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Now That The Individual Mandate Is Law— It’s Time To Get Down To The Hard Work Of Fixing Healthcare


Given the rhetoric coming from supporters of the healthcare reform bill following the Supreme Court’s upholding of the ‘Individual Mandate’, it may be hard to believe that in the larger scheme of things, Obamacare is no cure-all for the healthcare crisis. The decision is also not the beginning of the end of life, liberty, and the pursuit of happiness as opponents would have us believe. The furor from both sides mask the fact that the current reforms represent only the first few steps in a process of trying to fix the 800-pound gorilla of the U.S. economy.

The new program does correct a couple of basic problems in our health delivery system—but they are problems that exist because of a major underlying issue that is not addressed: the overconsumption of healthcare, and resultant waste of resources, by insured Americans. In the short run, Obamacare will create some modest relief for the economy, but ultimately the cost problem will come back (worse than ever) because everyone will be insured. The debates have not gone away, they have only taken a temporary respite.

So what did the individual mandate actually do? Remember that health insurance, like most other forms of insurance, is at its core a risk pool. Consider fire insurance—if you own a home it would be foolish not to have a policy that covers fire. Most people go their entire lives paying for fire insurance, but never collecting on it. The funds they do pay go to the relatively few homeowners or businesses that will suffer the tragedy of seeing their properties go up in flames. Those ill-fated owners are saved from possible ruin by the funding they receive in the form of insurance payments. For everyone else in the pool, they continue to have protection, and peace of mind, in case disaster does strike. It is a win-win situation.

Ultimately, much healthcare coverage in the United States also boils down to the unfortunate and the fortunate. But in these cases the disaster does not occur in one heart-rending hour or two as with a fire. Rather, it often manifests in the form of a chronic health problem—weak joints, heart disease, diabetes, cancer—with which a person is afflicted for life. Simply getting older is a chronic condition. Once the condition reveals itself, the cost of that individual’s healthcare will be higher forever.

And healthcare premiums are annual, so for the healthy, being insured doesn’t offer much in the way of immediate benefit, while the high, often unaffordable, cost of health insurance is excruciatingly apparent. As such, the healthy simply drop out of the risk pool. This is not unlike homeowners who haven’t had a fire dropping out of the fire insurance pool—and then having a fire and quickly signing up. For a risk pool to work properly, it can’t work this way.

The problem is of course intensified by the fact that bad health outcomes do happen to the “healthy” uninsured. Whether it's a random but life-altering accident, or the onset of a chronic disease, all too often the uninsured end up in emergency rooms wracking up extraordinarily expensive bills which are largely paid for out of the insurance pool that they abandoned – driving up costs even further for those who are paying in. This in turn drives more people out of the insurance pool, and the vicious cycle continues.

The individual mandate fixes this problem by simply making everyone have insurance. It cures the moral hazard problem, stops the leakage, and ultimately creates a situation where people do not end up in an emergency room dealing with massive and expensive health problems that could have been avoided or alleviated with early, preventative treatment. One problem solved.

Unfortunately, the new healthcare laws fail to address the problem with the insured.

Yes, there is another glaring reason for the run up in insurance fees over the past few decades that has nothing to do with those who have dropped out of the health insurance pool—and everything to do with those who have stayed in. Because preventative care is an important part of controlling the cost of long-term health issues, insurance has taken on the role of providing non-risk coverage. This is the equivalent of fire insurance companies also covering general property maintenance, and repainting and decorating. If these basics are given to the insured free, it shouldn’t surprise anyone when they want their property painted not every 3 or 4 years, but every few months. The attitude seems to be ‘I paid for it, I deserve it’.

I often use the anecdote of a nation where all citizens buy ‘food insurance’. When they go to the supermarket, they pick up whatever they want and simply pay some flat copayment at the checkout. Consumers would quickly forget to check prices and purchase appropriate amounts of food. Oh, you’re paying? I’ll have the lobster. Maybe two… I’ll bring one home for the cat.

This wholly price-unconscious attitude has been intensified by a healthcare system that regularly discourages cost competition and teaches its highest ranking professionals, MDs, that all that matters is the health of the patient with little if any attention paid to the price of procedures as related to benefit or effectiveness. On top of this new technologies and procedures have emerged, some with dubious medical value, which get pulled into the system because consumers want them (it’s free, right?). Doctors have no incentive to deny questionably effective procedures, and ultimately insurance firms pass the cost on to the whole pool through higher premiums.

