The Facts About Health Care Reform

OVERVIEW

As the CEO of a manufacturing business I spent over 25 years developing   extensive expertise regarding the issues of health care.    There is a good reason that most politicians, commentators, and journalists know so little about the problems and solutions.   It is a tremendously complex problem that touches on everything from the health care system itself, to Federal, State, municipal and school budgets, to even our education system which fails to adequately educate students to understand our own economic system.

It is frustrating to be dependent on politicians to improve the health care system, who appear to have such inadequate problem solving skills.   Frequently it appears they are coming up with solutions when they don’t even understand the problem or the cause of the problem.  Perhaps  the following list of questions below can help people understand the importance of reform, the problems that need to be solved, and possible solutions.

1. Why is reforming health care a critical issue today?
2. How did we arrive at this point?
3. What are the key problems that need to be solved?
4. What are the root causes of those problems?
5. What are the key elements of the health care system?
6. What should the role of the government be in solving the problems?  How should we balance government v. market solutions?
7. What are the best solutions to remedy the root causes?
8. What are some key problems with the proposed legislation?
9. What is the impact of our education system?
10. What are examples of misinformation or misunderstandings?

WHY IS REFORMING HEALTH CARE A CRITICAL ISSUE TODAY?

The Federal Government, States, schools, and many public entities are having the same experiences as old industries like steel, airlines, and autos.  Specifically, the cost of health benefits has become so significant that it drains resources from everything else.   One reason these industries suffered is that as they spent more and more on health care, they had less resources for growth and eventually created losses that resulted in bankruptcies.

Health costs are taking a larger and larger part of government expenditures which is not sustainable.   Something has to change.  No economy can function with health care taking such a large and growing part of the pie

Not only do health costs impact government budgets, but impact the budgets of employers and thus employees.   It also impacts those who have to purchase insurance, and is so expensive that many cannot afford to purchase coverage.

Additionally there are some problems related to coverage for people with pre-existing conditions, system abuses, and cancellation of coverage, where government regulations could have a beneficial impact.

In summary, without some changes, health costs as a budgetary item are unsustainable.  The high costs prevent many people from being able to afford adequate coverage,  and people who have had responsible behavior find they cannot get or keep coverage to which they should be entitled.

HOW DID WE ARRIVE AT THIS POINT?

 Both government and non-government employees have been promised benefits with costs that could not have been imagined at the time the commitments were made.   Additionally in many organizations, the people making the promises aren’t spending their own money, and in many cases  knew they would not be around when the promises became due.

WHAT ARE THE KEY PROBLEMS THAT NEED TO BE SOLVED?

Almost all problems lead to the issue of finding ways to reduce costs.  Reducing cost helps solve budget problems, makes insurance more affordable, and thus provides access to more people.

As mentioned earlier, other key problems relate to pre-existing conditions, cancellation of coverage, and prevention of system abuse.

WHAT ARE THE ROOT CAUSES OF THOSE PROBLEMS?

The root cause of all these problems comes down to “cost”.  So it’s important to then analyze the root causes of high costs.  In this case I’m referring to the cost of treatments, not cost of insurance.   To the extent that services are less expensive, then insurance is less expensive.    Inexperienced people mix up cost with price.   Lower costs will lower prices.  Legislation to force prices down will only cause more providers to refuse to accept patients covered by government plans.

Root Cause #1:  New Products and Technologies

My own observation is that costs have increased dramatically not because a doctor’s visit costs more, or an immunization is more expensive, or that the cost of an antibiotic is higher.   Health care is expensive because of all the new products, drugs, and technologies that did not exist years ago.

When you combine those developments with an aging population using expensive new technologies including end-of-life procedures you get a picture of why health costs continue to increase.

Root Cause #2:    Third Party Pay System

This is actually the root cause of the first root cause.  Why do we have such expensive new products and technologies?  The reason is the third-party pay system.  Typically, when companies want to develop new products they have to estimate the amount of development cost, the market size, the penetration of the market, the price they can sell at, etc.   In the case of many medical developments I imagine that you can spend as much as you want to develop a product and price it at whatever it takes to be profitable, because the people paying for it typically have not been the people using it.  Insurance companies, employers, and the government pay for things that are used by others.

As a result, we have the greatest medical technologies in the world.   The problem is that we can no longer afford to pay for them within our current system.

