Friday, March 26, 2010

A Health Care Post

Ah, to write a post about health care. So many ways to take this. So much to say. But I think what would be best is to write a little bit about the background that so many people don't really seem to have a good handle on. Everyone knows the system is broken. Even the critics of the new plan admit that much. But it doesn't seem like a lot of people know exactly how broken the system is. So I'll start with that. Then I'll take a quick look at some of the things the new law does well, and finish up with a few of the things that still need to be improved. It'll probably be a long post. But bear with me.

Part I: Problems in Health Care

There are all sorts of problems with our health care system as it stands. Everyone has their own favorite gripes. But I think we can break it down into 3 general areas: 1. No one knows what they're paying/getting; 2. Cost shifting; and 3. Market Failures

1. Let's start with the fact that very few people seem to have any idea how much they're really paying for health insurance. Sure, you might know how much is coming out of your paycheck every month, but do you know how much your employer is paying? By one study the average employer is paying $9,325 per employee. (Don't worry, there won't actually be too many numbers in this post). That's an awful lot of money that, if not being spent on insurance, could be going into employee's pockets as take-home pay. Or into employer's pockets as profit. Or into investor's pockets as dividends.

Bottom line, for every person out there who has insurance, there's a "hidden" cost of more than $9,000. And that number is double what it was 10 years ago. But what's really troubling is how few people know about this hidden cost. Most employees have no idea what their benefits are costing them, and how much more money they could be pocketing every year.

Another area where no one seems to know what they're paying or getting is the way in which insurance companies, in an effort to save costs, have successfully created provider networks. These networks are a great deal for the insurance companies - because the doctors in the networks have agreed to take a smaller amount of compensation for the "privilege" of being in network. Doctors, ostensibly, agree to these networks because it provides them with a guaranteed stream of patients. Trade some income for more security, goes the logic.

Of course, if the doctors didn't agree, then the insurance companies would label them as "out of network". The effect then would be that patients would go to other doctors, because "out of network" doctors cost the patient more money. Essentially, the insurance companies played a great game of gotcha. If the doctor is in network, the insurance company pays less. If the doctor is out of network, the doctor loses patients.

The result of this is that doctors aren't charging the same rates to everyone. Different insurance networks negotiate different payments ahead of time with the doctors, meaning a doctor might charge insurance company X at rate 1, insurance company Y at rate 2, and insurance company Z at rate 3. Further complicating the matter is that if an out-of-network patient comes in, they're probably going to get charged a different rate too. Only their insurance company (let's call them company A) will pay a small percentage and force the patient to make up the difference. So for X, Y, and Z you're probably looking at patients covering a normal co-pay. But for company A the patient will end up paying upwards of half the total cost.

Making the whole situation even more messy is that out-of-network patients and those without any insurance at all often end up getting charged an even higher rate for their procedures than they normally would have because doctors need to make up the lower costs they've been forced into by insurance companies. I once handled a case where my client was being sued for a medical debt. The hospital claimed he was charged the "customary" amount. But when we forced discovery on just how much they were actually charging all of their different patients, rather than reveal the specifics they decided to settle the case. They didn't want the court to see how much more they had charged the guy without insurance than the people with insurance.

That's a big problem. Charges and payments aren't necessarily related to the services doctors provide. They're dictated by the insurance companies. The middle men are running the price show, and nobody else knows what they're paying or what they're getting.

The final phenomena to be grouped under the "you don't knowing what you're getting" heading, is the fact that insurance is most often bought by employers for groups of people. But within that group individuals have different needs and wants for insurance. The company is probably going to buy whatever best fits their needs, not their employees, and employees are pretty much stuck with whatever insurance the company has. When you sign up for a job you'd better hope they've got good insurance.

Although it's a pretty straight forward problem, and doesn't need much explanation, the fact that employment and insurance are tied together is probably one of the biggest problems out there. It actually all started with World War II, when the U.S. put a freeze on employee wages. In order to attract workers, employers had to come up with other benefits, and so they started adding health insurance. There's been a whole history of the relationship between employment and health insurance, but at this point we've reached a point where that connection is probably no longer sustainable. Employers are paying too much. Employees are losing out on wages and don't have a real idea of how much insurance is costing them. And there are affiliated problems like job lock, employers picking plans that don't benefit individual employees, and loss of bargaining power for just about everyone involved except insurance companies. Beginning to wean ourselves off of it is probably a step in the right direction.

2. Ok, on to the problem of cost shifting. This should be a little shorter. The basic problem here is that there are a lot of people out there without health insurance. When these people get sick they go to the hospital, just like everyone else. And, just like everyone else, they get treatment. There's even a law requiring doctors to treat uninsured patients when it's an emergency situation. And really, that's a good law. After all, we don't just want people with treatable conditions dying in the street. There's a type of country where they allow that. They're called "third-world".

So, since doctors have to treat everybody, people who aren't paying end up getting cared for anyway. This means doctors are footing the bill. But practicing medicine isn't a cheap thing, and doctors simply would go out of business if they had to cover all the costs by themselves. Instead they shift the cost of non-paying patients onto paying patients by raising the amount they charge. It's kind of like how the cost of shoplifting is factored into the cost of the items in the department store. Only on a much more expensive and frequent scale.

Another thing to know about the way the system works is that people without insurance only have to be treated if it's an emergency situation. That means preventative care or other early-stage care options aren't provided. This is too bad because preventative care and early-stage treatment are almost always significantly less expensive than emergency care. What that means is that instead of covering everyone, and thereby enabling cheaper treatments, we've opted for a system in which some people aren't covered and are forced into the most expensive treatments, and then we all pick up the cost later by paying more when we go in to the doctor.

The other big part of cost shifting that happens in the current system is government care. Taxpayers cover a huge chunk of our population as it currently stands. Specifically, the elderly and the very poor (through Medicare and Medicaid). Part of the reason we have these programs is because these two populations are among the most expensive to cover. Because they're so expensive, insurance companies don't want to provide coverage, meaning that if the government doesn't, nobody will. The choice for the rest of us is essentially between providing coverage or letting them go without medical services (and therefore, you know, die). So as taxpayers, we're already covering the most expensive populations. That's a big reason why the national debt is so high, and why it'll only keep going up if we don't do anything.

