Sunday, October 25, 2009

Death Spiral or Circular Logic?

In todays IHT, there was this article about dramatically rising health insurance premiums.

Insurance companies are under pressure from investors to maintain healthy profits, while claiming they are fighting to contain costs. Yet premiums rise faster and faster, so one might very well surmise that they are ineffective at containing costs, even though they are demanding that they be the only provider of insurance, not the government.

Now, one reason offered for rapidly rising costs is the number of uninsured receiving hospital care, shifting that cost burden to hospital fees for the insured, and raising insurance rates. What is not addressed by the insurance industry is why people are uninsured, and I would offer that a major reason is that they cannot afford it. If the current approach to health care continues, is it not reasonable to conclude that rising insurance costs will result in more people being priced out of the market, further increasing hospital fees as the cost of the uninsureds' urgent/emergency care is shifted to the insured, who will suffer higher premiums, etc, etc, etc?

The industry also says that the low payment schedules of government health plans also results in costs being shifted to private insurers, again raising their premiums.

Throughout all this, the insurers are turning profits, and the article would lead one to believe that investor pressure has more of their attention that Congress and the general well being of the populace.

So, if one were to believe the insurance industry, any approach other than theirs contributes to the problem. But their approach, IHMO, is at the heart of the problem, as it has resulted in 20% of the under age 65 population having no health insurance, and that number is growing daily. The unemployed and under-employed cannot afford health insurance, and what has the industry proposed for these people, other than a sort of variation on "Trickle Down Economics"?

Death Spiral or Circular Logic? Methinks both.


PS, and since I don't feel like starting another thread for this one tidbit, here's a side comment in a post about the ability of the Government to provide more bail out capital by Blogging Stocks writer Michael Schulman:

However, Uncle Sam is now in so much debt that this is no longer a serious option. And it looks like we are going to spend another $900 billion-plus on health care reform over 10 years (a lot of money, sure, but about a third less than what Wall Street will spend on bonuses).

Gotta love our priorities.


  1. > Death Spiral or Circular Logic? Methinks both.

    Neither, really. This is nothing more than an attempt by the insurance companies to maintain the status quo. Anything else is just noise.

    Insurance company management (and I spoke with quite a range of managers including a Blue Cross/Blue Shield Vice President when I was in the industry) universally view any attempt by the government to make any changes to the current system with a mixture of fear and contempt.

    This is because they expect the government to wreck the current (incredibly expensive, disfunctional, and delicately balanced) system and replace it with something considerably less efficient that will eventually be more expensive.

    I have to admit that I think they have a point up to a point. I cannot think of any part of the federal government that serves then entire population that responds to changes with anything like speed or efficiency.

    The problem with the insurance industry viewpoint is that they have gotten so inflexible and expensive that, at least in the short run, the government alternative would be predictably faster, cheaper, and more consumer-friendly. The long-run, of course, is a different matter.

    The insurance industry has become so deeply enmeshed in the problem that they have completely lost context on this issue and there is no compelling reason we should listen to them about the solution.

  2. Funny that you should post this article today, because I just read this article:;_ylt=AtskdOPQEFuMFJGdO4Qrg.Cs0NUE;_ylu=X3oDMTNnNG40dHRvBGFzc2V0A2FwLzIwMDkxMDI1L3VzX2ZhY3RfY2hlY2tfaGVhbHRoX2luc3VyYW5jZQRjcG9zAzQEcG9zAzEEcHQDaG9tZV9jb2tlBHNlYwN5bl9oZWFkbGluZV9saXN0BHNsawNmYWN0Y2hlY2toZWE-

    According to this "Fact Check", the medical insurance industry has barely maintained an average of 6% profit margin over the past several years. That is hardly what I would consider "obscene or huge" profits. That is anemic compared most businesses. In fact, the health insurance industry rated 35th in profitability.

    I am just not buying the insurance industry "obscene profits" story that Nancy, Obama and Michael Moore are preaching about.

    I am not saying, "oh those poor insurance companies, we should cut them a break." I am saying that by talking about the "obscene profits" of the medical insurance company we are just pandering to the public, and even worse we are not correctly diagnosing the problem.

    Let's look at why health care is so expensive, and not attack the companies who are trying to pay for it.

    What I find funny about many public servants (myself included) is that most of them have never earned a dime in business and most do not understand the difference between revenue and profits, nor do they understand how profits are used.

    I am sure someone will suggest attacking the Drug Companies, so I will preempt it with this argument/question. Sure, they make a lot of money, but someone please correct me if I am wrong, that the US Patent for making a drug is not enforced outside the US. Doesn't this mean that a US company can spend billions creating a new drug, and a foreign company can copy the drug and sell it themselves outside the US, such as in India or China, taking away profits to pay for that drug, thus US patients are paying a subsidy for the world's drugs. I don't know if this is 100% accurate, but if it is, perhaps instead of talking about "obscene profits", we should think about ways to allow companies to be able to use their revenue more effectively, and then they can bring down prices.

  3. I'll take a swing at bg's question since I've actually seen the inside of an insurance company's books (although not in detail or for any length of time).

    First thing you need to understand is that the company's reported profits are not, strictly speaking, accurate according to GAAP (Generally Accepted Accounting Prinicples). Like the banking industry, the insurance companies are allowed by the federal government to interpret their profits before the public sees them. I'd say, based on a very incomplete viewing of one company's books that the profit margin is closer to 14% than 6%.

    But, to be honest, the insurance companies aren't really the heart of the US healthcare problem. The heart of the problem is that the US healthcare system was never designed to be a system in the first place. It is composed of a set of companies (insurance, pharmaceutical, medical supplies, hospitals, clinics, etc.) that are just trying to make money.

