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

Monday, March 22, 2010

2 Big Thoughts

There are two big thoughts bouncing through my head tonight. First, the health care issue. It's huge. And I want to give it its proper due. I do plan on putting up a post about it. Even though this blog is (obviously) coming towards its end. So look for that soon. But for tonight, let me just say: I understand the apprehension that people feel. But a lot of the challenges to the bill, a lot of the "can we afford it?" and other similar questions being thrown around by opponents... well, they're nonsense. And the opponents know it. If the numbers were really on the health care opponents' side you can believe they'd be focusing on them, instead of just asking rhetorical questions meant to raise fear or complaining about the process or throwing fits about the size of the bill. No, those are all tactics meant to distract from the substance.

So for all those who have their doubts: asking the questions is a good thing. But asking a question is just the beginning of the inquiry; you also have to look for the answer. And in this case the answers are most definitely there.
The second big thought, and this is the one I really want to talk about, is Joe Mauer.

8 years!

There are those "realists" out there who will caution about devoting so much payroll to one player. They would point out that injury concerns and longevity and basic considerations of chance and risk all mean that someday the Twins and their fans might regret this deal.

But those "realists" are ignoring reality. Baseball is about more than wins and losses. It's about more than playing for the postseason. It had better be, after all, because for every team that wins there's another that loses. Of course I want to see my team make the playoffs every year, but there are things in baseball that are more important. There are the stories. There are the heroes. There is the history.

Joe Mauer is all of that.

Try this for a story: Local kid is the top football and baseball recruit in the country, decides to play for his hometown team, and stays with them his entire career. If that doesn't cut against the "baseball is a business" line then nothing ever will.

You want a hero? Minnesotans are a fiercely loyal bunch. Quiet, unassuming, gracious, hardworking and very often very very good at what they do. Every single one of those words describes Mauer. He's an ideal Minnesotan. Even as the best player in the league he's quiet and unassuming. His work ethic is praised throughout baseball. He was recently touted as the "Fan-Friendliest" athlete in all of sports. Now he's proved his loyalty to Minnesota (just as the rest of us Minnesotans figured he would). Oh, and he's very very good at what he does. A hero is someone who represents an ideal, who lives up to a higher standard. And Mauer is Minnesota's hero.

How about history? Mauer is only 27 and it would already be more than fair to mention his name among the greatest catchers in history. He has 3 batting titles in the past 4 years. That's as many as all other catchers in the history of the game combined. Think about that. Even with a significant decline in his game he would still be a Hall Of Fame caliber catcher. To watch Joe Mauer is to watch one of the greatest baseball players of all time. What has happened over his career so far, and what will almost certainly continue to happen throughout the years, is history.

And, of course, there's the wins and losses. Even the strict realists must concede that Joe Mauer adds an awful lot of wins to a team.

So is this a good deal? The "realists" might have their doubts. But the reality shows us something different. Signing Mauer through 2018 gives the Twins an untouchable story, an ideal hero, and a front seat to history.

So we'll march day and night
By the big cooling tower
They have more money
But we have Joe Mauer!