Health Reform: A Century of Health Care Reform
Although Bismarck started a national health plan, American attempts to reform healthcare began with the Teddy Roosevelt and the Progressive era. Obamacare is just the latest episode.
Second Edition, Greater Savings.
The book, Health Savings Account: Planning for Prosperity is here revised, making N-HSA a completed intermediate step. Whether to go faster to Retired Life is left undecided until it becomes clearer what reception earlier steps receive. There is a difficult transition ahead of any of these proposals. On the other hand, transition must be accomplished, so Congress may prefer more speculation about destination.
Medical Economics (2)New topic 2013-04-09 21:37:40 contents
The Attitude of Big Business. In order to preserve maximum flexibility as long as possible, many important features of the Affordable Care Act (Obamacare) remain unrevealed, and some are perhaps still unsettled. Furthermore, attitudes change with experience. At the formation of the Obomacare idea, the leaders of big business (at the time) were more concerned about foreign competitors than about employee attitudes. The traditional goal of a "level playing field" led them to favor an employer mandate to provide employee healthcare. It probably was presented to them that they could only have their desires by agreeing to a universal individual mandate for everybody. Although it was uncertain whether the employees would agree, universal was the price to be paid, and they paid it. Whether new leadership supports this compromise or not, it is generally assumed that big business feels obliged to support Pete Stark's universal mandate until it is tested. Only time will tell whether businesses will withdraw their support in the face of events, but fragile beginnings certainly do not assure permanent support. Since it was the withdrawal of this group's support which destroyed the Clinton plan in 1994, a significant issue hangs in the balance. Therefore, when conflicts were discovered with the ERISA laws under which big business works, the inclusion of big businesses in the framework of the Affordable Care Act was postponed for a year. How it will emerge next year or whether the ACA can survive for a year without major business inclusion, both remain to be seen.
The Rising Voice of the Uninsured. A financial recession usually increases the number of health uninsured, but at present unemployment is slowly falling. However, decades of scientific medical advances are not only extending longevity, but reducing non-fatal illness among the young and uninsured. Although it is unclear whether youthful perceptions match the actual changes in their morbidity, young healthy people who rebel at paying health insurance premiums may actually increase in number substantially during the coming decade. Although overall inflation has been moderate, discomfort from competing costs of college debts and items such as gasoline have escalated. When the Affordable Care Act is fully implemented, youthful perception may make the first serious test of its usefulness. Those among them who actually get sick may get an opportunity to sample Medicaid, and report their experiences to their friends. To some extent, this will be a race between efforts to improve Medicaid in order to forestall complaints, and the tendency of young people to try to get their way by pounding the table with their shoe. If successfully managed, it could promote some badly needed improvements in Medicaid. Handled poorly, however, it could bring the program down.
Cost of the Program. The fact must be squarely faced that insurance almost always increases costs. That is true of all casualty insurance, whether auto, homeowners, or maritime. Correctly applied, it can indeed redistribute costs, but insurance imposes extra administrative expenses, and it produces "moral hazard", so total costs are increased by insurance. Moral hazard is a term of art, signifying that nobody spends someone else's money as carefully as his own. Actuaries calculate the extra cost imposed by present American forms of health insurance to be at least 30% of the total service, and arguments can be made it will be so much more, that level historical costs cannot conceal the appreciably higher premium level. Longevity is improved by reducing the number of brushes with life-threatening illnesses in a lifetime; costs go up because prices go up.
Universal coverage now introduces its own uniquely unwelcome issue, that eliminating non-insurance market benchmarks for medical prices also eliminates the cost guidance they formerly provided. Crippled though it may have been, the partially cash market did set benchmarks, if not prices, which insurers then had to match -- and those benchmarks will possibly soon be seriously diminished. That development will be welcome to those who wish to receive higher prices, but cause dismay among those who have to pay for them. The result is predicted to lead to price controls, which will in turn provoke shortages, possibly demonstrations or worse. Matters may not follow that path, but it is hard to see why not. As to any reduced overhead like marketing costs, employer-basing has already reduced them to a small opportunity for streamlining. In the past, a resort to price controls has almost invariably led to shortages. Even in 2013 there have been shortages of cancer drugs, an almost unheard-of event in the past century.
