A Flawed Debate
Listening to the health care (finance) reform coverage in the news media is a lot like visiting from Mars. Politicians and newscasters describe systems that simply do not function in the manner they describe, their “fixes” will not work, and they usually cause more harm than good.
How this all came to be is an intriguing story of lost opportunity, political deal making, and the triumph of dogmatism and ideology over rationality. I explain a lot of the flaws in my book: Standard Errors: Our failing health care (finance) systems and how to fix them which is available at www.afn.org/~mathstat/. The following thoughts are glimpses of the implications of our changing health care (finance) systems, explored in the book.
Health care finance – What is Really Broken?
Over the last few decades we have created ever more inefficient health care (finance) systems even as politicians have jumped on the bandwagon of greater efficiency. In the name of efficiency our national leaders have increasingly placed health care providers and patients at risk, eviscerating our health insurance system.
In place of genuine health insurance, they gave us inefficient, wasteful, and fraudulent managed care systems that do not, and never could deliver on their lofty promises to steer our health care (finance) systems toward greater efficiency. (See my book: Standard Errors: Our failing health care (finance) systems and how to fix them which is available at www.afn.org/~mathstat/.)
While paying lip service to extending health insurance for all, our leaders have compromised the health insurance market. But the situation is very different than described by policy makers, politicians, economists, actuaries and pundits. The destruction most of them describe is the exact opposite of what has really happened.
What Insurance Is and Is Not
The biggest problem is that most people confuse legitimate insurance mechanisms and pre-paid care mechanisms. We lose sight of the fact that managed care and most of their solutions for financing health care do not rely on legitimate insurance mechanisms at all.
Four decades ago we had a vibrant, growing health insurance sector. Ever more Americans were being covered through their employment and the Medicare and Medicaid programs extended health insurance to the elderly, disabled and economically disadvantaged.
Costs however, were also rising. As people made more use of preventive health care services they lived longer and generally healthier lives.
The answer Richard Nixon promoted was to convert our mixed profit and profit making health care system to a profit making system. In particular, Federal legislation began to vigorously support health maintenance organizations and “Managed Care.”
Despite initial enthusiasm for HMOs and managed care, they are not legitimate insurance mechanisms. The rhetoric was excellent, focusing on improving the health of the population, creating an efficient health care system, and reducing costs. The reality, however, was exactly the opposite. Falling health care status, an inefficient health care system, and increased costs. Rather than admit that it has been managed care and capitation that caused many of these problems, the advocates of these failures blame the ever dwindling legitimate health insurance mechanisms for these problems, suggesting that if we simply move to a completely managed care mechanisms all these problems will go away.
If you believe that line, I know some people selling bridges and tunnels in NYC.
What HMOs are supposed to do.
The ideal case for HMOs is that they will keep people healthy, hence the name “Health Maintenance.”
The reality is that as we age, we increasingly suffer from poor health. The age at which we become chronically or acutely ill may be delayed, but it can never be eliminated.
Health insurance covers rare but high cost health services. HMOs and Managed Care spend most of their resources providing routine, highly predictable care. Since HMOs and managed care organizations offer their plans for less than the costs of real insurance, but spend significant portions of their revenues on costs that are common, they cannot afford to pay their subscriber’s expenses when they require expensive care. Take in $4, spend $3 on cheap office visits and preventive care and you will not be able to spend much money on your subscriber’s rare, but expensive needs.
The Perils of Health Care Intervention
As HMOs have matured they have been burdened by their successes: increasing numbers of chronically and acutely ill members who are living longer with multiple, costly, and increasingly treatable illnesses. The calling card of HMO success is that we have more older and sicker people than we would have, had if we had not been so successful in our past preventive health endeavors.
1n 1971, a 55 year old man who had a heart attack on a golf course, would probably have died en route to a hospital. That same man, in 2011, will like survive sudden cardiac arrest and live for another 20 years, incurring health care costs for his post cardiac care and myriad other illnesses and accidents during that 20 years.
Rather than dying at 55 he will live until age 75, incurring costs for skiing accidents, cancer treatments, multiple cases of influenza, and multiple bouts of pneumonia. After 20 more years of additional health care services and costs, our 75 year old will likely have spent months receiving very costly care in hospitals and nursing homes, incurring even more costs as his health continues to fail.
Cost for 55 year old man to die on a golf course? $0
Cost for 55 year old man to not die on a golf course, live an extra 20 years with multiple health care problems? Hundreds of thousands of dollars.
Where exactly are the savings?
While physicians, nurses, and academicians suggest that early intervention saves money, the truth is exactly the opposite: Early intervention increases lifetime health care costs. The modest savings achieved by preventing a heart attack or lung cancer at 55 are dwarfed by the increased costs associated with an additional 20 years of health care.
HMOs that continue to cover their increasingly aged and debilitated patients have to charge more, not less, for their services as these patients age, precisely the opposite of what we are being told will occur.
Health Is Preferable To Illness – It Is How We Pay For It That Counts
It would be easy to dismiss these concerns. It is obvious that all of us want to live healthier, longer, more satisfying lives. We should all get the preventive care we need. The issue is not whether to get this care but how to finance it.
We all use light bulbs at home and work. But we do not buy insurance policies that pay for new light bulbs when ours burn out. Why?
Insurance is an inefficient approach to financing replacement light bulbs because everyone has to replace light bulbs. Saving, or budgeting, for light bulbs makes a lot more sense than buying insurance because we don’t have to pay an insurer’s expenses for processing light bulb claims on top of the costs of the light bulbs.
Suppose a light bulb costs $1 and lasts a year. Go to the store and buy a light bulb for $1 and you are done. But most insurers have expenses that account for 15-35% of their claims costs. Sales people are paid commissions or salaries. Insurers pay for clerical staff and administrators. They also pay for office space, phones, electricity, taxes and other expenses.
To buy an insurance policy to pay for replacement light bulbs we would have to pay about $1.33 for each bulb we are insuring, per year. It is more expensive than it is worth to pay for things that we know we all need. The same is true with health insurance. Routine office visits, routine tests, and routine medications that we all need cannot be efficiently covered by insurance.
On the other hand, tornadoes that destroy homes are relatively rare. All of us can buy tornado insurance pretty cheaply because very few of us are going to actually have tornadoes destroy our homes.
Managed care organizations waste their premiums on routine costs and they don’t have the money to cover rare but expensive treatments. This is why people with managed care plans are told to wait for care, or are denied care, while the same person with a real insurance plan can get care.
To build more efficient health care (finance) systems we need to stop making the same mistake over and over again. We need real insurance, not more managed care.