Sunday, November 8, 2009

Thoughts on Healthcare

In one of the earlier posts on jobs and why "they ain't coming back", I mentioned that I may share some thoughts on healthcare (or "HC" for short). Now with the passage of Pelosi's masterpiece in Congress last night, I figured I might as well post some of my thoughts.

As a pre-amble, part of the problem is that our politicians view HC first as a right (vs. a good) and, second, view "coverage" in an abstract sense (just like "jobs") and equate it with "access." Also, as a part of the introduction, I should point out that I have a very good, near-insider, view of the actual workings of two large city hospitals. With that:

HC is a very complex problem that cannot be reduced to soundbites, slogans and the like as much as the booboisie would like to have it that way. There is absolutely no silver bullet and any attempted solution with create an upset constituency. Usually in these cases, as it happened last night, the taxpayers get hosed. In addition, the current changes are so wide, that the unintended consequences will be incredibly large. Just the fact that the demented congress leaders are proudly comparing it to Social Security and Medicare should be a huge warning sign.

I will take a stab at a few aspects that need to be addressed in any HC reform (and they are not in the current 1,900+ page fake math monstrosity).

The problem with US health care is cost. It costs too much relative to what it costs in other OECD countries and it costs too much relative to income. A cost problem is in essence a price problem. Prices serve as signals. Since HC is a marketplace- quite distorted, but a marketplace- the price is telling us that there is a supply-demand imbalance. There is either too much demand, too little supply, or both.

Like good market fundamentalists, let's look at both sides:


(1) Doctors: the medical mafia has made it very difficult and expensive to become a doctor in the US, all in the name of patient safety, of course. I am not saying that it should be easy, BTW, but compared to other OECD countries, where doctors are more or less a middle class-level occupation, here, in most locations, doctors are not. Part of the supply constraint is the number of years of schooling required (upwards of 10 years post high school; often 15 with fellowships for certain specialties) and another part is the cost of education. When software engineers make too much in the US, somehow the H-1B quotas get adjusted and the supply of engineers in increased. Doctors, obviously, are luckier and smarter in restricting entry into their fields.

Does the Pelosi bill address doctor shortage? No.
In part, they "promise" to cut reimbursements. Like that's going to happen.

(2) Coverage availability: A huge problem now is the incredibly high cost of individual policies. There are a number of reasons for this, such as negative selection, state-level insurance market regulation, monopoly law exemptions, absolute lack of transparency in pricing and others. There really isn't a functioning market for individual policies, as far as I can judge. We recently changed car insurance policies. It took minutes. While the parallel is far from perfect, there is something to learn there.

Does the Pelosi bill address the dysfunctions of the individual policy market? Only partially, and will create more problems than it solves.
At least, they recognize that it is a problem and they are attempting to take steps towards a more transparent marketplace.

(3) Employer-link: I mentioned "unintended consequences" above. A big part of the problem is that most employed get coverage via employers, and this started as an unintended consequence back in the 1940's when the government started limiting compensation to control war-time inflation. This is a very, very perverse aspect of the existing HC system. It forces employers to get in the business of buying healthcare, medicines, flexible spending accounts, dental, fitness programs and other what I would call "non-essential" business activities. In addition, employers pay for a part or all of the insurance, on top of payroll taxes. This makes American businesses waste resources on non-business activities, and makes hiring in the US expensive.

Does the Pelosi bill try to move away from employer mandates? No, it makes them worse by taxing businesses that do not offer it.
I am going to make the prediction that within 3-5 years employers will be choosing to pay the 8% payroll tax penalty and not bother with the whole thing. If an employer can fire 60% of their benefits department, save on insurance costs and get away with an 8% payroll tax, I think the decision will be a no-brainer. Either that, or a wholesale move to hiring "contractors" in lieu of "employees": why even bother with payroll taxes at all? Or some other "who could have known" side effect.

I should also point out that the worst side effect of the employer-linked coverage is that it makes it difficult for start-ups to attract people. We all lose in aggregate when this happens but too few people care about what "might" have been. If Sergey Brin needed kidney dialysis, do you think he could have dedicated all his time to starting Google?


(1) Users of free HC goods and services: "poor", illegals, elderly
Most of our representatives are both innumerate and economically illiterate. Some even have troubles filing tax returns. They fail to understand that the demand for free goods is near unlimited.

