Affordable Health Care Reform

Abstract

This article explains the issues surrounding U.S. health care, and proposes the system framework to develop effective solutions.

(The views and opinions of this articleshould be considered as the views and opinions of this author alone, and not any entity that the author may be associated with unless expressly noted.)

Problem: How can we make health insurance affordable?

The U.S. healthcare system is the most expensive in the world. No other expenditure has risen as rapidly as healthcare over a sustained period of time. Average cost increases are 6-10%, more than double the standard inflation rate. The U.S. currently spends approximately 16% of its GDP on healthcare, and that figure is rapidly rising.

This high spending means that most new and advanced technologies are developed for the U.S. markets. Yet among developed countries, the U.S. often is ranked last on measures of quality, access, efficiency, equity, and outcomes. Additionally, despite this spending, the U.S. has one of the largest uninsured populations with over 40 million uninsured.

Solution: Reducing the long-term cost trend will ultimately make insurance affordable to all.

Clarification: The problem is NOT high costs. The problem is FAST rising costs.

High costs are not an issue, there are many items in life that are very expensive (such as rent, mortgage, or food) – but we have come to expect it, and can plan for it. What is frightening about healthcare is that

even if an individual can afford it now, he does not know if he can afford it ten years from now.

A very important distinction: Cost Factors vs. Cost Drivers.

A

Cost Factor is basic component of the cost of care that affects ultimate cost but not necessarily the change in cost.

A

Cost Driver is a force influencing cost factors to change the ultimate cost over time.

A list of common

Cost Factors are as follows:

Lawsuits –
Inefficiency –
Medicare/Medicaid vs. Commercial Cost –
U.S. Demographic –
Work habits –
Population Diet –
Cost of Technology –
Free-market –

Marketing –
Local Hospital Monopolies–

A short list of

Cost Drivers are as follows:

Medicare/Medicaid Cost Shifting –
Aging Demographic –
Changing Patterns –
Computers, TV � Sedentary lifestyles
Fast food

Technology/Free-market –
Increasing Inefficiency due to rising Medical Complexity

Primary Cost Driver: Technology

Citing technology as a primary cost driver sounds counter-intuitive because typically costs DECREASE as technology improves. So many everyday items from automobiles, to microwaves and computers, that used to be extraordinarily expensive, are now common household goods.

The reason why technology drives costs up in healthcare is due to the nature of

insurance – the masses of healthy support the few sick. Let’s have an example.

Primary Cost Driver: Technology (example)

Let’s say we have 1,000 members with claims averaging $100 per person per year (PMPY). The total cost to insure these 1,000 people = $100,000. Let’s also assume that typically 5 people die each year from cancer.

Year One:

Population = 1,000 members

Claims PMPY = $100 per person

Total Claims = 1,000 x $100 = $100,000

Mortality = 5 people out of 1,000 per year

Let’s say now it is

Year Two , and that we are starting out with 1,000 members again, just as inYear One . In this following year, a new targeted cancer treatment is developed that costs $1,000,000 per successful application. So this year instead of 5 members dying, we only have 4 individuals dying, and 1 life is saved.

What is the average claims per person now?

Year Two:

Population = 1,000 members

Initial Claims PMPY = $100 per person

Total Initial Claims = 1,000 x $100 = $100,000

Mortality= 4 people out of 1,000 per year

Cancer Treatment = $1,000,000 x 1 person saved

Total Claims = Total Initial Claims + Cancer Treatment = $100,000 + $1,000,000 = $1,100,000

Final Claims PMPY = Total Claims / Population = $1,100,000 / 1,000 =

$1,100 per person

The average claims per person increased by 1100% (from $100 to $1,100) simply due to this single technological breakthrough! Though this is a grossly oversimplified example – it helps to illustrate the basic issues at hand. That is,

Insurance supports funding:

The most advanced quality careAll the time

Imagine the legal issues of an insurer rejecting an effective treatment due to higher costs…

Primary Cost Driver: Technology + Insurance

Technology (the $1M cancer solution) is clearly good; however, in an

INSURED “FREE”-MARKET the invisible-hand theory breaks down. “Scarce” (a.k.a. expensive) resources are allocated to everyone.

Examples:

The overall cost of high-end super-computer spending has gone up over time; but no ordinary citizen will need a high-end super-computer
The cost of high-end Ferrari’s have also gone up over time; but who can afford one?

In short, the $1M cancer solution harms overall society by making insurance unaffordable for the masses; BUT it is

life-saving for that single individual.

