Don't Cover Doctor's Visits! (if you want a better healthcare system)

The debate of healthcare and healthcare financing continues apace, as we get deep into August. Our elected officials certainly knew there would be a certain level of disagreement, but I doubt they envisioned their town halls to become 2009's version of riots over civil rights and the Vietnam War.

You can now see why Rahm Emmanuel and Company wanted healthcare legislation signed and sealed before the August recess, though. Any 1,000+-page bill will have elements with which everyone disagrees, and it's just a matter of time before interest groups organize and solidify opposition to those elements.

Given that my Congressman, Jim Moran, is hosting his healthcare town hall -- accompanied by Howard Dean, presumably for moral support -- this evening, I thought it would be a good occasion to post my next essay on how I would like to see healthcare reformed.

My other commentary on reform appears here (each link should open in a separate window):

The "Public Option" For Health Reform Is No Option

When Discussing Heath Care, Paul Krugman Should See A Doctor

Copays, Premiums, and Risk-Pooling ... Oh, My!

The current essay recommends removing doctor's office visits from coverage under health insurance policies, and expanding the role of nurse practitioners.

The Problem

The financial structure of most health insurance policies encourages overuse and misuse of the healthcare system, with resulting increases in healthcare costs, as well as pervasive inefficiency.

One consequence of third-party payment is that the consumer of the service (in this case, the patient) is shielded from the true cost of the service. If you ask most people what a doctor's visit "costs," they will probably respond with whatever amount their copay is. The true cost is much higher -- probably $100 for a 15-minute visit.

As a result of this "cost-shielding," people are much more likely to see a doctor, for many more reasons, than if they had to pay full price for a doctor's visit. Many visits to the doctor are due to the common cold and allergy symptoms, for which very little can be done to alter the course of the condition except for rest, proper eating and hydration, and over-the-counter symptom control treatments.

Most common cold or allergy complaints do not require a visit to a highly-trained physician -- a nurse practitioner can treat the patient just as effectively, and at much lower cost. I would expect a comparable 15-minute appointment with a nurse practitioner would cost about $25.

The point is that many office visits to physicians are unnecessary, with money and time being wasted by the patient. Additionally, the physician could be using his/her time on much more sick or injured patients. But, since it only costs $20 or $25 to see "the expert," why wouldn't you? People would certainly think twice about making an appointment if it would cost them $100, especially if appropriate care could be obtained for a quarter of the cost by a nurse practitioner.

And why should office visits be removed from coverage by health insurance? Again, the third-party payment structure leads to overuse, as the consumer is not informed about the true cost of the service. The result is excessive, unnecessary use of healthcare services.

The Solution

I believe two changes affecting office visits would show dramatic healthcare cost reductions, with no lessening in quality: 1) remove office visits from health insurance coverage, and 2) increase the scope of services that nurse practitioners can provide.

First, the financial structure of health insurance policies. The vast majority of health insurance policies cover all office visits, with the insured only paying a modest copayment (typically $10 to $25). Office visits are, by far, the largest healthcare expense, due to their frequency.

Removing office visits from health insurance policies would render them similar in function to auto insurance policies: financial relief is available for highly expensive (or "catastrophic") needs, but less expensive services are wholly out of pocket. (This concept is actually available today as health-savings accounts (HSAs), but is largely unused.)

The second change, increasing the scope of services by nurse practitioners, is already gaining traction via some physician practices and urgent-care clinics. It only makes sense to have patients treated by a practitioner who is well -- but not excessively -- trained to provide the care necessary to heal the patient.

If you are hungry, in a hurry, and without much cash, it does not make sense to order a meal at a four-star restaurant; a fast-food establishment better meets your needs. However, if an important occasion is arriving, for which the added expense and time is worthwhile, then fast food might be counterproductive, and a fine restaurant is warranted. The same "triage" could apply to your choice of healthcare practitioners.

The net result of having the cost of office visits borne by the consumer/patient would be a greater ownership of one's healthcare. Office visits for (apparently) minor illnesses or injuries could be managed by a nurse practitioner. The nurse practitioner could triage the patient (via questions or observation), with potentially serious conditions being transferred to a physician.

From the physician's perspective, insurance compliance costs could be reduced, as fewer claims would need to be submitted and tracked. The physician would still "keep" the patient, but the nurse practitioner would be handling the majority of visits.

To continue the auto-insurance metaphor, having physician office visits paid by health insurance is akin to having oil changes paid by auto insurance. If that were the case, people would not look for shops offering the combination of high quality and low price that fit their needs -- they would be totally insulated from the "true cost" of oil changes. Additionally, people would not learn the most practical mileage interval at which to get their car's oil changed, and would end up getting oil changes much more frequently than is needed. ("If getting my oil changed every 3,000 miles is good, then getting it changed every 1,000 miles must be better!")

Obstacles

There are several impediments to these changes. The Powers-That-Be are not interested in fostering these changes. Insurance companies do not want to lose the premium revenue that accompanies insurance policies that cover everything under the sun. More rational health insurance policies would be much lower in cost, which helps policyholders, but certainly is not in the best interest of health insurers.

