Philadelphia Reflections

George (3)

It's often desirable to get live financial data and everyone knows. XML is the thing to use but actually writing programs that work takes a bit of trouble. Plus, once you've got the data you need to display it.

Macroeconomics of The 2007 Collapse

Sudden wealth creation, whether from the discovery of gold or oil, the conversion of poverty into useful cheap labor, or the sudden abundance of cheap credit, is of course a good thing. Sudden wealth creation can be compared with a stone thrown into a pond, causing a splash, and ripples, but leaving a somewhat higher water level after things calm down. The globalization of trade and finance in the past fifty years has caused 150 such disturbances, mostly confined to a primitive developing country and its neighbors. Only the 2007 disruption has been large enough to upset the biggest economies. It remains to be seen whether a disorder to the whole world will result in a revised world monetary arrangement. One hopes so, but national currencies, tightly controlled by local governments, have been successful in the past in confining the damage. This time, the challenge is to breach the dikes somewhat, without letting destructive tidal waves sweep past them. Many will resist this idea, claiming instead it would be better to have higher dikes.

It is the suddenness of new wealth creation in a particular region which upsets existing currency arrangements. Large economies "float" their currencies in response to the fluxes of trade, smaller economies can be permitted to "peg" their currencies to larger ones, with only infrequent readjustments. Even the floating nations "cheat" a little, in response to the political needs of the governing party, or, to stimulate and depress their economies as locally thought best. All politicians in all countries, therefore, fear a strictly honest floating system, and their negotiations about revising the present system will surely be guilty of finding loopholes for each other; the search for flexible floating will, therefore, claim to seek an arrangement which is "workable".

In thousands of years of governments, they have invariably sought ways to substitute inflated currency for unpopular taxes. The heart of any international payment system is to find ways to resist local inflation strategies. Aside from using gunboats, only two methods have proven successful. The most time-honored is to link currencies to gold or other precious substances, which has the main handicap of inflexibility in response to economic fluctuations. After breaking the link to gold in 1971, central banks regulated the supply of national currency in response to national inflation, so-called "inflation targeting". It worked far better than many feared, apparently allowing twenty years without a recession. It remains to be investigated whether the substitution of foreign currency defeated the system, and therefore whether the system can be repaired by improving the precision of universal floating, or tightening the obedience to targets, or both. These mildest of measures involve a certain surrender of national sovereignty; stronger methods would require even more draconian external force. The worse it gets, the more likely it could be enforced only by military threat. Even the Roman Empire required gold and precious metals to enforce a world currency. The use of the International Monetary Fund (IMF) implies attempts to dominate the politics of the IMF. So it comes to the same thing: this crisis will have to get a lot worse, maybe with some rioting and revolutions, before we can expect anything more satisfactory than a rickety negotiated international arrangement, riddled with embarrassing "earmarks". Economic recovery will be slow and gradual unless this arrangement is better, or social upheavals worse, that would presently appear likely.

My Years at Stockley

For forty-six years, I drove three hundred round- trip miles from Philadelphia to Stockley, Delaware -- once a month on Saturdays. That takes a whole day, so it kind of means I spent a year at sixty miles an hour, going and coming. In Delaware, they speak of going “South of the Canal”, to indicate the little state of Delaware is actually two states or at least two cultures. North of the Delaware-Chesapeake ship canal is the posh little city of Wilmington, where most of the major New York banks are moving to enjoy the special banking laws, and where the Dupont family held majestic court over its Ivy League Camelot. Wilmington has more lawyers than anywhere or at least more white shoe patrician lawyers than anywhere. Little Delaware generated special laws for the benefit of corporations, so a whole hive of corporation lawyers generated an industry of pretending that General Motors and IBM are headquartered there. Those lawyers were once so remote from the graduates of second-rate (i.e. state rather than national) law schools making a living as plaintiff lawyers, that even the doctors in Wilmington were on cordial terms with the Wilmington lawyers.

