several LSMS-surveys the question on health expenditures only referred to the first or last visit to a physician (mostly in a Health section). In addition, the wording of the question on health spending differed from “what did you usually pay” to “what did you pay in the last month”.

The same report also makes this observation;

When a system relies heavily on OOP, the payments required to access health care in relation to income can be high enough to result in financial catastrophe for individuals or households. Moreover, the impact of these out-of-pocket payments for health care go beyond catastrophic spending and many people, particularly the poor, may decide not to use services, simply because they cannot afford the direct costs 

You also said;

 I want to be able to pay more for better care than one can get on a government plan, and then decide if I will or not (and how much).  It is capitalistic and American

 I would like to say that I think this is taking capitalism too far. I do not think you deserve better care than someone else. A Mercedes instead of a Hyundai, sure. But access to neccessary medical care, no. Keep in mind the NY Firefighters and Policemen did not choose only the low income earners, or union members, or just the wealthiest to rescue on Sept 11th. They did not check green cards or tax returns. That is not Capitalism, but it most certainly is American, and right now I'm thinking a somewhat better class of American. That is where my vote draws the line.

Best wishes,


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#5) On May 19, 2011 at 10:38 PM, XMFHelical (< 20) wrote:



Good points and thank you for the link on out of pocket payments.  I do enjoy reading this stuff.  

As for the last point, I do appreciate it is unseemly to say that I would like the right to pay for better care if I can (I did not say deserve).  Consider the converse.  Since all possible 'necessary' care for everyone can never be an economic reality, would you then deny me the right to 'buy' the care that government rationers deem too extravagent to provide?  I sure wouldn't. Right now, most anyone of means (but by no means everyone) can travel to the US to get whatever approved care they are willing to pay for -- regardless of their 'fair government plan' (unless you plan to deny them visas too). There is no way to make economic realities not exist with healthcare.


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#6) On May 20, 2011 at 6:25 AM, devoish (77.59) wrote:

Since all possible 'necessary' care for everyone can never be an economic reality, would you then deny me the right to 'buy' the care that government rationers deem too extravagent to provide?

Maybe all possible "neccessary care" can be an economic reality. Maybe it is really just a matter of deciding we want the ability to keep Americans healthy more than we want the ability to kill foreigners. Maybe it is just a matter of deciding that John Paulson is worth 35x the paycheck of a minimum wage worker, and tax the crap out of income beyond that. Maybe we need to do both.

Even if it is not an "economic reality" it is certainly a goal to strive for, not discourage. For instance, if there is going to be a Government healthcare plan, say on a State level, then every elected official and their family gets enrolled in the least expensive Government plan - by law. If there is going to be private insurers, then every employee of every insurance company gets enrolled in that companys least expensive plan - by law. If you are going to let my boss choose the plans available to me, then my boss gets the same quality plan he chooses for me. Not some cheap useless coverage for me and everything included for him.

I think that it is very possible to take the benefits of capitalism's rewarding hard work to such extremes that they become detrimental. And I think we are there. My family's health insurance plan costs me $19,000/ year. Half of all Americans make less than $25,000. I just watched hree guys just spend half an hour mowing a lawn for twenty five dollars. The guy who pays them was not there. I cannot imagine those numbers are working very well for them especially after paying for gas in their machines.

It is a very difficult problem in large part because policy is letting it be and those who profit off healthcare without actually delivering healthcare (private insurers) are telling the story.

I mean how is it possible to look at the out of pocket chart you provided and decide that out of pocket spending explains our higher costs?

Here is another link for you to investigate. 

Best wishes,



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#7) On May 20, 2011 at 11:04 AM, XMFHelical (< 20) wrote:


Great, you answer the 'would you deny?' question with a utopian 'maybe'.  Well, good luck with that.   Again, I do think a copetitive government basic plan should be part of the healthcare landscape, as it iis now for retireees, but it will have to have limits based on economic practicality, not idealism.  But as you make clear, voters sure don't want to hear that and won't embarce it.

And consider, who benefits more from the healthcare benefit being non-taxable,  the rank employee or the higher bracket upper management?  Who is giving up a greater proportion of potential income to enjoy this ever costlier benefit and would benefit the most from its cost being reigned in?

As for that last link.  The  31% paperwork number is BS and pysicians well know that the 'pay for procedure' system is far more to blame than administrative costs, they just fear seeing it changed, so no question they would like to direct attention elsewhere.  The initial NEJM article link did a good job of commenting in drivers for cost growth. 

Government can indeed be more efficient, but not all administration is 'wasted money'. So here is my link (and yes, it too appears to be from a lobbyist group, just like yours was).  Not the best presentation, but it does make some points worth considering.

"This study, based in part on a technical paper by Mark Litow of Milliman, Inc., finds that Medicare’s actual administrative costs are 5.2 percent, when the hidden costs are included. In addition, the technical paper shows that average private sector administrative costs, about 8.9 percent – and 16.7 percent when commission, premium tax, and profit are included – are significantly lower than the numbers frequently cited. But even though the private sector’s administrative costs are higher than Medicare’s, that isn’t “wasted money” that could go to insuring the uninsured. In fact, consumers receive significant value for those additional dollars.


The point is that private insurers are much more diligent in scrutinizing claims. That financial stewardship adds to administrative costs; it also lowers claims costs (thus, doubly adversely affecting the private sector’s administrative cost ratio). The government, by contrast, is a claims-paying machine. When abuse becomes egregious, the fraud unit steps in — and that effort won’t be included in administrative costs. While everyone wants health insurance administrative costs to be as low as possible, that should mean as low as possible while still adequately adjudicating claims to ensure that insurers are paying only what they should. Medicare doesn’t do that. As a result, Medicare is paying claims it shouldn’t— and, ironically, making its administrative cost ratio look more favorable!"

Anyway, we're just going to have to agree to disagree (and I think that is a good thing).  Thank you for furthering the discussion, it is an important one.


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#8) On May 20, 2011 at 8:11 PM, devoish (77.59) wrote:


Maybe we should not "agree to disagree". Maybe we should just find out the truth? if you argue 2+2=4 and I argue it equals 6, the truth does not lie between us.

Great, you answer the 'would you deny?' question with a utopian 'maybe'. 

I  used "maybe" to offer you the chance to think about whether or not we can economically afford top quality healthcare for every American. And you took that as a means to disregard the possibilty. So lets face two of the facts we agree on.  First, the care in the United States does not meet the standards of many other Countries. AND  we pay more for that care that those Countries do. So obviously the money is there, somebody is simply trying to negotiate that money into there own pockets rather than into quality healthcare for all Americans. There really is no question that we can afford top quality healthcare, we are already paying for it, we're just not getting what we are paying for.

You offered a solution based upon the idea that raising "out of pocket" costs would help solve the problem, you supported the argument by saying we have "well below average out of pocket" costs, and tried to support that with a chart that says our out of pocket costs are just about as damned average as they could possibly be! 

I mean seriously, lets just agree on what your chart shows.

There are 30 Countries examined and 14 have higher out of pocket costs, 4 are equal and 12 are lower.

Can we agree to agree on that?

I hope so,


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