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Alexander Hamilton
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In 1789 while arguing for the establishment of a National Bank, Alexander Hamilton made one of the most famous counter-intuitive assertions of his controversial career. "A national debt, if it is not excessive, will be to us a national blessing".
The very suggestion of such an idea enraged Thomas Jefferson and his Calvinist adviser, Albert Gallatin. James Madison, ever the political schemer, immediately recognized a new bargaining chip in his move to relocate the national capital to Virginia. Political parties were promptly invented to mobilize votes on both sides, and the national bank remained a divisive issue for half a century afterward. Neither a borrower nor a lender is; how could anyone, then or now, say the debt was a blessing?
Indeed, that's evidently how the leaders of Singapore, Malaysia, Australia, China, and several other prosperous states still feel about it. While not eliminating taxes, these countries accumulated surpluses and created sovereign-wealth funds. Having paid off the national debt, and still finding a national surplus, what else are you going to do with it?
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Gallatin
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These countries hired investment advisers to buy stock for the funds, evidently feeling American stocks were the safest bet; it's hard to criticize that conclusion. In the present credit crunch, they are investing five and ten billion per transaction in the equity of America's premier investment banks. So far, they only acquire 5 or 10 percent ownership, but then the credit crisis may not be over yet. For them eventually to acquire 51% controlling ownership somewhere is not at all inconceivable. An ominous sign of where that might lead is found in our own captive pension funds. The state employee pension funds have quickly become captive to unions with their own agenda, with the result that the prosperity of the companies in the portfolio could be sacrificed to the benefit of interest groups. And yet, it wouldn't be so hard for America to do the same thing. If Congress had adopted the Bush proposal of three years ago to create an investment fund for Social Security, we ourselves would soon have what amounts to the largest sovereign wealth fund in the world. Could this be a solution to the weakness of the Federal Reserve in controlling the currency with bank debt? Could we somehow create a common world currency based on a common fund of sovereign wealth funds and with that, create a new definition of wealth based on equity rather than debt? The technical answer to the potential corruption issue would probably lie in stripping the voting power from such shares and then submerging them in a world index fund. The United Nations sound of it nevertheless still boggles the mind. Are people who oppose an equity-based world currency going to be forced like Gallatin to eat their own dusty words when the reality of debt-based currency sinks in? How many of the ambassadors of ideas about such suggestions, both pro, and con, would eventually surface as sneaky connivers like Madison, with a hidden side-agenda? After all, in a democracy, everyone is expected to marshal every argument, weak or strong, for his own self-interest.
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Federal Reserve
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The loss of banks as a tool for the Federal Reserve would undermine the way the Fed does its job. A deeper reality is that many governments really don't want the job to be done perfectly and independently. The European common currency, the Euro, is already irking the French and other national governments who sometimes hanker to inflate away their debts or deflate their way out of the subsequent inflation. A perfectly automatic currency regulation threatens an important ingredient of the sovereignty of nations, thus the whole concept of nationhood. Somehow, the desire of markets to enhance wealth must come to terms with the desire of governments to re-elect themselves.
It will take more than the present crisis to provide credibility for ideas as wild as substituting equity-based currency for the present debt-based one. Unless someone devises a better-sounding scheme, it seems more likely that financial Jacobins will propose sacrificing the unwelcome intruder. Derivatives, whatever that means, started this mess. Maybe we should make them illegal.
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International Money
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The United States government issues lots of different currencies. We issue ones, and twos and fives and tens and twenties. If you need more one dollar bills, you can walk into any candy shop with a five and the shopkeeper will more or less cheerfully make the exchange without charge. But if you want to change the same five dollar bill for euros, yen or drachma, you need to find an agent in a kiosk and pay a fee of about 3%. The booth or shop of the international money changer will have some sort of electronic means to tell what the rate of exchange might be at any given moment. To extend this idea, if the people at the mint run short of ones, they just print some more, meanwhile removing a comparable number of surplus fives from circulation. No matter how extreme the imbalance, it does not affect the price of dollar bills. That's more or less the idea behind the common currency in Europe and a major success. All countries of Europe want to join, nobody wants to leave.
But some things are lost in this obvious simplification of financial transactions; it has enemies. For one thing, the Federal Reserve or other central bankers can change interest rates instantly, but the rest of the economy has a certain amount of inertia. For example, banks typically deal in 90 day Treasury bills, so it takes them a month or two to catch up with the Federal Reserve as the old bills mature; in the meantime, they lose money. Almost all businesses have even longer legs than that. So during the lag periods, the national economy experiences inflation or deflation, which may represent the national interest at the moment, but in time things catch up and rebalance about the way they were before the central bank acted. Except for taxes, that is, and this specific attrition is one of the main arguments for eliminating the capital gains tax, or extending special allowances for banks and others who have short-term gains on price changes without effect on underlying values. The matter gets mixed up in domestic politics. Incumbents long for short-term inflation, nonincumbent challengers denounce it. Everybody welcomes a "strong" currency, everyone recognizes that a weak currency sounds pretty bad. Few, however, could defend their opinion. The people who benefit are the ones who can move fast, because there's usually a brief flurry of inflation or deflation, and then things go backward. People who can move huge amounts of money quickly are apt to make big mistakes in their hurry.