As a result, here in the city hospitals, you have a huge population that pays nothing for their hospital stays, and as a result, they treat it like a full-service hotel: non-stop demands, frequent visits, you name it. Homeless people simulating sickness to stay in for a couple of days, eat and take a shower. Nursing homes refusing to pick up patients if they have another test in two days. Families collecting the social security check from grandma refusing to let her die. Caribbean tourists visiting family trying to get in for a kidney transplant. Illegal aliens giving birth to their "anchor" babies. Drug addicts faking illness to get morphine and a good night's sleep. "Poor" trying to get themselves checked in so that they get 2 week supply of meds without a copay. These are all actual cases. ALL PAID FOR BY THE TAXPAYERS/FUTURE TAXPAYERS AT $5,000/DAY.

Does the Pelosi bill address these huge generators of losses for the system? Absolutely not. Even the simplest thing, such as mandatory minimum copays, are not in. Never mind some other solutions, like, gasp, rationing. The bill even bans illegals from buying insurance, even if they want to, thus guaranteeing that the taxpayers get the tab.

(2) Heavy users of HC goods and services: the obese, the smokers, the drug users, people with genetic conditions

Another way to reduce demand would be to discourage behaviors that are likely to result in increased health care demand. The way I would approach it, the government will not pay for anyone's care if they are obese (based on BMI or body fat %), smokers or drug users. And, on top, the system should assume that one does not qualify, unless proven otherwise, with annual eligibility checks.

Does the Pelosi bill do anything to reduce future demand by discriminating against the obese, the smokers and the drug users? No.

One exception to this group are people born unlucky with genetic disorders. I would have no problem with a portion of my healthcare dollar going to those truly, genetically unlucky people. However, smoking, obesity and drug use are a matter of choice by and large (with the exception of metabolic disorders affecting obesity), and have to be actively discouraged, something the bill does not do at all.

(3) Federal programs matching state spending
Another large factor in the "demand" side of the equation is that for many of the state-level run programs, the Federal government provides matching funding. Obviously, this creates huge incentives for states to maximize spending on everything, and, as a result, costs skyrocket.

Does the Pelosi bill change these incentives to reduce demand? No.

Again, unlike most HC problems, the solution here is relatively simple. Move away from matching, and go to zero-based budgeting: every year the budget resets at 0, and every dollar has to be rejustified.

(4) Tort reform
Talk to any doctor, particularly anyone doing invasive procedures of any kind, and you are likely to hear horror stories about malpractice lawsuits. The lottery-ticket tort system (the cesspool home of slime like John Edwards, and a major donor to the DNC and the President) encourages frivolous lawsuits and outsized jury awards. Since most jury verdicts are unpredictable, doctors and their insurance companies often choose to settle, thus feeding the scum.
The current system has two perverse consequences, one is an increase in insurance costs (which can run tens of thousands of dollars or more per year). The second, and much more costly but difficult to quantify, is that doctors overorder medical tests for unlikely conditions both in in-patient and out-patient setting, and have patients overstay in hospitals while waiting for all of those to come through. This is a huge money drain in the entire system.

Does the Pelosi bill address tort reform as means to reduce demand? No.

The solution is relatively simple: limit the maximum award in any malpractice suit to $50-100k, and refer all alleged cases to the State medical boards for review. As a result, in a true malpractice case (which is something a jury in my view absolutely cannot decide as most Americans in my view lack basic science skills), the doctor would lose his license.

(5) Prescription drugs
There are a few problems here. On one side, drugs are incredibly expensive to develop, and the people who develop them must earn a proper risk-adjusted return on capital for doing so.
Then there is the other side. The US taxpayer and paying HC consumers have been paying for the development of drugs that the rest of the world gets at much lower prices. This is not a system that can last for too long as the free riders have to be cut off. Second, the US is the only OECD country, to my knowledge, that allows direct-to-consumer (DTC) drug ads. This generates demand for certain brands even when generics are available. "Ask your doctor if the purple pill is right for you" has a cost and it is coming out of your pocket.

Does the Pelosi bill address the problems with prescription drug costs? No.

There are a few things that can be done: ban consumer advertising, ensure flat or reasonable pricing across regions, and so on. Obviously, it would take too much thinking on Congress's side.

(6) Demographics
There isn't anything the bill can do per se, but it would have been the perfect occasion to start with future cost reductions via various mechanisms as it is clear that the problems we have now are only going to get worse in the future. To paraphrase a famous management thinker, demographics is the future that has already happened. And it is not pretty, in my view. Ideally, this would be a wider national discussion on aging, and how what was promised simply will not be there. There will be substantial reductions in benefits in the future, whether you like it or not, and these reductions will be in healthcare, pensions and social security, again whether you like it or not.