3. Finally, let's consider some of the market failures in health care.

First, you have the incentives of health insurance companies. Primarily, health insurance companies, like all businesses, have an incentive to cut costs. For most companies cutting costs means finding efficient ways of doing business or eliminating waste or other similarly productive processes. But the best way for insurance companies to cut costs is to avoid paying out insurance claims. This makes even more sense when you think about the different business models; most companies make money when you use the services they provide, but insurance companies actually lose money when you use their services and make money when you don't. Thus, cost-cutting for insurance companies is about making sure people don't use their services.

This leads to things like lifetime maximums (when an insurance company determines that they've already paid out too much on your life and that they don't want to pay anymore). This is also what causes insurance companies to double check for "fraud" in your application once you put in a claim. Very rarely do they verify in any detail the truth of your claims at the time you sign up - because they don't care, you're paying in money. But as soon as they have to start paying out, then, if you've made a mistake on your application, they'll turn around and say "this is fraud. We wouldn't have insured you if you had filled out your application differently." And then they use this approach to kick you off of coverage. They have a double standard based on whether or not you're costing them money, and it's built into their system in order to kick people out when they stop being profitable.

They also have an incentive to avoid covering people who are more likely to have big claims in their lifetimes, thus, pre-existing condition denials. The practical effect of these approaches - lifetime maximums and pre-existing condition denials - is that the most expensive people don't have coverage and end up having their costs shifted onto the rest of us, like we described before.

All of the above market failures are about health insurance companies. But the most important health care market failure isn't related to insurance companies. It's just a straight-forward problem of demand. You see, the demand for health care is perfectly inelastic. It doesn't matter how much the price goes up; if you need the health care then you need the health care, and payment isn't an issue. Better to be alive and massively in debt than dead. In a normal market the more the cost goes up, the lower the demand sinks. But with health care that's not true. Demand is in no way related to cost - it's related to health. If you're healthy, well, then you wouldn't pay very much for a doctor, would you? Sorry doc, I don't have any cuts... no need for stitches today. But if you're sick...

Who watched Lost this past week? Richard Alpert was willing to give everything to save his wife's life, right? And no one questioned that fact. Because that's just how it goes. If there's a cure, no price is too high.

Further complicating things is the fact that in health care the absence of something small or routine can end up having huge effects down the road. So, say you get a cut that should probably have stitches. Those are pretty small and routine. But if you go without you run the risk of things healing wrong, tearing, infection, and, if the infection gets serious enough, even death. So how do you charge for stitches? Do you charge some small routine fee? Or do you charge a life-saving exorbitant fee? Demand and supply just doesn't match up like it does in a normal scenario. And of course, we've only got 1 life. So the cost of going cheap is... well, it's the ultimate price.

There have been those who have complained about over-insurance. That we expect our health insurance to cover even routine things, and that this is a problem. They liken it to auto insurance paying every time we need to get an oil change or fill up with gas. But the parallel doesn't really work, given the issues of demand. In health care even the routine things can be life-savers. When it comes to cars, not following through on the routine means not driving your car that week (if you don't have gas) or that it might break down a little sooner (oil change). But you can always go buy a new car. Or take the bus. Or stay at home. There aren't too many options if your body breaks down. There's no such thing as "routine" in health care, and the demand for services is perfectly inelastic. That's about as pure a market failure as you're going to find. And that's the reason that the market doesn't work for health care, and why a non-market based solution is needed. (This isn't to say that market-based solutions can't play a role. I think they can, as I'll mention below. It's just to say that where we have market failures something else will have to play an instrumental role in fixing the problems.).

Ok, there you go. A look at some of the problems. And even though it was long, believe me, it was quick. A lot more could be said. But we'll leave it there, since I think it hits on the biggest issues.
II. What It Gets Right

So what does the health care bill that passed do well? Let me take a stab at some of the biggest things. I'll cover a handful, but the biggest thing, and this is important to keep in front of us at all times, is that the evidence demonstrates overwhelmingly that countries with government health care have better quality and lower cost than the U.S. So that's the biggest thing - we're taking a step in direction of lower cost and higher quality.

So how does this bill accomplish that? A lot of different little ways and a couple of big ways.

First, and probably most important, it gets rid of pre-existing coverage denials, lifetime maximums and, for the most part, the uninsured. Just by virtue of extending coverage to everyone the government allows people who couldn't get coverage previously to access the care they need. This allows for preventative and early-stage care, which is much cheaper, as discussed before. That fact alone will lead to huge improvements in terms of quality and cost. By eliminating the most notorious ways that insurance companies kick the sick off of coverage the government also ensures that the insurance companies will be paying out like they should be. Previously consumers were double-paying for the sick. They'd pay in once when they bought insurance, which was designed to cover people who needed health care. But then, when those people who needed care were kicked off and forced onto government rolls, consumers ended up picking up the tab as taxpayers, while insurance companies pocketed the premiums that should have been paid out. This means insurance companies will be forced to actually provide the coverage they've contracted to provide, and taxpayers won't be hit twice.

So that's a biggie - lower-cost coverage (preventative and early stage care) and forcing insurance companies to pay out on those who need health care.

Second, since it's easier for people to get coverage and the denials are gone, that means people can actually switch jobs without fear of losing coverage, eliminating job lock. This should be a boost to the economy, enabling people to pursue careers in a freer way than previously existed. Associated with this benefit is a minimum standard of coverage. Every insurance company has to provide a quality product that meets or exceeds the standards laid out in the bill. You won't have to worry about whether your employer has a good plan since it will have to meet the minimum quality standards. (Previously there were some junk health care plans out there that did consumers little or no good, and that bordered on fraud. These will be eliminated.)

