Healthcare Fundamentals

Brad DeLong is one of the authors of an op-ed in the Wall Street Journal that makes the case that Sen. Obama’s healthcare plan is superior to Sen. McCain’s. According to the authors through a combination of enhanced use of information technology, incentives provided by paying for results rather than procedures, creating insurance pools for individuals and small groups, and extending coverage to those currently uninsured, greater efficiencies can be realized, more low-wage employees can be hired by U. S. firms (because the cost of benefits would be reduced), and reduce the cost of insurance premiums. They also contrast Obama’s plan favorably with that of McCain, claiming that Sen. McCain’s plan won’t reduce costs nor will it reduce the number of uninsured.

Be careful of the misdirections in the op-ed: nowhere do the authors claim a total net cost reduction in health care nor do they claim that better outcomes will result although a quick reading might give that impression. They do claim that more people would be insured under the plan but one would expect that in a plan which to some degree mandates coverage, wouldn’t one?

The Associated Press takes a somewhat more jaundiced view of both senators’ plans which is nicely summed up in the article’s opening paragraph:

WASHINGTON – John McCain’s health plan won’t lower the ranks of the uninsured. Barack Obama’s fails to curb the soaring cost of health care, meaning initial gains in helping more people buy health insurance would eventually be undermined.

That’s the assessment of health care economists who critiqued the plans of the two presidential candidates.

The critiques, published in the journal Health Affairs on Tuesday, reflect fundamental disagreements over how to improve access to health coverage. They also sound warnings about what could go wrong with each candidate’s plan.

I’ve written quite a bit about healthcare reform here over the years and in my view the problem with both senators’ plans is that they ignore the fundamentals.

The first fundamental of healthcare reform is that, if you say there are going to be cost savings, it means that somebody is going to take a pay cut, either doctors, hospitals, or insurance companies. Nobody takes a pay cut gracefully or willingly and I see no reason that doctors, hospitals, or insurance companies should be any different from the rest of us.

As I’ve seen the size of the slice of the healthcare costs pie represented by insurance administrative costs rise over the years to upwards of 30% today, I’ve come to support adoption of a single payer system (a system under which the government is the only or nearly the only insurer) simply because of the short term efficiencies that I think are likely to result. I’m pretty familiar with the way insurance companies actually operate and when I read Brad DeLong’s descriptions of them (for example) I don’t recognize the behaviors of companies I actually know.

Insurance companies make money in two ways: from the insurance business and by investing the money they get in ways that make a profit. During the late 1990’s while stocks were skyrocketing in the dot com boom insurance companies were able to make very comfortable profits using the second method. They largely ignored (or forgot about) the second method.

The insurance business is actually pretty simple. You spread risk over a pool of insureds and charge more for premiums than you pay out in claims or for running the business. If you’ve got to cover everybody for everything and can’t limit coverage, it isn’t the insurance business any more.

Premiums are going up because insurance companies aren’t making the sorts of profits they’re accustomed to by investing, because healthcare costs are rising, and, well, because it’s what the market will bear.

Don’t be befuddled into thinking that getting the insurance companies out of the healthcare picture will solve all of our problems. It will save us about 15%. At the present rate of non-healthcare insurance administrative cost increase that savings wil be absorbed in just a couple of years.

The second fundamental is that we don’t have enough primary care physicians to treat more people. We have the lowest number of primary care physicians per 100,000 of any OECD country as it is and the number is falling. Increasing the number of people covered by insurance won’t do anything about that at least not for the foreseeable future.

The third fundamental is that doctors of medicine are like everybody else: they’re strongly inclined to do what they’re trained to do and, frankly, they’re not trained to practice the sort of medicine the op-ed describes. Besides, preventive medicine requires cooperation from the patient so, unless you’re willing to monitor what the patient does as well as the outcomes seen by the physician paying the physician for outcomes is patently unfair.

The fourth fundamental is that the problems of the uninsured and of illegal immigration are joined at the hip. The uninsured are largely a local problem and they’re largely concentrated in places that have large numbers of illegal immigrants. Mandating insurance coverage won’t change that; legalizing the illegal won’t change that. The only way to keep a system of universal coverage affordable is to limit immigration, particularly illegal immigration. Also, please note that comparing the situation here with the situation in Europe is simply uninformed. We’re the only country in the world that shares a long land border with a country whose people have an average income a quarter of what it is here. Our problems are different than France’s.

There are really only two ways of controlling costs in medicine: nationalizing it and fixing prices or substantially increasing the supply of healthcare.

We know what the consequences of nationalization will be: it will create shortages and reduce the quality of care. I’ve favored increasing supply because I think that it solves the problem in a way that’s most acceptable to most of the American people.

4 comments… add one
  • Judi Main Link

    You might enjoy Dr. Max Gammon’s “Theory of Bureaucratic Displacement.” Milton Friendman recommended it when I was complaining about Chicago Public Schools and someone else was ticked off about the overrun costs in the military. Turns out Dr. Max, a Brit, was talking about healthcare.

    What do they have in common these days? A bureaucracy that employs, either directly or indirectly, so many people that everyone’s afraid to dismantle the systems for fear of massive recession. Maybe the financial system will just let us implode in the night, not with a bang…but a whisper.

  • Thanks, Judi. I cited Dr. Gammon in this post and I’ve probably referred to Gammon’s Law more than anybody in the blogosphere.

  • Roy Lofquist Link

    I agree with substantially all of this analysis.

    I authored and lived with a system in one of the largest hospitals in the world. It communicated in real time with three other major systems and by magnetic tape with the hospital billing system. They could not account for about 15 million dollars – they couldn’t balance the books.

    I also authored a time keeping and billing system that ended up in over 200 of the largest law firms in the country. It’s results were always out of whack with the other systems. Wasn’t my system. Every time I was called in to resolve these kind of problems it was the other guys.

    The root problem is that doctors and lawyers have absolutely no idea how to run a business but because of their culture they insist on being in charge. We solved these problems at the government level by creating the Federal Reserve and the SEC. The root of the current problems is that Fanny and Freddy are creatures of the Congress. The wrong people run things, and they will fight tooth and nail to retain their prerogatives.

    Like Thomas Friedman I’m pretty good at analyzing problems. Unlike him I don’t spout solutions that don’t make much sense. My solution to these problems? I dunno – do you?

  • Katie Link

    I think that the most important issue this year is health care and that it should be a much bigger part of the political discussion. I work for Boldmouth Inc. and have had the privilege of working for the Divided We Fail sponsored film competition at UCLA that is highlighting this issue. It is called Stolen Dreams and everyone, regardless of their political views, should check it out.

    The website is http://www.stolendreams.com

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