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December 18, 2009 – Comments (5)

As found at http://kirkspano.com/content/view/40/46/

I have been asked quite a bit about my thoughts regarding health care reform.  So, I'll spend just a few minutes on a couple points of major importance that nobody I hear in the media, government, hospital industry or the insurance industry takes the time to explain. 

Healthcare delivery suffers from a problem of pricing that only occurs from time to time in economics, that is it suffers from the problem of monopoly pricing.  Most people understand this to mean that there would be no competition for healthcare, this is a misperception.  Monopoly occurs not only when one firm controls a market, but also by definition when there is no substitute for a good or service.  In the case of healthcare, there is simply no substitute.  We can not say, "oh, I'd like a new coat, instead of that bypass" and live to tell about the nice warm material in our new jacket.

Because healthcare has no substitute, regardless of how many firms there are, there will be upward price pressure because the healthcare provider always has leverage with a patient seeking care, regardless of laws requiring treatment.  Many advocates of healthcare reform trumpet the "free market" as a solution for fixing healthcare.  They are mistaken to take this approach because the problem of healthcare costs has more to do with the demand for healthcare being urgent than the quantity of providers available. 

Simply opening more clinics and having more insurance plans in a market such as healthcare would actually be likely to raise costs and dilute the quality of care.  Why would this be so?  Let's consider whether more health insurance companies would be able to bring down costs.  The answer is surely no because the pool of insured from company to company would shrink, which in insurance risk-sharing pools raises costs.  If we opened too many more clinics and hospitals, the supply of medical personnel would eventually become stretched, reducing quality.  While I am not sure we are to that stretch point yet, a cursory overview of nurse shortages recently would seem to imply we are at least near that point.

As it stands now, much of the cost of healthcare in this nation is due to our inability to find a solution to covering people for primary care.  The uninsured end up in emergency rooms a disproportionate amount of time because that is where by law they can not be turned away.  Having so many people using emergency medicine, about 10-20% of the population at a given time (closer to 20% now with high unemployment), raises the cost of their care by as much as 900% or more.  Because those bills generally do not get paid, healthcare providers pass those costs on to the insured.  In essence, we already have universal coverage, we just have it very inefficiently.

Most estimates are that about 20-40% of healthcare costs are due to people going to emergency rooms when they should not or do not need to.  Our primary mission ought to be to reduce this "waste" cost in the healthcare system.  If we simply find a way to move non-emergency medicine out of the emergency room and to primary care, as a nation, we will save hundreds of billions of dollars over the next decade. 

Many believe a single payor system of healthcare can reduce costs.  They are probably right, however, such a system has always led to a reduction of high end healthcare services wherever it is practiced.  I do not believe Americans want to sacrifice quality of care.  I know I don't.  Any solution needs to preserve and continue to incentivize the creative energy and innovation of advanced medicine.

Since as long as I can remember, the healthcare debate has been distorted by extremists and speical interests.  It seems to me that solutions could be more common sense if politics was cast aside.  We all want lower costs and greater access.  Here are some broad, in need of refinement, ideas that I think will work if well adopted:

*Insure everybody by opening Medicaid on a sliding scale and Medicare to those turning 62 AND/OR provide tax breaks or subsidies to lower income people for private coverage.  Remember, the number one goal is to provide coverage that keeps people out of the ER.

*Place limits on certain business practices, such as excessive executive and management compensation, which result in costs being higher for the nation as a whole.  While it is difficult to define "excessive" it is not difficult to understand that when 10-15% of every premium dollar goes to bonuses and upper management compensation that is probably too much.

*Mandate periodic open enrollment for all insurance plans- meaning no health declines, so that we have true risk-sharing pools.  It will be necessary to backstop large claims for insurance companies with an industry/government re-insurance program- which is not a new concept.

*Mandate that all premium classes based on health underwriting, be within a certain range.  That is, the highest premium on a plan will be no more than 3 times the lowest premium offered on a plan.

*Mandate minimum benefits, such as many states already do, as the base coverage that must be offered on any plan sold.  Wisconsin is a very good example.

*Allow group/pooled purchasing by insurers and non-profit groups for prescriptions/drugs.

*Mandate standardization of forms, coding and claim processing- several estimates are that whis would reduce healthcare costs about 15%.

*Reduce litigation with more standardized award limits in malpractice cases (currently about 5-8% of healthcare costs can be attributed to litigation and litigation risks).

*Create a national health insurance information exchange that doctors and patients have protected access to, and implement on a relatively short time frame.  This would further reduce administration costs, improve the quality of care and create jobs in the short run during the buildout.

In general, I believe we ought to handle healthcare similarily to the other industries that have monopoly pricing pressure and can not be denied in a civilized society.  Other industries that are strikingly similar economically to healthcare are the delivery of electricity and water.  We have found ways to regulate those industries as utilities, maintaining private industry efficiency, while having high levels of service as mandated and overseen by government agencies.  I believe it is probably time for a regulatory structure that is similar to the utilities for healthcare.  The last time I checked, my lights were on, water came out of the faucet and the costs were rather low measured against my need for both.

