Health Exchanges: cathedrals or bazaars?

Recently the Division of Insurance released the names of insurance plans submitted by carriers for approval when “Connect for Colorado” launches this Fall. All of this stimulates several thoughts.

A first principle of economics is that suppliers and buyers interact freely in the market. Out of that chaos comes a price. In this instance, a regulatory body is specifying the product, approving it for sale, and quasi-regulating the price. It is attempting to influence demand and supply by a variety of tax subsidies and penalties. And, it is trying to maintain control by forcing both buyer and seller to use the Exchange. By my count, 14 insurance companies, many of them Board members of the Exchange, and heavily skewed toward HMO products are the main players.

Early evaluations of Exchange offerings suggest most insurance companies are entering this market with great reservation. Not all states have viable exchanges and there are many unknowns. It has all the appearances of a government-wired proposal process.

A characteristic of regulated markets is a shortage of supply. Pictures of communist countries always show bare shelves where canned goods and bread should sit. And, there is often a thriving black market in the shadows. Health care today is dominated by oligarchs who do business from their castles and cathedrals.  And, the foundations and NGOs who act as enablers and facilitators inhabit pretty nice digs too. This is not Steve Jobs in a garage or Bill Gates operating out of a skunkworks.

If the insurance industry wants to kill off the emergence of exchanges there are two ways they will do it. One is to sabotage their funding source. They will also hold off supplying viable products and only sell certain products through the Exchange. That makes the Exchange look more like a factory outlet store that offers slightly blemished goods.

Every supplier has challenges when it comes to distribution channels. A decade ago, Apple was having trouble brining its products to market through big box retailers.  Apple made two strategic moves. First it pioneered the “Apple-direct” stores. Second, it designed its products with specific price points to appeal to consumers in a retail setting. But, this came about not because of government inspiration(it was too busy initiating antitrust litigation against IBM and MicroSoft) but because  deregulation and competition between cellphone carriers, retailers and over the internet converged to create a perfect storm beneficial to the market. Electronic devices come to us by way of a virtuous cycle of continually lower prices and better products and services.

The whole notion of the Exchange may eventually be come to be regarded as a fool’s errand. We need a healthcare bazaar where there is intense competition, lower prices, innovative offerings and shakeout of marginal players. When ComputerLand, BusinessLand, CompUSA, Ultimate Electronics and a substantial number of Best Buy stores were forced to exit the market because of market competition, we know the disciplining forces of the competitive market were working. And, we will know it is working in health care when high cost hospitals start going broke, not getting propped up by government largesse.  And, we will know it is working when the large seven insurance companies who dominate the Colorado insurance market suffer the same demise that IBM and the computer mainframe companies. None of them manufacture hardware; they were universally humbled by Bill Gates and Steve Jobs. Joseph Schumpeter called it creative destruction.

I believe that the reason Exchanges are the center-piece of Obamacare  stems from an appalling misunderstanding of basic economic principles by the people involved.  Legislators  bristle at the suggestion that they need formal training in economics. They believe that when markets fail, they have electorally been given a mandate  to deal with health care access. When hyper-inflation and unintended consequences ensue they merely redouble their efforts and dig a deeper hole. If the dismal science guys couldn’t pull it off then let’s turn it over to the motivational speakers.

It took the Soviet Union a long time to collapse, and it was not because of new-found enlightenment of its leadership. Their system became unsustainable and ceased to function. From the mid-1970s up until now we have been witnessing the disintegration of organizational hierarchy and a transition to a post-industrial paradigm. Many of us do not understand fully the implications.  The true effects are being disguised by ill-advised policy actions. There is nothing worse for an expert fly fisherman who is plying the water to catch fish than to have a rank-amateur outfitted in Orvis gear come along and muddy the water.

Whether the Exchange succeeds or fails is too early to determine. I am unwilling to take bets either way. Every year we watch professional teams go to training camp and try to guess whether they will be champions. It rarely works out. And, way too many parents watch their son or daughter play high school sports thinking they will win a scholarship. It rarely works out.

The role of medicine

In 1878, John Wesley Powell held a meeting in Washington, D.C. that led to the creation of the Cosmos Club which led to the creation of the National Geographic Society. Powell, a Civil War veteran who had lost an arm at Shiloh and fought on through the siege of Vicksburg also led the 1869 expedition in the first descent of the Grand Canyon. John Wesley Powell would go on to direct both the U.S. Geological Society and the Bureau of Ethnography of the Smithsonian. But, it was an 1872 trip through the Great Basin that provides grist for the mill in this essay. Powell’s first encounters with Indians in the Great Basin, that vast arid area between the western slope of the Rocky Mountains and the Cascade Range of the West Coast generated a fascination that lasted a life-time. But, Powell’s vast collections of artifacts were kept in the basement of the Smithsonian long after his death in 1902 and not inventoried until the 1970s.

It during this trip that Powell, for the first time could dialogue with the Numic peoples who consisted of the Paiute, Ute and Shoshone tribes. These Indians were still living a stone-age existence. An offshoot, the Eastern Shoshone had acquired the horse from the Spanish in the 16th century and had morphed into the Comanche tribe. But, the Numa were largely in their pre-European contact state.