Another good thing this bill does is it starts to take some steps towards dissolving the link between employers and individual coverage. There are all sorts of new ways of buying coverage enabled by this bill, including insurance exchanges for small business and individuals. This will give consumers more direct power in purchasing insurance. Previously consumers usually had very limited options when buying insurance, which allowed those companies to increase prices and decrease benefits. More purchasing power for consumers should result in more competitive prices and higher quality plans. Unfortunately this bill doesn't go all the way in this area, and we'll talk about that a little more later. Suffice it to say, it does take some good steps in the right direction.

This bill also does a good job of providing subsidies for coverage, along with the individual mandate. This way people who can't afford health care will be able to. We're providing for the least of our brothers and sisters. That's a good thing.

The bill makes some adjustment to Medicare that will be beneficial to seniors (closing the donut hole) while at the same time reducing some of the over-payments made to hospitals (to cover, for example, uninsured individuals).

It also encourages error reduction and quality improvement efforts, which should result in better quality for everyone, while simultaneously rewarding quality over quantity (and this is an area where I have spent a ton of time and energy and have a little more expertise. This is exciting stuff for me. I haven't spent enough time with this area of the bill, but judging by some of the names that were being discussed in relation to this area, it's on the right path). This might be the most overlooked area of the bill, and one that will affect the most people without them ever realizing it. From what I've seen there appear to be specific reforms tailored towards avoiding medical errors (good models for this have been popping up, including here in Minnesota). There also are provisions aimed at encouraging a continuum of care and team-based health care delivery, something that has been proven to be especially effective (see, for example, the work of the CF Foundation). That's good stuff. There should be fewer errors, less duplication of services, and better quality of care as a result of this bill.

Finally, and this runs back to what we touched on at the beginning of this section, this bill is going to help control costs. Insurance should cost less under this plan, increases in price will be more strictly controlled, and, since more people will be able to get preventative and early-stage care and a lot of the cost shifting will go out the window, the actual health services we're paying for will end up being less expensive too. Numbers have been crunched all over the place, but just about every estimate shows us saving a lot of money over the next 10 years as result. The Congressional Budget Office is the place to check for more info on just how much we'll be saving.

Now there are those who are concerned about how much we will be paying in taxes for health care. But what it's important to remember is that we won't be paying more for health insurance, we'll just be paying through a different method. Here's two hypotheticals to illustrate the difference:
In situation A a person pays $2,500 in premiums and gives up $10,000 in wages in order to get insurance.
In situation B a person pays $2,500 in premiums, $2,500 in taxes, and gives up $5,000 in wages in order to get insurance.

Clearly situation A costs more money. A total of $12,500. That's the way the system currently works. Remember the hidden costs from way at the beginning of this post? That's the $10,000. The second situation is what we're moving to. A lot of people are upset because they think they'll now be paying in extra, in the form of taxes. But what they're missing is that their lost wages will go down. The total cost of the second situation is $10,000, clearly less than the $12,500. And of course, there are subsidies for those who can't afford the tax burden, which will help reduce the total cost for a large percentage of our population.

It's a pretty rough hypothetical, but that's how the new system will work. It will free up employers to be able to give better salary and wages to workers because the burden of paying for benefits will be lessened. And ultimately the total cost for health insurance will be lower in the new system.

So that's what this bill does well. It helps us take some important steps towards better quality care and lower costs.
III. What Still Needs To Be Done

Of course, this isn't a perfect bill. Setting aside some of the pork that's in the bill, which is just a typical product of our current Congressional system, there are other things this bill could have done better.

One of the big problems with health insurance - whether provided by private companies or the government - is that there are tremendous administrative costs. You're taking money from lots of people, you're paying out money to lots of people, and there's a lot of moving parts and variables - providing health care is tough, and figuring out payment for that care is equally difficult.

In the current system a lot of the administrative costs are duplicated in each of the various insurance providers. The fixed costs are tremendous since you need the entire system in place in order to provide coverage, and right now providers are doubling up on those fixed costs. Each additional person on the health insurance program doesn't cost much (or really anything) compared to the fixed costs, and so the more people on a single insurance, the better off that insurance provider is - since their costs are spread over a wider base. It's a simple scale of economy issue.

The ideal then would be a single provider system, where only one provider has the huge fixed costs and those costs are spread over as wide a base as possible. There are, of course, reasons to be concerned about the resulting monopoly. I personally think a single-payer system would end up being the cheapest, but there are other models too that would be improvements on the current system. Ultimately, finding a way to eliminate duplication of the fixed costs that insurance providers face is an important step toward reducing costs.

Unfortunately this might be something the we actually took a step backwards, or at least sideways, on with the new system. The government oversight needed for this bill will create more administrative costs (not much for the insurance companies, but more for the government) that we will have to pick up as taxpayers. Although this is a problem, there are two counter-points. First, to help deal with the problem there were cuts in other areas designed to offset the increased admin costs. Second, already had a system in which the government had a tremendous amount of administrative health care costs, specifically with Medicare and Medicaid. Ultimately we're probably looking at more of a step sideways, where government administrative costs shift to different areas - now there should be more oversight-related costs and fewer delivery-of-insurance costs - than a pure step backwards, where government administrative costs increase suddenly.

Although this is a problem now, in the long run a focus on two things will help turn this area around. First, a focus on eliminating duplication. We should look to other countries in this area to see where they have eliminated administrative duplication. There's no need for us to have every single insurance provider paying the same high administrative costs. Whether that means switching to a single-payer model or something else, eliminating these duplicate costs will go a long way towards lowering and controlling prices.

Second, we should demand government efficiency. There are those who will argue that the government is necessarily inefficient and that corporations are necessarily efficient. This is a fallacy, but that doesn't mean there isn't some truth to the idea that the government is often less efficient than it could be. We should continue to demand government accountability and efficiency. One of the biggest reasons government become inefficient is because people aren't paying close enough attention to the waste. So a vigilant public will help us streamline the government oversight and administration of health care.

The second big area for improvement is that we need to continue working towards a separation between employment and insurance. When individuals are able to buy their own coverage and have it completely divorced from their employment that will help ensure that people are getting the coverage they need and that consumers have more power. Although we're dealing with an imperfect market in health care, giving consumers more power in the health insurance marketplace is one of the steps that will help achieve the right balance. It will also free up money devoted to benefits in order to create more salary for employees (and profits for employers), in which case we'll all be better off.

