Turning point in health care

Between the end of World War II and the enactment of Medicare in 1965, the U.S. was focused on building its hospital infrastructure under the Hill-Burton Act of 1946.  The year 1965 is almost an A.D./B.C. divide because after that year, the focus shifted to providing access to specific population groups. These groups included the elderly(Medicare), the poor(Medicaid) and trade union membership and corporate employees(ERISA). The Affordable Care Act is merely an encore presentation to include uninsured individuals and small groups.
During the 1970s the U.S. began experiencing a round of severe hyper-inflation. After Ronald Regan was elected president in 1980 two key health policy strategies were devised to introduce prospective fee schedules and institutionalize the health maintenance organization as an ideal model. As a result, the American health care system has experienced a cascade of unintended consequences.
During the past 70 years we have witnessed health care grow from less than 4% of our GDP to nearly 20%. Early in the period only 3% of our workforce was employed  in health care. Today, nearly 17% of our labor force are health care workers. Because health care is largely societal overhead and non-exportable we are horrified as the health sector threatens to destroy our nation’s wealth creating ability and dispossess us all before we die.
      In spite of public policies which encouraged managed care, who has emerged as the truly outstanding health care system in terms of total value? There is little doubt that on the quality side, the Mao Clinic and Cleveland Clinic are renowned for their high quality. Kaiser Permanente consistently gets cited for its high quality in California for the Medicare population. Despite the appearance of quality almost no American health delivery system has proven to be cost efficient.
A crude examination of Kaiser Permanente, for example, illustrates my point. Nearly 20% of its employees are doctors and nurses. These are the primary hands-on providers of care. Most of the rest of Kaiser’s 100,000 plus employees are staff, clerical and support. Kaiser’s premiums are competitive with its peers, but no quality health care organization has been able to experiencing positive cost curves that you would expect from organizations achieving year in-and-out efficiencies.
During the industrial age virtually all products have had positive cost curves during their life cycles. Costs invariably start out high but as these organizations scale up the per unit cost of the product declines. Henry Ford’s first automobile was over $800, but by 1927 he had driven the cost down to a little over $200 a car. Ditto for household appliances, computers, cell phones, production homes and every aspect of our life. This is due to “learning curve phenomena” whereby producers figure out how to become more efficient over time but still manage to produce high quality. So, why is it that health care costs have defied economic laws of gravity?
      The answer is actually quite simple. Health care policy initiatives designed to increase access removed most of the disciplining forces of the marketplace through an over-reliance on subsidy and tax preferences. The consumer became insulated from the realities of the market. This coupled with the prevalence of insurance ignited round-after-round of inflation.
Hospitals, doctors and other providers have not been forced to achieve optimal micro-economics within their firms. Health providers rarely go out of business. By and large they have a franchised monopoly in their service area and continue to be specialized and labor intensive with high level of fixed costs. They have responded not by competing using marginal cost strategies; instead, they respond by increasing their intensity of clinical services to increase revenues. Administrative costs for every participant in the food chain have continued to grow as a percentage of total costs.
      As a result, the American health care system is now more expensive than any of the Western European socialized systems. Over the past few years U.S. quality has rightly been called into question. HMO’s and managed care,which were supposed to be our salvation have been a bitter disappointment. Why?
You can analyze the root causes of our current dilemma without much difficulty. A descriptive analysis of the past is not the important question to be asking. We need prescriptions for future success.
What Americans must come to grips with “…what is the role and future importance of health care in our economy and society?” To answer that question I suggest you take a look at a globe of the earth.
Every country on the planet needs a certain set of abilities to develop and prosper. Good education, water, sewer and roads are obviously basic. But, health care is a key foundation cornerstone in that edifice.
Now, in a perfect world, the U.S. would have an efficient, high quality health care system to share with the developing peoples of our planet.  They would obtain the dollars necessary to acquire our abilities by producing goods and services that we wished to buy from them. It would be a virtuous trading cycle.
If health care were a wealth-creating export industry it could be encouraged to grow to dominate our GDP. Ideally, however, only 7% to 10% of our GDP should be necessary to satisfy our own internal needs. The current excess capacity should be exported. This builds the case for imposing harsh disciplining forces on our health care system. It is necessary to achieve the means to an end. Maybe it could be achieved through socialized regulation. But, history has shown us that every nation eventually had to deregulate and reintroduce market forces to achieve both high quality and efficiency.
      The current practice of turning to large insurance companies to achieve competition and discipline in the health care marketplace is flat-out destined to fail. If General Motors and Ford were not producing high quality cars you would not complain to GM Acceptance or Ford Credit corporations, their financing arms. Asking the financial intermediaries to do the dirty work of disciplining buyers and sellers is Forrest Gump stupid.
Health insurance by its very nature creates dead weight loss and insulates the consumer from the bitterness of the environment. By its nature it encourages over-production and over-consumption. We need less insurance, not more. If you do not buy this proposition, you need to buy Paul Samuelson’s basic text for Economics 101.
I believe there are things in this World which are rocket science. Putting a man on the moon or sending a lander to Mars truly mystifies me. We build planes that defy the laws of gravity and huge ships which float.
But, health care economics is not anywhere near this complex. We have made a mess of things by putting it in the hands of the wrong people. When we wanted the Nazi code broken we brought in Alan Turing, not Winston
Churchill. When we wanted an Atomic Bomb built we created the Manhattan Project. We didn’t turn it over to a confederancy of dunces.
I remain optimistic that we will eventually see the light. Our old manufacturing industries are not coming back. They are gone forever. Americans will continue to try everything until the right thing is the only avenue left. Then, we will get on with making health care an economic engine for the 21st Century.

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