During the past month several reports have been forthcoming regarding the variation of costs in the health care system. In the case of medical providers there is clear evidence of wide differences in costs and utilization both in terms of geographic region and between institutions. When the Colorado 208 Commission studied the issue it also found that there were great variation between what insurers, government and individuals pay. And, recently, the Colorado Division of Insurance analyzed insurance proposals for the health exchange. Again, wide variations in insurance premiums are being proposed. Are such differences evidence of profiteering? Or, is this an opportunity for consumers to take advantage of lower price offering.
The fifty year history on this matter is instructive. Differences in costs at all levels of the health care system have increasingly been noticed as transparency in the health industry improved from computerization. Jack Wennberg and Phil Caper employed computer-based claims data to compile the Dartmouth Health Atlas. And, Medicare has long used mandatory cost reports to track differences. The Business Coalition and Health Data Commission movement has focused on public reporting of these variations.
Soon after Medicare was enacted in 1965, health inflation became a problem because payment systems at the time reimbursed providers their costs. When ERISA was enacted in 1974, large corporate, union and public sector groups aggressively began to self- insure. This undermined the old community-based risk pools assembled by Blue Cross. The Omnibus Reconciliation Act of 1983 was passed as a solution to the mounting problems. (As an aside: It is interesting to me that both ERISA (Nixon) and COBRA83 (Reagan) were passed by Republican administrations). The 1983 act ushered in an era of managed care and prospective price fee schedules. And, that brings us to where we are today: Republicans seeking to repeal Obamacare are the pot calling the kettle black.
All in all the set of public policies was well intentioned but it has been a dismal failure in terms of economics. Cost shifting has distorted, warped and tortured the market. We usually rely on the individual self paying patient to wring out the dead weight loss in a system but cash purchasers have no bargaining power and they have abandoned the insurance market to the point where mandates and subsidies are necessary. A lack of disciplining force in the health care market is obvious when the 12 leading socialized economies of Europe spend almost half what the U.S.’s competitive market spends. They average 8-10% of GDP and we spend 18%.
Reasons for variation are normally explained by differences in input costs, economies of scale, management prowess and profit-seeking attitudes. We will never eliminate all the differences that exist in human systems. It is a role of government to make sure that disciplined, countervailing forces exist. Gradually, over time, variations are reduced and we achieve the most efficient, high quality system possible. In the case of health care two forces conspire to sabotage this goal. First, the consumer is by and large disconnected from direct payment of either the premium or the services rendered. Second, our desire to make sure that 100% of the population receives Cadillac care runs counter to market principles whereby the market rations based on the consumer’s ability or willingness to pay. Because of public entitlement programs and employer-tax-advantaged plans, the health care purchase is rendered an abstract transaction largely performed by third parties. Rationing thereby becomes a political act.
The second neutralizing force is the imposition of discounted, fixed fee schedules. This intervention almost always overpays low quality providers and underpays high quality providers. Health providers who are both low cost and high quality are punished by fee schedules imposed by government fiat or the insurance oligarchs. The additional volume and premium pricing that should reward our best providers is denied them. Prices in a natural, functioning market, are signals of quality and efficiency. A monopolized or heavily regulated market will cease to send valid signals and eventually all feedback becomes white noise. No provider is distinguishable from another and quality has to be assumed. Providers with high standards and ethics eventually either create a black market in concierge medicine or exit the market, leaving the consumer subject to the Law of Lemons.
The cumulative effect of health policy decisions since 1965 has rendered health care a brownfield. Sadly, Obamacare does nothing to make it green. There is little economic rationale within it that would hope to flatten the cost curve without the blunt trauma force of price regulation. Worse, ACA imposes a perverse principle that is one of the cornerstones of socialism. By forcing young, healthy individuals into a risk pool filled with older, sicker patients it becomes a covert act of intergenerational transfer and taxation by another name.
This is all the more tragic because we should be taking deliberate steps to make health care a global export industry. The Planet Earth, soon to be filled with 8 billion people, desperately needs good health care. The U.S. should, by now, have positioned itself to take our advanced technological and educational capabilities and deploy them around the world. Instead, we have been out-foxed by socialist countries who spend half what we spend and they get better results. How do you compete when socialism is more efficient and effective than capitalism? During the eight years that both George Bush and Bill Owens, respectively, controlled national and Colorado state government, exactly nothing was accomplished.
In an ideal world, we would spend no more than 7% of our GDP and 5% of our workforce on domestic health care. To compete against socialized systems we simply must get more bang for the buck. Variations should narrow over time. Health care organizations need to operate in an ecosystem where they are disciplined to have low administrative costs. Technology should lower costs the way it does in the personal computer market. And, institutions should be scaled to a level where they operate at optimal efficiency. In a virtuous cycle we, in the U.S., would buy consumer goods made in foreign countries. In turn, foreigners would use those dollars to buy the health care we provide.
The stakes of this game are very high. I have news for you. We are not going to reclaim the manufacturing base we have lost to foreign countries. And we are not going to deport the 50 million aliens who have infiltrated our economy. The twin effects of these trends has eliminated wage gains over the past thirty years and destroyed the middle class. An ongoing balance of payments deficit simply cannot continue forever. At best it cannibalizes our wealth and renders us impotent.
The root of this problem stems from two strategic blunders of epic proportions. First, during the past decade policy makers have been vascillating between an embrace of Adam Smith’s conservative and John Maynard Keyne’s liberal economic theories.(More pot calling the kettle black!) The problem is that neither of these two thread-bare concepts represent 21st century thinking.
The second great failure has been to put narrow specialists, cultivated during the industrial revolution, in charge of our society at a time when we desperately need generalists. When specialists attempt to solve complex, systems problems they almost always lack the requisite skills and we end up in the briar patch. Specialists cannot help driving into the future looking out their rear-view mirror. That is why their public policy initiatives are a always a day late and a dollar short. In the end, the kettle and the pot argue over distinctions without a real difference. The situation now seems impossible. We desperately need a finesse option.