To put it mildly, rationed healthcare is politically disadvantageous for those who attempt to enforce it. The most conservative projections now suggest that Obamacare will increase healthcare costs by 22%. Since the following proposals would by contrast almost surely reduce costs by a conservative 30%, it is not impertinent to suggest that no matter remains closed while a 50% overall cost swing remains credible. That would be particularly true when it concerns 17% of gross domestic product (GDP) during a recession. In fact, no one has even contemplated what it would mean to inject 5% of American GDP back into the world economy, especially by the mechanism of releasing a paralyzed medical system.
Patient Participation in Claims Costs, Generally Speaking. For the insurance industry, this is an old story. Industry survival has depended on success in answering it effectively. In health insurance the traditional approaches have mainly been 20% co-pay, and about $500 annual deductible. The first means 20% of all benefit cost, the second means the first $500 of benefit costs in a year. These figures evolved out of countless negotiations between labor and management, or within legislatures, are now accepted as traditional, and are accepted by the public. These figures also represent how much each side thinks it can afford, since they see themselves as ultimately paying the bill. Until recently however, patient participation at such small levels has not reached a point where it significantly influences patient behavior, which is set by entirely different forces, and is now the main long-term cause of healthcare cost inflation. As mentioned above, business negotiators seldom pay much heed to imposed costs, just so long as their major competitors must pay the same costs; in fact that is one of the flaws in our corporate system. However, governments as third-party payers enjoy no such luxury, and most of the complaining about healthcare cost inflation has originated with governments. Consequently, businesses not infrequently drag governments to higher cost levels, and this must be recognized as a reality of entitlement programs. Furthermore, attempts at raising patient cash contributions have always had political rather than economic origins, usually loudly characterizing any cost constraints at all as crippling the intent of insurance, making false promises, and depriving the poor of humane treatment. If patient contribution ever reaches 50% of costs, the program will likely be called a failure (Insurance exchanges please take note.).
However, it would appear incentives cannot affect overall patient behavior very much until patient payments do reach a much higher point, and we may well see some experiments to test what that level may be. (As it is argued here, this dilemma need not be completely dispositive.) More recently, steadily rising healthcare costs have actually led to employer increases in co-pays and deductibles, and the Obama administration has been giving signs of yielding to the behavior modification argument. However, these approaches cannot be called a success until they seriously reduce long-term healthcare cost inflation, and that remains a doubtful outcome.
In fact, no desperately sick patient should ever be expected to pay much attention to costs. The restraint of partial cash payment should be reserved for lesser conditions, and even provider discipline should be reserved for what are provably individual provider decisions, whether at the institutional level or the professional one. There are certainly broad areas where no patient cost restraint whatever can be justified, and program design should recognize that premise. Nevertheless, much more could be done with patient participation in costs than is done at present.
Targets for Cost Restraint Requiring Two Distinctive Approaches. There are two factors in overall medical costs: item price, and item volume. Above a certain level of sickness severity, only item prices can be legitimately constrained, not volume of service. Before any of that happens, of course all published prices should be audited and forced to conform to standard cost-to-price ratios, because cost-shifted indirect costs are so prevalent. For minor conditions and illnesses, volume control on the patient remains legitimate, particularly for conditions where patients are usually responsible for inciting them. Patient cost-sharing is therefore a legitimate out-patient approach. Officials given the right to set such boundaries will almost surely be assailed as having a conflict of interest, or untrained for the decisions; it is an unpleasant role, attractive only to unpleasant people.
The healthcare market segments itself into two quite different approaches, and successful administration consists of accurately distinguishing the two. As soon as the patient enters a hospital, his control of cost creation is taken away along with his clothes. Therefore, payment by diagnosis is a sensible approach for inpatients, and could be even more effective if the diagnosis codes were revised to include greater stratification by the additional use of laboratory and other billing sources as confirmatory evidence. An argument can be made that fee for service to a helpless patient operates without cost resistance. But having removed incentives for abuse, the laboratory data becomes even stronger evidence of underlying diagnostic distinctions. Since Obamacare has apparently not fully examined such distinctions, there remains hope it can be persuaded to see the codes need expansion. At present, DRG codes are very crude, and rely heavily on errors on the high side canceling out errors on the low side. Furthermore, they are derived from (ICD), the International Classification of Disease, which identifies individual diseases only if they are common, responding to the needs of medical records librarians who complained that usage did not justify the effort of coding every case. This combination of short cuts and errors is too crude for the advanced use now planned for them, and would benefit from substituting the coding system called SNOMED3. A case can be made for both lumping and splitting; perhaps two codes are required, a crude one derived by computer-lumping precise ones of the same average cost -- rather than by similar etiology. As matters now stand, teaching hospitals have no way to assert a need for greater reimbursement for greater case complexity, specialty hospitals are able to select inexpensive cases within expensive categories, and rural hospitals are left without satellite cash cows.
