Financial Adviser

August 12, 2009

Here's To Your Health

I have been asked quite a bit about my thoughts regarding health care reform.  So, I'll spend just a few minutes on a couple points of major importance that nobody I hear in the media, government, hospital industry or the insurance industry takes the time to explain. 

Healthcare delivery suffers from a problem of pricing that only occurs from time to time in economics, that is it suffers from the problem of monopoly pricing.  Most people understand this to mean that there would be no competition for healthcare, this is a misperception.  Monopoly occurs not only when one firm controls a market, but also by definition when there is no substitute for a good or service.  In the case of healthcare, there is simply no substitute.  We can not say, "oh, I'd like a new coat, instead of that bypass" and live to tell about the nice warm material in our new jacket.

Because healthcare has no substitute, regardless of how many firms there are, there will be upward price pressure because the healthcare provider always has leverage with a patient seeking care, regardless of laws requiring treatment.  Many advocates of healthcare reform trumpet the "free market" as a solution for fixing healthcare.  They are mistaken to take this approach because the problem of healthcare costs has more to do with the demand for healthcare being urgent than the quantity of providers available. 

Simply opening more clinics and having more insurance plans in a market such as healthcare would actually be likely to raise costs and dilute the quality of care.  Why would this be so?  Let's consider whether more health insurance companies would be able to bring down costs.  The answer is surely no because the pool of insured from company to company would shrink, which in insurance risk-sharing pools raises costs.  If we opened too many more clinics and hospitals, the supply of medical personnel would eventually become stretched, reducing quality.  While I am not sure we are to that stretch point yet, a cursory overview of nurse shortages recently would seem to imply we are at least near that point.

As it stands now, much of the cost of healthcare in this nation is due to our inability to find a solution to covering people for primary care.  The uninsured end up in emergency rooms a disproportionate amount of time because that is where by law they can not be turned away.  Having so many people using emergency medicine, about 10-20% of the population at a given time (closer to 20% now with high unemployment), raises the cost of their care by as much as 900% or more.  Because those bills generally do not get paid, healthcare providers pass those costs on to the insured.  In essence, we already have universal coverage, we just have it very inefficiently.

Most estimates are that about 20-40% of healthcare costs are due to people going to emergency rooms when they should not or do not need to.  Our primary mission ought to be to reduce this "waste" cost in the healthcare system.  If we simply find a way to move non-emergency medicine out of the emergency room and to primary care, as a nation, we will save hundreds of billions of dollars over the next decade. 

Many believe a single payor system of healthcare can reduce costs.  They are probably right, however, such a system has always led to a reduction of high end healthcare services wherever it is practiced.  I do not believe Americans want to sacrifice quality of care.  I know I don't.  Any solution needs to preserve and continue to incentivize the creative energy and innovation of advanced medicine.

Since as long as I can remember, the healthcare debate has been distorted by extremists and speical interests.  It seems to me that solutions could be more common sense if politics was cast aside.  We all want lower costs and greater access.  Here are some broad, in need of refinement, ideas that I think will work if well adopted:

• Insure everybody by opening Medicaid on a sliding scale and Medicare to those turning 62 AND/OR provide tax breaks or subsidies to lower income people for private coverage.  Remember, the number one goal is to provide coverage that keeps people out of the ER.
• Place limits on certain business practices at health insurance companies, such as excessive executive and management compensation, which result in costs being higher for the nation as a whole.  While it is difficult to define "excessive" it is not difficult to understand that when 10-15% of every premium dollar goes to bonuses and upper management compensation that is probably too much.
• Mandate periodic open enrollment for all insurance plans- meaning no health declines, so that we have true risk-sharing pools.  It will be necessary to backstop large claims for insurance companies with an industry/government re-insurance program- which is not a new concept.
• Mandate that all premium classes based on health underwriting, be within a certain range.  That is, the highest premium on a plan will be no more than 3 times the lowest premium offered on a plan.
• Mandate minimum benefits, such as many states already do, as the base coverage that must be offered on any plan sold.  Wisconsin is a very good example.
• Allow group/pooled purchasing by insurers and non-profit groups for prescriptions/drugs
• Mandate standardization of forms, coding and claim processing- several estimates are that whis would reduce healthcare costs about 15%.
• Reduce litigation with more standardized award limits in malpractice cases (currently about 5-8% of healthcare costs can be attributed to litigation and litigation risks).
• Create a national health insurance information exchange that doctors and patients have protected access to, and implement on a relatively short time frame.  This would further reduce administration costs, improve the quality of care and create jobs in the short run during the buildout.

In general, I believe we ought to handle healthcare similarily to the other industries that have monopoly pricing pressure and can not be denied in a civilized society.  Other industries that are strikingly similar economically to healthcare are the delivery of electricity and water.  We have found ways to regulate those industries as utilities, maintaining private industry efficiency, while having high levels of service as mandated and overseen by government agencies.  I believe it is probably time for a regulatory structure that is similar to the utilities for healthcare.  The last time I checked, my lights were on, water came out of the faucet and the costs were rather low measured against my need for both.

Your hoping for a real solution to healthcare costs and access advisor.

Kirk Spano