And so it is in the eyes of foreigners. Right now, the American tourist to Paris confronts a taxi charge of $120 for a twenty-minute ride from the airport to the downtown. Everything else, from thirty dollars continental breakfast to two hundred dollar dinners, seems comparably overpriced. Tourists with sticker shock return home to tell their friends all about it, just before the November elections. No doubt it has an opposite effect on Parisian shopkeepers and their acquaintances. But the tourist trade is comparatively minor, compared with major industries. Airbus was once giving Boeing a seriously competitive race for airliners, but now Airbus is contemplating possible bankruptcy if currencies do not soon readjust, and Boeing is laughing all the way to the bank. Stop a minute and consider what happens when you buy and sell a whole company. Now it's the reverse, and a group of European investors is considering buying Anheuser Busch, the largest American brewery. The producer of Budweiser beer seems extremely cheap to Europeans, just as the beer itself is cheap for European beer drinkers. And then just consider a personal note: the wife of Senator McCain, running for President, owns a huge chunk of Budweiser distribution. The pillow talk in that family is likely to focus on the unfairness of hostile foreign take-overs.
So, all in all, tinkering with the currency as a direct or indirect consequence of a banking crisis caused by overbuilding houses in the sunbelt, has potentially fearsome consequences. They must be added to effects on commodity prices, and revolutions in the banking system. Those two issues are next to be considered.
When medical care was entirely a private two-party arrangement, the patient and doctor negotiated what was to be done, and often the price; if the patient could not pay, some embarrassed workaround was figured into the equation, including a vague promise to pay the doctor when he could. A surprising number of patients did pay later, and because the doctor's bill contained very little overhead, even partially paying it off created an unspoken promise that the patient would now be welcomed back.
It was the appearance of insurance forms which created secretarial overhead, even though of course it also brought along some revenue. Skeptics may doubt the extent of this, but at my advanced age as a patient I now visit four doctors of different specialties. Collectively, they seem to have fourteen assistants and fourteen computers I can count. That remains the situation even if a patient delegates decision-making to members of the family, or a hospital wants to know what is being given away to charity patients, or a bewildered patient seeks a second opinion. It changed abruptly when third-party payment seemed to entitle a government or an insurance company to be reassured that claims were legitimate. This uneasy and often resented intrusion into a private matter began to cause friction even in the 1920s, soon after third-party reimbursement made an American appearance, and as physicians gradually recognized that "utilization review" generated more overhead cost than simple claims submission. At first, health insurance companies were restrained from brisk business-like behavior, by the realistic possibility that the patient might switch back to paying bills in cash. Somehow that possibility now seems so remote that when the owner of a Korean auto manufacturing company tried to pay his hospital bill with hundred-dollar bills, the hospital simply had no procedure for handling such an unexpected request.
As long as a secretary was sitting there filling out forms, she might as well answer the phone for appointments. In this way, appointment systems became routine, including hidden extra revenue loss generated by broken appointments. Insurance pre-payment is always complicated by the realities of emergency care, where considerable expense must sometimes be incurred before the third-party has a chance to review the facts; in this lies the origin of the term "reimbursement". The third-party acquired the ability de facto to delay or deny reimbursement, an action immediately regarded as high-handed, since expenditures had already been made in good faith and could not be recovered. The right to deny such claims was implicit, and at first it was used gingerly by insurance companies trying to establish themselves. Now that insurance is considered normal, any incurred costs must be handled in some way, so other subscribers are charged extra to keep the hospital solvent. The cost to the system is exactly the same this way, but no other way has been suggested to maintain the credibility of insurance oversight. When I once told the owner of a department store that I had 2% bad debts in 1955 (ten years before Medicare) he replied that my bad debts were less than his and my bookkeeping was far more elaborate. True, some hospitals could not survive without the insurance system, but if others in better locations examined their experience extensively, they might discover their accident rooms are net losers for the insurance. Third-parties slowly retreated, hospital prices crept upward and the system readjusted, but no one is entirely satisfied with this showmanship masquerading as a balance of terror. When you see a sick or injured person turned away from an emergency department for lack of insurance proof, you can be sure there is either not enough slack in the system, or not enough administrative imagination.