One thing that I personally would like to see would be the elimination of for-profit health care. I think a lot of what drives insurance abuses is an extreme profit motive. We'd all be disgusted if an individual doctor refused to treat a patient unless that patient signed over the deed to their home. We should be similarly disgusted when the corporations that are running hospitals and insurance companies do virtually the same thing. Eliminating for-profit medicine would go a long way towards containing costs for patients, while still compensating doctors (because you eliminate corporate profits, instead of employee salaries).

Finally, I'd like to see continued financial innovation. For example, I think an advanced copay system can be a productive addition to a health care regime. Co-pays are created as a way of battling over-insurance - instead of any hypochondriac going to the doctor for any old reason - it encourages people to only use services when they really need them. If you have to pay something you're less likely to go to the doctor for minor things, right? But this creates a problematic tension. We want to discourage wasteful visits but we don't want to discourage necessary visits. So what we've done with our current co-pays is set a relatively low bar - somewhere around $10 or $20 per visit.

But a better system would base the copay on the individual patient. So for someone who is really poor, $20 can be enough to prevent a visit to the doctor all together. That's not what we want. And for someone very well off, $20 isn't a drop in the bucket, so it won't discourage wasteful visits. An income-based system of copays would help address this problem.

Or maybe an even better system would consider health behaviors in determining the copay. The classic example would be to take two people with lung cancer, one who is a smoker and one who is not. The smoker should have to pay more for their treatment because their behaviors almost certainly contributed to their condition. Thus, the copay for the non-smoker could be set at $0 or $1, but the copay for the smoker would be set much higher, say $100. This would encourage healthy behaviors and help cover the costs of the system in a more equitable fashion.

These aren't the easiest systems, but some actuarial science could go a long way towards making sure we have a system in which those who create burdens pay more of their way and those who are victims of circumstance aren't wrongfully punished.

These types of innovations need to be continually encouraged. There's a lot of improvements that can be made in our system. And when we're talking about what can still be done, well, that's probably the biggest factor: considering the next innovations in price controls and quality improvement.
Alright, there you have it. Admittedly it's rambling. Not exactly a cohesive vision. Heck, I'm so burnt out after writing this that I might well have written things that I already disagree with. But I think this is a good starting point in the discussion. There are lots of problems. There are lots of things that the new system does well. And there are lots of ways we can continue to improve.

So, if you read the post. Even part of it, let me know. I'd appreciate your thoughts. Let's continue improving our system.

I've got the rockin' pneumonia
And the boogie woogie flu


nicole joy frethem said...

Thank you for writing the intelligent and well-researched post that I do not have the time or background knowledge for. I guess, from my own two cents, I think both parties can back down on the rhetoric. People are getting ridiculous. Accomplishing this does not make us communist China nor is the most important thing we've done in the history of America. Everyone needs to chill out. It's good. Unless you are an insurance company (who, like you said, doesn't give a $hit about you unless you're profitable so I don't see any reason to care about them) this WILL help you.

Gina said...
This comment has been removed by the author.
Beau said...

1. I've seen research that shows that the percentage of money spent by the government on their healthcare programs for administrative costs is significantly lower than the private sector. Part of that I'm guessing is that Medicare and Medicaid aren't competing against anyone, so they don't have to advertise near as much (which I think relates back to your single-payer theory as being the cheapest).

2. Isn't the idea behind forcing people to get insurance is that the costs the insurance companies take on by, you know, paying for sick people, will be offset by young and healthy people paying in? And with this the insurance companies really won't be hurt at all by this legislation?

3. Aside from all of the science and research and statistics that back up this argument, I think we sometimes lose sight of the fact that this is partly a moral issue. Every one gets sick regardless of their personal character, so having a system that rewards people who got the lucky genetics is inherently wrong. We provide fire and police protection (theoretically) to everyone, regardless of their drive, their character, their status because we believe people have the right to be protected from harm. Why should cancer be treated differently from arson?

4. One way to defray costs would be to somehow help promote a cultural shift about the end of life. It is a natural instinct to want to NOT DIE. I get that. But an exorbitant and disproportionate amount of money and resources are spent helping people with virtually no chance at having a good quality of life NOT DIE for a few weeks or months because many of us live our lives in denial that it will end someday. It saddens me when a 94-year old is on a ventilator for three weeks. It saddens me when a patient with advanced Alzheimer's is given a permanent gastric feeding tube when they can no longer swallow. It saddens me when someone with congestive heart failure and chronic pneumonia continues to take antibiotic after antibiotic and takes a maddeningly slow deterioration to the grave. I'm not suggesting there are any rights or wrongs for any situation, but the common denominator often in these situations is not the hope of living, but the fear of death. If our attitudes changes, we'd probably be happier in addition to being more cost-efficient.

Mark D said...


I'll strive to add more commentary when I have a clear, awake head, but I do find some core issues with your commentary.

In the most basic, please know that all health care facilities have a 'charge master' in which all billable items reside, and all items have a single, universal charge. The charge does not change (i.e. go up or down depending on your insurance or lack thereof), and is pretty darn universal.

The difference is in what they receive in terms of remuneration from the payor. If patients come in for the same broken leg, Company A may remit 60% of the charge. Company B may remit 84% of the charge. And personal payor C may remit 100% of the charge within 30 days, or 90% of the charge at the point of service due to a cash discount. The point is that each payor "pays" a different amount of the bill, and the hospital / care provider accepts this based on their contract. Larger organizations, naturally, get a better rate since they provide a greater amount of customers in what is a very competitive environment. To many, this a simply a semantic difference as compared to 'charged' amount, but there is a large fundamental base to the difference when it comes to customer base and volume.

I'll try to add more later, but please know that while I appreciate your article, there are a few points where I feel you're off base, and wish to clarify. As needed, I can supply sources (it's easy when you work at the largest safety net hospital in the state).


Durham said...