South of the Canal was something else. I saw burning crosses on several occasions, and my trip took me past two race tracks for horses and two for beat-up jalopies that smash into each other for the fun of it. To be fair about it, I was shot at twice, once below the canal, and once in Wilmington, that's another story. The incident below the canal was not terribly spectacular; I just heard a loud noise as I drove past Elks lodge, or maybe a Moose lodge, and there was a nice round hole in my fender when I got out of the car. I suppose someone in the lodge was just careless with his gun, but it is not impossible that I had crowded a pick-up truck which retaliated with fair warning.

I met a nice lady from Rehoboth who tells me she remembers when the highway was built; before 1930 or so, there was no road connecting lower Delaware with the outside world. The native people speak with an accent which isn't quite Southern and which is said to be very close to true Elizabethan English. The area was settled by Swedes before the English came, so the people are quite handsome in a sort of Daisy Mae, L’il Abner way. The highway has an interesting history. Coleman DuPont purchased the land and built the highway at his own expense. If you know anything about rural legislatures, you can guess what happened next. He offered the highway to the State and the legislature refused to accept the maintenance costs. When he then hired his own police force to patrol the highway, the legislature reconsidered and accepted his offer to give them the highway.

My trips to this area have their destination at the Hospital for the Mentally Retarded in Stockley, Delaware. In spite of the way it is spelled, it is pronounced "Stokely". A state cop once forgave my speeding violation when I told him I had been at "Stokely". He said that in spite of my out-of-state license plates, I must be telling the truth if I knew how to pronounce it. The hospital has always kept a sign-in log in the administration building, and it is fun to see my signatures going back to 1958, month after month. I've had a couple of close calls or near-accidents on the highway which I haven't told my wife about, and on two occasions the ice or fog was so bad I had to turn around and come home without completing the trip. The trip ordinarily isn't so bad. The car is on cruise control, there are medical education tapes to play (Audio Digest, courtesy of the California Medical Association), and a sort of hypnosis makes you forget where you are going until you get there.

The medical director is a nice young fellow who has a practice in a nearby (25 miles) town and stops by for a few hours a day. Except for him, just about every resident doctor in thirty years has been foreign-born, and I would judge, very poorly paid. So, several years before I came to Stockley, someone had the idea of bringing in consultants from Wilmington, Philadelphia, and Baltimore. In the early days that was reasonably easy to do, because the hospital was filled with six hundred perfectly fascinating cases. I've seen several albinos and one thirty-year-old who was no bigger than an infant in arms. They used to have a number of cases of grotesque hydrocephalus, where the poor child grew a head larger than you could put your arms around and which would develop huge bedsores because the child couldn't move his head, let alone lift it. Because the Delmarva Peninsula has been a closed society for over three hundred years, there are lots of cases of rare inherited diseases. I have seen many cases of disorders that other doctors have only maybe read about, and I must admit I loved the experience.

But you know after you spend as much time with them as I have, they stop being interesting cases and become individuals, with names and personalities. Since the aging process is accelerated in several common diseases like Mongolism, I have known some of the patients' as little children, then as adults, and finally as dying withered victims of senility. Many times, I have watched the central agony of mental retardation; the children inevitably outlive their parents and ultimately have no one to love them except the institution.

In that role, Stockley does pretty well, although perhaps not as well as it used to do. The switch seems to have happened with the John Kennedy administration when money for the retarded became abundant. That landmark was especially memorable on a Saturday when the Russians menaced us over Cuba. I never knew we had so many eight-engined bombers as circled over the Dover Air Force Base that day. Years later, a pilot brought his son to see me, and I asked him. "Yup," he said. "we were carrying eggs, all right." "Picked them up in Alaska."Computers and the Regulation of Medicine.

Computers and the Regulation of Medicine.

George Ross Fisher, M.D.

I am going to take chance in this essay that I can hold the attention of the reader through a preamble of theory, before addressing the consequences for the practice of medicine. That seems necessary because I believe that the consequences are different from what most readers would intuitively expect and persuasion lies in first convincing the reader of the theory.

