David Goldhill on healthcare

Read the whole thing; must, must, must read. Here are some excerpts:

Everyone I know has at least one personal story about how screwed up our health-care system is; before spending (another) $1trillion or so on reform, we need a much clearer understanding of the causes of the problems we all experience.
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How often have you heard a politician say that millions of Americans “have no health care,” when he or she meant they have no health insurance? How has a method of financing health care become synonymous with care itself?
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Society’s excess cost from health insurance’s administrative expense pales next to the damage caused by “moral hazard”—the tendency we all have to change our behavior, becoming spendthrifts and otherwise taking less care with our decisions, when someone else is covering the costs. Needless to say, much medical care is unavoidable; we don’t choose to become sick, nor do we seek more treatment than we think we need. Still, hospitals, drug companies, health insurers, and medical-device manufacturers now spend roughly $6 billion a year on advertising. If the demand for health care is purely a response to unavoidable medical need, why do these companies do so much advertising?
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Want further evidence of moral hazard? The average insured American and the average uninsured American spend very similar amounts of their own money on health care each year—$654 and $583, respectively. But they spend wildly different amounts of other people’s money—$3,809 and $1,103, respectively. Sometimes the uninsured do not get highly beneficial treatments because they cannot afford them at today’s prices—something any reform must address. But likewise, insured patients often get only marginally beneficial (or even outright unnecessary) care at mind-boggling cost.
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Perhaps the greatest problem posed by our health-insurance-driven regime is the sense it creates that someone else is actually paying for most of our health care—and that the costs of new benefits can also be borne by someone else. Unfortunately, there is no one else.
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Every proposal for health-care reform has featured some element of cost control to “balance” the inflationary impact of expanding access. Yet it goes without saying that in the big picture, all government efforts to control costs have failed. Why? One reason is a fixation on prices rather than costs. The government regularly tries to cap costs by limiting the reimbursement rates paid to providers by Medicare and Medicaid, and generally pays much less for each service than private insurers. But as we’ve seen, that can lead providers to perform more services, and to steer patients toward higher-priced, more lightly regulated treatments. The government’s efforts to expand “access” to care while limiting costs are like blowing up a balloon while simultaneously squeezing it. The balloon continues to inflate, but in misshapen form.

... less complicated surgical cases (the kind specialty clinics typically take on) tend to be more profitable than complex surgeries and nonsurgical admissions. Without those profitable cases, hospitals can’t subsidize the cases on which they lose money. But why are simple surgeries more profitable? Because of the nonmarket methods by which Medicare sets prices.
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So what exactly makes an ER more expensive than other forms of treatment? Perhaps it’s the accounting. Since charity care, which is often performed in the ER, is one justification for hospitals’ protected place in law and regulation, it’s in hospitals’ interest to shift costs from overhead and other parts of the hospital to the ER, so that the costs of charity care—the public service that hospitals are providing—will appear to be high. Hospitals certainly lose money on their ERs; after all, many of their customers pay nothing. But to argue that ERs are costly compared with other treatment options, hospitals need to claim expenses well beyond the marginal (or incremental) cost of serving ER patients.
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Why has adoption of clinical information technology been so slow? Companies invest in IT to reduce their costs, reduce mistakes (itself a form of cost-saving), and improve customer service. Better information technology would have improved my father’s experience in the ICU—and possibly his chances of survival. But my father was not the customer; Medicare was. And although Medicare has experimented with new reimbursement approaches to drive better results, no centralized reimbursement system can be supple enough to address the many variables affecting the patient experience.
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I requested the total cost of the delivery and related procedures from our hospital. The answer: the hospital discussed price only with uninsured patients. What about my co-pay? They would discuss my potential co-pay only if I were applying for financial assistance. Keeping prices opaque is one way medical institutions seek to avoid competition and thereby keep prices up. And they get away with it in part because so few consumers pay directly for their own care—insurers, Medicare, and Medicaid are basically the whole game. But without transparency on prices—and the related data on measurable outcomes—efforts to give the consumer more control over health care have failed, and always will. Here’s a wonderful example of price opacity. Advocates for the uninsured complain that hospitals charge uninsured patients, on average, 2.5 times the amount charged to insured patients. Hospitals defend themselves by contending that they earn from uninsured patients only 25 percent of the amount they do from insured ones. Both statements appear to be true! How is this possible? Well, hospitals bill according to their price lists, but provide large discounts to major insurers. Individual consumers, of course, don’t benefit from these discounts, so they receive their bills at full list price (typically about 2.5 times the bill to an insured patient). Uninsured patients, however, pay according to how much of the bill the hospital believes they can afford (which, on average, amounts to 25 percent of the amount paid by an insured patient). Nonetheless, whatever discount a hospital gives to an uninsured patient is entirely at its discretion—and is typically negotiated only after the fact. Some uninsured patients have been driven into bankruptcy by hospital collections. American industry may offer no better example of pernicious “price discrimination,” nor one that entails greater financial vulnerability for American families.
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One of the most widely held pieces of conventional wisdom about health care is that new technology is relentlessly driving up costs. Yet over the past 20 years, I’ve bought several generations of microwave ovens, personal computers, DVD players, GPS devices, mobile phones, and flat-screen TVs. I bank mostly at ATMs, check out my own goods at self-serve supermarket scanners, and attend company meetings by video­conference. Technology has transformed much of our daily lives, in almost all cases by adding quantity, speed, and quality while lowering costs. So why is health care different? Well, for the most part, it isn’t. Whether it’s new drugs to control previously untreatable conditions, diagnostic equipment that enhances physician productivity, or minimally invasive techniques that speed patient recovery, technology-driven innovation has been transforming care at least as greatly as it has transformed the rest of our lives. But most health-care technologies don’t exist in the same world as other technologies. Recall the MRI my wife needed a few years ago: $1,200 for 20 minutes’ use of a then 20-year-old technology, requiring a little electricity and a little labor from a single technician and a radiologist. Why was the price so high? Most MRIs in this country are reimbursed by insurance or Medicare, and operate in the limited-competition, nontransparent world of insurance pricing.