I Though part I was good and mostly correct, though some of it open to a little interpretation. As I am sure you could have guessed I agree with little in part II. But a couple of your suggestions in part III are worth further development.

I have to admit the writing style was non abrasive. I have to give you kudos for that.

Matthew B. Novak said...

Nicole -

Thanks for the link on Facebook. And yeah, toning down the rhetoric needs to happen. Hopefully I was successful in walking a middle line here.

Beau -

I like so much of what you said. And you bring up a good point regarding the fact that health care is so frequently about hard decisions and calculating out an impossible cost benefit analysis.

Mark -

I certainly used the short-hand in that section. I'm aware of the way it actually operates. To the service provider it might not make much of a difference - they're going to charge X regardless of how much company A, B, and C are paying. But it makes a big difference in the way the system works. And that was the point... the vast negotiating power of the insurance companies disrupts the market.

I know you have a lot of insight into the problems health care providers face, so please do share some more.

Durham -

I'll just say thanks.

Nate said...

Matt, this is a very well written article and I really appreciate much of what you had to say. I also view this bill as a move in the right direction, and its frustrating that many of the opponents have so little insight into what it is actually proposing, and oppose it based on misinformation and politically charged zeal.

As someone who works in the field, I am a frequent participant in discussions on this topic, and one thing that frequently surfaces in conversation with other healthcare providers is the need for tort reform. This bill does not address the area of malpractice lawsuits and the ridiculous settlements which congest the system. These days it often seems as though patients enter a hospital in the hopes that the Doctor will somehow "slip up" so they can make out like bandits. What we need is a system like Great Britain's where, if an individual loses a suit against a Doctor, he then must pay the cost of the Doctor's legal fees and reimburse him for lost time at work. What this would accomplish is to do away with the extraneous lawsuits and only the true cases of malpractice would be brought to court, as well they should be.

The consensus among most Doctors I have spoken with about healthcare costs, is that too much is being spent on the margins of life. By this I mean on the unalterably terminal patients, and on the hopelessly premature infants. After all, despite our best efforts the mortality rate remains 100%, what it comes down to is a matter of exactly when we decide to accept that fact.

Jeff said...

I think, oddly enough, we ended up near the same place on the issue of routine/preventive care despite your issues with my analogy. If you recall, I wanted insurance to not cover routine visits but government to make contributions to individuals based on means so they could pay for such care. Your co-pay system is somewhat similar - routine care costs are based on means and paid, at least somewhat, directly by the patient.

I just thought of this - maybe the system for routine care can be modeled on food stamps - another solution to provide low-income people with a necessity while maintaining a functioning market for everyone else?

I think your issues with my analogy come from comparing apples to oranges. I agree that demand for catastrophic/chronic care is highly inelastic and that markets don't work fully in this area. But markets do work for routine care - primary-care doctors can compete for patients, patients respond to price signals that limit their consumption, &c, and that's what I was referring to with my car insurance analogy.

Either way, good article.

jwilli7122 said...

Just read part 1 - good post, Matt. Will read more later.

Joey Williams

Matthew B. Novak said...

Nate -

I'd be interested in seeing more about that model of malpractice reform. A lot of people talk about malpractice reform as a big deal, but the truth, of course, is that's a tiny tiny percentage of the total health care expenditure problem (we're talking about saving a handful of pennies when you need a hundred bucks). But that doesn't mean it's a bad idea. Most of the proposals suggest just capping awards, which I'm pretty opposed to. But a fee-shifting approach might be a good idea.

Jeff -

From your post I had gotten a sense that you embraced a "the market works" mentality. I'm glad to hear that you don't exactly think that. I still don't think it really works, even for "routine" care, since, as I discussed, there's not really such a thing. Maybe we could say care designed to assess illness is routine, but that's about the extent of it.

I'm not willing to say that the market works for "routine" care (I'm not sure how much competition there is by primary care physcians, or how much they could compete; I'm not convinced the demand/price interaction is really pure or effective), but I would agree that some market-based solutions can be effective in different ways. Specifically in discouraging waste (as opposed to legitimate demand) and in cost-shifting to those using the system. That's why I like the risk-based-copay model, since it shifts costs to those who caused their own demand.

I think your food stamps suggestion is somewhat interesting... we'd probably be better off with a government insurance program though, rather than a "you get X dollars to spend on health this month" model (like food stamps). That way funds are only being distributed to those who need them at the time and those who need them don't run out. But I think that's probably more along the lines of what you were actually thinking anyway, right?

aladante said...

Your analysis is based on a false premise, therefore it is in-valid. To blame the big insurance companies.
You have just blamed the people who are paying the bills for the cost of the product. How does that make sense in your world? The crisis is due to the COST OF HEALTH CARE, not the cost of the insurance. The cost of insurance is a direct result of the cost of health care. Your big bad insurance companies have a cap of 35% in individual plans and 30% on group plans for profit margins. "The Bill" now reduces that to 20% 1nd 15% respectively. So to blame them for paying the bills is so far off base it is hard for me to not consider it just silly talk. They promise people they will pay their bills in return for a premium. If you (the Consumer) allow your MD and Hospital charge whatever they want for services, then you (the Consumer) will have to pay the price.
Sorry but you need to go back to the drawing board on this one.

Matthew B. Novak said...

See, for example, cost shifting.
See, for example, the problems with networks.
See, for example, the market failure.
See, for example, the fact that no one knows what they're paying.
See, for example, a profit margin of 35% for insurance companies.

I didn't create a premise (blame insurance companies) and find arguments to support it. I worked from the problems that exist.

Yes, one of those problems is the cost of health care. But a big chunk of that problem is caused by the insurance system we have (cost shifting, lack of preventative care coverage, network arrangements, etc.). Compare health care costs in other countries where the payment system is different.

Or perhaps you'd care to enlighten us as to how the cost of health care has skyrocketed?

And perhaps you'd suggest how, if the cost of health care is so high, insurance companies are still pushing that 35% profit you cite to?

And I'm curious if I know you... if so, would you care to identify yourself? Thanks.

