What Don't We Get About Healthcare in this Country?

I have been increasingly concerned with some of the things I hear and read about healthcare in this country, particularly our legislators and those who would propose solutions to the problems we face in the healthcare industry. With an economic lens on the topic, I felt compelled to get my ideas out there so we all can have a better understanding of the dynamics among the major players in healthcare.

SHORT SUMMARY: Our system in the USA is fraught with perverse incentives among three parties: the provider, the "patient," and the payer insurance company. These incentives must be understood if we are to deal with the healthcare crisis in this country. The resulting forces mean that we will continue spending more and more on healthcare -– higher premiums, larger government subsidies, and a greater share of our GDP.

CONSEQUENCES: If our government continues to push for less spending, as in the proposed legislation from the Republicans in the US Senate and House, it simply pushes the costs to the states and local communities. They are not going to be able to handle it and we will all suffer with the reduction in healthcare services. It is most disturbing to see the proposed legislation pushing the reductions further into the future – as if that would make it more palatable, or solve the problem. That is simply irresponsible. Our government and elected representatives can and must do better. As we search for solutions to this dilemma, we must recognize and deal with those perverse incentives. If we don't, costs will rise dramatically since there are essentially no checks on the increasing costs.

The following is a revised and expanded version of the piece originally published in the Minneapolis StarTribune newspaper. Here's the link: Be sure to look at the comments.

I have tried to point out some basic problems with our current system, but did not try to propose any solutions. However, any legislative actions need to be formulated with these basics in mind.

What Don't We Get About Healthcare in this Country?

Our system is fraught with perverse incentives among three parties: the provider, the "patient," and the payer insurance company. When you, the patient, have a health-related problem or question, and IF you have insurance, you go to see the doctor, clinic, or hospital. The only incentive to NOT go is the copay or deductible, or the prospect of paying the whole cost if uninsured. The provider has no incentive to say "no", and every incentive to say "yes" − if you have insurance (or, even better, if you will pay the full "sticker" price).

The provider will get paid for your visit so their bottom line incentive is to maximize your visits (or refuse to see you if you are uninsured). The main incentive for the provider is to charge (or bill the insurance company) as much as they can, or can get away with - as much as the "market" will bear.

Third are the insurance companies, the payers. They get the bill from the provider. Their main incentive is to NOT pay or to pay less. This sets up a battle between providers and insurers. The provider might recode a diagnosis or a treatment to get it approved. The patient can appeal a denied bill.

Insurance companies are not in business to lose money. They will raise premiums, raise copays and deductibles, cut coverage, drop out of a market, or worst case, shut down in bankruptcy. No organization can tolerate sustained losses. The Affordable Care Act said that insurers must spend at least 80 percent of their premiums (85% for larger employers) for the delivery of healthcare. They get to keep 20 percent? Those are good odds in any business. The industry was not even at that level yet when the ACA passed. What a sweet deal. It means that 20 percent of every dollar spent on healthcare contributes nothing to the health of our society (sure, the insurance companies try to make us think it does). That is a pretty hefty margin which we would not tolerate in many other industries. For a revealing historical perspective on the rise and role of the insurance companies, see the article by Christy Chapin in .

The purpose of insurance is to cover rare and catastrophic events (such as house fire or car accident), not for regularly incurred expenses. Furthermore, both of these examples are mandated ― you can't get a mortgage on a house without insurance, and you can't get a car license without proof of insurance. It is really a misnomer to call it "health insurance" at all. Would we say you can't get healthcare if you don't have insurance?

Interesting that the only two parties not fighting are the patients and the providers. They are the buyer and the seller in this marketplace! However, add the insurance companies to the mix and we no longer have a bona fide marketplace. It's also interesting that the healthcare insurance industry and companies have been notably absent from this conversation.

In the U.S. we have made huge investments in our healthcare infrastructure with the capacity for delivering excellent care. We have modern hospitals with the latest equipment, a great network of clinics and providers, and advances in pharmaceuticals. Healthcare has been one of the strongest sectors in our economy. We don't want to give it up. Unfortunately, it is accessible mainly in urban areas and only if you have insurance. Ultimately, we are all paying for it.

