Observations on the AHCP Republican healthcare plan

Here are some initial observations about the American Health Care Plan.

Obamacare diagnosed the problem of our health care system as an underinsurance problem and focused on getting everyone insured. Although it's true that something like 15% of our citizens were locked out of the system, Obamacare addressed only one of the symptoms of our sick system rather than the disease. Furthermore its treatment was faulty and was falling apart.

The Obamacare plan for the uninsured was to have the younger healthy people fund the care for the older sicker people but they weren't buying into the deal. There were certainly winners but a lot of losers too as many were forced off insurance they liked and had to pay much higher premiums. Many of the winners, actually most, were simply being pushed into the Medicaid program. Medicaid is not the subject of this post except to say that it is a truly terrible program. It is flawed from many aspects but from the economic standpoint it is at the same time grossly wasteful and grossly underfunded and pushing more people into it is definitely not a rational solution for what ails our system.

Most reasonable Democrats agree that Obamacare as it stands is flawed but wish simply to fix it. However not only is the basic concept wrong but it does nothing to correct or even aggravates the more fundamental problems of our health care system such as severely excessive medical prices, stifling of innovation in medical services and grossly excessive outside interference in medical practice. The plan that the President and Congressional leaders have now proposed will attempt to address all these problems.

The Repubs have some major problems that the Dems didn't have in 2009. The Dems had a filibuster-proof 60 member majority. Also, despite its problems, 8 years have now allowed a bunch of Obamacare beneficiaries to settle in. The Repubs must honor Trump's pledge that the new plan would take care of these people. Parading them around would be red meat for the Dems attacks. More than that it's the right thing to do.

What the Repubs must absolutely clarify is that the AHCP is only the first installment of a comprehensive three part plan to rationalize American health care economics and it is the least important part to boot. It's the Obamacare replacement to help the uninsured. It gives them money through the tax system to use to buy their own insurance. No more mandates. It keeps in force the Obamacare insurance regulations on pre-existing illness and children up to age 26.

The next 2 parts to follow are more critically important. Part 2 is Tom Price, the HHS director, eliminating many of the Obama era regulations on health care. Part 3 is the good part intended to lower health care costs, encourage service innovation and give health care back to patients and doctors. This includes things like buying insurance across state lines, malpractice reforms, broadening the use of health savings accounts, and allowing various organizations other than employers and unions to develop specific insurance products. For example ARC, an organization advocating for the disabled, could develop an insurance plan tailored for its members like my disabled grandson.

The reason for splitting things up like this have to do with Senate rules which will allow Part 1 to be passed by a simple majority, but Part 3 will need to get some Democrat buy-in to overcome a filibuster. However the whole thing ties together. Giving the uninsured money to buy their own insurance is important, but bringing the cost down and allowing for service innovation is critical, not just for the uninsured, but for everybody.

The Dems are shooting at the plan, which is to be expected. The Repubs did it with Obamacare. However the Dems have allies of convenience in Rand Paul and his conservative friends who look at the refundable tax credits as another government entitlement. There's a problem with their argument. Tax subsidies, mostly from the federal government, amounting to more than $300 billion, go to people who get insurance through their employer. No matter how you slice it that ain't fair to those who don't. Dr. Senator Paul can't have things both ways. Either you give the subsidies to everybody or not to anyone, but taking them away from those who get employer based insurance at this point would be political suicide.

Part 1 might have some alterations before coming to a vote. But the most important point is that passing Part 1 is necessary both to replace the Obamacare arrangement to help the uninsured, but also to get to the good stuff in Parts 2 and 3.

One last point. Almost immediately the AMA leadership came out against the new plan. That alone would make me support it. The AMA presumes to speak for all physicians, but have less than 20% membership, and that counts student and resident members. Practicing doctors didn't drop their memberships because they just forgot to send in their dues. The AMA doesn't speak for them so don't be fooled by that one.

The Lack of Market Forces in U.S. Healthcare. MRI Cost and Utilization as an Example.