Nate said...


As someone who will very shortly be entering the workforce in medicine, let me enlighten you about about the costs of healthcare and who is truly profiting.

Being a physician is no longer the lucrative career it once was, indeed, I will not even approach paying off my medical school loans till I am in my mid to late 40s, and even that estimate is based on living a modest lifestyle. During my residency I will earn perhaps 45 thousand a year for the average of 70 hours per week put in at the hospital, during which time the accruing interest on my loans will outpace the payments I will be making on them. Indeed, it is not till after residency that I will even begin to touch the principle, and if I were to have the cost of a family added at any point it would only prolong my debt.

I have spoken with numerous Doctors, all of whom tell a similar story, how their take-home income has continued to drop, even as the cost of healthcare has continued to rise.

aladante said...

For Nate, I am not blaming you, I am simply stating fact. The GP is getting shat upon by all of his colleagues, the specialists, the anesthesiologist, the neurosurgeon, the podiatrist are the ones making all the money along with the Facilities. They have learned from the faulty system that is health care in the US that in order to make money you need to know how to work the system. You son, need to focus on becoming a specialist, because as a GP you will be a slave to the system. I know you don't have any plastic surgeon or cardiovascular surgeon friends who are struggling.

aladante said...

For Matt, the answer to your questions is long,so here goes.

Okay, Cost sharing you say "Instead they shift the cost of non-paying patients onto paying patients by raising the amount they charge. It's kind of like how the cost of shoplifting is factored into the cost of the items in the department store. Only on a much more expensive and frequent scale."
In other words Hospitals and MD’s charge too much for a service to the insurance company, that is paying their bill, because they can, to make up for those who do not pay.
Are you blaming the Insurance company because they will pay peoples bills as charged and not tell the hospital or MD that they can't up charge for people who do not have insurance or are you saying that should be an acceptable practice? I am confused.

As for networks, you summed it up perfectly when you said ". I once handled a case where my client was being sued for a medical debt. The hospital claimed he was charged the "customary" amount. But when we forced discovery on just how much they were actually charging all of their different patients, rather than reveal the specifics they decided to settle the case. They didn't want the court to see how much more they had charged the guy without insurance than the people with insurance."
You just made the case that it is not the Insurance Companies setting the high prices for services, they are trying to help people get more affordable care by negotiating with the health care industry. It is the MD's and Hospitals and their little secret on how they can gouge America needs to be kept a secret.
Next you speak of Market failures, now what I get out of that is “health insurance companies… have an incentive to cut costs” “the best way for insurance companies to cut costs is to avoid paying out insurance claims” “insurance companies actually lose money when you use their services” “cost-cutting for insurance companies is about making sure people don't use their services.”
You are incorrect on this entire premise. Insurance companies make the same off of health insurance at all times. Look at any insurance companies’ contracts and it will state clearly that they anticipate spending 65 dollars out of every 100 they take in from you on care. If they don’t make that much money off of you, then they will raise your rates, and as long as they can prove it to the Dept. Of Commerce, they are only allowed to do so by law. There are no arbitrary rate hikes allowed by insurance companies. They must prove their loss ratio in each state in order to raise a premium.
Now when it comes to pre-existing conditions and lifetime limits you are again being silly. Tell me, do you think it would be appropriate for a person to be able to call his insurance agent while his house is burning to the ground, and up his coverage, or perhaps buy coverage if he has none. Or better yet, would it be right for a person to be allowed to buy $1,000,000 worth of life insurance on someone who was just diagnosed with stage 4 cancer? That is what you are saying is a business model that avoids paying claims? Well DUH! Would you place a bet on the Indianapolis Colts to win the superbowl that was played this past February? Of course not. It doesn’t make sense. Now if every person were given the option to have Health insurance from birth, and if they chose to opt out, but wanted to come in at a later date. Then as long as they paid every penny they would have paid from birth, the no pre ex system would work and be a truly feasible system. Without it, you are asking a business to accept a known loser. Now how is that good business?

aladante said...

See, for example, the fact that no one knows what they're paying. You say “Let's start with the fact that very few people seem to have any idea how much they're really paying for health insurance.” “Another area where no one seems to know what they're paying or getting is the way in which insurance companies, in an effort to save costs, have successfully created provider networks” “Making the whole situation even more messy is that out-of-network patients and those without any insurance at all often end up getting charged an even higher rate for their procedures than they normally would have because doctors need to make up the lower costs they've been forced into by insurance companies.”
So your whole concept of no one knows what they are paying that you write about in your blog, is about how much insurance costs, and about how the big bad insurance companies are setting the rules of what is paid and screwing doctors out of their pay. How do you consider that a correct and true statement when you, yourself, followed it with your case where the Hospital didn’t want to give up their secret pricing system?
See, for example, a profit margin of 35% for insurance companies. I fail to see this anywhere in your blog… That is their margin; if you feel that is unfair then perhaps you would like to tell me your margin as an attorney.
People work for money.

“I didn't create a premise (blame insurance companies) and find arguments to support it. I worked from the problems that exist.”

So as you have stated in your original piece, you were working with the problems, but from the wrong end. You say health care costs are high because of health insurance, yet this is impossible because insurance costs are directly reflective of health care costs. If health care costs are low, insurance is low; if on the other hand health care costs are high then health insurance costs are high. Insurance costs are not arbitrary, they have to meet the standards set by state Insurance Commissioners.

“Yes, one of those problems is the cost of health care. But a big chunk of that problem is caused by the insurance system we have (cost shifting, lack of preventative care coverage, network arrangements, etc.). Compare health care costs in other countries where the payment system is different.”
You stated in you case study yourself, it was the Hospital who didn’t want to give up their secret. You can ask me how much it will cost any person in the state of Minnesota for insurance and I can give you a figure in writing, along with that figure I can give you a 1-2-or 3 year guarantee on that price. I will also be required by law to explain to you how we come up with that number, how much I personally will make, and how much the company who is insuring you anticipates in making on you. I have all the numbers on other countries and cited some for you. Again, in those countries the health care provider is not allowed to cost shift, they do give preventative care, and the whole country is their network, but that has nothing to do with the insurance company. If you want to know a good reference book for these figures it is “Your Health Matters” by Gregory Dattilo and David Racer.

aladante said...