    Unfortunately, none of the companies are rewarded for lowering the client's medical costs. I'll give you an example; insurance company profits are fairly heavily regulated in certain aspects (and not at all in other aspects, but that's another discussion) and the base (reported profit) can't exceed (I think) 7% of the premiums paid in.

    So let's say you're an insurance executive comparing two drugs with equal effectiveness. One costs $1.00 per dose (7 cents profit) the other costs $100.00 per dose ($7.00 profit), which one will you choose for your clients?

    I can hear you say, but what about competition? There's a lot of it in the health insurance industry, but not in the way you'd think. I'm not sure why, but suspect government regulation. Prices are established by the producer of the healthcare products and the insurance industry is only allowed to negotiate a percentage markdown which is typically very similar for all insurance companies.

    Sheera is probably more knowledgable about the drug industry than I am but I'd hazard a guess that reverse engineering drugs (which are very subtle blends of chemicals) is probably a very risky business and I wouldn't be particularly interested in taking a pill that had been reverse engineered because a minor mistake could make me rather quickly dead.

    One thing I know in detail is that drug company profits are highly variable because of the nature of the patent laws and scientific discoveries. A few years ago the "obscene" description of drug companies was accurate because they had a lot of drugs that the public used heavily that were still under patent.

    The situation today is much less "obscene" because a lot of the most valuable drugs have gone off patent and haven't been replaced by equally valuable discoveries and because several of the drugs proved to have potentially lethal side-effects and Merck, for example, is being sued by literally tens of thousands of angry plaintiffs who may, or may not, have a valid case. VERY time consuming and insanely expensive in our legal system (another area that could use some serious reform).

    Another incredibly expensive area of concern for medical companies are patent enfringement cases. Success can mean literally insane quantities of money for the winner and the companies continually sue each other on the off-chance that the case has merit.

    The high rate of commercial duds, legal wrangling, and the potential cost of mistakes are just a few factors in why our drugs cost so much and why reforming our healthcare system is going to require far more effort than anybody currently predicts.

  4. Pluto, thanks for taking the time to write a detailed response. Based on what you said, it is very possible and likely that the insurance companies are making greater than 6%, but even 14% isn't outrageous profit. When you listen to the politicians pander, you would think that the insurance companies are running a pyramid scheme. It still feels like a scapegoat.

    As you state, there are several causes of the high cost of health care, insurance companies just being one of them. Am I missing something, what is the government doing to solve or at least address the other problems. Is there a holistic solution, or are we just picking a fight with the smallest bully in the playground because we can?

  5. There are several other reasons I can think of for high medical costs:

    1. Fee-for-service, where the doctor and hospital receive more when they medicate more, whether or not the treatment is needed or effective.

    2. Lack of genuine knowledge of whether a specific treatment is effective. Much of this is because a) fee-for-service, and b) the market for research on outcomes isn't there. People get sick, doctors and hospitals provide treatment, insurance companies (or the government) pay and the patients either get better or die. There's a fair amount of study that suggests that the range of treatment is pretty wide, more dependent on physician experience and background rather than efficacy.

    3. Let's not let private insurance off the hook. Whether they're making 6% or 14%, their profit is "pure", that is, they have little in the way of market forces squeezing them. Costs go up, they pass the costs on to the public. They have no physical plant to maintain, no unions to deal with, no one but stockholders/investors to placate. Oh, and speaking as someone who works in the engineering business, 6% would be a hell of a good year for a typical private engineering form. 2-4% is more typical, and EVERY engineering firm I know of has lost money this year. Anyone happen to know if this is true for ANY insurance company?

    My position on this is unchanged. Private insurance and fee-for-service medicine is not in any way "necessary" for a civil society. The government need not do anything but provide a not-for-profit insurance cooperative. If it's a good idea it will work. If it's not, the private insurers will eat it alive. The market will work.

    I would only comment that the people who "expect the government to wreck the current...system and replace it with something considerably less efficient that will eventually be more expensive" aren't - as far as I can tell - the private insurers. They are the GOP's talking heads, which we should expect to say something exactly like that. The private insurers, rather, seem worried that the public will prefer a public plan to their own. And given the amount of pre-existing conditions denied coverage, recissions and generally parsimonious payouts, who can blame them.

  6. bg: A holistic solution would require remaking the U.S. medical industry from the ground up. While I would agree with this as a good idea, given that fee-for-service medicine has always been a bad idea, the political will isn't there.

    And given the size and influence of the medical and insurance industries, weeping for them as "the smallest bully" seems a little louche'. The reality is, that for all our bloviating here, nothing "bad" will happen to the insurance, pharmaceutical and medical industries. They own enough legislators - as do the Masters of the Universe on Wall Street - to know that they need only keep doing what they've been doing, keep their bought politicans bought, and the stupid public will blame the poor Negroes and illegal immigrants and liberals and Gertrude Stein, for fuck's sake, rather than the oligarchs who are bending them over without lube.

    Ohm yeah, and fuck Rupert Murdoch, too.

  7. Medical care in Damascus 700+ years ago was free to all under the rule of the Mamluke sultans. This is a piece of medical history I just recently gleaned from a history written by Sir John Bagot Glubb. He was aka Glubb-Pasha, commander of the TransJordan Arab Legion from 1939 to 1956, a translator of many Arab historical works, and a writer of many books and articles on the middle-east and the history of that region.

    And the medical care in Damascus back then was better I will wager than any available in Europe (with the possible exception of Muslim Spain).

  8. All children should be enrolled in Medicare. If it is good enough for old geezers like me, then it should be good enough for infants, toddlers, moppets, preteens, teens and young adults (up to the age of 21 or up to 25 if they are still thriving educationally in college).