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Senator Wallace Bennett
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Early in the 1970s, Senator Wallace Bennett of Utah devised a solution to this problem, and persuaded the rest of Congress to endorse a nation-wide system of Professional Review Organizations (PSRO), run by the medical profession but paid for by Medicare. Although many physicians muttered about the "creation of new elites", and hospitals were particularly uneasy about the migration of power, the new system worked reasonably well. If the physicians in the local PSRO approved a service, it was paid for. If payment was denied by a local PSRO, an appeal to a state-wide body of physicians was provided. In that way, prevailing local standards were respected, while appeal to distant physician judges was also provided, to guard against local vendettas ganging up on someone they disliked. Inevitably, a few localities would elect an unsatisfactory PSRO, so a voluntary national organization was formed to educate, inform and defend the process, and better able to discipline it with peer pressure than might be supposed. The national organization was pleasingly benevolent, sometimes apologizing for its role as a necessary one to weed out constituent PSROs whose bad behavior might discredit the others and start up the usual chatter about professional self-government: The foxes were guarding the hen house, and must be replaced by wolves. The PSRO gradually adhered to an unspoken rule of rarely boasting of success; it saw its role as redirecting unsatisfactory behavior, not vanquishing wrong-doers. It soon became evident that successful PSROs were of two types, rural and urban. In localities where a single hospital served a county or more, physicians were of all types mixed together, and the need was to strengthen the emergence of the natural leaders, often by placing them on the PSRO board. In large cities, however, a sorting-out process had usually resulted in strong hospitals and weak ones; birds of a feather flew together. The weaker hospitals were soon identified and urged to elect stronger leadership; sometimes it was necessary to suggest that the institution might serve better as a nursing home. Throughout the process ran the threat of exposure; successful PSROs usually relied far more on peer pressure than the threat of withholding payment.
What ultimately defeated the PSRO was its success, not its failures. Many pre-existing elites were content to see a new governance structure fumble, but felt highly threatened by a successful one. Moreover, the AMA leadership seemed particularly concerned about the direction of "regulatory capture", and was not completely certain whether the PSRO was beginning to dominate the Washington bureaucracy, or the AMA House of Delegates, or a little of both. The PSRO fraternity was definitely a large national organization of doctors who knew and respected each other, and many of its leaders were in the AMA House. Matters finally came to a head in a famous vote opposing the PSRO, by 105 to 100. The opinion of organized medicine meant a great deal to Congress. When representatives of the PSRO next testified before the Senate Finance Committee, the Chairman of the Committee wryly announced the next speaker from the AMA was one who was "presumably here to explain to us the difference between 105 and 100." The PSRO law was soon amended, and insurance review took its place.
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AMA House of Delegates
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For the time being, utilization review in the future is apparently currently limited to Medicare, under the Medicare Accountable Care Act. With the foregoing bit of history to warn the Accountable Care Organizations about what they are getting into, a simple set of principles can be stated. Utilization review encounters two components of cost: the volume of care, and the price of the services. Doctors control the volume, hospital administrators control the prices. Determining the proper volume of services is a job for practicing physicians, alone and unhampered. To some extent, under the new law an incentive to keep it that way was created by sharing with the provider members a portion of any cost savings associated with the patient group. But the ability to change the sharing will probably be a a one-sided government decision unless the physicians fiercely insist that it remain negotiable. Agreeing that the physician voice should be dominant in the issue of service volume should not imply agreement to exclude their inspection of the prices of services. When physician income becomes linked to their choosing less expensive alternatives, physicians must not continue to be blinded to what the true cost of components truly is. While it remains conceded that hospitals and vendors must retain some flexibility in adjusting the ratio of charges to costs, any deviation from a standard bandwidth must be negotiated with the physicians affected. Past experience should be ample proof of the fairness of this demand.
The volume of most medical services at present is about right, but prices will keep rising when they bear little relation to the underlying direct costs. Furthermore, the Medicare (or similar) Cost Report of every hospital must annually report the ratio of cost to charges, probably by item rather than department. And this ratio must be monitored. Complexity is no argument against doing so; the Chargemaster system has never been resisted because of its complexity. It has been no secret for thirty years that a twenty-dollar aspirin tablet has a very high ratio of charges to its actual cost. Other items are provided at a loss, and the mixtures are highly variable between hospitals. Everyone concerned knows this situation is unsustainable, but everyone recognizes that total denial of reimbursement is entirely too destructive if no slack remains in the system. If it is successful an appeal mechanism will become necessary, because new treatments can be resisted by old treatments, but the optimum rate of change will vary by local situation.
Rather than overcomplicate matters, the goal should be total denial of reimbursement for denied services, because the public will demand it. It must however, be coupled with an adequate profit margin on approved services, to service the costs of retrospective review. Designation of the optimum ratio of cost to charges is a critical decision, much like the function entrusted to the Federal Reserve, of picking the best average interest rates for the national economy. If the agencies selected by Obamacare get this point very wrong, very often, the public must quickly be in a position to let everyone know of its displeasure.