However, this is tinkering around the edges of volume measurement. Much greater savings are immediately possible from attention to prices, through billing for direct and indirect costs separately, recognizing indirect costs as the present main locus of cost-shifting. Some serious thought should be given to the growing shift of profitability to the outpatient area, with inpatient care transformed into a loss-leader. As that is increasingly true, it becomes wiser to shift attention to the prices of outpatient and emergency room services. Going all the way to Health Savings Accounts would be ideal, because it enlists patient incentives to the side of prices restraint. HSA also comes inherently segmented, between outpatient and inpatient hospital. Beyond segmenting price and utilization controls, however, consideration should also be given to segmenting health insurance itself, to match natural cost segmentations. Prison inmates, persons mentally impaired, and illegal immigrants account for nearly 30 million persons, and require specific ministrations, not patchwork exceptions to what the rest of the population requires.
CONVENE BLUE RIBBON COMMISSION TO REPAIR PSYCHIATRIC INPATIENT CARE. The 1983 BRA switched hospital inpatient reimbursement to payment by diagnosis (DRG). Abuse of the psychiatric exclusion then led to "corrective" legislation which has essentially reduced American's psychiatric inpatient care to an underfunded national disappointment. The problem is not an easy one, so a commission should devise a workable methodology for psychiatric hospitals, relying neither on present approaches, nor on DRG. But overpayment is a better outcome than no care at all. Homeless people sleeping in cardboard boxes on downtown steam grates are the consequence any visitor to the area can observe at night after the commuters go home. Psychiatric social workers readily recognize their daytime patients in the boxes.
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|Daniel Blain, M.D.|
Daniel Blain, M.D. (1898-1981) was just about the most important psychiatrist in America. He was the Physician in Chief of the Institute of the Pennsylvania Hospital at 49th and Market, the first and in many ways the most prestigious psychiatric hospital before it was closed. Before that, he was the first Medical Director of the American Psychiatric Association, itself the first (1844) medical society in America. His fame rested on organizing the disorganized psychiatry of the Veteran's Administration into a chain of advanced "Dean's Hospitals", a huge and very important achievement. Before that, he had achieved considerable fame as the man who took the dilapidated State Psychiatric Hospitals with a reputation as "snake pits" and made them a respectable part of the medical community. And before that, he had been born in China as the son of missionaries. As a matter of fact, even before that he was a descendant of General Mercer of Revolutionary War fame.
Dan was an outstanding example of the peculiar fact that Psychiatry was dominated by social upper crust psychiatrists in Philadelphia for a very long time. In fact, Benjamin Rush of the 8th Street branch of the Pennsylvania Hospital is known in some circles as the "Father of Psychiatry", while in other circles he is known for signing the Declaration of Independence. That isn't true in other cities, and it definitely isn't true in New York City, where the psychoanalytic school of Sigmund Freud took that city by storm, and essentially drove every other school of psychiatric thought out of town, out of medical schools, out of psychiatric hospitals. The famous sixteen year psychoanalysis of Woody Allen is an example of the extremes of that fad. Every profession has petty civil wars of that sort, best left undiscussed in public. But in the case of psychiatry, it was indirectly a material contributor to the present disappearance of inpatient psychiatry, and the related appearance of lots of homeless people on steam grates. Let me give a biased view of what is a massive human tragedy, which someone else can "rectify" if he chooses.