CLOSED AND OPEN SYSTEMS

There is a growing body of endeavor known as the Theory of System, which acknowledge that all events are consequences of pre-existing conditions (like the consequences of adding acid to bicarbonate in a beaker), and are thus “closed” systems. However, most events in biology and sociology are so complex that it is only possible to deal with them as “open” system, for which we substitute wisdom for scientific certainty. “Wisdom” is a set of traditions, maxims, opinions, and strategies which allow you to make predictions about the inevitable outcome of events within an open system. The teleological nature of human events was once referred to as Manifest Destiny, and realists like Talleyrand spoke of diplomacy as the art of manipulating the inevitable.

Example:

Wisdom has it that in your choice of a practice location, you should remember that “you can’t make money where it ain’t.”

And now a conclusion about the computer revolution: Since computers increase the capacity to store and manipulate detail, the computer revolution increases the number of closed systems, and shifts the scope of wisdom in decision-making from traditional areas to new subject which was formerly incomprehensible.

HIERARCHIES

In dealing with open systems, managers and executives have evolved a basic strategy; they organize manageable subunits into hierarchies. Units are organized within departments, then organized within divisions, reporting to a policy-making body. Further, because the purpose of the organizational structure is to simplify management, each level of the hierarchy is oblivious to the techniques of the level below, and is only interested in the output of the level below.

Example:

The patient paying his bill is interested in the total amount that he has to write on the “bottom line,” which in his case is the dollar amount of the check he must write

The director of the x-ray department is concerned with a subtotal related to the x-ray department. The chief technician is concerned with individual studies. The dark-room attendant is only interested in pieces of film.

COMPUTER CONCLUSION: Primitive Computer Systems merely duplicate the pre-existing manual system. Their real power lies in the next step, which is to reorganize the reporting system. That is, they cause a reorganization of the hierarchy.

TRANSMISSION

The prediction is made that management system will be forced in the direction of a hierarchy of three: Those who are able to make decisions, those who cannot make decisions but are necessary for some task, and the computer. One function often seen in non-computer systems is simply to pass the information unchanged up to the line. There is little doubt this activity will vanish.

Example:

Robert McNamara (from Princeton via Ford Motors) was a computer expert who became Secretary of Defense under John Kennedy. By installing computers, McNamara was able to jump the Army reporting system (Sergeant to Captain to Secretary of Defense) and confront the generals with discoveries before the generals had received the news. We are told that the generals didn’t like it a bit. But can anyone doubt that Robert McNamara carefully filtered the data before h presented it to President Kennedy? The system of hierarchical reporting condenses the data to the next step up.

COMPUTER CONCLUSION: Many systems of management by delegation will soon be swept away by the computer revolution, and middle management will be the most threatened region. It will resist but it will lose.

MODIFICATION

Another function of delegated systems is to take raw information and reduce it to condensed form for the benefit of the next level upward. They do so by a process which is often a mystery to the next higher level, and hence a certain power is conferred on the lower subunit to modify the conclusion by modifying the system of manipulation. The method for controlling such activity is to produce a procedure manual which the next higher level must approve, but the inherent complexity which forced a delegated process to be created also obscures the power of the delegated subunit to modify the system.

COMPUTER CONCLUSION: Computer technology strictly defines and inflexibly follows defined procedures for steps in hierarchy. It thereby confers much stricter control power to the higher levels of hierarchy.

THE NEED TO KNOW

If for no better reason than to reduce programming costs, the computer process confers a new power to the lower levels of hierarchy. The higher level must now strictly define its reasons for asking for certain information. If it cannot demonstrate a need to know, it cannot justify the cost of knowing.

