Could It Be So Simple?

Could it be that the only reason health-care costs in the United States are so much higher than other countries is that we pay more for health care than other countries? That’s the point of view articulated in a February 28, 2012 Washington Post article by Ezra Klein.

But wait. Aren’t Americans sicker, more stressed out, less attentive to our health than almost every other society on the planet? Aren’t we more addicted and dependent on the relative proximity and ease of access our health-care system provides and that drives the consumption of health care to astronomical proportions?

A survey released on March 2, 2012 by the International Federation of Health Plans suggests that the cause of higher health costs in the U.S. may, in fact, be that straightforward. The survey found that for 22 of 23 medical services and products, Americans pay more than any citizens of the other 24 countries surveyed.




Source: Washington Post

Perhaps we shouldn’t be so surprised with these findings. After all, in most other countries, prices for health-care services are either set by government edict or established through industry-wide negotiations between providers of services and payers. In the U.S., while Medicare and Medicaid have wide latitude to establish prices, they will pay for services --subject to political pressure from provider groups-- the commercial health-care market operates differently from health-care systems in other countries.

In the commercial market, payers and the providers of health-care goods and services engage in sophisticated negotiations. The result is the establishment of prices for goods and services that often reflect the relative market leverage of the participants. Because these negotiations take place between local, regional and national payers and local, regional and national providers, the result is an array of prices that vary significantly from market to market and among payers.

Is it practical to think that the United States will someday achieve a national market for health care? By that, I mean a market in which the prices for services will be generally equivalent across the country, just as the price of gasoline or milk is today. Without significant change to the way prices are set today, it doesn’t appear so. To the contrary, health-care prices are by and large established locally and regionally, and are often driven by the degree to which health systems and practitioners can exert market power.

Food for thought: The way we establish prices for health care today isn’t working to our benefit, at least if we compare the cost of health care here to other, industrialized countries. As Americans, we resist government price controls. If truth be told, we need a different, better way to price health-care services, one that leads to long-term price stability at a lower proportion of our GNP.

The business community gets this, and so do most American health-care consumers.

The big question in all this is: Why is it so hard to identify leaders within the health-care community who are willing to talk openly about this problem and tackle it head on?

Our Dysfunctional Health-Care System: Can Cost Cutting Heal It?

The number of Americans who have health insurance through their employers is dropping with unprecedented speed. The latest Gallup and Healthways, Inc. survey reveals that in the third quarter of 2011, only 44.5 percent of Americans now carry health insurance through their employers. That’s a decrease of more than 5 percentage points in three years.

As fewer employees enjoy health-care coverage through their employers, they’re paying more for the privilege. According to the Commonwealth Fund, premiums for employer-sponsored family health insurance policies increased by 50 percent from 2003 to 2010.

In fact, the annual amount employees pay toward their insurance has risen by a whopping 63 percent over that timeframe.

As sobering as these statistics are, they only skim the surface of an underlying problem. Over time, our health-care system has morphed into a dysfunctional state, and now resembles a dinosaur teetering under its own weight.

Our current system suffers from two, life-threatening disorders. The first is a market bias to provide the very best health care no matter what the cost. This cost push has moved steadily up even as consumers have been shielded from the true costs of their health care and are now shouldering more and more of the cost burden.  They just don’t know the cost of what they’re buying.

Look at it this way. Consumers are familiar with the cost of gas. They haven’t a clue about what health-care services cost until they get socked with a bill, even though they are the primary purchasers of these services.

The second disorder is this: Unlike other consumer purchases, in health care, price and demand carry no equilibrium-creating pressure to put the brakes on rising costs. If gasoline gets too expensive, people can drive less and prices fall. If the costs of health-care services soar, consumers have not had any effective way to make prices fall. For the most part, they don’t use less health care, at least not yet.

The rub comes in as employers are hit with rising insurance costs. Simply put, employers are typically willing to pay increased premiums if the increases are in line with inflation and if their cost structures allow for them. If the increases exceed these criteria, they pass the cost increases on to their employees.

All of which begs the question: How will consumers be able to keep supporting the staggering increases in health care? The answer is: they won’t. And this suggests that the system is fast growing more dysfunctional, will soon fail to support its own weight, and will fall apart. Unless, that is, something major is done.

Some health-care systems are already scanning the horizon and learning what other industries instinctually know how to do when costs unreasonably outpace demand. They’re searching for ways to cut costs. What a novel idea for health care.

Others are looking to the federal government to step in and shore up our dysfunctional - system. Ironically, government is a big part of the problem. Given the rigid, non-compromising philosophies now driving the health-care discourse in Washington, government stands frozen in grid lock without the resilience to find or even discuss solutions. Thus, nothing gets done.