    As for those in between the magic ages of 21 and 65:
    1] stay off ciggies, booze, fat and sugar; and
    2] stop signing up for non-essential elective surgery; or
    3] pray a lot; or
    4] help pay for the yacht of insurance execs by signing up for private health insurance; or
    5] bite the bullet and sign up with Uncle Sam's boys (and girls) in uniform.

    Uncle should also beef up funding for a medical education to those willing to sign up for 20 years as a general practitioner in the boondocks or in the inner cities - but no burbs and no specialization. If it is good enough for the DOD to fund the education of military doctors and nurses, then there is no reason that the Department of Health and Human Services (HHS) can't do it on the same or larger scale.

    Screw the health insurance companies, they are vampires. Tax them and big Pharma back into the stone age.

  9. FDChief's response is right on as usual but we'd need to reform more than just the healthcare system to reach the holoistic solution goal BG was requesting.

    We'd have to reform the legal system, people's attitudes towards it, some small aspects of the capitalist system (mostly these were under control until the late 1990's when they were deregulated), and most especially people's attitudes towards what they can and cannot expect out of the medical system.

    I firmly advocate that we get started on such journey but don't expect that we'd finish it in my lifetime.

    By the way BG, Wal-mart, the world's largest retailer usually makes about a 3% profit margins Southwest Airlines, generally agreed to be the strongest airline in the US makes 0.5% profit margins. There are companies that make bigger profit margins than the insurance industry but they are mostly financial companies with relatively few costs.

  10. The medical insurance industry has an antitrust exemption. This make me nervous and suspicious.

  11. 6% profit does not take into consideration the obscene dollar amounts in the millions and outright gifts that are supposedly the "honest" pay of the health insurance moguls. Those are considered a cost and therefore are not included in the 6% of BG or even the 14% that Pluto comments on.

  12. Overall, the insurance industry as a whole has done a less than stellar job of contolling health care costs, to include their overhead costs and the overhead costs they create for healthcare providers with a totally cumbersome claims system. And, of course, the providers' administrative costs are marked up by the insurers to achieve their profits. Thus, we pay a premium for inefficiency.

    But, has the industry needed to control costs? As long as people need insurance and there is money to pay for it (to include all the non-care related costs and profit), things will continue to muddle along towards a more and more obscenely high per capita cost of health care.

    Left to the current approach, premiums will continue to rise, pricing more people out of the market, raising the premiums for the diminishing customer base until ???????

    Since the current approach has only led to higher and higher per capita expenditures, wouldn't one wonder whether radical reform might be needed? How many people have to be without the routine care that a universal system could offer to stir public outrage? It's not any one component of the health care industry that is at fault. The entire package is dysfunctional at the societal level.

  13. > Left to the current approach, premiums will continue to rise, pricing more people out of the market, raising the premiums for the diminishing customer base until ???????

    Until corporations start cancelling their healthcare plans because they are too expensive. And that is going to happen VERY soon. The link below is to a USA Today article from last month stating that the average annual family premium is now $13,375 per year.

    Corporations are at the breaking point and are starting to dump their employees to cheaper Health Savings Account (HSA) plans or just dropping healthcare altogether.

    I figure that healthcare costs are now going up between $800and $1,500 per year and that most companies will have no choice but to start dropping healthcare altogether when the cost hits somewhere between $15-20,000.

    My best guess is that we'll see a major Fortune 500 company drop their healthcare coverage to some sort of fig-leaf coverage earning them widespread condemnation and their CEO's several trips to the White House and Congress for a tongue-lashing but will stick to their guns. Then they'll show dazzling profits at the end of the quarter and everybody else will jump on board.

    If my estimates are correct we've got somewhere between 18 months and 7 years to fix the system before this occurs.

    > The entire package is dysfunctional at the societal level.

    No, when it comes to healthcare, the entire society is disfunctional AND the entire system is dysfunctional AND they reinforce each other. Consider the Medicare recipients who are arguing that they don't benefit from what is essentially a government-run universal (for those over a certain age) healthcare system.

    This is why I am so doubtful that anything currently before Congress is going to work. This is one of those issues where we will only start making intelligent choices after society as a whole has experienced Medical Insurance Hell for a little while.
    Good luck!!!

  14. I observed the health care reform debate in the U.S. for months and it strikes me how little economic competence plays into the discussions. Most pundits only talk in interviews on basis of simplistic assumptions.

    There are two separate problems that require two separate solutions. Some pundits argue is if their favourite solution would address both problems.

    (1) Adverse selection.
    This is a fundamental economic problem of insurances. A public option would do nothing about it; it would merely lessen the symptoms.
    The whole "preexisting conditions"/"unaffordable for individuals"/"low coverage" problem complex bases on adverse selection.
    Adverse selection is the reason for why European systems look as they do; an obligation to be insured (and to accept customers at set terms) coupled with either a single payer system or a compensation regime solves the adverse selection problem completely.

    The market fanbois can drivel as much as they want; insurance markets have two fundamental defects, and adverse selection is one of them (the other one is moral hazard). The insurance market cannot work well on its own. That's proven in empirics, science and it can be calculated.

    (2) Cost and efficiency (as cost/GNP, for example)
    Many tools work against inefficiencies, and all are about regulation or competition (=change of regulation).
    There's little reason to expect drastically lower health care % of GNP, though.
    The trend has good reasons; it's similar to why food prices don't make up 50% of household expenses any more. The structure of our consumption changes and a rising share of health care cost is part of that natural change.
    You can cut off about 1% GNP from U.S. health care cost in international comparisons anyway; we Germans don't factor in the free medical university education costs into our national health care costs, for example.

    Finally, health care costs are simply consumption. They crowd out other forms of consumption, but they don't decrease international competitiveness. Many pundits got that wrong as well.