It starts with a Budget Reconciliation Act of the 1980s, which brought us the DRG (Diagnosis-related) system of paying for hospitalized patients. The idea was that appendicitis resulted in essentially 7 days in the hospital, give or take a couple of days, and the bills for an admission for appendectomy were for more or less the same amount. If you had fifty or a hundred cases a year in your hospital, the high bills balanced the low bills, and the overall hospital reimbursement was essentially the same without itemizing the bandages and whatnot. Congress bought this package, and after it got going, just about all hospital bills were reimbursed at one of three hundred prices, the cost to the government was the same, and there was a whole lot less bookkeeping and accounting cost. It was a success, except for a few cases where the costs did not closely line up with the diagnosis, and psychiatric hospitals were where they concentrated. So, psychiatric hospitals were excluded, and psychiatric bills skyrocketed. This experience has been carelessly cited as an example of the evils of payment by service ("fee for service"), when in fact the duration of psychiatric hospitalization is related to features of the condition, like a danger of suicide, rather than the diagnosis itself. Psychiatric leadership at the time contained many in a subset of physicians who did not think much of inpatient psychiatry in the first place, and even less of lobbying, and they underestimated the severity of the assault on the specialty. Apparently, no workable formula for pricing inpatient psychiatry has since been brought forward to be approved by a Congress which is more accustomed to getting its lobbying in the form of one-liners. And would you believe it, psychiatric inpatient care soon disappeared.
That's right, if someone in your family needs psychiatric hospitalization, I wouldn't know where to tell them to get it -- at any price. From considerably overpaying for psychiatry inpatients, to paying scarcely anything for them, this little change of the regulations caused every psychiatric hospital I know of by name, to close. It helped balance some state budgets, but it also was a considerable factor in filling the steam grates of American cities with people who sleep on cardboard boxes. And what it illustrates is that this is what political society always seemed to do, before Dan Blain and a small group of upper-crust psychiatrists were temporarily able to shame them into something better. In fact, if there is any tattered remnant of good inpatient psychiatric care left in America today, it is in the Veterans Hospitals that Dan was able to straighten out.
Dan Blain will probably eventually be bypassed as a curiosity, like his wife. She was a Wister Logan Blain, descended from families who ruled Philadelphia a hundred years before even General Mercer came along. So the Blain couple lived on an enormous farm plot, centered at 20th and Olney right next to LaSalle University, which is built on their property. It also contains the Peale House, where Charles Willson Peale lived as the elected president of the rebel faction of the American Revolution. Peale didn't know what he was supposed to do, so he resigned and painted portraits of people. The Blains enjoyed keeping a cow on their land, the last cow in Philadelphia, and the LaSalle students enjoyed stealing the cow and leaving it on the top floor of a dormitory, for laughs. Meanwhile, the Blain couple had cocktail parties on their front porch for visiting dignitaries. They usually wore blue jeans, and Mrs. Blain, the absolute Queen of Philadelphia society, was occasionally observed to pour vodka into her glass of beer. That sort of background may well have been useful when psychiatry needed to be built up and humanized, but it became a liability when the rest of inpatient psychiatry failed to appreciate what was knocking on its door.
Millions of people were unexpectedly cancelled by health insurers at the onset of the Obama Insurance Exchanges. The President repeatedly told the public under Obamacare they could keep their old plans if they wished, even after notices to the contrary were mailed out. Insurance spokesmen firmly responded that the terms of the law required they could not keep the old plans for a single day. This promise was reinforced by the original section 1251, but later amended in confusing ways.The public had been told nothing like that during a three-year opportunity to be open about it; in their view, it was sprung on them. Maybe they had even been lied to; more likely, someone objected, causing revision that could be interpreted in several ways. In any event, postponement of the large-employer plans made it moot for the customer but not for the voters. To quell the uproar, the President quickly delayed the cancellations for a year, then extended the suspension, and soon provoking alarmed announcements from the insurance industry that such insurance would lose money. It suddenly became a question whether he could make the insurance companies take them back, and some said they wouldn't, even for just one year. It all sounds like an uproar on the other side of the curtain. The irresistible conclusion emerges there is more to this arrangement than is revealed, with further surprises to be feared. After all, the old rates had been set by the insurers, so something extra must have been added by someone else, but possibly it triggered some clause in the risk corridor provisions. Long accustomed to caveat emptor from salesmen, the public will have trouble getting over the assumption that insurers had been promised more expensive products to sell, in return for doing something of value for the Obama administration we haven't yet learned about.