You see the HMO and PPOs with the networks were conceptualized by MD’s and Hospitals, not Insurance Companies. The Ross-Loos Medical Group, established in 1929, is considered to be the first HMO in the United States; it was headquartered in Los Angeles and initially provided services for Los Angeles Department of Water and Power (DWP) and Los Angeles County employees. In 1982 through the merger of the Insurance Company of North America (INA) founded in 1792 and Connecticut General (CG) founded in 1865 came together to become CIGNA. Ross-Loos Medical Group, became now known as CIGNA HealthCare. Cigna is not an Insurance Company, nor is Medica or U-Care, they are Health Maintenance Organizations and Preferred Provider Organizations. HMOs and PPO’s and POS are regulated at both the state and federal levels. They are licensed by the states, under a license that is known as a certificate of authority (COA) rather than under an insurance license. So as I said all of your concepts about insurance companies networking are in-valid. Remember, most of your HMO’s, PPO’s are owned and managed by the Medical Professionals.
Better yet, the Health Maintenance Organization Act of 1973 allowed for the distribution of loans and grants to start or expand an HMO, removed state restrictions on HMOs as long as they were federally certified, and most importantly required companies with more than 25 employees to offer some form of either federally certified HMO coverage or traditional health insurance to their employees.

So you ask, “Or perhaps you'd care to enlighten us as to how the cost of health care has skyrocketed?”
Well its simple really. You have the majority of people insured or in an HMO/PPO if they are working in America as most people worked for companies that had more than 25 people. (See HMO ACT of 1973). Now when people go the MD or hospital, it only cost $10! WOW, what a wonderful thing. So they start going for every little ache and pain, or perhaps a Bee Sting! MD’s and hospitals are working harder and harder for less because they had too many HMO/PPO’s so the they decide that they will start charging insurance companies more for their services, (you dirty little secret analogy). The insurance company gladly pays because they know they can raise their premiums if they spend too much, and the American Public continues to blindly go to the MD’s because it only costs $10. Well all of the sudden it costs $20 and more money is being deducted from their paychecks. Many still continue to use/abuse the system but some people who cannot afford the co pays start to go less and less, but the 20% of the insured that spend 80% of the premiums collected continue to go. The MD’s and Hospitals continue to charge more because no one is asking them why they are charging so much. This continued until we have gotten to where we are today. Everyone wondering why their Insurance premiums are so expensive yet they don’t cover anything. Well, I say ask the MD’s why they charge so much because Insurance can only be as expensive as 35% more than they are paying out.

“And perhaps you'd suggest how, if the cost of health care is so high, insurance companies are still pushing that 35% profit you cite to?”
That is why the health care crisis came to light in a nutshell, people have finally noticed how much insurance costs and how much they still have to pay out of pocket. I do not disagree that insurance costs allot of money, I just disagree who caused it to. If you have read the health care bill you will see that "The Bill" has changed that to 20% and 15% respectively (Sec. 1001, as modified by Sec. 10101) so I can foresee my commissions being cut for the second time in the last 4 years. Oh well, My goal is to help people through this mess, anything I make is a bonus.
So there you have it, you asked…I am an insurance guy who has read every turn of this bill since inception. I am also Dan Matthes (Richards Dad.)

Matthew B. Novak said...

Dan -

So just as a base, let me clarify: you're putting the blame not on insurance companies but on HMO's and PPO's? Your disagreement is less with the mechanisms I outlined and more with the label I attached to the causes (specifically that the label was "insurance" and not "HMO and PPO's"?).

I mean, you're right, that technically HMO's and PPO's are different from insurance, in a sort of technical sense. And, within the industry, I'd expect the differences are even more than technical. But to the lay person there's not much of a difference.

I remember a week in class where we discussed the evolution from insurance to HMO to PPO. But I can't say that was a particular focus in my health law course beyond the access problems those new forms created (i.e., choice of doctor). Again, to most of us, HMO's and PPO's are just forms of insurance.

Matthew B. Novak said...

Dan -

For some reason I didn't get all your posts in order initially... they appear to be corrected now. My previous response went only to your last comment.

Let me say just one more thing though, in response to the rest of what you write:

Your issue seems to be, generally, that health care costs are high and therefore insurance costs must be high.

I don't disagree with this premise. What I questioned, however, is how health care costs got so high. How did they rise at a rate far exceeding inflation? That's what my post tries to explore. I do think a chunk of that problem is caused by the health insurance industry. For example, lifetime maximums and pre-existing condition exclusions force hospitals to care for people without compensation. That care then results in higher prices in other areas. The whole cost-shifting scenario. Yes, I understand that for any particular insurance company covering someone with a pre-existing condition is a bad business decision. That's clear. (As and aside, that's exactly why this bill has a mandate - so people can't game the system and thereby screw over the insurance companies.)

But just because it would be bad business for an insurance company doesn't mean the practice isn't a contributing factor to rising health care costs (and therefore to rising insurance costs). I'll happily give you that rising insurance costs are a product of rising health care costs. But I'd ask you to give me that health insurance practices are a contributing factor to rising health care costs.

aladante said...

Brilliant Matt,
I agree that Insurance practices are a HUGE Problem. First, I have seen the insurance company pay an MD for surgery on 3 eyes. They have a knack for doing exactly the wrong thing most of the time. But also as an insurance guy, one of the most pleasurable things for me to do is get claims paid. Realistically they have to be paid and generally they always are, but the dotted I's and crossed T's are a big problem. Mutual Insurance Company (MSI)started a new Standard Operating Procedure in the mid, 1980's. They started denying claims and asking for more information. You know what they and the rest of the industry found out? That 30% of the American Public will never re-submit that bill. It became SOP for most companies now.
I believe that HMO's and PPO's are the crux of the problem for MD's And Hospitals as well a for Insurance Companies. They drive down payments to the MD's and hospitals through their negotiations, thereby making these providers charge more to the people who have insurance that will pay, to which the insurance company does gladly pay, then raises your rates. A vicious cycle. The best part of the Health Care reform bill to me states it "Requires each U.S. hospital to establish and make public a list of its standard charges for items and services." That is a huge step in the right direction.
I believe if we make the MD's and Hospitals compete for our business just like Target and Kohls, and if the consumer starts taking responsibility for some of his/her health care costs, and depends on Insurance for only that which they cannot afford, and if HMO's, PPO's , and Regular insurance had to all pay the set amount as requested by this bill. The crisis will be subdued, until someone else learns how to work the system...