Root cause #3:  Cost Shifting

When Congress talks about taxing insurance companies or medical devices to pay for reform, they are really talking about taxing individuals who end up paying higher premiums to cover the higher taxes.   Similarly, the government, by virtue of lowering Medicare reimbursments, underpaying providers, and mandating treatment for the uninsured or even illegal immigrants, cause hospitals and providers to pass those costs onto employers and other customers.  These are secret or hidden taxes.  I have seen estimates that currently suggest that $1000 of everyone’s health costs is due to this hidden subsidy.   Because many providers can’t pass these costs on they either stop practicing or more frequently are refusing to accept Medicare patients.

Cost shifting is bad because when you obscure the true cost of things you can’t figure out how to make improvements.  The lack of transparency in pricing health costs allows this practice to continue.

Root cause #4:   Waste

There is significant waste in the current system.  Some examples include defensive practices, duplication of tests, inefficient office systems, or terrible incentives.  There is waste in administration.

Root cause #5:   Tax Deductibility

Everyone who is insured should be able to get the same tax benefit.   Why should the cost of coverage be deductible to an employer but not to an individual?

Root cause #6:  Government Regulations

Mandating benefits people would not buy if given the opportunity result in increased costs.  Inadequate regulation allows insurance companies to deny coverage, cancel insurance, or otherwise abuse the system.   Similarly, regulations and policy encourage reliance on employer-provided coverage instead of portability.

Root cause #7:  Pricing in the U.S. v. Foreign Pricing

Many drugs and medical technologies are developed in the U.S. by U.S. companies with tax benefits from the government.   We then allow these companies to sell their products overseas at less cost than we pay – to accommodate price controls in other places.   Why would we want to give tax benefits to our U.S. companies, and then provide the products developed to our competitors overseas at less cost than we pay?

WHAT ARE THE KEY ELEMENTS OF THE HEALTH CARE SYSTEM?

Below are 4 categories of the health care system with a few examples.  These are the areas where intelligent changes can result in improvements.

Delivery System:

• The under use, over use, or misuse of appropriate services.
• Administrative waste.
• Process waste

Benefit and program design:

• Government mandated benefits.
• End-of-life costs.
• Incentives for providers and users.

Public policy:

•  Uninsured.
• Cost shifting.
• New products and R&D.
• Insurance industry regulations.

Behavior:

• Importance of educating users.
• Following medication directions.
• Good health and diet practices.
• When to depend on specialists.

WHAT SHOULD THE ROLE OF THE GOVERNMENT BE IN SOLVING THE PROBLEMS?  HOW SHOULD WE BALANCE GOVERNMENT v. MARKET SOLUTIONS?

Before any discussions occur about how to best solve the problems that have been identified, a philosophical conclusion must be reached about the proper balance of roles between the government and private markets.  Otherwise, there is no point in discussing legislative details.

Think back to when the government was heavily regulating the trucking industry, the airline industry, and the telephone industries.  As a result of deregulation, competition increased and prices came down.  Compare the difference between the time it took to develop white phones, colored phones, and push button phones to today’s free market in computers, software, cell phones, etc.   I’m certain that if you compare medical procedures that are less impacted by government regulation and insurance like Lasik and plastic surgeries, to those where significant government interference exists, you will find that there is greater innovation and cost reductions when there is less government regulation.

Additionally, have you ever noticed a difference between public housing and private?   Who do you want to provide health care?  In other words, capitalism and private for-profit markets really do work to bring down costs.

Almost nothing the government administrates is as efficient as is done in the private sector. They are not capable of controlling costs, and it is absurd to think they can do a better job.  I would love to see a comparison showing what school boards, states, and the federal government currently spend per person for health care as opposed to employers.  My guess is that these efficient bureaucrats are spending way more than the private sector.  One reason is that it is much easier for the private sector to react and make changes to benefits, systems, processes, etc.  For example, an employer’s ability to make changes in co-pays and deductibles to create more incentive for people to be cost conscious is easier than for the government.

When legislation or regulations were established to allow IRA’s, 401k’s, or government backed student loans, it’s the private sector that set up the administration to make them easy to establish and use.  Competition forced companies to constantly make improvements.   Recently I helped someone get a student loan.  It was simple to do on line, response was quick, and everything was handled in a minimal amount of time.  (Ironically, the government is trying to take this over from the private sector)  With the right incentives, health providers will continue to find ways to reduce costs.