The other source of circumvention is the hospital system of enforcing a physician hierarchy reporting to a physician chieftain, but insisting that the chieftain himself be financially beholden to the hospital administration. In that way, financial health of the institution sometimes dominates the health of the third parties, who then find a way to retaliate. if this issue is neglected a deadlock could affect the health of the patients. Since a three-way balance must be preserved, governance must be fairly shared three ways. Those who believe this is a minor issue because the third party obviously has final power, have a great deal to learn.
(Healthcare for Citizen Lobbyists)
There are a few other ideas about the cost of medical care, which I would say are widely held, but the truth of which seems dubious. In fact, I would characterize them as misconceptions. If misconceptions are held long enough, they eventually work their way into the tax code.
Is Preventive Medicine Always and Everywhere Less Expensive?
As heads nod vigorously in support of prevention, please notice in general usage it suggests several different things. The overall implication is that small interventions for everyone are less expensive to society; less expensive, that is than large expenses for the few who get the disease. That is clearly not invariably the case, and unfortunately, in a compulsory insurance world, it may seldom be the case. The point is not that preventive care is a bad thing, because it is often a very good thing, even by far the very best thing. It's just not necessarily cheaper.
Take for example a tetanus toxoid booster, which ten years ago cost less than a dollar for the material. Recently in preparation for a vacation trip, I was charged $85 dollars by my corner drugstore, just for the material. If you do the math, $85.00 times millions of Americans is a far greater sum than the present aggregate cost of Americans actually contracting tetanus, especially following the advice to have a booster shot every ten years. This becomes more certain if one adds in the cost of administration. The vaccine is quite effective, Americans had almost no cases in the Far Eastern Theater in World War II. The British who did not vaccinate routinely had large numbers of often fatal cases. Furthermore, even if the tetanus patient survives, the disease is hideously painful. Is it better to immunize routinely? Yes, it is. Is it cheaper? I'm not entirely sure, because I have no access to the production costs of tetanus toxoid. But it certainly seems likely it isn't cheaper. Malpractice costs, which are a different issue entirely, complicate this opinion.
Better, yes. Cheaper? No.
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Preventive Medicine
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Something, probably malpractice liability, has transformed an effective preventive procedure from clearly cost-effective to -- probably not cheaper for a nation which no longer has horses on the streets, but still has horses on farms and ranches. This is presently mostly a malpractice liability problem for the vaccine maker, not a preventive care issue. Take another well-known example. In the case of smallpox vaccination, it is now clearly more expensive to vaccinate everyone in the world than to treat the few actual cases. The waffle currently being employed is to limit vaccination to countries where there are still a few cases, hoping thereby to eradicate the disease from the planet.
Over and over, an examination of individual vaccinations shows the answer to be: better, yes, cheaper, no; with the ultimate answer depending on accounting tricks in the calculation of cost, cost inflation because of third-party payment, and related perplexities. To be measured about it, excessive profitability of some preventive measures could act as a stimulant for finally calling off prevention, by taking on a briefly more expensive campaign to achieve final eradication. Somewhere in this issue is the whisper that "natural" gene diversity of any sort must never be totally eliminated, a viewpoint which even the diversity philosopher William James never openly extended to include virulent diseases.
Routine cervical Pap tests, routine annual physical examinations, routine colonoscopies and a host of other routines are in general open to questioning as to cost-effectiveness. The issue is likely to increase rather than go away. Much of the current denunciation of "Cadillac" health insurance plans focus on the elaborate prevention programs enjoyed by Wall Street executives, college professors, industrial unions, and other privileged health insurance classes. A more useful approach to a borderline issue might focus on removing such items from health insurance benefit packages, particularly those whose cost is subsidized, either directly or by income tax deductions. Those preventive measures which demonstrate cost-effectiveness can have their subsidy restored, or be grouped together into a category which must compete for eligible access to limited funds.
The inference is strong that unrestrained substitution of community prevention for patient treatment escalates costs rather considerably, and -- at the least -- needs to demonstrate more cost-effectiveness before subsidy is extended. While self-interest is a possibility if only physicians are consulted, total reliance on bean-counters could eliminate benevolent judgment entirely. Community cost effectiveness is a ratio, and both sides must be fairly argued. Don't forget many people quietly recognize the need for gigantic cost-shifting between age groups. Spending money on young workers to pay for shots is one way to shift the cost of elderly illness, backward to the employer they no longer work for. It can be a pretty expensive way to do it.
In the final analysis, without some form of patient participation in the cost, this issue is probably unsolvable. To launch a host of double-blind clinical trials to find out the truth will lead to answers of some sort, which will quickly be undermined by price/cost confusion, leading to increasingly futile regulation. Including preventive costs in the deductible at least allows public participation in the decisions and true balance to begin; which is to say, even universal preventive care admiration cannot be adequately assessed except in the presence of a substantial open market for the product.
