Friday, August 10, 2012

A Spoonful of Reality Helps the Medicine Go Down

Before you roll your eyes and say, “Great. Just what we need. Another Hollywood big-mouth weighing in on a controversial subject he knows dick about,” a word about my creds: Before I joined the circus, I spent 20+ years making a living as a benefits consultant to dozens of private and public sector employers. So I do know a thing or three about how the current system works (and doesn’t work).

That said, it seems to me that whenever the subject of health care reform comes up, two opposing forces go totally Medieval on each other; the Left shrieks for a government-funded single-payer system while the Right bellows in defense of the current system of Medicare, Medicaid and employer/union-sponsored private payment plans. While both these approaches offer certain advantages and I could give you an exhaustive list of pros and cons to each, neither addresses the core issue, and that is the screaming runaway train of medical-inflation we’ve witnessed over the last four decades, a rate well in excess of three times the Consumer Price Index.

So how did the system get so screwed up? 

In the 1940s, employer-sponsored medical insurance was introduced as a "perk" to get around federally mandated wartime wage-freezes (yet another silly idea) to attract and retain skilled labor. What started as a snappy little benefit that cost only a few dollars per employee has since spiraled out of control. 

Now imagine for a moment if, rather than offering medical reimbursement plans, employers had opted to pay for some other basic expense—clothing, for instance.

At first, there wouldn’t be much of a change.  But it wouldn’t take long before plan participants would begin to upgrade their wardrobes.  Why opt for the no-name generic crap when you can fill your closets with haute couture?  After all, if there is no cost differential between “adequate” and “the best,” who in their right mind would choose cotton over silk underwear?  

Meanwhile, retailers would burn all those ugly “Spring Clearance SALE” signs because nobody would care about discounts.  In fact, the term “discount” would soon become synonymous with “substandard.”  And as prices became increasingly irrelevant to their customers, clothing stores would steadily boost them in order to maximize profit.  To counter this, insurance companies would establish benefit limits tied to “usual and customary” prices.  But since those prices would be pegged to the actual claims submitted, they would continue their upward creep.

Designers would soon jump on the bandwagon, abandoning seasonal lines for monthly lines.  Again, insurance companies would respond to the increase in claims by incentivizing the purchase of generic brands over designer duds.  However, it would soon be pointed out that there is no generic equivalent for the triple-vented pleated sport-kilt in Ralph Lauren’s Mid-October Collection.  Furthermore, there won’t be for the foreseeable future since Ralph holds a patent on the pattern.  So in order to placate their policy-holders and remain competitive, insurers would agree to cover designer-brands “until such time as a generic equivalent becomes available.” 

Then, some whiz-kid in Contract Services would negotiate a sweetheart deal with a network of clothing retailers, dub it a "Haberdashery Maintenance Organization" (HMO®) and the insurance companies would structure their plans to pay enhanced benefits to those employees who choose to exclusively shop at participating stores.  Employers would be weighing the advantages of Wal-Mart-Plus versus Target-Net. 

It would rapidly become apparent, however, that the HMOs themselves have become de facto bargaining units for their member merchants, who would unilaterally increase contracted rates with the knowledge that few employers have the intestinal fortitude to order their workforce to—gasp—change retailers! 

So, again, insurance companies would be forced to bite the bullet and pay the piper.

Oh, yeahand pass the costs on to their clients, who would pass the costs on to their customers, further increasing an invisible but steadily growing and onerous sales-tax to everyone who buys goods and services.

Still doubt all this would come to pass if the cost of clothing was borne—and corrupted—by the intrusion of third-party payers? 

Granted, there are a number of additional factors that drive up medical costs such as an aging population, technology and malpractice claims.  But consider the case of Lasik eye surgery, the average cost of which has plunged from $2,200 per eye in 1998 to just north of $1,000 per eye today despite a 98% increase in medical CPI over the same period.  Like every other medical procedure, it is subject to the aforementioned inflationary factors. 

However, Lasik is not covered by the majority of insurance plans, Medicare or Medicaid.  The sole reason the procedure defies economic gravity (or, rather, is subject to it) is due to the power of the market, supply and demand, and competition between providers.

Sure, third-party payment seems like a great idea, especially when you're the recipient. But consider this: The two components of the economy which are largely paid through third-parties—health care and college-level education—have seen costs skyrocket over the last four decades, far outpacing inflation.


Because third-party payment schemes grossly distort the market forces of supply and demand. 

More importantly, third-party payment eliminates incentives for consumers to exercise even baseline prudence, such as comparison shopping, negotiating prices and rendering judgments regarding cost vs. value. The resulting "super-inflation" has little impact on consumers who qualify for third-party benefits—medical plan participants or scholarship/financial aid recipients—but is positively catastrophic for those who don't.

This distortion, btw, occurs whether the third-party payer is the government or private insurance.

So why, when discussing “health care reform,” does everyone in the government, the health care industry and insurance companies insist on quibbling over irrelevant details like who will pay for what and who should be covered?  Why do they continue to ignore the third-party elephant in the room? 

Because, kiddies, with that tsunami of dough flying back and forth, they are making boat-loads of bank! 

For example, rate increases on employer health insurance plans are based on what is called “claims experience” (i.e. actual medical charges plus medical inflation).  The insurance company’s “administration” (i.e. overhead) and “retention” (i.e. profit) are bundled together and charged as a percentage of “claims experience.”  Now tell me, what company wouldn’t just love to peg their profit to the single most runaway component of the Consumer Price Index?  Oh, and by the way, you can bet they aren’t “spreading the wealth” to the rank-and-file schlubs who actually administer claims either.

The same is true of the medical industry and big-government.  The status quo guarantees each their measure of profit and/or power.  They distract by politicizing details of what and who will be covered, of what and who will foot the bill, all the while ignoring the underlying problem of runaway costs. 

Everyone is a winner except for the consumer.

The solution is clear.  It is long past time third-party payment of medical care was acknowledged for what it is: A ruinously failed experiment.  As such, it should be banned. Only then will consumer forces (and sanity) be returned to the health care market. 

True, because powerful business and public-sector interests are so utterly invested in the status quo, such a radical overhaul would generate unprecedented fear-mongering and doom saying.  But as counter-intuitive as it sounds, the key—the only key—to meaningful healthcare reform is to ban third-party payments altogether until such time that the patient has completely exhausted his or her personal financial resources. Though it may seem that such a scheme is cruel and radical, consider the fact that until the 1940s, this is *exactly* how Americans paid for their health care and, somehow, everyone retained access to the system.


  1. The solution is clear. It is long past time third-party payment of medical care was acknowledged for what it is: A ruinously failed experiment. As such, it should be banned.

    Disagree, though I would say that third-party-pays systems should be left intact for the kinds of things insurers truly do well: high-expense, low-risk events such as paying for cancer treatment, hospitalization following an accident, and so on. Otherwise, insurers are mere gatekeepers between patient and doctor.

  2. I agree. Rare, catastrophic claims could be handled with a deductible indexed to a multiple of the claimant's gross income.