How to Control the Cost of Medical Care

How to Control the Cost of Medical Care Neil A Kurtzman, MD Grover Murray Professor University Distinguished Professor Texas Tech University HSC

l Medical costs in the US are now $1. 7 trillion – 2003 l Every year grows at 2 -3 times GDP l The burden of supporting our current system is unsustainable

• • • In 1960 healthcare was about 5% of GDP Today its triple that The reasons for the increase are many - Medicare 1965 - Separating service from payment - Technology

• The last contract signed by the Big three US auto makers and the UAW will make health insurance costs even higher • The contract will make US autos even less competitive against foreign cars • It's also unsustainable

June ‘ 05

• More than 200 years ago the philosophers of the Scottish enlightenment concluded that politics could not solve virtually all of the great problems of life • Nobody seems to have learned anything from them • Consider the politics of healthcare over the past year

• Congress passed and the President signed a prescription drug plan • That wasn’t needed • That nobody understands • It’s 600 pages long • That costs no one knows how much

• Why did we focus on drug costs when the problem clearly lies elsewhere? • Why have we failed to realize that we are faced with an economic problem – how to provide an important service to all at an affordable price while avoiding shortages • Who is to blame?

• The drug companies • The hospitals • The insurance companies • The doctors • The patients • The press • The politicians • The medical schools • In short, everyone

• Solutions abound • But none discuss the problem that requires fixing • How do we pay for healthcare?

The doctors contend that there will be at least $200 billion in administrative savings in a single-payer national insurance plan 8/13/03

• Reps Conyers and Mc. Dermott have introduced the National Health Insurance Act • Promises to save $150 billion in paperwork and $50 billion by single payer bulk purchases of drugs • This from the government that has no idea of its administrative costs • And which if it were a private corporation would be in jail for accounting fraud

“In the latter third of the (20 th) century, no positive program for universal, comprehensive health services was enacted. That left the financing and organization of health services to market forces and converted health-care services to a for-profit arm of the insurance industry. ” Richmond and Fein Science, 26 Sept 2003

One wonders what alternative universe these Harvard professors inhabit, because if there’s any part of our economy sheltered from market forces it’s health care. Our current difficulty with high cost medical care results from the lack of market forces, not their presence.

• Neither the buyer or the seller negotiates the price • There is no price competition • The biggest payer is the government which writes the rules and sets the prices • This apparently is a Professor of Medical Economics idea of Market Forces

“The lack of a comprehensive health plan leaves almost 20% of the US population without health insurance. Many other individuals are inadequately insured, in a complex array of financing arrangements that result in heavy administrative costs. Because financiers have largely taken over the financing and management of health services, they have become politically potent forces in maintaining the current chaotic, but largely profitable, system. Physicians and patients alike are being held hostage to decision of for-profit insurers. ”

• The medical establishment clearly wants a single payer system of health insurance • Financers and for profit-insurers are the villains • Is this the solution to ruinous medical costs? • Should we create a $1. 6 trillion dollar federal bureaucracy that will both ensure adequate medical care for all while simultaneously restraining costs? • A single payer system would effectively double the size of the federal government • Certainly not • Why? Because it’s impossible (just for starters)

• Consider the rule book that would result • The government took 600 pages just to define organic • Costs would inevitably rise and services be in shorter supply • The economic history of the 20 th century has been the failure of central planning • Affordable health insurance is not possible unless affordable health care exists

• An insurance company invests some of the premiums it receives thus earning money allowing it to charge lower premiums than it would if it didn’t invest • The government spends, it doesn’t invest • That medical insurance companies don’t do much of the above is because they avoid competition with all their strength

• Why is medical care so expensive • Ask first why computers are so cheap • Every year they get better and less expensive • Why?

• Dell • HP • Gateway • IBM • Sony • Toshiba

• Nvidia • ATI • AMD • Intel

Competition

A rare example of price competition in medicine. What would this cost if paid for by insurance or Medicare?

No one hates competition more than businessmen

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices. Adam Smith Wealth of Nations 1776

• Everybody is for competition except as it applies to them • Unions want tariffs on cheaper foreign goods • School boards and teachers unions oppose school vouchers • Farmers want subsidies and tariffs • Drug companies collude with government to avoid price competition

• Universities also hate competition • They lobby their state legislatures to help them avoid it • Texas A&M doesn’t want TTU to have a vet school

• In free society goods and services are rationed by price • In healthcare there is no price rationing or competition • Thus demand is limitless and costs are ruinous

• A single payer system would eliminate what little competition there is • It would further stimulate demand increase cost and/or create shortages • It is exactly the wrong approach to the problem of affordable medical care for all

• Consider the movie The Barbarian Invasions • Winner of the Academy Award for Best Foreign Language film of 2003 • Depicts the most government controlled medical system in the Western world – that of Quebec • It’s not about medicine, but its protagonist has a terminal illness