  15. To all,
    What we got here is a failure to communicate.!
    Let's forget about profits , whether large or small. We are after all capitalists, or so I'm told.
    The entire question boils down to concepts such as what are we as a nation. Do we believe in the sanctity of life or are we WARRIORS looking for something, anything to kill. Where will we prioritise our objectives. We CAN"T fund DOD and have money for little things like universal health care. Regardless of what we are told we just can't have it all.
    If we can't agree on humanistic principles then we will continue to wantonly spend ourselves into oblivion. Right now 40 cents of every federal dollar spent is borrowed. Unfortunately the figures for local and state gov't are not known to me. But just take a swag and look at where we are . We are in a state of hurt. Sometimes I feel like Rod Serling is pulling all the strings.
    HAVE WE GONE NUTS???We can't fund wars or health care with money we don't have. God Damn -what can be simpler than that? It's so simple that even a Ranger can wrap his mind around it.
    It all boils down to Maaslows heirarchies-either we are dedicated to life or to death, and that's the bottom line.
    Maybe if the profit is so low for insurance companies then maybe we shouls just nationalize them?! End of discussion.
    jim at

  16. Any discussion about company provided health insurance has to factor in that the large corporations are self insured. An insurance company will be hired to administer the company's plan, but the employer pays for the care every month. The insurance company isn't putting its own capital at risk.

    I've been on the employee side of this for many years, with some unpleasant experiences. For reasons unknown, as I approach Medicare age and retired for a while, my plan has been golden. I only need to tap TRICARE as a supplement for both medical(seldom) and drugs, and It isn't costing me anything besides low copayments.

    Also, doctors are like lawyers in that they make money on their customer's misfortune. Yes, we go for routine health care but that isn't where the money is made.

  17. bigbird brings up another good point about why health care is so expensive. Doctors are not cheap.

    And they shouldn't be. What is the average cost of medical school, at least $120,000, yes? Bare minimum. That is one hell of student loan. And malpractice insurance is crazy. Add to this, doctors get no business training which means they often run costly and inefficient private practices.

    So, we can take the socialized health care option, similar to the military, where the government pays for med school, where there is no malpractice insurance because the patient has no rights to sue, and the business side is run by health service administrators and the doctors just have to do doctor stuff.

  18. The entire debate about insurance companies is nothing but a distraction from the real problems facing our health care system. The politicians and pundits who push the insurance-companies-are-evil line won't tell you this, but private, for-profit insurance represents a small part of all health care spending. You could eliminate the insurance companies tomorrow (even the non-profit ones) and costs in the rest of the system would continue to rise at 2-3 times inflation and GDP growth. That's simply unsustainable and it's a problem none of the politicians want to deal with. Yes, insurance companies have failed to contain costs. Guess what - so has everyone else including all the government programs and even Tricare, which is legally an insurer of last resort.

    So in this latest iteration of health care "reform" that the Democrats have come up with is not going to change much. The "public option" (or "competitive option" or whatever focus-group inspired term they're using nowadays) is a farce that won't change anything that matters, like reducing health care growth to say nothing of reducing the actual cost.

    What we're likely to get expanded coverage using borrowed money, no cost savings and accelerated cost growth due to all the new utilization of health care services. So at the end of the day all that will be accomplished is to move us closer to the abyss of national insolvency.

    And Jim, the current DoD budget is around 5% of GDP. Health care spending is currently about 16% of GDP and is expected to rise to 21% by 2018. So if we got rid of the entire DoD budget today, we'd be right back in the position we're in now in less than 10 years. There is nothing we can cut that would feed this monster for long and if we don't slay it soon it will eat us alive. Isn't it great to see our venal Congress wasting time and moving us closer to the precipice with all the stupid crap "reforms" they're proposing?

  19. Andy: You've beaten this "don't look at the man behind the curtain" drum before about insurance companies. I'm not sure I understand why you have skin in the insurance companies' game. Why not just start with "Yep, the insurance companies ARE heartless, chiseling bastards but they're only a SMALL part of the problem"? You'd get people like me off your ass and you could get on with your argument.

    Which, as far as I can see, is that medical costs are rising and will continue to rise, indefinitely, until economic collapse ensues. What I still don't hear you saying is:

    1. Why you believe this. As far as I can see, the main reasons that medical costs are rising the way they are are a) fee-for-service, b) a reimbursement scheme that has an effectively unlimited process for passing the costs on to the public, and c) a public that demands more from the system - especially costly, low-return processes like end-of-life care - and refuses to accept any other form of rationing other than by income.

    All of these inputs are mutable, and will change as costs peak and resources contract. So it would seem that rather than an infinite slope we are in a peculiar slope of the curve which should and will change as the externals change

    2. What you think SHOULD be done. That's the purpose of this blog, anyway, right? It's a harmless place for us to be King of the World and tell each other what we'd do if we could only. You castigate Congress - and there's a lot to castigate them for, the mercenary bastards - but before you can cast stones you have to show that your own house isn't made of glass.

    So - what's YOUR idea?

  20. Lots of good comments here that I don't have time to respond to in depth.

    Sven's analysis of the US healthcare situation is pretty much on the numbers and provides a good view from outside the US.

    The only area I'd disagree with him is the last comment about healthcare consumption not affecting competitiveness. Since companies pay most of their employees healthcare costs and those costs are SO much larger than they are in other countries, most US companies have a large disadvantage when competing with companies in other countries.

    Example: US auto manufacturers need to charge about $1,500 more per vehicle than Japanese auto manufacturers just to pay for their retiree's medical and pension costs. That imbalance is growing by at least 5% per year. The imbalance drove the US auto manufacturers out of the small car market (along with other factors, of course) and has crippled their competitiveness in these tough economic times.

    Jim, we've done the Guns & Butter thing before. Only we were fighting in Vietnam and were just getting Medicare (which President Johnson assured us would never spin out of control, right!!!).