Much "preventive" care is really "early detection" or "early management". That's entirely different. When the goal changes so subtly, it is often not possible to judge what is worthwhile, except by placing some price on pain and suffering. The abuse by the trial bar of the monetization of pain and suffering in the malpractice field, ought to be a gentle reminder of that. Preventive colonoscopy has clearly caused a decline in deaths from colon cancer; that's a medical judgment and a transitional one. Whether the cost of catching those cancers early was cost-effective is largely a matter of colonoscopy cost, and on digging into it, will be found to be as much an anesthesia issue as a colonoscopist one. In any event, it is not one where the opinion of insurance reviewers should be decisive. If the litigation industry moves to make an omission of prevention a new source of action, it will surely be a sign it is a past time, to caution the public about the direction of things.
Average Hospital Profit Margins: Inpatient 2%, Accident Room 15%, Satellite Clinics 30%
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Payment By Diagnosis
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Outpatient is Not Necessarily Cheaper Than Inpatient For the Same Problem. Medicare provides half of the hospital revenue; the other half is often dragged into a uniform approach. The reimbursement mostly has nothing to do with the itemized bills hospitals send and may have little to do with production costs. The DRG (Diagnosis-Related Groups) system for reimbursing hospitals for inpatients is thus not directly based on specific costs in the inpatient area. It is related to clustered diagnoses lumped into a DRG group, and then assumes overpayments will eventually balance underpayments within individual hospitals.
That last point, depending on the Law of Large Numbers, is questionable, and especially so in small hospitals. When two million diagnoses are condensed into 200 Diagnosis groups, group uniformity just has to be uneven. Reimbursement means repayment, but this interposed step often interferes with that definition. Someone in the past fifty years discovered the reimbursement step was an excellent choke point. Manipulating the reimbursement rates without changing the service is a handy place to choose winners and losers; it's largely out of sight of the people who would recognize it for what it is. Furthermore, for various DRG groups, or for all of them, it becomes possible to construct a fairly tight rationing system for inpatient costs.
The degree to which actual production costs match a particular DRG reimbursement rate is blurred by inevitable imprecision in the DRG code construction. It is impossible to squash a couple of million diagnoses into two hundred code numbers without imprecision. It works both ways, of course. The coders back at the hospital will seek weaknesses out, experimentally. A grossly generalized code is placed in the hands of hospital employees, resulting in a system which suits both sides of the transaction, but is one which ought to be abolished, on both sides, by computerizing the process. At least, computers could avoid the issue of mistranslating the doctors' English into code.
The overall outcome with Medicare is an average 2% profit margin on inpatients during a 2% national inflation. This is far too tight to expect it to come out precisely right for everybody. And in fact, inflation has averaged 3% for a century but is 1.6% right now. The Federal Reserve Chairman desperately tries to raise it, but it just won't go up. If you don't think this is a serious issue, just reflect that our gold-less currency is supported by a 2% inflation target which the Federal Reserve is proving unable to maintain.
For technical reasons, the same forced loss is not true of outpatient and emergency services, which usually use Chargemaster values. Emergency services are said to approximate 15% profit margins, and outpatient services, 30%. It is therefore difficult to believe anyone would start anywhere but the profit margin, and work backward to managing the institution. In consequence, the buyer's intermediary has stolen the pricing process from the seller. Without the need to communicate one word, prices rise to the level of available payment and then stop there. But let's not be too specific in our suspicions. Some incentive to direct patients to the emergency and outpatient areas must develop, and is acted upon in the pricing. It just doesn't have to be so confusing and so high-handed.
Any assumption by the public that outpatient care is cheaper than inpatient hospital care is likely to be quite misleading. Short of driving the hospital out of business, revenue in this system is whatever the insurance intermediary chooses to make it. There was a time when the intermediary was Blue Cross, and behind them, big business. Nowadays, it is Medicare, but Obamacare probably aspires to the turf.
Let's test the reasoning by using different data. Because hospital inpatient care is reimbursed at roughly 106% of overall cost, while hospital outpatient care is reimbursed at roughly 150%, hospitals are impelled to favor outpatient care, no matter which type of care happens to have the cheapest production cost, the best medical outcomes, or enjoys the greatest comforts. Instead, the rates and ratios are ultimately determined by magazine articles and newspaper editorials. At some level within the government, a political system responds to what it thinks is public opinion, vox populi est vox Dei. No matter what their personal feelings may be, hospital management encounters more quarrelsomeness on wages in the inpatient area, less resistance in the outpatient and home care programs. So, true costs must actually rise in the outpatient area, sooner or later, following the financial incentives. Personnel shortages follow, as does friction between hospitals and office-based physicians. The process is circular, but the origin of favoring outpatient care over inpatient care was primarily driven by some accountant reading a magazine article.
A highly similar attitude underlies the hubbub for salaried physicians rather than fee-for-service. It's a short-cut to a forty-hour week, and following that, to a doctor shortage. And following that, to enlarged medical school budgets. If anyone imagines that will save money, the reasoning is obscure.