Powell learned two things that stunned him and occupied his thinking for the remainder of his life. First, the Numa had no concept of mental illness. Their medicine did not provide for it and Powell remarked that he never met an insane Indian. Contrast this with the immense number of mentally ill people left in the wake of the Civil War. That war had killed 600,000 men, handi-capped 2 to 3 million and left several generations to reconstruct their lives. Mental illness was rampant.

Powell also discovered that post-menopausal women were rare. After their child bearing and raising years, they routinely grouped together, went into the desert and starved themselves to death. In Western European society, women who survived child-birth typically lived longer than men and went on to inherit most wealth.

These two factoids are certainly not sufficient to overturn our beliefs regarding the efficacy of modern medicine. But, over the years I have experienced a string of encounters that, when taken as an integrated totality cause me to pause to think about whether we are on the right path.

In 1969, I was taking a college course in sociology at Montana State University, Billings. My professor was a PhD from Columbia who had come out to Montana in the 1940s to interview Cheyenne, Crow and Sioux Indians who had been a part of Custer’s Last Stand. Dr. Daugherty remarked one day that he could never reconcile a couple of things. First, the Indians believed that life expectancy was going down as a result of modern life. There were numerous Indians who claimed to have been warriors at the battle, but their chronological age just didn’t make any sense. Daugherty could never reconcile Indian claims with his understanding of life expectancy.

Then, in the 1980s, I had an encounter with a shaman Lakota Sioux by the name of Wallace Black Elk. Wallace was the grandson of the original Black Elk, the revered holy man of the Sioux. Wallace had come to Denver and taught at Denver Free University. In his lectures he routinely professed the belief that modern culture would be our demise, not our salvation. He reiterated the belief that life expectancies were actually declining. He also expressed the view that the White Man’s propensity to grow his food in intensive environments would lead to chronic wasting disease and was the cause of the rise of dementias, and other brain diseases. He also felt that blights and other diseases could be expected in our crops of grains and other carbohydrates.

If you were stacking cards with this and many other comments in popular writing, it would be a house of cards for most people. Most science based professionals would go ballistic at any notion of such a thing. But, let’s shift over and consider the writings of medical and other professionals. In his book,The Role of Medicine: Dream, Mirage, or Nemesis? by Thomas McKeown  (Feb 1980), McKeown a physician presents data that suggests much of the improvement in outcomes has actually come from public health improvements in water and sewer. He poses the possibility that modern medicine has plateaued in its ability to deliver on it’s promises.

I do not seek to become Martin Luther here nailing 95 theses to the church door. I merely suggest we pause and consider as to whether we should be barreling down a path that could lead to accidental overthrow at some point?

Almost every day our popular understanding of what is good for us is either overturned or challenged. Should we be taking aspirin? Does controlling cholesterol really reduce heart attacks? Does having insurance lead to better health outcomes? Are all of those coronary bypasses justified? Doesn’t the health care system kill hundreds of thousands of people every year? And, it goes on and on.

We have to remember that prior to the 1970s health care had questionable legitimacy in the minds of most people and it consumed less than 4% of our gross national product. The advent of diagnostics such as the MRI and drugs such as the polio vaccine began a shift in thinking. In his 1984 book, The Social Transformation of American Medicine, Paul Starr chronicled the means by which the medical profession transformed its image from “barber surgeon” to respected professional.

Health care will soon consume 20% of our gross national product in a country of under 400 million souls who comprise less than 10% of the World’s soon to be 8 billion people. We cannot spend such large sums for either health care, education or energy and expect the rest of the planet’s population to achieve parity. But, even the wealthiest country cannot promise entitlements to huge numbers of aged people when equal access implies hyper-inflation. It simply is not sustainable and it will stop, even if policy makers choose to do nothing. The overhead is too great and our average unit costs are too high to convert it to an export industry.

We have two alternative pathes to take. One is to use the blunt force trauma of public policy to restructure the industry and wring out the dead weight loss that has arisen from insurance, tax preferences, and employer involvement. That will be exceedingly painful because the unaccounted for and unfunded liabilities are trillions of dollars.

The other path is to begin to abandon the current system in favor of something different. I am not suggesting a return to a medicine man waving an eagle feather over me while I sweat. But, we can learn something from traditional societies. Both India and China have 35,000 to 50,000 herbal remedies derived largely from plants and natural substances. Our drug companies are dispossessing us and we know it. A return to health care delivered in the home, less intense environments, preventive care, food as medicine all have potential. But, so does advanced diagnostics. Genetics and personalized medicine delivered using our understanding of advanced chemistry, physics and biology have immense potential.

When considered as a whole, we all realize we are on the wrong path and that a cross-roads awaits us. But, like the Mad Hatter who told Alice that if she didn’t know where she wanted to go, it would make any difference which route she took, we will have to look inside ourselves and take a personal inventory.

There is a very good chance that the health care system of the future will require individuals to use an internal moral compass and a spiritual center that we long ago abandoned in favor of the institutional pill. Many will simply not make the transition. They will have their hand out and seek an entitlement that they think they previously paid for. But, if those old Indians are right and our life expectancy is not being increased, taking the drug of institutional ease means you are paying with your life.