    Bigbird points out one of the unfortunate side-effects of corporate-based healthcare, some companies are very generous towards their employees and some are real jerks. It's all in the luck of the draw.

    BG's comment about the cost of becoming a doctor in the US is accurate and has led to a serious shortage of General Practitioner doctors (these are the guys you see first before being referred to a specialist if needed, they are the backbone of the US healthcare system but not very well paid compared to other doctors and the case loads can be crushing).

    This shortage has been partially addressed by a number of solutions such as Physicians Assistants and Nurse Practioners but mostly we've been importing a lot of doctors from other countries where it's cheaper to get the required education and experience. This has caused some resentment in the other countries for obvious reasons...

    BTW, the Clinton and Bush II administrations did several small things to reduce the impact of Medical Malpractice lawsuits against doctors so Malpractice has retreated from likely career-ending to just really annoying and rather expensive. Corporate malpractice, like in the Merck example I cited is completely different, of course.

    Andy's got the official numbers for projected healthcare costs right but my own personal numbers, based on 20+ years of watching this crisis develop show that the official numbers are too conservative. I'm estimating that health care spending will absorb a full 33% of the US economy by 2022. The creativity of the US medical sector when it comes to money should never be underestimated.


    Health care costs are part of the overall compensation for work (if seen at the micro level) and part of overall consumption (if seen at the macro level).

    The addition of health care cost does not increase total compensation or total consumption in the medium and long term (after the market adapted to the shock) and is therefore irrelevant to international competitiveness.

    Your car example is wrong because you assume a ceteris paribus difference that does not exist. The increased health costs reduce the wage.
    The big three are struggling for completely different reasons anyway (and never liked or even designed good small cars post-WW2; the U.S. "small cars" of the 70's were equivalent to European medium-sized cars in horsepower and weight).

    Their greatest problem is that they cheated. They promised services in the future in exchange for work in the present - and did so for decades without building up reserves to keep that promise. Now it's their time to pay, and of course they're not competitive while paying at once for the work output they got today and yesterday.

  22. I would venture to say that what we are all dancing around is that the entire health care industry is a fragile monster of it's own making. I say industry, because it is, in the US, a business, just like McDonalds and General Motors. While there has been governmental involvement, it has been much more of a participatory involvement than a governance of necessary social services involvement.

    While there has been a hue and cry for preventing any further "too big to be allowed to fail" monsters in the financial services industry, for example, no such awareness is widespread in terms of the health care industry. Health care has been priced at "what the market will bear" for decades, and the burden shifting and cost sharing of insurance masked the immense costs. Further masking the run away costs is the "hidden price" of employer contributions, an example of which is in Sven's post.

    No simple "adjustment" or "modification" of the current US approach to health care financing is sufficient to prevent the ultimate collapse. What is in place is far to dysfunctional to be "fine tuned" back to a healthy state.

  23. Sven: Huh. I'm going to have to study your link in detail and see if I can find a weakness in the argument. Nearly all arguments in Econ start with radically different assumptions and proceed from there. Thanks for the link.

    As a side note, the auto companies are not alone in having underfunded their pension, nearly everybody has done so in the US. The auto companies are merely the first to get caught doing it. The US government is, by far, the worst offender (see Social Security and Medicare).

    Al's statement perfectly sums up my thinking on the subject. The way the US provides health care services is so out of whack with the reality of the expenses that no "fine tuning" is possible.

    But I'd go further than that. It is also self-evident that nearly nobody sees the problem clearly (as Sven just pointed out, it's possible I don't see it clearly either and I've been in every aspect of the industry over the last 20+ years).

    Since we don't truly understand the problem, we won't be able to create a proper solution. So this means that we're going to be stumbling around in the dark room crashing into things until we:
    a) kill ourselves (unlikely but not impossible)
    b) stumble across a light switch
    c) get lucky and fall into the solution (even more unlikely than solution a)

    Sounds painful, time-consuming, and expensive. No wonder nobody wants to start doing it.

  24. Maybe we should start the GWoHC. We've had wars on everything else, maybe it is time for a war on health care. We need a health car Tsar with unlimited power to crush insurance companies, drug companies, enforce government run clinics with government bought and paid for health care providers.

    Sorry, not constructive.

    What are the odds that anything constructive will come out of this round of health care debate and discourse? And what will be the implications on the next round of elections in '10 if the Dems fail to deliver on their promises, or will this be the mid 1990's all over again? Could we see a swing back in the GOP's direction as a result of this goat screw?

    Hate to be the pessimist here, but it seams like the only thing that actually happens in DC is shifts of power.

  25. Chief,
    You've beaten this "don't look at the man behind the curtain" drum before about insurance companies. I'm not sure I understand why you have skin in the insurance companies' game.

    I don’t have any “skin” in the insurance companies’ game – I just don’t have an ideological ax to grind against them or anyone else. At the end of the day, I don’t really care if the insurance industry survives or not as long as more fundamental problems are addressed. So no, I’m not interested in going after perceived class enemies since doing so doesn’t actually solve anything. And if it doesn't solve anything, I have to wonder why the insurance industry and its heartlessness appears to critically important to you. If the insurance companies were really the root of the problem then things would be on board with you, but they are not. I’m interested in the long-term sustainability of the system and these programs because they are all expected to fail (including social security) before I retire, to say nothing of my kids. All Congress wants to do is throw more borrowed money and the problem and propose tangential reforms that won't do anything except appease ideological interests. If you want spend time and energy fighting an ideological battle against the insurance industry, then don’t let me stop you. Just don’t be surprised if any victory turns out to be a pyrrhic one.

    I agree with you the fee-for-service system is totally fucked up and it is the most important thing that needs changing. Of course, no one is much interested in changing it.