Everybody can guess what it costs to wash a couple of sheets and buy a couple of TV dinners. Everyone fundamentally understands Society's need to transfer medical costs from the sick population to the well population. Nothing known about hotel prices justifies a 50% difference in price between inpatient and outpatient care, all else being equal. The room price mainly supports overhead costs which are unrelated to direct patient care, so those fixed costs are like migratory birds, settling to roost where it's quiet. Remember, it doesn't cost driving the system, it is now profit margins.
The Return of a Discharged Hospital Patient Within 30 Days is not Necessarily a Sign of Bad Care. Rather, it reflects the fact that hospital inpatient reimbursement is entirely based on the bulk number of admissions, not the sum of itemized ingredients. Having undermined fee for service, Medicare must resort to taxing the whole admission.
Early re-admission can, of course, be a sign of premature discharge or careless coordination with the home physician. But these issues are so remote from the basic reason for admission, that bulk punishment is unlikely to change the criticized behavior. That behavior may mean a convalescent center is convenient to a hospital, making it reasonable to move the patient without much loss of continuity of care; and treating his return to the acute facility becomes a matter of small consequence. It is also a matter of cost accounting; when you claim a hundred dollar hotel cost to be worth thousands of dollars, many distortions are inevitable. If a hospital essentially shuts down on weekends, for example, there actually might be better care available somewhere else.
Imposing a penalty for returns to the hospital post-discharge has certainly changed behavior, but it is far from clear whether institutions are better as a result. Without a detailed study of longitudinal effects and costs, this threat is no more than an untested experiment. Without access to accounting practices, doctors assume the penalty for a high re-admission rate merely affirms that hospital insurance reimbursement by DRG is solely dependent on the discharge diagnosis, therefore bears little relation to the quality of care. Given a particular diagnosis, reimbursement is totally independent of any other cost. When all you have is a hammer, everything looks like a nail to the DRG.
The legitimate reasons for re-admission to the hospital are many and varied. Collectively, they could well constitute a general attitude on the part of a particular hospital that it is reasonable to send many patients home a little early in order to achieve greater overall cost savings -- in spite of sustaining a few re-admissions. But this is somewhat beside the point. The insurance companies accept the fallacy that favoring readmission is the only way a hospital can increase reimbursement under a DRG system. This is merely a debater's trick of redefining the issue, from true cost to reimbursement amount. More or fewer tests, longer or shorter stays have no effect, but readmission can double reimbursement. Consequently, re-admission has been stigmatized as invariably signifying careless treatment, justifying a penalty reduction of overall reimbursement. This is high-handed, indeed. It would require a research project to determine which of the alleged motives is actually operational.
The Doughnut Hole: Deductibles versus Copayments. To understand why the doughnut hole is a good idea, you have to understand why copay is a flawed idea. In both cases, the purpose is to make the patient responsible for some of the cost in order to restrain abuse. As the expression goes, you want the patient to have some skin in the game. The question is how to do it; the doughnut has not been widely tried, but the copayment approach is very familiar: charge the patient 20% of the cost, in cash.
This co-pay idea finds great favor with management and labor in negotiations because the premium savings are immediately known. If the copayment is 10%, then employer cost will be decreased by 10%; if it is 50%, the cost is reduced by 50%. In midnight bargaining sessions, such simplicity is much appreciated. However, the doughnut hole was not devised to make negotiations simpler for group insurance, it was devised to inhibit reckless spending, theoretically unleashed once the initial deductible has been satisfied.
Health insurance companies also like both co-pay and doughnuts for questionable reasons. Both offer an opportunity to sell two insurance policies as two pieces of the same patient encounter, adding up to 100% coverage, but eliminating the patient's skin in the game. Doubling the marketing and administrative fees seems like an advantage only to an insurance intermediary, while it totally undermines the incentive of restraining patient overuse. In practice, having two insurances for every charge has led to mysterious delays in payment of the second one, even though they are often administered by the same company. Physicians and other providers hate the system, not only because it involves two insurance claims processes per claim, but because it often makes it impossible to calculate the residual after insurance, i.e., patient cash responsibility, until months after the service has been rendered. Patients often take this long silence to imply payment in full, and disputes with the provider are common. Long ago, older physicians warned the younger ones, "Always collect your fees while the tears are hot."
It has long been a mystery why hospital bills take so long to go through the system; at one time, protracting the interest float seemed a plausible motive. However, the persistence of delayed processing during a period of near-zero interest rates makes this motive unlikely. It now occurs to me that the reimbursement of health insurance costs by the business employer is related to corporate tax payments, and hence to the quarterly tax system. Using the puzzling model of a monthly bank statement for online reporting would have some logic, but great confusion, attached to the bank statement approach for group payment utility. But in the end, I really do not understand why health insurance reimbursement or even reporting to the patient, should take so many months, and cause so much difficulty. Recently, the major insurance companies have started to imitate banks by putting the monthly statement continuously online on the Internet. If doctors find a way to be notified, the billing cycle could be speeded up considerably, and even the deplorable custom of demanding cash in advance may abate. The intermediaries probably won't do it, so it is a business opportunity for some software company, and a minor convenience for the group billing clerk.