The fundamental problem with the economics of medical care in our country is that, in accordance with government policies over many decades, we've relegated payment to third parties. The result has been high prices, reduced quality of services and stifling of service innovation. I'd like to provide some concrete examples in the next few posts. I'll start by inserting a section from an essay I wrote 3 years ago:

In Japan medical services are completely private but prices and fees are strictly controlled by the government and are set very low. The average price for an MRI of the head in 2009 was set by the Japanese government at $105 as opposed to over $1000 in the U.S. At such prices one might have expected producers to have limited interest in these tests but in fact Japanese manufacturers responded to the market by producing compact machines at a much lower price[1] and are producing these machines for export.  As a result consumer demand increased markedly and Japan now has far more MRI machines and does far more MRI tests per capita than any other advanced country[2] resulting in both decreased cost and increased diagnostic capacity. Contrast this situation with that of Canada where funds for medical services are centrally controlled and availability of MRI machines is limited by budgetary constraints. One finds there long waiting periods for all but the most urgent MRI tests[3] and therefore marked decrease in diagnostic capacity.

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[1] Reid, T. R. (2010-08-31). The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care (pp. 92-93). Penguin Group. Kindle Edition.

[2] MRI scanners per capita http://www.oecd-ilibrary.org/sites/health_glance-2011-en/04/02/g4-02-01.html?contentType=/ns/StatisticalPublication,/ns/Chapter&containerItemId=/content/serial/19991312&itemId=/content/chapter/health_glance-2011-30-en&mimeType=text/html

[3] Waiting list for MRI in Canada http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2653696/#__sec7title

I quote this section not to endorse the Japanese system or to suggest the correct utilization of MRI scans but simply to show the large elasticity that exists in the use of medical  technology and how such technology is dependent on economic stimuli.

Many people have the idea that medical practice is cut and dried, that there is only one right way to treat each case, and that therefore the market forces of substitution or alternative choices cannot operate such as for example when buying a refrigerator or a television. This is far from true. If a patient comes with shoulder pain there are multiple diagnostic and treatment options. MRI gives the most definitive anatomical diagnosis but is not needed. After all there was a time when there was no MRI. A cost of $100 vs $1000 makes a great deal of difference as to whether it is selected.

In Japan almost all have insurance. There is a fee for service system and the patient pays a portion of the cost, usually 30%. All medical facilities must be operated by doctors. The government carries on negotiations with doctor representatives to set prices. I believe that it would be better to have a market based system in which the patient makes cost decisions which would result in lower prices and more innovation. However the point is that the price was forced down. Hitachi and Toshiba innovated by producing a new line of compact, inexpensive MRI machines costing around $150,000 - a fraction of the price of the bigger machines then used in the United States resulting in a much larger MRI market.

In our system the orthopedist demands an MRI which leaves no diagnostic ambivalence. The cost to the patient is either zero or some small co-pay. The third party payer has little justification to refuse. All it can do is put up roadblocks, demanding a lengthy frustrating procedure to obtain permission. Canada with it's government run system faced the high cost MRI problem by limiting the availability of MRI machines. MRI facilities in Canada have a substantial wait list problem, with some centers reporting wait times of up to one month for urgent scans and up to several years for non-urgent scans.

The U.S. has 4 times as many MRI scanners as Canada and Japan has many more than both countries. Japanese patients have many more MRI scans than in the U.S. and far more than in Canada. In the U.S. because of third party payment there is little market pressure on cost and technical innovation tends toward higher cost refinements rather than lower cost advances. Technology is the lifeblood of medical advances. However, for third party payers technology that increases cost is a liability and is resisted. The Canadian government payment system follows suit and therefore a system intended to assure medical care for all by putting the government in charge ends up by restricting its availability.

MRI is an essentially harmless way to investigate the body's anatomy. Originally it was developed with brain and spinal cord diagnosis in mind. However it has now revolutionized orthopedic diagnosis. I read recently that prostate MRI is equal to needle biopsy in localizing cancer. Who knows what other uses might be found  in a mass market, but it's use is restricted by payers. MRI price is obviously far higher than it needs to be, even for insurers. The real price would be discoverable only in the free market in which consumers rather than third parties paid. Direct payment would put market pressure on price, would not restrict the market but would expand it and would lead to innovation based on cost and efficiency just as it did in the computer market.