Would the post office have tried to improve their package delivery efficiency if they didn’t have to compete with FedEx, or UPS?   The private sector will always be more efficient.   Compare the public school system’s ability to fire incompetent teachers with private schools.

For another comparison think about the government built cars in the Soviet Union and other communist controlled countries compared to those built in the West.  There is a great museum in Bavaria that displays the history of German cars.  There are hundreds of cars from West Germany that show the progression of the industry.  I think there was one car from East Germany.

Government tendency toward a one-size-fits-all, is behind the problems of both immigration and Medicare.  Health care does not lend itself to central planning.  We should rely more on the private markets, not less.   I’m even thinking that a careful examination of all the funds spent and coverage achieved through current government plans would be better spent by just dividing up those funds and putting it all in HSA accounts.

WHAT ARE THE BEST SOLUTIONS TO REMEDY THE ROOT CAUSES?

Cost of new products and technologies:

Any standard benefit plans should only cover known and existing products and technologies.  Anything new must be evaluated.  If included in future benefits, agreement on who pays cost and how must be predetermined.   Perhaps those who want automatic access to these new technologies would have the option of a higher premium cost.

Third-Party pay system:

Regulations to provide incentives to move away from employer-provided care.  Encourage more use of HSA’s and more incentives whereby users know, understand, and have a stake in what things cost.  A voucher system (based on age and location) that puts funds in an HSA so everyone can purchase a product that best suits them and also gives them the freedom to add to the HSA if they prefer a plan with more benefits.  This would bring free market forces to health care costs and provide a known fixed cost to the government.

Cost shifting:

I can’t imagine any reason that one person should pay more or less than another person for the same service from the same provider.   Wouldn’t it save a lot of time and prevent all the games, if providers had to publish their prices and charge everyone the same thing?   I don’t care if someone wants to charge more if they think they provide better quality.   But everyone, including the government should pay the same thing to avoid all the hidden taxes through cost shifting.

Ending cost-shifting and paying prices based on real costs, will allow market forces to reduce the cost of medicare services.  Prices for medical services and products should be transparent and posted like almost all other things purchased by consumers.

Waste:

Continue pressure on prices and provide incentives for providers to find ways to reduce costs.  It has been determined that tort reform will eliminate a lot of unnecessary procedures.

Tax deductibility:

Everyone should be able to deduct the cost of the health expenses and insurance up to a certain reasonable limit.  That deduction should not be too high that it places average taxpayers in the position of subsidizing others with an excessive benefit.

Government regulations:

If the government wants to create some standard benefit plans as models that would be a good idea.  But they should not be mandatory.  Standard plans would be easier to administer.  But to the extent insurance companies prefer to offer alternatives, they should be required to hi-lite the differences between their plans and the standard plans.   Plans should be available at lower cost that encourage hospice care instead of expensive end-of-life treatments.

There are serious constitutional issues and enforcement problems to require everyone to purchase insurance.   I believe the issues of pre-existing conditions can be solved with new regulations.   If we lower costs, eliminate cost-shifting, encourage HSA’s and portability, more people will be able to maintain coverage.   Once people know they can’t lose their coverage and can’t be denied coverage for a pre-existing condition for which they are covered (if they want to change their insurance) the issue of pre-existing denials goes away.   People will have incentives to keep insurance instead of being forced to purchase it.   There really isn’t an alternative since you can’t allow someone to buy insurance for a risk that already has happened.  I.e. You can’t buy fire insurance for your house after it has burned down.

Regulations should be developed to encourage HSA’s.  In fact, combining all these accounts like HRA’s, HSA’s, IRA’s, 529′s and flex spending into one account for retirement, medical, and education, should be explored.

Regulations which interfere with the doctor patient relationship should be reduced because they prevent the free market from improving service and reducing costs  such as would normally occur in a customer-supplier relationship.

U.S. v. foreign pricing:

Similar to the solution to cost-shifting,  everyone should have to pay the same price for the same drugs or products provided by the same company.

WHAT ARE SOME KEY PROBLEMS WITH THE PROPOSED LEGISLATION?