And as we know, through Medicare and Medicaid, the federal government unilaterally establishes the prices it pays for health-care services and leaves hospitals and physicians to right size their incomes by digging deeper into the pockets of their customers.

Just as important, Washington today moves with a vacuum of leadership and without a shared vision of what should be done. And so the health-care dysfunction continues.

Without a resolution at hand, our health-care system risks turning into a non-caring force in favor of those who can afford its services. Those with the money to pay will receive the health care they need. Those who can’t pay will go without.

In the meantime, the best course seems to be to do whatever we as individuals can do to keep ourselves healthy so as to minimize our reliance on this dysfunctional system.

Its Time to Get the Government out of Fixing Prices for Health Care

Nine family physicians have decided to leave Indianapolis-based American Health Network (AHN) in favor of practicing their profession trade as part of Riverview Hospital.  The Indianapolis Business Journal’s reporting of this seemingly innocuous decision by nine doctors offers rich insight into the convoluted nature of the American health-care payment system.

According to AHN, these doctors can now bill their services for around three times what they were asking patients to pay when they were part of American Health Network.  AHN estimates that the additional billings will add $6.9 million to the health-care tab paid by the Indianapolis community for health care.

A number of reasons may have prompted Riverside to want these physicians to come to work for the hospital, but the bottom line appears to be this: Because these physicians are employed by Riverside, the hospital can charge higher fees for their services. In fact, the fees are three times higher than the physicians charged before they worked for the hospital.  Are the services now three times more valuable to patients?  Doubtful.  Are the outcomes delivered by these physicians significantly better?  Probably not.  Why then, the difference?

As they say, “it’s complicated.”  Let’s try to uncomplicate it.

In its quest to engineer an equitable and efficient payment system, the federal government regularly adjusts the payments it will make to the medical community for serving Medicare patients.  Because Medicare is such a large and significant component of health care, private insurers often establish payment systems that mirror those of Medicare. 

To clamp down on suspected over-billing for services by physicians in outpatient settings, Medicare has taken steps, the result of which is to make the differential between services provided in an inpatient setting larger than it has been in the past.  Not surprisingly, hospitals and physicians are reacting as you or I might if we were in their shoes.  They’re following the money.

Decisions like this by players within the health-care market have little, if anything, to do with improving the quality of care or reducing its cost.  These decisions have to do with maximizing revenue. This is what one should expect within an open-ended, fee-for-service financing model.

On the other hand, what if there were open and free markets for the services these family physicians provide?  And what if the price for services were based on the perceived value of the service, not on where the service was delivered?

To make this happen, a number of significant and important changes would have to occur. First, the government would have to get out of ongoing and continuous central planning. By substituting its judgment for the wisdom of the market as to how to best allocate resources, the government has created so many market distortions that health care can no longer legitimately be described as a market.  At least not a free market. 

The U.S. health-care system suffers from a fate that’s actually worse than centralized planning.  In Soviet-style economies, central planning worked within the framework of fixed resources and this led to rationing.  In the U.S. health care system, we don’t ration services. Instead, the government has a safety valve – the private sector. Insurers and Patients are expected to pick up the tab for whatever the government won’t pay for.

Government would also have to get comfortable paying providers market prices for services it funds through Medicare and Medicaid.  It used to be gospel that these programs deserved preferential pricing because the alternative would be uncompensated care arriving at the doorstep of providers and hospitals.  This argument may have had merit early in the development of these programs. But this argument has outlived its usefulness.  The time has come to move beyond social policies that deliver preferential pricing for these programs.  Pricing policies like this inflict grave harm on the larger market for health-care services.

Second, care providers would have to rationalize their business models and actually become familiar with what they’re charging for their services.  Many types of care are necessarily open-ended, because it’s often difficult to estimate or predict what the total price for a regiment of care will be.  Diagnosing a particularly vexing ailment is a good example of the kind of service that can be hard to create a fixed price for.  On the other hand, a routine physical is pretty straightforward.  So is a normal baby delivery.  Do you think your doctor knows what he or she charges you for services like these?  Probably not.

Third, Insurers, with a helping hand from a newly-restrained government, would need to recognize that their own practices help cloud the market for health-care services.  This begs the question: What good is a posted price for services if the actual cost to the consumer is significantly adjusted by a health insurer after the fact? 

Under many benefit plans, the only meaningful price distinction drawn is among those providers who are or aren’t in the plan’s network.  Provider competition and innovation on the basis of price isn’t going to come anytime soon in this world.

Is all of this going a bridge too far?”  Hopefully not, but a realist would have to conclude that achieving even a beach head with these changes represents a lot of heavy lifting.  It’s not that it can’t be done.  It’s just that in health care, we’ve come to believe that markets don’t work, and that even if they did, we would collectively suffer. 

In the meantime, how can we blame the health care market for not working when we don’t have the discipline or conviction it takes to bring it to life?