Similarly, the American Medical Association -- the governing body that largely determines which services can be provided by physicians (and only physicians) -- is not interested in having its treating authority diluted by other professions. It views just about any attempt by other professions to treat patients as an encroachment on their turf.

Skyrocketing healthcare costs might do more to expand the availability of creative health insurance policies, such as HSAs, and to increase the availability and treatment authority of alternative healthcare providers, such as nurse practitioners. It remains to be seen whether commonsense, cost-effective, minor tweaks to the healthcare system can garner sufficient support.

Copays, Premiums, and Risk-Pooling ... Oh, My! (First in a series on healthcare reform)

At the risk of causing eyes weary with healthcare reform to glaze over, I am starting an essay series to suggest various measures to improve the current U.S. healthcare system. The measures I describe include global changes, as well as tweaks, or modifications to the current system. Nothing I suggest is necessarily original -- the changes are discussed elsewhere in great detail -- but my blog offers an opportunity to have a discussion with those not steeped in the details of healthcare financing.

I have decided to make the essay much more manageable for readers by addressing one weakness and solution per day.

I have been a healthcare consultant for 15 years, with experience tracking the financing of patient care, medical technologies, drugs, biologicals, and advanced procedures for treating patients. Doing so has afforded me a birds-eye view of how the U.S. healthcare system intersects with patients, physicians, hospitals, and health insurance companies.

An earlier essay discussed the inherent problems with the so-called "public option," whereby the government will offer a health insurance plan to "compete" with private-sector insurance companies. An astute reader commented that, while he felt my piece was effective in identifying the structural flaws with the public option, I did offer any solutions of my own. (In other words, it is very easy to criticize without presenting alternatives.)

As everyone knows, President Barack Obama (here, here, here) and others have derided the free market for "failing" Americans in health care. That is, quite simply, false at best, and a lie at worst. The federal government has infiltrated itself into the health insurance market so deeply that it publishes approximately ten thousand pages of rules and regulations annually, just for Medicare and Medicaid. That does not even include regulations for private insurers, as well as legislation and regulations the state governments lard onto the insurance market.

So, the reader will understand if my recommendations to improve the healthcare system do not draw on anything Obama says; in fact, most of my suggestions run counter to anything he has said or believes. So, with that framework understood, let's jump right in.

The first measure needing reform is the tax structure of health insurance.

Tax Structure

Problem

The tax structure of health insurance is one of its most distorting features. A series of federal rules, enacted shortly after World War II and culminating in an IRS decision in 1954, resulted in employer-sponsored health insurance not being taxable income (and, therefore, payable with pretax income). However, health insurance purchased elsewhere (e.g., self-purchased) must be paid with after-tax dollars.

Predictably, the vast majority of Americans now receive health insurance through their employer. (David Blumenthal, MD, summarizes succinctly the origins of employer-sponsored health insurance in his 2006 New England Journal of Medicine article "Employer-Sponsored Health Insurance in the United States — Origins and Implications" located here.)

This tax preference for employers has several pernicious consequences. First, it means that health insurance provided by employers is much cheaper than health insurance purchased by an individual for himself and/or his family. As a result, simply having health insurance tends to tether employees to their jobs -- even if the job is less than desirable -- out of fear of being without coverage. This "job anchor" prevents many individuals from pursuing a better job (however, one defines "better," whether it be a higher salary, shorter commute, improved quality of life, etc.)

The second implication of employer-sponsored health insurance is that it constrains salaries. If a new employee already has health coverage from a spouse, he or she may not need to participate in the employer's health insurance plan -- thus saving the employer thousands (or tens of thousands) of dollars a year in insurance premiums. However, that economic benefit -- through no strategem on the employer's part -- accrues 100 percent to the employer. In other words, the employee does not participate in the economic benefits of forsaking health insurance, in the form of a higher salary or other benefits.

Solution

Removing the tax deductibility of employer-sponsored health insurance would help equalize insurance costs between employers and individuals. A likely result is that many employers would no longer provide health insurance as part of the benefit package.

Despite probable knee-jerk reactions about the horror of this possibility, this is not a bad development: As prospective employees start negotiating for jobs in the "new normal," and realize benefit packages no longer include health insurance, they should begin demanding higher salaries and/or other benefits (i.e., subsidized transportation costs, subsidized tuition, etc.) to compensate.

The provision of employer-sponsored health insurance was originally offered because the federal government placed a cap on salaries -- leading employers to search for other job benefits -- so the process of salaries increasing to compensate for the lack of health insurance is simply a reversal of earlier employment decisions.

Ultimately, shifting health insurance provision to individuals is a better arrangement, because employers do not (cannot, actually) offer employees the full range of health insurance options available, for the employee to select the plan that best meets his or his family's needs. Rather, in an effort to keep insurance premiums as low as possible -- while still offering employees a modicum of choice -- most employers allow employees either an HMO (health-maintenance organization) or PPO (preferred-provider organization) option.

Employees could use the resultant higher salaries to select from a much greater range of health insurance plans -- and the plans would not be linked to employment status (or lack thereof).