The point is not that a patient’s health isn’t important, but in a world of scarce resources we still have to do the basics of cost benefit analysis in order to achieve the best overall outcomes (cost-benefit analysis is almost considered unethical in this arena). Many in and out of the medical field say that expensive, routinely ordered procedures are often unnecessary or yield very little for the patient involved. Doctors are further motivated by fear as malpractice lawyers sue over any perception of less than maximum care. Add it up and a situation has been created in which costs run amuck for the insured, leading to higher premium costs, which then pushes more people out of the system into the realm of the uninsured.

For a while insurance companies began to put consumption controls in place—the HMO was a leading example. These groups offered cheaper insurance premiums—with the idea that there would be fundamental limits on consumption in terms of what was covered. But when such limits were imposed, they often seemed capricious or even harsh, despite the fact that the person had purposely bought into a cheaper system. Politicians soon came on board, legislating away such limitations (including portions of Obamacare). The brief reprieve in rising healthcare costs soon gave way to double-digit increases (again). The bureaucratic system was clearly a flop.

The concept of overconsumption as the central problem in U.S. healthcare, and it is hardly recognized by policymakers. Instead the debates almost exclusively rage over who the payer is or should be. Of course we shouldn’t be surprised by this—very few politicians get elected by telling voters that they are over-consuming.

And the evidence is there. The following table shows 2010 per capita expenditure figures for healthcare among nations that spend the most on health per person. The United States, far and away, stands out as the biggest spender on healthcare per capita – despite having legions of uninsured unlike these other countries where national health is also at the top of the expenditure list. The United States spends over 50% more per person than the number two or three countries on the list. If it costs this much with the uninsured included, can you imagine how much it is with the uninsured NOT included?

Of course the over consumption is hardly limited to the private sector. Part of the table’s overall total is direct government spending for Medicare and Medicaid. Our rank in public spending? Number two in the world, only behind Norway, and way above Canada’s public system, not to mention numerous ‘socialist’ European nations.



What do we get for all this spending? Not much. Life expectancy at birth or at age 60 is slightly lower than nearly all of the other nations on the list. Child mortality rates and simple quality of life indicators paint a similar picture of a nation that spends a lot of money on healthcare, and doesn’t get all that much in return.
I credit the Obama administration for at least beginning the healthcare reform conversation. But this can’t be the end of it. Now that everyone will be required to have insurance we can expect the overconsumption problem to grow even larger. At some point in the foreseeable future, there will have to be another major discussion about healthcare—this time not about who is paying, but rather about what is being paid for.

I’m, unfortunately, highly discouraged by the rhetoric. President Obama did try to put some elementary limits on the provision of healthcare based on scientific proof of effectiveness. The Republicans, led by that paragon of reasoned thought Sarah Palin – and the very group who should most welcome such basic and reasonable limits – instead started to scream ‘death panels’ in their shrill battle to reclaim the White House.

Another example is news that a panel of medical experts, after careful study and the application of scientific methods, recently concluded that mammograms for women under 40 were simply not needed and should be discontinued except in specific cases where an individual’s risk is higher due to genetic or other causes. Instead of following this well-founded scientific analysis, another shrill battle ensued, funded quietly by the mammogram making industry, and waged by self-styled feminists who labeled such ideas as a form of misogyny. Politicians became involved and now it is codified.

There are solutions. Using panels of medical experts to come up with best practices that determine what can be covered under insurance is one way. Going back to using some basic price mechanisms that limit consumption of certain procedures (based on expectation of reasonable benefit) is another. But it will be difficult. All rules, no matter how cleverly written, have undesired results. This is highly intensified in healthcare, where individual outcomes vary widely in response to the same drug or procedure. And of course health issues are highly emotional. Much of the waste in healthcare occurs in the last days of life when expensive and ultimately futile procedures are used to extend the life of an individual by days or hours. Telling a patient’s loved ones that no more can or will be done is exceedingly difficult. But it has to be done.

Sadly, when it comes to healthcare in particular, our nation seems prone to legislation by emotion, where the most strident voice and tastiest anecdote can trump even the best science. This does not bode well for our next healthcare battle.

CATEGORY: Healthcare

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