Does the Pelosi bill address the coming demographic upheavals in the healthcare system? No.

(7) Fraud
Finally, it is not a secret that there are substantial fraud operations going on with the various programs. Every major bust there is simply staggering in scope, but what is also staggering are the incentives for people not to work and to hide assets to qualify for the "free" programs, a small-time "beat the system" operators.

Does the Pelosi bill address fraud at the large and individual levels? No.

This is my market-based look on the bill. I am sure there are a lot more aspects of it, but I have given up thinking any more about it as there is no way I can change anything. I rate this bill at FAIL as it fails to address the underlying problems with the current system. It simply raises taxes while doing nothing for a "true" reform even though the bill is marketed to the clueless populace as "reform." It is not.

Mind you, the bill is completely unconstitutional as it mandates purchases of services from private parties that you do not want. There is plenty written about the tax increases it will bring about, going to jail if you do not have insurance (what sort of a Orwellian country is this becoming?) and so on. In aggregate, Congress took upon to reform the status quo, and made a bad situation into a complete disaster last night.

The unintended consequences of this monstrosity will surely surprise everyone. Here are a few suggestions. Remember that black swans are black swans for a reason. My view as clear as anyone's on what will happen. I am only sure it will be something that will "surprise" the consensus.

(1) Disappearance of employer-based insurance as employers accept the "fine" as a cost of doing business
(2) Republican majority in Congress in 2010 based on the HCR-economy combo
(3) Controversial aspects of the bill get voted down in the next 2-4 years
(4) Since the bill does nothing to address supply and demand, HC costs continue to outpace inflation to the politicians' surprise
(5) Attempts at cost-fixing in healthcare lead to rationing
(6) Rationing leads to a two-class health care system: one for the "rich" and one for the "masses". The "rich" pay cash to providers who do not want to deal with insurance companies or the government.
(7) The cash-only providers are banned because it is not egalitarian. End result: Royal Caribbean retrofits a few cruise ships into healthcare centers/hospitals, parks them in international waters near the big coastal cities and operates heli/ferry services lifting cash customers for treatment.
(8) Proliferation of self-medication and outsourcing of medical services
(9) The whole B/S reduces the supply of doctors, dropping the physician to population ratios to near third-world levels within 30 years
(10) Canada and Indian reservations become medical tourism hotspots for regulatory arbitrage purposes
(11) Introduction of end-of-life care vouchers to control costs. Since most costs are incurred in the last 3 months of a patient's life, when faced with a serious condition, a patient can choose to use "the" voucher. If the patient survives, she no longer has a voucher the next time around. Black market develops for identities and vouchers.
(12) No one goes to jail for failing to purchase insurance, despite what the bill says
(13) The bill thrown out as unconstitutional within four years, starting with a state judge decision in "flyover land" where there is still some common sense and respect for the constitution left
(14) New pharmaceuticals nearly disappear as producers cannot afford R&D; most pharmaceutical production moves abroad
(15) Major national politician runs on a platform consisting entirely of rounding up the illegal aliens and shipping "them" South in box cars
(16) NYT- if not liquidated by then- runs stories of young people who died while waiting for treatment while some "old, rich" white guy got it quickly
(17) Legalization of a market for organ and tissue donors for cash payers; everyone else dies while waiting for a transplant (this already exists in some niches, like eggs, embryos and gestational carriers)
(18) Patients are asked to pay for linens, food and medicine out of pocket during hospital stays (not a rare practice in many places around the world)
(19) ER doctors demand cash pay to see patients (again, not rare in many places)
(20) Increased rates in hospital-caused deaths as cost-cuts endanger basic safety

I think that my short last post, having the USSR rep knocking out the US guy just as the bill was passed is an apt analogy. I admit that I was rooting for the USSR guy, just a better all-around fighter, while keeping an eye on twitter for the vote results. What is really depressing is that there has not been a real attempt for reform since Hillary-care. Here's a classic from a few years ago, Fedor vs. Randelman, with Fedor winning shortly after being on the receiving end of this move.

Update 1 11/13/2009: Here are a couple of things that worry me a bit in retrospect. One, HC is about 15% of the economy. Congress just passed major legislation regarding HC. It was off the headlines within 24 hours: by Monday there was practically nothing. This is disturbing. Part of it might be that the Senate battles lie ahead.
Second, again a gut feeling, the bill was passed at 11 pm on a Saturday. However, our congress people love their holidays. They even take Yom Kippur off because they can. Now somehow they did a vote on a Saturday night. Hm. Makes you wonder.

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