Nate said...


Do not presume to tell me what I should do with my life. As it happens, I have no interest in specializing, I happen to feel that primary care is important. As shocking as this may be to you, not all Doctors are in it for the money, as nice as it would be to have a little compensation for the work we put in But I wouldn't expect you to understand, frankly, you are rendered incapable of doing so by not living it, so I guess I cannot fault you for your rampant ignorance.

AGJ said...

cont'd from a Facebook post:
in regards to the current law on Health Care Reform...

I know that Tort Reform is a small token, but it is the overall protection of good Doctors. Yes there are some crummy ones - but they are vastly outweighed.

Again, I am more concerned about how the Doctors, Nurses, and Hospitals will be affected. Tort Reform helps to aid in that. The more I learn, the more Hospitals are not properly covered in this bill. But I won't speak to this bill - I think that it is a travesty. Again, it should have been broken down into smaller chunks for various reasons.

Reason 1: The Reps (Congress & Senate) could have had more latitude on deciding what was best for their states/constituents....

Reason 2: We would have a more clear understanding of the workings of the bill(s) - which would mean a lot less smoke-n-mirror effect from each party.

Reason 3: A lot less pork would have been allowed into the bill(s)

Reason 4: The comprehensive approach created an atmosphere of an "all or nothing" bill. We all lost out on this.

Reason 5: The House was created so that all voices were heard - in the manner that this bill was hurried through - I don't think that this was the case.

Reason 6: One of the great tools of this Rep Dem was that a bill could be created in the House - with the emotion and urgency attached. The Senate (from what I understand) was more of a cooling house - where calmer heads prevailed. This bill seemed to travel opposite of this due to reconciliation. Yes I understand the nuances - but the original formula seemed to lend a better hand at such an issue.

Reason 7: With more bills, this would have meant that more time could be spent hammering out the finer details with the populace having a true voice. The way that it was hammered through before the Easter/Passover break was an insult to the American people.

Reason 8: There would be lawsuits regardless. However, I think that the suits would address varying areas in regards to each state. 13 Attorneys General that are filing suit is a significant number in this day and age.

If you truly think that this is the manner that a bill of this magnitude should have been passed, then I have lost all respect for you. This is one of the most incredible bills passed in all US history - touching each and every life. For this to pass in the manner that it did was repulsive - no matter what side you are on. That is why so many people are outraged.

I will grant you that nearly 45% of the populace finds the bill favorable, but nearly 50% find it overstepping the bounds of the federal government.

And this a a great reason why the CBS poll has given Obama a resounding "F" (79%) on his Healthcare Policy. CBS is not what you would consider as a right-wing thinktank.

To continue the poll, nearly 80% give him an 'F' on bipartisanship; Social issues: nearly 60% 'F'; Energy & Environment: 56%, Foreign Policy: 58% 'F'; Economy: 69% 'F'.

Overall on his Presidency? 64% give him an 'F'; 23% give him a 'D'.

The House of Reps is even lower...

aladante said...

I am sorry to have miss-read the meaning of your rant that said "Being a physician is no longer the lucrative career it once was, indeed, I will not even approach paying off my medical school loans till I am in my mid to late 40s, and even that estimate is based on living a modest lifestyle. During my residency I will earn perhaps 45 thousand a year for the average of 70 hours per week put in at the hospital, during which time the accruing interest on my loans will outpace the payments I will be making on them. Indeed, it is not till after residency that I will even begin to touch the principle, and if I were to have the cost of a family added at any point it would only prolong my debt."

It appeared that you were complaining about how little you will make. You also were going to tell me who was making all the money in health care but obviously, to continue with one thought is mighty difficult when you have to worry so much about your debt. Man I don't even know you and I probably never will, but you obviously need to lean on personal attacks in an argument for some reason. That has usually been an attribute to one who believes in FOX as a news source. If this is so, it is not a judgment, just an observation. Bottom line, my comment to you was based on the fears of poverty you so voraciously shared. The obvious solution to me was specialize...

Nate said...


Wow, your insight into my nature is truly dizzying, reading your words was akin to having my skin stripped slowly from my body revealing my true self and having my soul exposed to the world...

Oh wait, thats not at all the case, you merely proved that you do not in fact know the first thing about me, other than what you have read into a short paragraph which clearly struck a nerve, considering the venomous reply it generated.

Actually, I couldnt help but laugh when you suggested I might be a follower of "FOX News", because that is the one single thing furthest from the truth that anyone has ever said about me. The mere thought of Fox News and the sorts of folk who buy into the steaming pile of tripe they generate is enough to make me viscerally ill.

The one thing you got right is that I did in fact complain about reimbursement for Doctors, which is a legitimate concern, it does not mean that I am "greedy" to desire that physician be fairly compensated for their work. I guess you had trouble connecting the dots on this one all by yourself, that must be a really hard task for you, on par with coloring inside the lines, but you will get there, keep trying. Allow me to spell it out in a simpler way so that you can actually understand it.

Primary care physicians are the first line of defense for healthcare, if they do their jobs well, then specialists will not be needed as often. There is a shortage of Primary care physicians in this country, because it is not compensated adequately, the upshot of this is that there are both more specialists, and a greater demand for specialists, since the paucity of PCP's leads to a breakdown in healthcare and perpetuates poor control of chronic health conditions that deteriorate and go on to require acute care.

This was not always the case, the current state of affairs has arisen in response to the broken system.