In a world long accustomed to government anti-trust constraints, that higher prices with less competition could be mandated by law was almost too good for insurance companies to imagine. But now, after the deal is suddenly "postponed", any other industry groups who may have negotiated secret accords, are warned of the price: they must expect to absorb some costs whenever this President is forced to abandon his side of a bargain. The National Journal , recently quoted an interview with an insurance lobbyist that large amounts of insurance money helped finance Tea Party meetings, suggesting internal dissension within the industry.
In any event, the cancelled policies were almost entirely individual policies in the end, and the ultimate goal is speculative. A different way of expressing the thought is, a large collective of individual policies can more easily resist pressures to cross-subsidize other favored clients. One thing is almost uniformly true of persons who hold individual (as opposed to group) policies: they pay for health coverage with after-tax dollars, and therefore are out of pocket by 20-30% extra for equivalent insurance. Many of them may well resist higher-priced products for that reason. Eliminating individual policies would cost the government considerable tax money and indirectly raise premiums. There must be some other motive for animosity toward individual policies, but we will have to wait to find out what it is. It may be just as simple as reducing the visible cost gap between the old system and a new one.
One of the best ways to wreck a good plan, is to fail to provide for success. Most innovators spend so much anxiety over possible failure , they never get around to planning for the problems created by the plan's roaring success. So, let's voice some concerns about where the Lifetime Health Savings Accounts might stand, if everything worked perfectly.
In the first place, there could be a conflict between the small investor's best interests. On the one hand, he will undoubtedly do better for himself by purchasing index funds than individual stocks. He gets diversification and low fees, supported by mountains of evidence that only a rare investor will do better with stock-picking and market-timing, no matter who is advising him. But if myriads of people do the same, index funds could overwhelm the market. Already, they represent several trillions of dollars, and show no signs of slowing the pace of advancement. The proportion of stockholders who actually vote their shares will steadily shrink, and ultimately we can expect the few shares that are voted, to be in the hands of managers and insiders of the company. Now it is probably true that the average small investor knows so little of what is going on, that both he and the companies are better off if he doesn't exercise an uninformed vote. A more likely danger is imperfect agency on the part of the managers of the funds. Wall Street periodically circulates rumors of fund managers offering to vote the fund proxies, in return for in return for the selection of their fund for the affected company's pension fund assets. It doesn't matter whether this is true, what matters is it is believed. Sooner or later, Congress will get wind of such rumors and pass inhibiting legislation. The nature of such regulation and/or legislation is ultimately to impair the value of the stock. The salaries of CEOs may go down, and some Wall Street predators may be thwarted, but overall return on investment will be lessened by the suspicion.
The bond market is much larger than the stock market, because leverage is the basis for a great deal of profitability. No one knows what the optimum ratio of bonds to stocks should be. In 2007, the ratio of bank leverage was fifty to one, and few people complained it was too much. In the depths of the 1930 depression it was far lower, and few people complained it was too low. In retrospect, fifty times is insanely high, while if you bought any stock at all in 1939, you probably made a ton of money. The herd instinct always seems to drive this relationship to extremes, but in fact the optimum ratio will also go up and down with the times. Any law setting limits will be meaningless for long periods of time, and then suddenly be a serious impediment to the economy. The problem lies in the reality that bond trading is, with few exceptions, a zero-sum game. For you to win, someone else likely has to lose. By contrast, the stock market represents company ownership, and it is possible for both sides of a trade to be highly satisfied with their outcomes. It certainly isn't guaranteed, but the environment is more favorable for a passive investor. The long run hazard lies in the possibility that nearly all investors will go to school and learn these aphorisms, thereby undermining the bond market except for insurance companies, banks and other long-term investors, who can hold a thirty-year bond to maturity. A flight from bonds would inevitably make their prices drop, followed by a shortage of bonds, which would then make their prices soar. Carried to an extreme, and protracted for a decade, a disturbance of this sort would cause the buy-and-hold stock investor to lose the faith, and ultimately to lose his shirt.