• The legislation doesn’t reduce costs and the deficit.  It increases it despite major tax increases.   Since it isn’t focused on reducing costs, I don’t see how it helps all the states, school boards, municipalities, and others with their budget issues.   Likewise, if costs aren’t reduced, than insurance costs aren’t going to be lower, and less people can afford insurance, not more.
• The legislation doesn’t do anything to solve the problems of cost-shifting.  In fact it makes them worse.
• There are significant unknowns and assumptions in determining the costs. Historically the CBO is not accurate with predictions on such large programs.  A process that focuses on improving the current system and reducing costs is much easier to predict.
• Some legislators want the reform proposal to include a low-cost government option that is self-sufficient and relies on premiums it collects.  Are there any examples of a situation where the government can compete with private enterprise at a lower cost without subsidies?    I know the post office loses billions every year.  I believe that if there is a public option it will shortly be the only option because no one can compete with the government since they don’t concern themselves with profits and tend to under charge. I know the government provides such low-cost insurance to coastal residents, that private insurance can’t compete.  And even when they want to compete, the government sometimes dictates how much they can charge.   I believe this program runs at a substantial deficit. Thus taxpayers end up subsidizing the insurance of those who live in flood prone areas.   Is that what we want with health care? Is there any assurance in the legislation that a public plan will never be subsidized?
• Why would we want to expand Medicare, which is insolvement, wasteful, and subject to corruption?  Also, if expanding Medicare means expanding underpayments, there will be more cost shifting to employers and private purchasers of health insurance, and more doctors refusing to accept Medicare patients.
• When there are ways to reduce costs so that more people can afford insurance without tax increases, what is the point of increasing taxes?
• There is language all through the Senate bill that raises many questions.  One of my favorites has to do with the power of the Secretary of HHS to negotiate rates with providers.  I always wondered how this works.   Is she going to sit down with my doctor or someone he chooses to represent him to come up with an agreement?  To me, the power of the government in any rate negotiation is one of the biggest problems with how Medicare gets paid and will spread to other parts of the system if this legislation is approved.

WHAT IS THE IMPACT OF OUR EDUCATION SYSTEM?

It seems obvious that if more of us were taught the realities and benefits of our own market system in school, we wouldn’t be so polarized about this issue.   My observation is that most people don’t understand our own system of economics and the great success it has brought.

To me, it appears that the 2 areas of the economy where expense is most uncontrollable,  provides the least customer service, and where consumers seem to have the least influence on the quality of the product, are the 2 areas where the government is most involved – health and education.  I guess there is some irony there.   If the government wasn’t so involved with education, perhaps people would have a better education and thus realize the importance and benefits that private markets bring and can help in the areas of health care.

WHAT ARE EXAMPLES OF MISINFORMATION AND MISUNDERSTANDINGS?

Insurance companies make too much money.

Compared to what?   How much should they make?  Do we really care what executives make as long as they are providing a service and have the market incentives to reduce costs.   Do we care how much the CEO of Blackberry makes?  No, we only care that more people can afford one today than ever before.

Same with pharmaceutical companies:  what should they earn considering the investment and risks they take and how much do they earn.   Does it matter as long as they are providing life-saving products and have incentives to compete to continue to lower costs?

Is it true that other industrial countries have better health care at lower costs?

We read many comparisons of our costs and outcomes to those in other countries.  You cannot compare that data without asking many questions.   Is it possible that we have more unhealthy and obese people who cost more?  Is it possible that our benefits are different?  Maybe we are paying more for end-of-life care and they are providing more hospice care.   Ignore all the comparisons  of other systems that you read about, unless you are certain that apples and apples are being compared.

Do people in countries with government run health care prefer their system more than U.S. citizens prefer theirs?

Despite complaints about HMO’s all surveys always showed that most people loved their HMO’s.  We have a similar issue with people surveyed in other countries.  Of course most peole like their insurance because most people don’t have major illnesses where problems might appear.  I’m sure if the only people surveyed, whether in HMO’s or in other countries, were people who had major illnesses or interactions with their providers, the results would be different.  An extreme example would be to survey only the people who come to the U.S. from Canada.

When politicians say that a goal of the reform is to provide health insurance to uninsured people, what do they mean by insurance?

Is everyone, regardless of how much they earn or pay in taxes, entitled to unlimited health benefits?  What is the philosophical goal of the legislation with regard to benefits?  Maybe some people prefer catastrophic coverage only and others prefer coverage for more minor issues.  Maybe some want to pay for both.  Is everyone entitled to expensive end-of-life coverage?