Primary Cost Driver: Technology + Insurance + ” Free”-Market

The insured “free”-market system of healthcare delivery has also resulted in some intended, and some clearly

unintendedconsequences:

The U.S. due to its market-driven system has the most advanced care available. Generally new medical technologies are first developed in the U.S. and then exported to other countries at a severe discount. (Examples: Drugs, CAT scans, etc.) The fast-rising costs are due to the “free-market” method of distributing scarce resources in an INSURED setting.
In an insured “free”-market, the most effective means of lowering operating costs is through better underwriting than the competition; NOT through better care delivery. Individuals who have never been sick (e.g. high-profit) rarely consider “quality” care; where-as families who have a history of disease (e.g. negative-profit) deeply appreciate genuine, compassionate care. If an insurer becomes “known” for better care, who would be the first to sign-up?
In a group insurance market, the only “free”-market forces are insurance companies negotiating directly with hospital systems. Hospital systems typically strive to achieve local monopolies, to attain significant pricing power. Insurance companies avoid trying to disband local monopolies because they want to maintain lower “network” rates for employer groups that have employees in the areas that are serviced by the hospital monopoly. The insurance carriers then effectively FAIL at providing a profit incentive for one hospital system to perform better than another hospital system, and instead indirectly encourage hospital systems to form monopolies due to their failure in providing appropriate incentives.

Primary Cost Driver: Technology + Insurance + “Free”-Market ==> Rising Complexity

A directoutcome of insuring new technology is a rapid increase in system complexity. Typically, natural market forces, in a normal free-market, will cause the system to reshape itself in a manner that coordinates care better. Providers typically would earn more profit through improving efficiencies in the system; however, this is not the case in the existing system.

In an

insuredenvironment where technology is rapidly improving, it is easier to increase profit by

specializing further

instead of

growing profit through efficiency gains (e.g.care-coordination).

Market forces will always cause providers to pursue the

easiestmethod of increasing profit. In the current system, the easiest method of growing profit isNOTimprovingefficiency, it isspecializingin more advanced technology.

Insurance companies are required to pay for whatever care is necessary to effectively treat a disease state. If a treatment can be “shown” to be effective, then insurers will reimburse the cost.

The difficultyis the following:

a) It is easy to show treatment effectivenesswhen a patient is immediately dying

b) It is not easy to show treatment effectiveness when the care is preventative (as in the case of care-coordination)

It isprecisely thisdifficulty, thatdrives profit-minded hospitals into large investments in specialty care instead of large investments in care-coordination and prevention.

Key to Solving (Controlling) Rising Healthcare Costs:

To solve this dilemma, we simply need to address any one of the aspects of driving this rise in healthcare costs. We can either address one or all of the following:

Cost Drivers:

Technology
Insurance
“Free”-Market
which lead to ==>
Rising Complexity

Let’s break the potential solution(s) into steps:

Step 1: Addressing Technology Stop the advance of technology. This would solve the problem and turn the healthcare system into a more typical insured setting such as P&C or Life Insurance; however, this idea is ridiculous. What is needed is to allow for new technologies to be developed without the imperative that they be covered under the insurance plan.

Step 2: Addressing Insurance Ban health insurance. This suggestion is also ludicrous, because desiring insurance coverage is the whole reason for this debate. A better idea is to create a base-line health insurance plan to service all the major existing medical needs, and to allow for the creation of a secondary health insurance market to cover additional services as they are developed.

Step 3: Addressing the “Free”-Market Distribution (in an insured setting). Nationalize healthcare. This suggestion is more plausible, but difficult to embrace due to the negative perception of socialism in America. Additionally, there is a very real concern about the reduction in efficiency when a monopoly controls all aspects of healthcare delivery.A better idea is to allow for private companies to continue to deliver health care while changing the reimbursement to a risk-adjusted system where companies with sicker patients will receive larger payments . Companies would be rewarded for efficiency in delivering quality healthcare, instead of being rewarded for better underwriting practices. Moreover, this system is already in place in the form of Medicare Advantage for the over 65 population in the U.S. (To clarify, the goal is not to eliminate the free-market, but rather to convert to an improved,
alternative free-market system that addresses the inherent issue of insurance and simultaneously fosters competition in the manner that is desired. A government-run monopoly would simply freeze the system where it is today — with the lack of competition removing monetary incentives for improvement.)

Step 4: Addressing Rising Complexity (Treatment vs. Prevention)
Prioritize prevention over treatment. This suggestion is universally acceptable; but extraordinarily difficult to implement.The REASON why this is so difficult to implement is b/c there are TWO 2 ways to improve health:
PreventionTreatmentTreatment produces immediate outcomeswhere a competitive (free) short-term market-place can be useful in setting prices; however,

Prevention produces long-term future outcomes that only a long-term market-place can be useful in setting prices.

U.S. healthcare is a SHORT-TERM marketplace where individuals and groups can change insurers annually. This does not foster the necessary market incentives for long-term prevention regimens.