Comment on NEJM Article on Constitutionality of ACA

Friday, April 6, 2012

Comment on NEJM Article on Constitutionality of ACA

Fortunately in the United States we remain a society of laws rather than of men. The power of the federal government over the states and individual citizens is limited by our written law even if the men in the temporary majority feel that they have a wonderful idea that will be good for all. The Supreme Court, for better or for worse, is the mechanism in our written law for deciding where those limitations lie. The members of the Supreme Court are individuals of varying temperment, unelected but selected by a political process. This is our system.
The Obama administration and the Democrat party could have carried out their idea by levying a tax and purchasing "insurance" for those who did not have it. That clearly would have been constitutional and from the economic standpoint would have given the same result as the ACA. I believe this approach would have been their preference but was not considered politically feasable. The constitutionality question was a calculated risk which they took as the best available option politically.

On the payment issue: medical insurance is not insurance - it is a pre-payment scheme. It is the worst of all ways to pay for medical care.

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letter to annals - constitutionality of ACA

Annals of Internal Medicine published an article by 2 Harvard economists claiming that the ACA is constitutional. The following was my response.

Drs Gruber and Cutler contend that the ACA individual mandate is essential for the integrity of the medical payment system which they favor but this is hardly the constitutional point. These Harvard economists should instead attend to whether the ACA comports with basic economic principles (as outlined in the textbook of economics written by their own Harvard colleague (1)) and leave the legal reasoning to others.

 Medical insurance is not insurance at all, but is a high priced pre- payment system. It is by far the worst way to pay for anything. It relieves the patient and physician from the trouble of making appropriate price motivated trade-offs and substitutions. The system requires large administrative cost for coding, billing and documentation, none of this with medical value. Inherent in all this is a large amount of wasted resources which could be directed toward useful alternatives. Price fixing produces waste, decrease in quality and loss of competitive forces that improve services and bring prices down.

It seems incongruous to contend that a citizenry who already pay for this system indirectly cannot pay for it more directly. Small items like lab tests and doctor visits and even small procedures are affordable out of pocket for the average individual and there would be less waste and lower cost if paid this way. Bona fide lower cost insurance that belongs to the individual could pay for high priced unexpected medical events.

Granted that persons with low income or serious chronic illness need society's help but total government command and control is surely not the best solution.

The ACA mandates an expansion of our present wasteful pre-payment price-fixed system to every individual. It forces free citizens to waste the fruits of their labor for the sake of a collectivist experiment. It will almost certainly raise the cost and reduce the availability of medical services for everyone.

1. Principles of Economics 2011 Edition. Chapter 1. N. Gregory Mankiw.

Fixing healthcare

Insurance is a mechanism for controlling risk for unlikely but high cost events. Using insurance as a payment mechanism for low cost everyday occurrances such as doctor visits is preposterous and the only reason we do it is that someone else is paying the premium.

Medical insurers are not the problem. They are simply offering a product for which there is a demand. For their work they make a reasonable profit which is in line with other service industries. Profit is not a problem. It is what rewards a business for a good product and efficiency. The reason that just about any government service you can name is impersonal and inefficient is the lack of profit motive. Giving over control of payment for medical care to the government on the theory that elimination of profit will produce lower cost is nonsense. Non-profit medical insurance companies are certainly no more efficient or less costly than for profit companies and they do not provide lower cost policies. If we want to make insurers even more efficient we must arrange for more competition.

Whichever way you slice the problem, medical care costs money. Medical personnel, prodedures and treatments must be paid for. The public will pay the bill either through taxes or as part of their work compensation. If we continue to insist on paying indirectly through government or through "insurance" arranged by employers, there will be higher cost, more wasteful, less appropriate and more inefficient results.

Medical care is certainly a right. What is not a right is demanding that someone else pay for it. In a wealthy and generous country it is proper that we help those who are unfortunate and deserving get proper medical care. That can be done through private charity and through government assistance. That problem does not call for government involvement to any other extent.