Granted, employers would still have a cost advantage due to pooling (i.e., large employers could "pool" together a number of employees, thus spreading out risk to reduce premiums). However, individuals would still be able to join risk pools, and benefit from the same premium-reducing activity. As a matter of fact, individuals could join pools structured around commonalities that may result in greater cohesiveness than employers, and potentially greater loyalty to insurance companies. These advantages might well result in lower premiums for pools that involve "families of families" and other cooperative arrangements, especially given the disloyalty that employers and insurance companies have toward one another. (Employers change health insurance companies approximately every two years.)

When Discussing Heath Care, Paul Krugman Should See A Doctor

On July 25, Nobel Prize-winning economist Paul Krugman wrote a column entitled "Why markets can't cure healthcare" in which he listed reasons for which the free market was unsuited for health care.

The tone of the column is condescending (or smug, perhaps? the difference escapes me), as he repeatedly knocks over the straw men he uses as "weaknesses" of the market in healthcare. However, I feel he mostly repeats the talking points uttered by those who favor of government-run healthcare, but -- as is typical -- without any data or sound analysis to justify his position. (Presumably, Krugman's Nobel Prize grants him immunity from having to provide supporting evidence for any of his claims.)

Sadly, the New York Times closed the comment period for this column, so I'll just share my thoughts here.

His first whopper is that the "big bucks are in triple coronary bypass surgery, not routine visits to the doctor’s office."

Wrong, and not only a "little" wrong, but "a lot" wrong. As in "billions of dollars" wrong. In 2006 (the most recent year for which data is available), Medicare payments for all bypass surgery (not just triple-bypass surgery) totaled $2.9 billion.

By contrast, in the same year Medicare paid $13.5 billion for office visits of mild to complex decision-making. These office visits represent an enormous 12.2 percent of total Medicare payments to doctors for all services and procedures. In other words, one out of every eight dollars that Medicare paid physicians in 2006 went to Krugman's piddling office visits.

So, Krugman's unsubstantiated claim notwithstanding, the "big bucks" in healthcare are with office visits, which represent a dollar expense 450 percent greater than bypass surgery. (All data are from the CMS Data Compendium.)

Krugman later states that health care "must largely paid for by some kind of insurance," and that "[c]onsumer choice is nonsense when it comes to health care. And you can’t just trust insurance companies either — they’re not in business for their health, or yours."

Insurance is necessary for SOME -- but by no means all -- healthcare costs. And anyone who mentions "consumer choice" in the same sentence as "health care" is only displaying to the world how ignorant he is. Since the 1940s/1950s, employers have been given preferential tax treatment over individuals for purchasing health insurance, with the obvious result that virtually all Americans under age 65 obtain their health insurance from their employer. Most employers offer employees a limited number of insurance "choices" (in most cases, either an HMO or a PPO, and that is it), which do not even include some of the newer packages that are more appropriate for younger workers, such as health-savings accounts or high-deductible plans). So, the vast majority of "consumers" already have very little "choice" about which insurance policy they purchase.

Krugman's comment about not being able to "trust" health insurance companies is specious and meaningless. Does that mean that people cannot "trust" their auto insurance companies, their life insurance companies, their homeowners' insurance companies, etc.?

Insurance companies need to be regulated, to be sure. But, can you trust the government, either? And, if not, who is going to regulate the government? The answer: no one. Not when the government is making the rules that will govern oversight. I would rather take my chances with a greedy insurance company that has oversight -- rather than the government, which will have no oversight, is subject to political pressure, and can always justify denying treatment for the greater good (i.e., taxpayers).

People who conduct business transactions based on "trust" -- rather than on contracts -- are destined to get fleeced, whether they are purchasing insurance or are purchasing a car. No one relies simply on "trust" when transacting with an insurance company, so Krugman's claim is just utter, misleading nonsense that ignores every aspect of contract law, business, and economics -- which is ironic, since the statement is coming from a Nobel Prize-winning economist.

Krugman states that "private insurance has much higher administrative costs than single-payer systems."

The fact that private insurance companies cost more, administratively, than public-sector insurance is a convenient falsehood for those in favor of government-financed or -controlled healthcare.

In actuality, the so-called financial "advantages" that the government demonstrates over private insurers largely derive from outsourcing to private enterprises. As a result of the outsourcing, Medicare does not have to pay union wages, infrastructure costs, or leasing/rental fees. Additionally, Medicare spends very little on reviewing insurance claims, with the result that administrative costs are kept low, but fraud is rife in Medicare.

Lastly, Krugman states that "in health care, the free market just doesn’t work."

If Krugman wants an example of how free-market principles work -- and work well -- in health care, he need look no further than a medical treatment in which government regulations are minimal, and insurance coverage is almost non-existent: laser eye surgery.

When laser-eye surgery first hit the market, costs exceeded $2,500 per eye. Approximately ten years later, per-eye costs had dropped to $1,000 per eye, with greatly improved quality.

That is how the free market works when not strictured by excess regulation: lower costs, improved quality, continuing innovation.