Defenestrating Thoughts from the Bivouac

With all the talk of universal health care, I thought it was interesting that no one was really talking about the real reasons that our health care system is bad. We all know the problems:

• It is near impossible to get affordable private healthcare.
• Insurance companies routinely deny treatment patients need.
• Insurance is tied to employment.
• and so on…

But these are really just symptoms, what we need to identify and fix are the core problems. As always, we need to ask the right questions, otherwise we’ll never really understand the problem.

And the right question is, how on earth did we get to the system we have today? Everyone talks about “the good old days”, when doctors made house calls and we didn’t have to wait 45 minutes after our appointment time passed to see a doctor. In those days, healthcare was affordable and doctors made good money. So let’s try to figure out what changed.

I believe the root cause of the problem is that we have an extremely powerful middleman between the patients and doctors. While, these insurance companies, HMOs, and their ilk may not be completely useless, they wield way too much power. This disproportionate power is the root cause of our health care problem.

The reason that they are so powerful is due to a series of government policies. These are policies which I assume had good intentions, but also had unforeseen, horrible consequences.

#1 – Employment based insurance is heavily subsidized by the government, private insurance is not

Originally, someone thought that “if we help companies provide health insurance, then more people will have it”. This led to a policy where employer provided health care is tax free. This means no federal income tax, no state income tax, and no payroll taxes for either the employer or the employee. This alone is roughly a 50% subsidy!

The unintended consequence here is that the subsidy basically destroyed the chance for affordable private insurance to exist. First of all, due to the subsidy, the price of private insurance is now at least twice as much as employment based plans. Second, since the only potential customers for private plans are the unemployed or people not covered by a government plan, these private plans can never reach the economies of scale to drive down prices.

As a result, we the patients have no power against the insurance companies. If they deny our coverage, we can’t do a thing. Why? We can’t easily “take our business to a better provider”. Since there are no tenable private options, we have to change our jobs to find a better provider!

#2 – Doctors are not allowed to collectively bargain against insurance companies due to antitrust regulations

The insurance companies have the upper hand against the consumer. And it turns out that they have the upper hand against the doctors too. Due to antitrust regulations, doctors are not allowed to collectively bargain with the insurance companies. As much as doctors would like to, as a group, force the insurance company to change, they are not legally allowed to! (Note: this is starting to change in some states, but the damage is already done and will take a long time to undo, if ever.)

This means, if doctors want to play, they have to play by the insurance company’s rules. They have no power against the insurance companies.

As a result, doctors are paid whatever the insurance company decides to pay for a service. Given all the overhead of runing a medical practice, the doctor is forced to see as many patients as possible which lowers the quality of care and increases the wait time to see the doctor since they need to have a full queue of people everyday.

Presumably the antitrust regulations were put in place to prevent doctors from ganging up against the patients, but the unintended, yet predictable, consequence was to put all the power in the hands of the insurance companies.

#3 – Doctors and medical providers are allowed to charge vastly different amounts for the same exact service

Even though the Robinson-Patman Act forbids price discrimination, health care is exempt. So the same exact procedure may cost the insurance company $60, but it often costs a normal person $600 out of pocket! You can see this evidence in the statements your insurance company sends you. You’ll see, for example, that the doctor billed $500 dollars for a service, but the insurance’s negotiated rate is $149.35.

Originally, I suppose this stipulation was in place to allow doctors to charge less for patients that have financial problems. But the unintended consequence is that people without insurance pay more and end up subsidizing those with insurance.

Because of these 3 reasons, the patient is no longer the customer. This is a key observation and goes a long way to explain the distortion in the health care industry. It turns out that the insurance company is the customer; after all they are the ones paying the bills.

Sellers need to adjust and optimize for their customers, so it shouldn’t be a surprise that doctors (the sellers) end up adjusting to the insurance companies (the customers). If the patient was the customer, doctors would optimize for quality of treatment at the best price. Instead, doctors need to optimize for insurance companies and guess what? Insurance companies pay a fixed amount regardless of quality.

Doctors now have little incentive to optimize for quality first. They instead now need to optimize for throughput, they need to see enough patients a day so that they can make enough money to keep their practice running. As a result, we see the doctor for 5 minutes, even though we waited 45 minutes to see him.

The doctor also has an incentive to get whatever money he can from the insurance company, this means sometimes ordering unnecessary labs and procedures.

What are the insurance company’s incentives? Well, first we need to realize that the term “insurance” is a misnomer. We don’t have “health insurance”; we have “pre-paid plan”. After all, it’s not possible to make actuarial estimates for routine coverage; so we just have a monthly premium. So, the insurance company’s incentive is to lower costs. They do this by denying and refusing to cover treatment, medicine, and anything else they can.

Since insurance companies have all the power, doctors and patients don’t decide how they will  be treated, bureaucrats do.

Now that we know what is causing the problem, it turns out that the solution is really simple. But enough for today, I’ll write about that in my next post. :-)