From an economic perspective, the demand for healthcare is unlimited. Yet the supply, the resources we devote to healthcare are limited ― by the premiums we pay for insurance, by the taxes we pay for the government to provide programs to cover healthcare costs, and the out of pocket costs we are willing and able to pay.

Healthcare should be universal (not to be confused with "single-payer"). For education we have public schools, and mandate that every child must be receiving an education somewhere. It is in the best interests of society for people to be educated… and healthy. Everyone should have access to at least some minimal level of care. We criticize other countries' "socialized" medicine as being "rationed." Well, ours is, too − on the basis of money. The default in this country is: you are NOT covered unless you "opt in" by buying insurance or applying for government aid. The insurance companies can't say no (if it is coded right), but they can pay out less − or increase premiums next year. If you "opt out" (i.e., do nothing), in an emergency, you will still receive some level of healthcare when you go to a hospital. Most states have mandated that you be looked after. We ultimately all pay the price in taxes or reduced services to the rest of us. The primary benefit of universal coverage is that it eliminates variable pricing. If everyone is in one big risk pool of insurance coverage, then we can have standardized uniform pricing for every healthcare procedure or service.

Some suggest that everything will be fine if we just have an open free market. Yes, greater competition can lead to lower prices. A free market assumes that the buyer (patient) and seller (provider) are those directly involved in the transaction. Also, any introductory economics class tells us that markets work well only if there is complete, free, and open access to information − pricing, quality, and user ratings of providers. We have anything but in the healthcare industry. Further, microeconomics assumes that both buyer and seller will act in their own self-interest. In a totally free market, the rich will get excellent care, and the poor would get none. With insurers involved, they require providers to charge cash customers the same amount as they bill the insurance company. To stay "in network" a provider must agree to NOT give discounts to cash patients. Only the insurer gets a discount! I have seen payments cut to as much as 90 percent of billed charges. This keeps both patients and providers captive to the insurance companies. Again, the system we have in place is one in which they cannot lose.

The ACA was a Band-Aid which only delayed the inevitable increase in costs. There was no viable mechanism to control costs, made worse by mandating the coverage of pre-existing conditions and older children, and by removing the lifetime cap. These were good and important things to do. Perhaps what we got in the ACA was the best we could do at the time, having all the stakeholders at the table. But much work remains to dig ourselves out of this predicament. The current proposals before Congress will not get us there. Things would only get worse for us all.

Unfortunately, the Republicans are now backed into a corner. They don't have a replacement for the Affordable Care Act which can improve on it. Their current proposals are a disaster, but they need to come up with something, anything, to save face before the American people and to fulfill their "promise" whatever the cost. They will be motivated to vote for almost anything, and their leadership is pushing for that. The far right conservatives simply want to reduce the federal spending on healthcare, by any means. Their mantra: cut spending. I hope we can stop this nonsense before it is too late.


Other articles worth reading:

"How Did Health Care Get to Be Such a Mess?" by Christy F. Chapin, New York Times, 2017 June 19.

A nice historical review back to the 1930's which explains a lot of how we got to where we are today, and who the real culprits were and are.

"Why American Healthcare Is So Hard to Heal" By Dan Munro, Techonomy, 2017 July 13.

Larry Sobel, 2017 Aug. 24, Discusses various models for single payer and the countries using each, plus points to an alternative called EMBRACE.

"Healthcare Information for Dummies" by Anthony Wunsh, July 26, 2017.

He says that only 50% of expenditures on healthcare actually go to the delivery of healthcare. The remainder is for administration and overhead, i.e., "paper pushing." The insurers require extensive paperwork from the providers, which doesn't contribute to healthcare.

"11 Legislative Acts Which Devastate Quality Affordable Health Care In America" Dr. Howard Green, 2015 Sept 21.

"Trump isn’t letting Obamacare die; he’s trying to kill it" The Conversation, Simon Haeder, 2017 July 28.

What does choice mean when it comes to health care? Norman Daniels, Harvard Medical School

The Republican position on health care has been based upon a belief in individual choice. Here's how their own versions of health care bills eroded choice, however, and how they also did harm