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I hope that whatever reform is finally enacted this fall works—preventing people from slipping through the cracks, raising the quality standard of the health-care industry, and delivering all this at acceptable cost. But looking at the big picture, I fear it won’t. So I think we should at least begin to debate and think about larger reforms, and a different direction—if not for this round of reform, then for the next one. Politics is, of course, the art of the possible. If our health-care crisis does not abate, the possibilities for reform may expand beyond their current, tight limits.

The most important single step we can take toward truly reforming our system is to move away from comprehensive health insurance as the single model for financing care. And a guiding principle of any reform should be to put the consumer, not the insurer or the government, at the center of the system. I believe if the government took on the goal of better supporting consumers—by bringing greater transparency and competition to the health-care industry, and by directly subsidizing those who can’t afford care—we’d find that consumers could buy much more of their care directly than we might initially think, and that over time we’d see better care and better service, at lower cost, as a result.

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How am I supposed to be able to afford health care in this system? Well, what if I gave you $1.77 million? Recall, that’s how much an insured 22-year-old at my company could expect to pay—and to have paid on his and his family’s behalf—over his lifetime, assuming health-care costs are tamed. Sure, most of that money doesn’t pass through your hands now. It’s hidden in company payments for premiums, or in Medicare taxes and premiums. But think about it: If you had access to those funds over your lifetime, wouldn’t you be able to afford your own care? And wouldn’t you consume health care differently if you and your family didn’t have to spend that money only on care?

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Ten days after my father’s death, the hospital sent my mother a copy of the bill for his five-week stay: $636,687.75. He was charged $11,590 per night for his ICU room; $7,407 per night for a semiprivate room before he was moved to the ICU; $145,432 for drugs; $41,696 for respiratory services. Even the most casual effort to compare these prices to marginal costs or to the costs of off-the-shelf components demonstrates the absurdity of these numbers, but why should my mother care? Her share of the bill was only $992; the balance, undoubtedly at some huge discount, was paid by Medicare. Wasn’t this an extraordinary benefit, a windfall return on American citizenship? Or at least some small relief for a distraught widow? Not really. You can feel grateful for the protection currently offered by Medicare (or by private insurance) only if you don’t realize how much you truly spend to fund this system over your lifetime, and if you believe you’re getting good care in return.

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Imagine my father’s hospital had to present the bill for his “care” not to a government bureaucracy, but to my grieving mother. Do you really believe that the hospital—forced to face the victim of its poor-quality service, forced to collect the bill from the real customer—wouldn’t have figured out how to make its doctors wash their hands?