    There are a ton of other things that need to be done, here are a couple listed in no particular order:
    1. Get more medical professionals. We graduate the same number of doctors as we did in the 1950’s and we have a perennial shortage of nurses, PA’s and other professionals. The supply of healthcare matters.

    2. Radically changes the incentives in the system, which will require a holistic approach and the slaying of many sacred cows. Right now the system we have is this: Health providers are in the position of recommending what patients should buy which is all paid for by a third party (employers, insurance, government). It’s no wonder that the institutions who actually write the checks in such a system are unable to control costs since neither patients nor doctors have any incentive to do so.

    There are a few options that could be looked at:

    1. Increase the supply of healthcare substantially. This would force providers to compete for patients instead of the situation we have now where providers can pick and choose which plans to cover. You’d also need to end provider monopolies which consolidation has brought to many areas. It's hard to negotiate fees with a monopoly.

    2. Use regulation and government control over provider licensing to turn medical professionals into salaried employees, like they do in the UK and France. This would end fee-for-service obviously.

    3. A third option is to use a capitation system where providers are paid a fee for each person in the system instead of for each service. Google capitation for more info - it's the system Italy uses.

    Of course, none of those options are presently politically possible, nor is abandoning the fee-for-service model since there are so many vested interests that support it.

    All of these inputs are mutable, and will change as costs peak and resources contract. So it would seem that rather than an infinite slope we are in a peculiar slope of the curve which should and will change as the externals change

    Personally, I think that is wishful thinking because it suggests that Congress will somehow act prudently before the system collapses. I think history tells us that Congress is all too willing to look the other way and ignore the problem until after a collapse happens.

  26. Whoops, sorry for the serious grammar errors, hope you get the gist of what I was saying.

  27. Why not just start with "Yep, the insurance companies ARE heartless, chiseling bastards but they're only a SMALL part of the problem"? You'd get people like me off your ass and you could get on with your argument.

    I didn't read this closely enough before. So, what you're saying is that my arguments are going to have less (or possibly no) credibility with you and others unless I pass some kind of litmus test on the evils of insurance companies. No thanks. My arguments can stand or fall on their own merits and I have no intention of bolstering them by pandering to particular points of view.

  28. bg: What are the odds that anything constructive will come out of this round of health care debate and discourse? And what will be the implications on the next round of elections in '10 if the Dems fail to deliver on their promises, or will this be the mid 1990's all over again? Could we see a swing back in the GOP's direction as a result of this goat screw?

    Excellent questions; below are my personal answers in order:
    1. I'm actually upbeat about health care reform in the long run (10-20 years). Anything short of total defeat means that we are at least beginning to start down the road towards the final product of healh care reform. No clue where we'll end up but you don't finish the journey unless you start it.

    2. It depends on how bad the Democratic base takes a defeat (which is largely a function of how much spin the D's and the R's succeed in putting on the issue).

    I expect that the R's (who have displayed considerable negative spin skill in the past) are going to really capitalize on this issue to re-energize their base and they'll have a pretty good chance (25-33%) of retaking the House and maybe a Senate seat or two in 2010.

    Then they'll spend 2010-12 blocking Obama in every possible way and run for the White House in 2012 on a platform that the D's can't get anything done. Assuming the R's pick a halfway decent candidate (no Sarah Palins) and VP they should win easily as the D base will be badly demoralized.

  29. One question to consider is, "What do private insurance companies add to your health care other than cost?" Their administrative costs tend to be higher than Medicare and Medicaid. Add to that their need to turn a profit, however slight. So, our ridiculous "fee for service" system carries a 20% markup just to be "insured".

    Makes no sense.

  30. Al,

    I don't understand what you're saying. The fee-for-service system is system-wide and doesn't just apply to for-profit, private insurance.

  31. Actually, Al, we get a couple of big benefits from insurance companies. They negotiate lower rates for their clients on goods and services and they are tremendously easier to work with than Medicare and Medicaid.

    I've worked for clinics that refuse to treat Medicare patients because the reimbursement is so low and the bureacratic paper-shuffling is so expensive (hospitals don't have the luxury of turning away patients but I do know of at least one hospital that went out of business because it had too many Medicare patients and the reimbursement rate was below their cost).

    Add in the fact that both Medicare and Medicaid are bankrupt and so pay the medical providers using ever-rising quantities of deficit spending and you've got yet another unsustainable model for providing medical services.

  32. As Andy has mentioned in recent posts, private insurance is more the icing on the cake than the actual problem.

    The heart of the problem is the conflicting and unrealistinc expectations that have been set by the public, the government, and the corporations that provide medical services.

  33. Fee for service requires significant administrative support. I recently read an article (it's late and I don't have the energy to track it down to link to it, so please trust my memory) that cites 1.66 clerical/administrative workers in support of each physician to process billing, insurance processing, etc. That's pure and simple overhead which contributes to cost of health care delivery. Ever get a hospital bill? Pages of itemized, coded entries, right down to individual aspirins. Pure overhead, just to collect.

    In short, the delivery system at the provider level is rife with inefficiency and overhead costs. And, it costs some 20% more for the insurance carriers to collect premiums and disburse payments. A fair portion of the provider's overhead costs results from the burden of complying with a variety of insurers' different claims systems.

    Now, everyone in the industry is making money, and there are markups on markups on markups. Each "middleman" adds overhead and profit costs to the final cost of health care. Ever wonder why is so overpriced?

  34. Al,

    If you haven't already, you really should this to the following two programs. They are well worth the time and little bit of money and directly address many of your points:

  35. Err, that should be "listen." Geez I can't type today.

  36. "Pluto said...

    Sven: Huh. I'm going to have to study your link in detail and see if I can find a weakness in the argument."