Example:

The PSRO, acting on behalf of the physician community, violently resists the inclusion of data elements in the reported tape sent to the Bureau of Quality Assurance. At the same time, it is anxious to acquire as much data as possible from units lower in the hierarchy, who in turn resist the process. It can be expected that this process will eventually settle out at roughly the best equilibrium for the community at large, although differing aggressiveness among the participants may cause temporary inequities. The weapons in the battle, which are at the disposal of the physicians are:

(1) Superior Claims on the decision-making process.

(2) The faith of the public in physicians as the most trustworthy custodians of their health privacy.

(3) A superior pool of talent, determination, and independent means committed to a vital issue.

COMPUTER CONCLUSION: If you have a good chance of being the winner in the reorganization of a hierarchy, it is better to participate to your utmost rather than hold back out of fear that someone else will be the winner, because only participants are winner.

NETWORK

We have spoken thus far of hierarchy as the only manageable approach to the complexity of open systems. A more general description would be “modularity” since modules can interact in a lateral direction as well as vertically. When they do, the result is a network of modules in three dimensions. Since computers increase the ability to cope with complexity, they increase the ability to work in three dimensions. Hierarchy is the last resort of manual management; just as three-dimensional chess is beyond the ability of people who are not even very expert at two-dimensional chess. In this sense, the computer revolution provides some hope for the American System, which presents hierarchy and naturally prefers networks when feasible. This is to some extent a philosophical preference and does not seem to be true of the Japanese social system, or the German mentality, or the Communist method. The natural American instinct for lateral equality is thus an ally in Medicine’s conflict with Government, but a hindrance when it encourages Nurse independence or unrealistic consumerism.

Whether lateral or vertical, the interaction of modules in a complex open system is the same: delegation of a method, the output from one module as the sole input to other modules, and resistance to the need to know.

COMPUTER CONCLUSION: The organization of modules into vertical hierarchies or horizontal networks is largely a political process, with three-dimensional networks as the last resort of compromise, and with strict vertical hierarchies as the last resort of inadequacy.

CONFIDENTIALITY

Complexity is itself a major defense of confidentiality; since computers reduce complexity, they also destroy the smoke screen. Computer System which stumbles ahead or is manipulated into breaches of confidentiality is certain to raise a great uproar about the need to know and the right to conceal. In the PSRO system, the issues balance between the duty of accountability and the patient’s right to privacy. When reduced to these terms the physician community has a clear advantage in the mind of the public, if the advantage can be effectively exploited. The latter can, however, be overturned by speedy pre-emption of the turf. it can be predicted that special pleaders will insist on accountability when all they really want is power and satisfaction of envy; it can fairly be predicted that some will weaken their claim to privacy by overextending its bounds.

Example: The system of peer review on Medicaid prescriptions in Pennsylvania has turned up a number of instances of patients who obtained multiple prescriptions for “controlled” drugs from multiple doctors, filled at multiple drug stores, probably for resale on the streets. When the doctors and pharmacists were notified, they were universally grateful and took steps to curtail the problem. However, the computer vendor learned of the problem (regardless of the fact that all reports are shredded after review) and persuaded the state government to institute a system of restricting problem patients to a single physician. It may now be impossible to dislodge this meat-ax reaction, in spite of the fact that the computer peer-review system is probably able to cope with the problem without invoking hierarchical power.

A Second Example: The United States Navy recently developed a system of computer protection so elaborate that they boasted of it in the newspapers. Two computer scientists read of it, and in a month’s, the time had broken into the system via telephone. The Navy was then agitated to read of its disarmament in other newspaper articles.

COMPUTER CONCLUSION: There is no present foreseeable technical method of protecting the confidentiality of computerized data, except by physical ownership and physical protection of the machine itself and all of its activity.

CONCLUSIONS

The most significant event in the Twentieth Century is the Computer Revolution, just as the Industrial Revolution was the major event of the Nineteenth Century. By the greatest good luck for medicine, the computer revolution is capable of solving the four major problems which now threaten the American Medical System.