So, the idea of a doughnut hole was born, after empirical observation about what was owed on two levels, one for small common claims, and another for big ones. Formerly, the patient either paid cash in full or was insured in full, so arriving at the Paradise of full coverage is purchased in cash within the first deductible. Unfortunately, once that last threshold was crossed, the sky became the limit. Some way really had to be found to distinguish between extravagant over-use, and the use of highly expensive drugs, particularly those still under patent protection. The idea was generated that if the two levels of the doughnut hole were calculated from actual claims data, there might often be a clear separation of minor illnesses from major ones. Since the patient would ordinarily be uncertain how far he was from triggering the doughnut hole, the restraint of abuse might carry over, even into areas where the facts were not as feared.
It is too early to judge the relative effectiveness of the two different patient-responsibility approaches, but it is not too early to watch politicians pander to confusion caused by an innovative but unfamiliar approach, while the insurance administrators simplify their own task by applying a general rule, instead of tailoring it to the service or drug. And by the way, the patients who complain so bitterly about a novel insurance innovation, are deprived by the donut hole of a way to maintain "first-dollar" coverage, which is a major cause of the cost inflations they also complain so much about. Some people think they can fix any problem just by loudly complaining about it. Perhaps, in a politicized situation, it works; but it doesn't fool anyone.
Plan Design. The insurance industry, particularly the actuaries working in that area, have long and sophisticated experience with the considerations leading to upper and lower limits, exclusions and exceptions. Legislative committees would be wise to solicit advice on these matters, which ordinarily have little political content. However, the advisers from the insurance world have an eye to bidding on later contracts to advise and administer these plans. They are not immune to the temptation to advise the inclusion of provisions which invisibly slant the contract toward a particular bidder, and failing that, they look for ways to make things easier, or more profitable, for whichever insurance company does get the contract. The doughnut hole is a recent example of these incentives in action; no member of any congressional committee was able to explain the doughnut for a television audience, so it was ridiculed. The outcome has been a race between politicians to see who could most quickly figure out a way to reduce the size of the hole. The idea that the size of the hole was intended to be an automatic adjustment to experience, seems to have been totally lost in the shuffle. Asking industry experts for advice is fine, but it would be well to ask for such advice from several other sources, too.
Fee-for-Service Billing. In recent years, a number of my colleagues have taken up the idea that fee-for-service billing is a bad thing, possibly the root of all evil. Just about everyone who says this, is himself working for a salary; and I suspect it is a pre-fabricated argument to justify that method of payment. The obvious retort is that if you do more work, you ought to be paid more. The pre-fabricated Q and A goes on to reply, this is how doctors "game" the system, by embroidering a little. I suppose that is occasionally the case, but the conversation seems so stereotyped, I take it to be a soft-spoken way of accusing me of being a crook, so I usually explode with some ill-considered counter-attack. My basic position is that the patient has considerable responsibility to act protectively on his own behalf. That is unfortunately often undermined by excessive or poorly-designed health insurance. Nobody washes a rental car, because that's considered to be the responsibility of the car rental agency. A more serious flaw in the argument that we should eliminate the fee for service, was taught me in Canada.
When Canada adopted socialized medicine, I was asked to go there by my medical society, to see what it was all about. That put me in conversation with a number of Canadian hospital administrators, and the conversation skipped around among common topics. Since I was interested in cost-accounting as the source of much of our problems, I asked how they managed. Well, as soon as paying for hospital care became a provincial responsibility, they stopped preparing itemized bills. Consequently, it immediately became impossible to tell how much anything cost. The administrator knew what he bought, and he paid the bills for the hospital. But how much was spent on gall bladder surgery or obstetrics, he wouldn't be in a position to know.
So I took up the same subject with the Canadian doctors, who reported the same problem in a different form. Given a choice of surgical treatment or a medical one for the same condition, they simply did not know which one was cheaper. After a while, the hospital charges were abandoned as a method of telling what costs more, and eventually, no effort was made to determine comparative prices at all. There's no sense in an American getting smug about this, because manipulation of the DRG soon divorced hospital billing charges from having any relation to underlying costs, and American doctors soon gave up any effort to use billing as a guide to treatment choices. We organize task forces to generate "typical" bills from time to time, but these standardized cost analyses are a crude and expensive substitute for the immediacy of a particular patient's bill.