5 Comments – Post Your Own

#1) On December 18, 2009 at 11:30 AM, chk999 (99.97) wrote:

Interesting ideas. One thing that people will have to get over no matter what structure we end up with is that they are "entititled" to any possible intervention or drug, especially in the last six months of their lives. That is where more than half of healthcare spending goes.

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#2) On December 18, 2009 at 11:52 AM, RonChapmanJr (32.92) wrote:

Rationing healthcare is the answer.  If we figure out a way to ration it effectively, we win.  Any other "solution" and we lose.

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#3) On December 18, 2009 at 11:58 AM, edwjm (99.87) wrote:

Interesting ideas indeed!  Unfortunately, the political structure of this country is so infiltrated by corporate interests that few if any of them have any chance of implementation!

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#4) On December 18, 2009 at 12:02 PM, davejh23 (< 20) wrote:

"In essence, we already have universal coverage, we just have it very inefficiently." 

"Most estimates are that about 20-40% of healthcare costs are due to people going to emergency rooms when they should not or do not need to.  Our primary mission ought to be to reduce this "waste" cost in the healthcare system."

"Simply opening more clinics and having more insurance plans in a market such as healthcare would actually be likely to raise costs and dilute the quality of care."

It's true that we pretty much have universal care...however, how our current system is set up, costs will continue to rise rapidly as the insured pay for the uninsured.  I don't believe that opening more clinics will necessarily increase costs.  I remember when we used to have non-profit clinics and the uninsured had options besides emergency rooms.  Problems with our current malpractice system drove these types of clinics out of business.  As you suggest, malpractice reform will be necessary to reform our healthcare system.  I know one specialist that pays $300K plus annually in malpractice insurance.  His actual take-home pay is usually less than half that.  Half of his practice's annual revenues go to pay malpractice insurance...reform in this area could easily bring the costs of care down 25%+...at least for some specialized care.  Simple malpractive reform could eliminate malpractice risk for those willing to operate clinics for the uninsured and significant cost reductions could be acheived with very limited government involvement.  Combined with special tax treatment for those operating such clinics, quality care would quickly become available to the uninsured.

"While it is difficult to define "excessive" it is not difficult to understand that when 10-15% of every premium dollar goes to bonuses and upper management compensation that is probably too much."

For most insurance companies, 10-15% of premium dollars do not go to executive compensation.  Some of the largest insurers in the country are still run as non-profits with slim margins.  I agree that there should be reform to limit excessive compensation though.  At least in the past, insurance companies were not set up to make profits off of premiums at all.  Actuaries don't develop tables to ensure 20% margins. Actuarial tables should determine break even points.  Insurance companies should take in what they pay out, and all profits should be made through safe investments using those premium dollars.  Not one bonus dollar should be paid from premium dollars...100% should be from investment gains.  That's how all insurance companies operated in the past, and I don't know why health insurance companies would be any different now. 

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#5) On December 18, 2009 at 1:34 PM, kirkydu (92.30) wrote:

Ron: Are you serious?

dave: I think you missed a bit what I wrote or I wasn't clear.  More health insurerer will raise insurance costs, more healthcare providers will water down quality at some point.

"malpractice insurance...reform in this area could easily bring the costs of care down 25%+"

If it were that easy, we would do it.  Litigation costs are only about 5-8% of healthcare costs by all estimates I have ever seen, so a 25% savings on healthcare costs is impossible even with tort reform.  And remember, ultimately, at least the threat of litigation is necessary to maintain high standards.

I might like your idea of funding more clinics for the uninsured rather than giving the money or credit to the uninsured.  That might be a more efficient way of meeting the same end.  However, then you face the problem of segregating patients and the opposition will say that leads to poorer people getting a lower level of healthcare.  Such clinics would have to be well funded to attract talent.  I'll think on this.  I wonder if anybody has studied how those numbers would work.  Anybody out there???

10-15 cents on the dollar that for profit companies take in from premiums do in fact go to management and executive compensation at most companies.  United Healthcare is a little lower by virtue of their size.  You can find that info right in 10-K filings.

Clearly there should be some actual laws passed in this nation regarding non-owner management and executive compensation.  Nothing Draconian, but parameters that shareholders (not some gov'ment pay police) can easily enforce.  Right now shareholdes are getting screwed by the country club deals of guys who sit on each others boards and vote their friends, or at least co-horts in pay fixing, pay raises and bonuses without much regard for performance.  

Heading at least part way back to the old non-profit model that Reagan killed I think does make some sense.  I mostly agree that insurance company profits should be mostly derived from investments of free cash flow (I hear there is some guy in Omaha who knows how this works).

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