    A corporation and a labor union negotiate and agree on 1% wage increase plus setting up a free health care service for all workers.
    The agreement is about to be inked when suddenly the CEO proposes to drop the health care thing and to simply raise the wages by 3% instead.

    Do you think the labor union will agree?
    No? Well, then agree that health care costs are simply part of the overall compensation.

    - - - - -

    That reduces the potential for disagreement to the question whether one dollar for health care is at least equivalent to one dollar in wages or not.
    Keep in mind that the corporation doesn't need to pay income tax before it pays for the health services while the workers would need to do so.
    So in fact, one dollar health care expenditures of a corporation may save the corporation about 1.15 dollars in wages.

    - - - - -

    About the international comparison:

    Why should corporation a from country A be disadvantaged in comparison to corporation b in country B just because its workers spend fifteen instead of seven cents per dollar of their total compensation on health care?

  37. I don't live particularly near a military base, and even that one is being BRACed, but I have no problem finding doctors and hospitals that accept TRICARE, and Medicare. This used to be a problem here in NJ, but not anymore. In addtion, this is not a cheap state to live in.

  38. I also have never had a problem with doctors and hospitals accepting Medicare and TriCare here in Washington either. For me that includes only my country GP which I see no more than once a year or less. For my wife it includes not only the local GP but several big city specialists which she sees several times a year.

    The question is what if I did not have Tricare as secondary insurance? I feel certain my GP would go with just medicare. But I have no faith in the big city boys. Or maybe they would, as I do not believe that Tricare allows a large chunk of their bill but only a small percentage in most cases. And Tricare probably allows no more than a gold-star private insurance company would.

  39. Andy: not sure why you don't think that a salaried system is possible. As you point out, most other industrialized countries use it, and here the Mayo Clinic system is based on it.

    The big reason that I'm so down on the private insurance cartels is the same reason I'm down on many other private cartels, whether they are energy cartels, telecommunication cartels or defense industry cartels; the public, you and me, are poorly served when a monopoly, whether natural or man-made, seizes power over a substantial part of the economy. The big private insurers, private hospitals and private medical industry shills like the AMA wield power above the demographic weight. And, as with any corporation, they have no reason to wield that influence for anything but the increase of their own profit and power.

    So when you say things like "(r)adically changes the incentives in the system, which will require a holistic approach and the slaying of many sacred cows" and you DON'T preface it by saying "After first slaying the sacred cows of this toxic status quo, such as the big private insurers, Big Pharma and the private fee-for-service medical combines..." you're assembling a circular firing squad for your argument.

    Why aren't there more medical schools graduating more docs?

    Ask the AMA, the hospitals and clinics why they're not screaming for more help? Why aren't the big insurers shouting to the rafters that we need more primary care docs, instead of swiftboating the "public option"?

    Why does the despicable fee-for-service system continue to flourish, if we all recognize it for the inefficient bloated revenue generator it is?

    Ask your insurer why he's not mailing you fliers about the wonders of the Mayo Clinic system instead of swiftboating the "public option".

    The present system is choking our economy and trapping us, in our jobs, in our fear of losing them and losing our defense against illness and injury. And the existing players - from Congress to your local MD - have no impetus to change this. And - especially and - the private insurers; again, they add nothing that couldn't be done in a simple public resource pool, and in return they act as a dead weight at any attempt to rein in the system because of the consequent reduction in profits.

    Al, as always, reduces the argument to its most central question; where is this whole mess taking us, and what can we do about it? Right now, it looks like its taking us over the hill to the poorhouse, and the real question is whether we stop now and see if there's any way to strip the thing down to the underpinnings and save it or just go merrily along for the ride.

    Given my low opinion of the public and the so-called "public servants"? I'll bet on the latter.

  40. In Canada there is an interesting dynamic starting.

    We have increasing trouble getting family doctors (after all, why go to med school and only get paid what a family doctor does, when you can become a dermatologist and make 10 times as much.)

    Thus, there is pressure in the system to give "nurse practitioners" more doctor-like powers to prescribe and generally fill more of the "family doctor" niche.

    Now, where it gets interesting is that nurse practitioners are not under the control of the "doctor lobby" and are generally salaried.

    We are even starting to see the rise of clinics where most of the front line staff are nurse practitioners, but there are a few doctors at hand for immediate consultation.

    Needless to say, this drives the traditionalist fee for service types crazy.

  41. Chief,

    Andy: not sure why you don't think that a salaried system is possible. As you point out, most other industrialized countries use it, and here the Mayo Clinic system is based on it.

    You answered your own question. The AMA is firmly against such a move since it would result in pay cuts for providers, principly doctors.

    and the private fee-for-service medical combines

    Like I said to Al above, fee-for-service is a feature of the entire medical system, not just the private portion. Medicare, medicaid, Tricare, etc. use the same fee-for-service reimbursement system as employers and insurance companies do. The only difference is that medicaid dictates how much it will reimburse by fiat - of course, when those efforts are politically successful, providers respond through a variety of measures....

    In short, there is no such thing as a "priviate fee-for-service medical combine." Fee-for-service is how reimbursement works for the entire system (with a few tiny exceptions, of course).

    "Swiftboating" the public option? Who cares! The public option doesn't solve any of the pressing problems affecting our system and is likely to create new problems. It's a non-reform being sold as reform by people who want "competition," but a single-payer system. They can't get a single-payer, so they're selling this public option thing. Anyone with an ounce of sense knows that it has nothing to do with providing "competion" to private insurance and everything to do with driving such insurance out of business to pave the way for a single-payer system. After all, it's poor regulation that's led to consolidation and a reduction of competition among both insurance companies and providers. Why is no one discussing such regulatory reform? Hmmm......