My friends in the Legal Profession make a sort of similar complaint. The advent of cheap computers created the concept of "billable hours", in which some fictional average price is fixed to a two-minute phone consultation. In the old days, my friends tell me, they always would have a conference with the client, just before sending a bill. The client was asked how much he thought the services were worth to him, and often the figure was higher than the actual bill. In the cases where the conjectured price was lower, the attorney had an opportunity to explain the cleverness of his maneuvers, or the time-consuming effort required to develop the evidence. A senior attorney told me that never in his life did he send a bill for more than the client agreed to pay, and he was a happier man for it. Naturally, the bills were higher when the attorney won the case than when he lost it, which is definitely not the case when a hospital is unsuccessful in a cancer cure. Similarly, you might think bills would be higher if the patient lived than if he died, but income maximization always takes the higher choice. So the absence of this face-to-face discussion is a regrettable one in medical care, as well.
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Professor Kenneth Burdett
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The Right Angle Club, now in new quarters in the Pyramid Club, was recently visited by Professor Kenneth Burdett of the Universities of Pennsylvania and Cornell. A charming fellow with a Scottish burr (he mentioned being born in England), the professor told of a new twist to economics, which mostly employs familiar data in unfamiliar ways. Many concepts central to macroeconomics actually become less informative as net values or ratios of other expressions, losing useful information in the name of abbreviated elegance. "Unemployment" was offered as a handy illustration.
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Mark Rank
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We tend to think of 230,000 new jobs this month as a hard fact, whereas employment might be more precisely described as a set of several million people switching jobs each month, offsetting several million others who gain new jobs, along with almost as many who simply decide to leave the workforce and retire. We always sort of knew unemployment was a combination of gainers and losers, but few of us recognized that net turnover affected far larger volumes of people going opposite ways at slightly different rates. The reasons underlying a large flux, in other words, may be much more important than small net overall fluctuations. Or, far larger population upheavals may produce deceptively similar net results. We've been accustomed to judging smaller final ratios than to many-times larger underlying flows, or at least implying undue importance to a small subset of change. What usually happens is vastly larger numbers of people lose their jobs during a depression, but almost as many millions more re-enter the workforce, too, but at a lower wage level.
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Thomas A. Hirschl
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Curiously, a new book by Mark Rank of Washington University, and Thomas A. Hirschl of Cornell (!) called Chasing the American Dream: Understanding What Shapes our Fortunes has just appeared, saying much the same thing. Their approach is to develop a figure for the risk of being unemployed for a year in the next 5, 10, or 15; at the moment the answer for unmarried white persons sometime during the next fifteen years in the future, is 32 percent. That seems to be a much more scary projection than setting the present aggregate total unemployment at 4.6%. We'll have to wait 15 years to see which prediction really is more descriptive, or if it has the same consequences we immediately assign to it. But it would appear many assumptions are about to be set on their head, and the quality of our projections is about to shift dramatically. For example, Chairman Bernanke of the Federal Reserve placed great stock on wage inflation being "core" inflation, but these calculations suggest much more can be made of the data than that. Since somehow it is suggested the present recession has eight more years to run, current oversupply may require eight more years to run down; old data restated in this new way may have different implications for policy.
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Chasing the American Dream
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Right Angle members who lean both right and left seemed impressed and befuddled by a new view of an old topic, and that's probably a good thing. There seems no question of the validity of the approach, no question of significance, and little doubt of its ability to change attitudes. We look forward to many more such insights from the Dismal Science, of this nature. For instance, this professor of many students of the rentier class remarked at how repeatedly he had been struck by students able to afford red convertibles (and the Princeton tuition cost) were nevertheless willing to throw themselves into the scrum of Wall Street, to make even more money.
He regarded that as a strength of the American economy, in stark contrast to that in Europe, where the first sign of prosperity sent his old acquaintances straight to the pub, to relax a bit. In the British aristocracy, "entering trade" is a low-class thing to do, whereas sitting on the sidewalk sipping wine is the mark of really high class. The American version is reversed, but possibly that's a more useful misconception.
Originally the "lower counties" of Pennsylvania, and thus one of three Quaker colonies founded by William Penn, Delaware has developed its own set of traditions and history.
Start in Philadelphia, take two days to tour around Delaware Bay. Down the New Jersey side to Cape May, ferry over to Lewes, tour up to Dover and New Castle, visit Winterthur, Longwood Gardens, Brandywine Battlefield and art museum, then back to Philadelphia. Try it!
Millions of eye patients have been asked to read the passage from Franklin's autobiography, "I walked up Market Street, etc." which is commonly printed on eye-test cards. Here's your chance to do it.
In 1751, the Pennsylvania Hospital at 8th and Spruce was 'way out in the country. Now it is in the center of a city, but the area still remains dominated by medical institutions.
Grievances provoking the American Revolutionary War left many Philadelphians unprovoked. Loyalists often fled to Canada, especially Kingston, Ontario. Decades later the flow of dissidents reversed, Canadian anti-royalists taking refuge south of the border.