Nationalized Single-payor systems are not true free-markets; however, they are LONG-TERM innature where the single-payor can focus on preventative programs and the single-payor can reap the rewards of their LONG-TERM investment.

Theprimaryreason why single-payor systems have better cost-outcomes is due toits LONG-TERM system structure. However, this does not mean that single-payor systems are inherently better than market-based systems;but itdoes mean thatLONG-TERM systemsare inherently betterthan SHORT-TERM systems. For the free-market advocates who seem to be terrified of anything that has the veneer of socialism, and for liberal advocates who denigrate the profit-driven capitalistic system — there can truly be an alternative pleasing to all. The U.S.does not need togive up its market-based structure; but it must move towards a cost-sustainable system.

It simply means that the SHORT-TERM market structure needs to be converted into a LONG-TERM market structure.

Recommended Policy:

Now, let’s describe what one possible solution could look like in America (other solutions are also possible, as long as they address the UNDERLYING issues):

Expand Medicare Advantage to cover everyone with payments on a risk-adjusted basis. Raise taxes to cover this program and give tax credits to employers who offer creditable coverage to their employees. [Caveat: This could work, but we would still need to resolve the current issue of massive cross-subsidization of government programs vs. commercial insurance. Immediate transition without addressing this pay-disparity would produce a massive system shock that would not be advisable.] (Step 3)

Create a base-line health insurance plan under the expanded Medicare Advantage program. A secondary insurance market will naturally follow, typically in the form of enhanced benefits with supplemental premiums being charged. Medicare already has such a baseline health plan in place for senior citizens. [To clarify: The baseline insurance policy would not need to be run by the government or single entity — the baseline only needs to be agreed upon so that antiselection will not cause insurers to focus on U/W to reduce disease instead of prevention or better care to reduce disease.] (Step 2)

Create a regulatory body with the power to determine which new technologies are cost-efficient enough to be covered under the base-line health insurance plan. CMS partially bears this role currently; however, its role needs to be expanded to include the power to define what is cost-efficient, and the right to not cover technologies that are effective but not cost-efficient. Efficient new technologies that CMS overlooked would still have a chance to succeed in the secondary insurance market if they are truly effective. [Caveat: there is no perfect method or organization that can say when a technology is “worthwhile.” At the same time, some effort of defining “good” is needed in an insured marketplace that does not have the typical market-forces in play. The key is to begin somewhere and allow for an evolving feedback loop to constantly improve the recommendations.] (Step 1)

Create an effective rewards system for overall disease reduction instead of disease treatment. It is not clear to me at this time what such a system would look like. A single-payor system would have a vested interest in overall disease reduction; but it has the counter-vailing effect of monopolistic inertia. Convertingthe health insurance market into lifetime policies instead of annual policies would succeed as well, but would punish the unlucky individuals who chose the wrong carrier at their birth. Mandatory 10-year policies would provide for a good blend, encouraging prevention on a 10-year scale, while providing freedom to shop carriersseveral times in a lifetime. [Comments: Any recomendations would be appreciated.] (Step 4)

Conclusion:

Solving the problem of sky-rocketing healthcare costs begins with an understanding of the underlying drivers causing the increase. In the long-run, an insured “free”-market is not financially sustainable with regular, costly advances in technology. The U.S. already has the seeds for an effective overhaul of its healthcare system in the form of the existing Medicare Advantage program. The recommendation is to expand the existing program, while giving stronger regulatory authority to CMS, and moving from a short-term system to a long-term one. Any long-term resolution of this issue will have to bear some aspect of this recommended solution.

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Final Thoughts:

There is a massive debate going on regarding health care and reform. Nearly all parties have good intentions; however, most debaters focus on a single “holy-grail” to solve the system, either a

“government-run single-payor system”, to
“FREEDOM to make one’s own decisions”, to
“reducing massive waste”.

Most of these debaters also focus on a single culprit as the root cause of all the woes in our system, for example:

evil insurance companies
government intervention
fraud, litigation and complexity

It is overly simplistic to assumea system failure due to a singleissue. It is easy to find a scape-goat to blame; however, if the problem is a systemic one, then removing the scape-goat will not bring us any further along. Therefore, it is necessary

to understand the systemas a wholewhen making decisions about the system.

We mustunderstand the underlying purpose behind each component of the system, and fit them together withinthe larger framework. Rarely,has any major discussion focused on the details of the economic structure of the system, and how each component of the system is layered on top of one another — but the system must be taken as a whole if it is going to be improved. My goal in writing this article is to help you understand the framework of our current health care system.Ifwe understand how our systemfits together; thentogether, we can createthe bettersolution.