1. THE FAILURE OF THE PRE-PAYMENT INSURANCE MECHANISM. The removal of cost restraints on the patient (and thus the provider) has had a predictable upward effect on costs. The overwhelmed system has reacted in a typical hierarchical manner: try to convert insurance companies into regulatory bodies, and if that fails, into rationing systems. The computer revolution (if we are agile) has the potential of drastically reducing the information costs which are now 40% of hospital and insurance company costs. It also has the ability to control utilization abuses, and expose power abuse to public decision.

2. THE VAST INCREASE IN PARAMEDICAL PERSONNEL. Middle management is most vulnerable to computer replacement, and middle management now costs 20% of the hospital dollar. Physicians in complex medical centers are most alarmed about this problem, which they can easily identify by comparing the hospital parking problem with what it was, twenty years ago. Surgeons are typically least concerned since their role at the center of procedures is least threatened by aspirants. But surgeons are hearing of “unnecessary” surgery, and even the small-town solo practitioner has to hire girls to fill out forms. The complexity of our system must be reduced, and computers can do it. The best way to thwart the claims of aspirants to power is to eliminate jobs.

3. THE EXPLOSION OF SCIENTIFIC INFORMATION. No one would wish to reduce the output of the research community, but ways must be found to organize and transmit the information without resort to fragmentation by sub-sub specialists. The computer is ideally suited to the problem. THE MALPRACTICE CRISIS. Physicians are uncomfortable with the idea that peer review may soon become entangled in the malpractice system, as indeed it inevitably will. The matter comes down to biting the bullet, armed with a statistic. Surely consent for an arteriogram is more threatening if it is couched as “you might lose your leg” than if you are told, “you have one chance in five thousand” of such an occurrence. Realistic insurance premiums can be set when the risks are defined. Juries can be provided with realistic statistics on normal risks and normal expectation of benefits.

Through all of these four problems runs a common theme: The cost of medical care. The PSRO seems to be the last best hope of curtailing the cost threat to medicine, and so the PSRO can be expected to be the vehicle for the computer revolution’s resolution of the issue. Senator Bennett probably had no idea of what he was doing, but he did it, and the problem is now our problem.

Health Insurance National, and Otherwise

Health Insurance National, and Otherwise

George Ross Fisher, M.D.

A Message to Big Business

Recently the National Chamber of Commerce studied the question of cost containment in the health field and urged local chambers to organize data reporting systems for employee health and hospital costs. It is not clear what employers could do with such information once they had it since their employees (or unions) are likely to be resentful of intrusion into personal privacy. If the data should by chance demonstrate that one doctor, hospital or HMO was cheaper than another, the more expensive providers of care would surely claim that quality was related to cost. In any event, the American tradition is for the patient, not his employer, to select his doctor.

A far more productive data analysis for employers would be one which helped him select the best insurance company, or the best health insurance benefit package, for the employee group. While it is true that unions have exerted considerable influence on benefits packages or even carrier selection, the unions and the employers unite in a desire to get the most benefits for the least health insurance cost. It, therefore, seems likely that more action would result from examination of the financial data than the medical data, although in both cases it is necessary to be a diligent pupil before the data is intelligible. We here propose that it is worth-while to understand the ratio of hospital costs to hospital charges. Having understood the matter, the Chamber is urged to apply it to local hospitals and individual employee groups.

The examination of internal hospital subsidies is greatly assisted by the existence of an unwieldy document, the SSA-2552. The Medicare agency requires every hospital to complete a 25-page annual financial summary, complete with folded-over pages and filled with numbers. This document is prepared for a public purpose, and under the Freedom of Information Act, is available to all who wish to examine it. For the purpose at hand, it is possible to ignore all of this document except for column 2 on page 18. On page 18 is found “Worksheet C.” Departmental Cost Distribution. In column 1 will be found; the total costs generated by each department during the year (A.), together with the total charges generated by that department (B.) In column 2, the place where present attention is focused, each department displays the ratio of A divided by B, the ratio of Cost to Charges. A quick glance will identify that the ratio is usually less than 1.0, in keeping with the practice of charging more than your costs in order to make a “profit”. A glance down the line will quickly show even a casual reader that there is a very considerable variation in the ratios from one department to another and that there are definitely department with a ratio greater than 1.0, which means that these departments are being subsidized.