• Part of it is set in a Montreal hospital • Its physical plant is falling apart • Its medical staff is monstrously indifferent • It is inefficient and corrupt • The only way to get decent care is to go to the US or bribe hospital administrators and union chiefs

• The movie was made by French-Canadians • If its depiction of local medical care is only 5% correct – don’t get sick in Quebec • They have managed to add shortages to ever rising costs

• The perfect is the enemy of the good • Most poor people are poor temporarily • A good but imperfect health care system is better than chaos • Two generations of Americans have been conditioned to see healthcare as an unlimited entitlement – in this regard they resemble the East Germans

• An American family that earns $50, 000/yr and has pets spends about $1000/yr on Vet bills • Spending a similar amount on human healthcare is seen by many as an onerous burden

How Could Medical Care be Reformed? l Untie it from employment l Employers would give what they currently spend on health insurance to their workers l The government would mandate the terms of a minimal health insurance policy which would be required from all

• Everyone would be required to have the basic minimum policy • Proof of insurance would be required as it now is for drivers licenses • The poor would be given health insurance coupons similar to food stamps • Insurance companies would compete for their customers by offering lower prices or greater coverage • No rates for services would be set by insurance companies or the government

• Every patient would pay the provider directly • The insurance company would pay the patient • • • whatever was billed less a deductible Each policy would have a limit, when it was exceeded the patient would bare the entire financial burden until catastrophic health insurance kicked in Unused benefits would accrue This would encourage patients to shop both for insurance and medical care

• Price competition by providers and hospitals should be mandatory • The part of the government that must be involved is not HHS, but rather the Dept of Justice – the Anti-Trust Division • The government should encourage the growth of specialty hospitals - it just put a moratorium on new ones

• They weren’t competing in any meaningful sense • They were just taking well insured patients away from full service hospitals • In a truly competitive system they would have to offer better prices to survive • Any hospital administrator who threatened his medical staff with loss of privileges if they worked at a competing hospital would be vulnerable to the Dept of Justice

• Insurance companies would offer more expensive policies for those who wanted to pay more for better coverage • Inherent in any workable system is that coverage will be unequal • This is very hard for Westerners to accept • The alternative, however, is bankruptcy

• Ultimately we are all going to pay the cost of our healthcare • It is in our best interests to keep the costs as low as possible

The Drug Companies Why are their prices high? l They avoid competition l They all make statins, ACEIs, ARBs, etc l And they charge more or less the same prices l They should be forced to price compete l

• Here’s where the government comes in • The full force of the anti-trust laws should be used • See what happens to drug prices when the DOJ threatens to break up Pfizer • Government also needs to monitor safety and fight fraud • But it must encourage, not discourage, competition

Single payer system • Price controls • Shortages • Increased costs (taxes and fees) • Rationing either by fiat or delay

Rationing by Price • Untie health insurance from employment • Give currently insured workers what their companies are currently paying for health insurance • Make health insurance premiums tax deductible as they are now • Allow people to buy whatever policy they can afford

• Competition would lower costs • People would shop for the best policy they can find – eg, do you need a mammogram every year? Will one every other year do? • Reconnect the service with the payment • Politically difficult to do • Providers must offer price competition • Only them will costs fall

• The most important factor driving costs has been new technology • It incrementally improves care, but exponentially raises costs • Medical care has increased 11% a year for the last four decades • With price competition technology would lower costs • Only in Medicine does better technology raise prices

• Also needed is tort reform • Politics trumps economics • Which is why we’ll probably make the wrong choice about how to manage healthcare • But it’s not inevitable that we make the wrong choice • Our current system is bad, a single payer one could be even worse • We should consider other alternatives

Mancur Olson: The more important the system the more likely it is to be reformed only after it collapses

• Why have we failed to debate alternative solutions to the healthcare crisis? • Virtual ignorance of basic economics by the public and the press • A few years ago the Nobel Prize in Economics was awarded for showing the people don’t make rational economic decisions - saving $15

• The furious reaction to Chairman Greenspan’s warning about Social security • No will to reform SS even though everyone knows it’s needed • People would rather get $1000 a month that buys • $500 worth of goods and services than get $750/month that buys $750 worth of goods and services When I was chairman of the Dept of Int Med I couldn’t get most doctors to understand that they were better off making $100 K in Lubbock compared to $120 K in New York

• The failure of America’s universities to seriously debate the funding of medical care • An almost total lack of intellectual diversity in America’s universities • Intellectual diversity is as important as any other kind • It’s what tenure was created for

• Chairs and deans don’t want to fill their faculties with professors who disagree with them • John Stuart Mill has recently been quoted ridiculously out of context • But he said that vigorous debate was the only way to approach the truth • If we don’t have a debate about healthcare we’ll have a disaster