    As for single-payer I'm not against it at all as long as it goes the "full monty" (ie. a completely nationalized system). I think single payer would be a disaster if only the payment side of the equation was nationalized. Regardless, I'm against the public option for two reasons: First, it doesn't do anything to address the systemic problems and secondly, I view it as a deceptive gambit designed to bring that about changes that it's proponents cannot legitimately sell.

    Why does the despicable fee-for-service system continue to flourish, if we all recognize it for the inefficient bloated revenue generator it is?

    Because of a few reasons, IMO:

    1. Congress is weak and venal and there are many vested interests who support the system.

    2. Most Americans are happy with their health care. They are worried about rising premium costs, not systemic costs (since those costs are hidden from them). They want lower premiums but not radical changes in the system that might negatively affect their care. Many don't even want something less radical and pointless like the public option because they don't want to risk losing the care they have (ie. should their employer drop coverage because there's a public option).

    As for what we can do about, I'm doing what I can, but I personally think our country will drive the bus off a cliff before real reform occurs.

  42. How much has US health care spiraled out of control? While it is difficult to compare costs there and here due to differences in cost of living, etc, here's one example.

    The wife is renewing her driver license. That requires a physical and eye exam by an ophthalmologist. Since this is not considered "basic health care", we must get the two medical exams from private practice doctors at a fixed rate of 45 Euro for each. The exam requires a chest x-ray, EKG and typical blood work. These are available from the National Health Care for free. Due to the low priority of driver license exams, she would have had to wait a couple of weeks for the blood work, so she elected to have it done by a private practice doctor who has a full lab here and would do it on a "walk in" basis. Cost? 30 Euro.

    Now, back in the good old USA, the blood work for a physical was priced at $150 (about 110 Euro). It was done by a technician in a small branch office of a large regional lab company. There were one or two technicians who collected the blood and did some of the more routine testing on site. The office here had the microbiologist (doctor) and three technicians, and all the space age equipment necessary to do the work on site. Of course they were not part of a large business with a dozen "branch offices", so no economies of scale. Yet it cost us 1/3 of the going rate in the US, and only because we wanted this routine procedure faster.

    Of course, all private health providers here have to compete with National Health Care, so they cannot get too over priced. Similarly, three visits to a private dermatologist for diagnosis of a minor skin lesion, cryogenic removal, biopsy and followup was only 60 Euro. Try getting that in the US and see what you pay. I was billed $300 in the US 10 years ago for two visits with removal for a similar growth.

    Now, someone explain the 3 to 5 times higher rates from the US private sector versus the Greek private sector to me.


  43. Al, this may be part of it:

    There's much more at the CRS report linked to on that page, though Greece is missing from a lot of the data.

  44. Al,

    Another factor (which is explained in detail on the two radio programs I linked to earlier) is that medical billing is very expensive in the US. Doctors, providers, insurers, etc. have to hire a lot of medical billers to "code" the various proceedures so that doctors get paid. Almost all doctors in the US in private practice have to hire at least a couple of these medical billing specialists becasue the fee-for-service billing system is so arcane. So in addition to relatively high salaries for providers they also have relatively high costs due to billing complexity. There is no standard for billing codes either. Every insurance company and third-party administrator (the people who handle companies that self-insure) uses a slightly different system with different codes and rules. This is one reason why administrative costs are so high for insurance companies. What isn't talked about much, however, is that such costs are just as high or higher for medical providers. The doctors interviewed in the story said they spend about 25% of their revenue on the billing department. It's all pretty insane.

  45. "The wife is renewing her driver license. That requires a physical and eye exam by an ophthalmologist. Since this is not considered "basic health care", we must get the two medical exams from private practice doctors at a fixed rate of 45 Euro for each. The exam requires a chest x-ray, EKG and typical blood work."

    In Germany we don't need to renew and to get the original driver's license you need only an eye exam which you get at every optician for 6 € in ten minutes.

  46. Sven-

    The renewal was due to age, which out of respect for my wife, I chose not to mention.


    I am well aware of the unbelievable burden of the billing nightmare in the US. I recently helped a local Greek insurance agent try to make sense out of a US hospital bill for one of her clients. $2.00 aspirin tablets, itemized for each administration, really blew her socks off.

    To make matter even more fun, the patient had been seriously injured when rear ended by another car in the US. While being treated, she developed pancreatitis. He injury from the accident was covered by the US driver's auto insurance, and the hospital struggled with that insurance to separate the injury costs from the pancreatitis costs. The 12 page itemized (to the point of insanity) bill showed some items "Covered" some items "pending resolution" and some items "patient responsibility". The "covered" items then showed "insurance pays" and "Patient responsibility". I tried to explain what it all meant, and the agent said, "All we want to know is how much our customer is being required to pay herself so we can pay her." The hospital wouldn't accept assignment of benefits from a Greek insurer, so they had to reimburse the client. I said, "Did you tell the hospital that?" She said, "Yes. The hospital said they don't give any other bill than this type."

    Of course, that was just the hospital bill. Radiologist, Surgeons, Anesthesiologists and other also submitted their itemized bills as well.

    My cousin broke her hip while visiting here. Major surgery in a NHC hospital. Total bill for "room & board" and "supplies" was one page and 1,200 Euro. 11 days in hospital. Every employee was salaried, and all lab services, were done in-house by salaried people.

    Having had major surgery in private hospitals myself, I also know how torturous the billing process is. And our private physician's group back in the States had as many clerical employees as doctors and nurses combined.

    It's a joke in the US, and we are finally becoming the butt of that joke.

  47. @bg

    "Maybe we should start the GWoHC. We've had wars on everything else..."

    Begs the questions:
    -Who would command such an endeavor?
    -Do we have the manpower?
    -Is all of our amazing technological weaponry capable of fighting an enemy that is so elusive, cunning and wiley?
    -Instead of COIN would we then have COIC (COunter Insurance Company)?