The Medicare cost report, available from every hospital, displays the ratio of costs of charges for each revenue-production department of the hospital. The concept of the ratio is simple enough. In a free enterprise system, everyone is accustomed to the idea that the price of things is always a little higher than the cost. The difference is called a profit margin, or mark-up. We are even familiar with the occasional situation where the selling price (charge) is less than the cost; that is called a loss-leader.

Therefore, loss-leaders excluded, we would except the normal ratio of costs to charges to be approximate.90, allowing about a 10% profit for bad debts, charity, etc.

Furthermore, we would expect the individual department of the hospital to display a cost-to-charge ratio which is relatively uniform, and fairly close to overall total for the hospital.

Notice that the important issue is not how close the ratio is to unity (1.0) but rather how close it is to the overall hospital total ratio. That is, how uniform the ratios are between departments.

A great many people assume that, if the cost-charge ratio is less than 1.0 and a profit is therefore generated, any insurance company which pays charges must have higher premiums than an insurance company which pays “costs”. Such an inference is not necessarily correct as a theory and is quite clearly incorrect in certain circumstances. The premium reflects all of the expenses of the insurance company, not just the hospital payments. Subsidy of non-group individual subscribers by group subscribers is a major example of the equalizers affecting health insurance premiums.

The following figures for cost-to-charge ratios were taken from an actual hospital’s Medicare cost report. They fairly represent the national pattern, although there is a great deal of individual variation between hospitals. The important things to notice are the non-uniformity of departments, and the separation of hospital departments into two distinct classes:

Table 1. Ratio of Costs to Hospital Charges by Department

Undercharged (Ratio) Overcharged (Ratio)

Operating Room 1.02 X-Ray .74

Short Procedure 1.20 Isotopes .68

Labor & Delivery 1.32 Laboratory .69

Anesthesia 1.19 Oxygen .59

Physical Therapy 1.38 EKG .22

Daily Room Charge 1.22 EEG .54

Intensive Care 1.25 Medical Supplies .46

Drugs .58

Finally, one dare not assume that the cost-to-charge ratio for a department is reflected in every service performed by that department. The ratio comes about by the cost accountant assigning indirect costs to those departments which have the best cost reimbursement experience. At the same time, charges are raised on those items most likely to be paid for in cash, within the perceived limits of the ability to pay. Charges tend to be closely examined on common items like blood counts and chest x-rays, while uncommon test and services tend to be too much trouble to examine frequently in close detail. Therefore, there are often bargains in rarely-used services whose charges have not been raised in some time. Finally, there are items which can be charged off as bad debts if unpaid by a Medicare patient. Under this heading are personal items like television sets, or uncollected 20% coinsurance on ambulatory services; for setting h charges on these items, maximum brazenness is rewarded.

How to Play the Game

The free-market, or Adam Smith, philosophy is presumably highly regarded by the Chamber of Commerce. The theory supposes that every rational person will press his own interest and advantage to the point where he comes into equilibrium with the rest of the community, who are acting on their own separate behalf. It must be clear that the hospital financial and reimbursement system strongly endorses the “every man for himself” philosophy. What follows are a few suggestions for overachievers in the business world who would like to play the hospital game with a little more success than they have demonstrated in the past. Perhaps if they do, the community at large will benefit as a new equilibrium is set.

Notice that a cost/charge ratio greater than unity (1.0) means a loss leader. If your insurance company pays charges, it is paying less than another company which is paying costs. Never mind that the “costs” are inflated with doubtful indirect costs; that’s what the cost-reimbursing insurance company pays.