You have to feel sorry for the traditional stock broker and investment advisor. The advent of the computer and of low-cost diversified funds, have badly shaken what has long been an honorable and respectable profession. However, stock brokers have resisted adopting the legal role of fiduciary, pledged to put the customer's interest ahead of his own. Most of the major stock brokers started as private offices to handle the affairs of one rich family, who essentially didn't care about the fees and commissions. As a favor to rich friends, they enlarged the business and utilized economies of scale. In consequence, almost all stock brokers could hope to get rich from trade secrets. With the advent of computers and high-speed trading, the broker trade became an investing profession, graduates of business schools and even mathematics majors from Ivy League Universities. The secret of success in that environment was volume, not trust-fund babies as friends and former classmates. Pension funds in particular aggregated a large number of obedient clients for them; the salary scale was still opulent, but the clientele were no longer their equals in sophistication.
As the brokerage house with walnut panels and oriental rugs began to fade away, the social level of the broker was no longer so important, and high fees interfered with maintaining high volume. It is only a matter of time before the personal financial manager discovers a small volume of potential clients, including trust-fund babies with some investment training of their own. The surviving financial advisors are only cogs in a big machine. In the meantime, be careful of whose advice you take, especially if he steers you away from index funds. There is a significant risk the advice is really coming from the sales manager, unloading the firm's inventory. The most lurid example is what has happened to 401(k) pension plans, where the investment return is heavily consumed by fees, altogether too often. It would certainly pay to browse through a book by Ibottson, containing all of the statistics you need about the last century. Since 1926, large-cap stocks have averaged 10% total return, while somewhat riskier small-capitalization stocks have averaged 12.5%. Your interview with an advisor can't be considered finished until you are told what the 15-year experience has been at that particular fund. Unless you are determined to get the data, you probably won't get it. Because of this behavior, the famous investor Warren Buffett tends not to buy stocks and bonds at all. He buys the whole company. The results of his investment fund, Berkshire Hathaway, are a rather close match to the returns which Ibottson reports.
Ok, ok, got that. But suppose everyone gets it? In that case, one would suppose the prices of common stocks would fall, and the prices of bonds would rise to a new level. At that point, the advice would be to buy funds which hold huge amounts of bonds of all maturities, and hold them to maturity. Remember, investors in Health Savings Accounts would effectively be investing for the next sixty to eighty years. Someone must be found to change the composition of the portfolio rather drastically, and to do so gradually enough to avoid convulsing the market. Panics are essentially what happens when everyone tries to get out the door at the same time. Are we to risk the entire savings of the nation for healthcare, based on that sort of opinion? It seems pretty clear to me that we have to trust someone, but it is not clear to me how we can assure ourselves that the person or persons with authority, will be sufficiently unaffected by politics -- to be trusted.
Which brings up the Federal Reserve. It would be hard to find a group of more serious people, generously infused with a strong sense of duty and fidelity. But strong differences of internal opinion regularly surface, not necessarily following political ideology, as much as creating it. After all, some of this stuff is really hard. In the full century since the 1913 creation of the Fed, the dollar has declined a thousand percent, from the value of one dollar to the value of one penny. John Kenneth Galbraith, one of the wittiest civilized men on earth, loudly and earnestly advocated a deliberate 2% inflation in the value of the dollar. Well, we have it, and the dollar has completely severed its connection to gold and silver, or any other commodity. The currency has now just become a computer entry, when thousands of years of experience speak to the hazard of doing so.
When the dust settles, there remain two reasons why we should take such risks. The first, is the rather good possibility we can indeed extricate ourselves from a looming health finance disaster, by taking this risk. The second, is to reflect on the growing possibility that medical research can eliminate enough disease, and reduce the cost of caring for what is left, to give us the room to ease into sustainable finances. If that's our grand strategy, only America, using American bravado, could pull it off.
Looming Early Issues in Obamacare
Obamacare is constructed from the regulations issued by the Secretary of Health and Human Services. They respond to the laws passed by Congress which were two thousand pages long. After two years, only the outlines of this program are known. What are the looming issues?
Psychiatry: Last Cow in Philadelphia
Daniel Blain, just about the most famous psychiatrist in America, lived at 20th and Olney, West. Not only was that the place he lived, he kept a cow there. And this was within living memory.
Higher-cost Health Insurance is What's Mandatory
Cancellations of millions of health insurance policies show the Affordable Care Act aimed to mandate a few specific types of policies, and not merely to the uninsured. Without a government subsidy most plans would cost more. The promise that you can keep your old plan, and keep your doctor, was an empty one.
What Price Success?
If everybody buys diversified stock funds, and never votes at the annual meeting, who owns and controls the company?