Notice that the benefits package of a charge-reimbursing insurance company should heavily include the use of those hospital departments which are loss-leaders. Those departments which are highly profitable for the hospital, however, should be avoided, since the presence of insurance just raises the prices still more. Since these services are mainly out-patient (ambulatory) services, tell your employees to go for them to their doctor’s offices. If you must cover them with insurance, specify that the insurance is not valid for use in a hospital. (Don’t worry about anti-trust: plenty of policies are only good in a hospital out-patient department.) If you feel you must cover them, put them in the major medical policy.

Notice that the cost-reimbursing insurance companies have an exactly opposite set of motivations. They need to include a large number of ambulatory benefits since they get a bargain on such services. However, if they are restrained from this endeavor, they will be forced to resist the cost escalation of inpatient-intensive services, which means they resist the current escalation of indirect costs. Since the root cause of hospital inflation is the rampant growth of unrestrained indirect costs, it is possible that restricting Blue Cross to inpatient reimbursement would stop the spiral. It is in the competitive interest of a charge reimbursing carrier to avoid extending out-patient benefits. Blue Cross, by contrast, would have to be forcibly restrained.

If an employer intends to be serious about playing the hospital game, he needs to know what kind of services his own employees are using. He also needs to know what the particular cost/charge quirks are at the local hospitals where most of his employees find themselves from time to time. It is easy to imagine one employer with 30% of his employees' women under the age of thirty, while another employer mostly might have nothing but middle-aged male employees. A new business will have young active employees, an older business may have pensioners to consider. The climate makes a difference, and occupational hazards must be considered. So, what’s good for one employer isn’t necessarily good for others, or necessarily good after the business grows for ten years. And the hospital cost accountant, by the way, isn’t going to be asleep as things change over time.

It would require a rather sophisticated data system for an employer group (or even an insurance company) to analyze its experience in terms of hospital departmental usage. So, a simpler conceptual approach is suggested. The departments with a high cost/charge ratio tend to be used by surgeons and surgical specialties. Conversely, the non-surgical physicians' internists, pediatricians, psychiatrists, family practitioners) tend to use most heavily the hospital departments which have low cost/ charge ratio. There is no conspiracy at work; it just happens to work out that way as a result of independent stresses which have been discussed elsewhere.

So, it would appear that subsidizing is taking place by the patients of non-surgeons for the benefits of patients who have surgery. Somewhat true, although the situation is more complicated.

Both Blue Cross and the commercial carriers employ an analytic system for large employee groups, known as experience-rating on the basis of charges incurred, (even though the plan pays costs, not charges). The commercial carriers experience-rate on the basis of charges, too, but they actually pay the charges. So, an experience-rated group gains nothing by switching carriers so long as the experience-rating continues to be based on hospital charges. The premium they pay will reflect a subsidy of surgical patients by non-surgical ones.

But there is another class of patients for whom the reverse is true. The non-group individual subscribers to Blue Cross have a diversion of premium money toward surgery, while the whole non-group program is receiving a subsidy from the group subscribers. It is difficult to tell whether the continued effect is positive or negative for surgical patients. But the non-surgical, non-group subscribers are certainly getting a bargain. Until someone figures out a way to force subscribers to belong to a group, a company should think twice about forming one. Decreased benefit package? Buy an excess major medical policy and forget it.

Of all the subsidies which characterize this giant medical financial equilibrium, the greatest is on the basis of the age of the subscriber. It scarcely needs proof to recognize that young subscribers do not have the same health costs as older ones, but they do pay the same premium. All health insurance plans would do well to devise a system of vesting before competition exploits this inherent weakness and topples the structure. A movement by groups into non-group would eventually reach an equilibrium, but a selective movement of young subscribers to competitors or self-insurance would start a spiral which could be very drastic, indeed.

Finally, there is one other recourse which subscribers could take to the situation wherein non-surgical hospital patients subsidize surgical ones, while experience-rating prevents them from doing much about it. The recourse would be to seek care outside of a hospital. Nowadays there is not much difference between a first-class nursing home and a hospital, except that you can’t do much surgery there. Next time you hear someone talking about “excess hospital beds”, take a hard look at who is talking.