U.S. Healthcare’s Perverse Commercial Incentives

An interesting article recently published by Robert Kuttner in the New England Journal of Medicine explains how our relentlessly increasing healthcare costs are due to more than these usual culprits: Our aging population, expensive new technologies, poor diet and lack of exercise, the tendency for the supply of supply providers, medical devices, and new treatments to generate its own demand, excessive litigation and defensive medicine, and tax-favored insurance coverage.
The other culprit, he explains, is America's "pervasive commercialization," which is dominated by:

... for-profit insurance and pharmaceutical companies, a new wave of investor-owned specialty hospitals, and profit-maximizing behavior even by nonprofit players raise costs and distort resource allocation ... [as] private bureaucracies siphon off $400 billion to $500 billion of the $2.1 trillion spent [due to] perverse incentives produced by commercial dominance of the system.

Mr. Kuttner isn't the only one blaming our economic system for many of healthcare's problems. His explanation of pervasive commercialization driven by perverse incentives is consistent with John Bogle's description of the "pathological mutation of capitalism" that is destroying the American economy. Mr. Bogle is an authority who has been named by FORTUNE magazine as one of the four giants of the 20th century in the investment industry, and by TIME magazine as one of the world's 100 most powerful and influential people. As I wrote at this link, the pathologically mutated form of capitalism he describes has infiltrated and broken our healthcare system by pressuring healthcare providers to treat more patients in same amount of time to maintain their profits, which mean greater likelihood of errors and omissions due to overload. Furthermore, providers who keep their patients healthy longer through prevention, and who treat ill patients in the most cost-effective manner, are at serious risk of financial ruin. Not to mention the lack of good evidence-based guidelines defining what cost-effective care actually is. The end result is that the consumer receives less value, i.e., higher costs and lower quality.

So, our healthcare system is based on a pathologically mutated model of capitalism that encourages a form of commercialization in which perverse incentives maximize profits for some by delivering low value to the consumer … What a mess!

Mr. Kuttner gives examples of the kinds of problems these perverse commercial incentives are causing in the healthcare industry. He begins by explaining how many private insurance companies control costs by:

...practicing risk selection, limiting the services covered, constraining payments to providers, and shifting costs to patients…[thus] resources are increasingly allocated in response to profit opportunities rather than medical need, many attainable efficiencies are not achieved, unnecessary medical care is provided for profit, administrative expenses are high, and enormous sums are squandered in efforts to game the system. The result is a blend of overtreatment and undertreatment — and escalating costs. Researchers calculate that between one fifth and one third of medical outlays do nothing to improve health.

He then claims that:

Great health improvements can be achieved through basic public health measures and a population-based approach to wellness and medical care. But entrepreneurs do not prosper by providing these services, and those who need them most are the least likely to have insurance… Comprehensive, government-organized, universal health insurance systems are far better equipped to realize these efficiencies because everyone is covered and there are no incentives to pursue the most profitable treatments rather than those dictated by medical need… Commercial incentives are not fixing what's broken.

He also explains how primary care physicians are suffering the brunt of our broken healthcare system due to perverse cost-containment strategies, such as income targeting, which cause their caseloads increase and net earnings stagnate or decline:

The idea is that physicians have a mental picture of expected earnings — an income target. If the insurance plan squeezes their income by reducing payments per visit, doctors compensate by increasing their caseload and spending less time with each patient … [which] has multiple self-defeating effects. A doctor's most precious commodity is time — adequate time to review a chart, take a history, truly listen to a patient. You can't do all that in 10 minutes. Harried primary care doctors are more likely to miss cues, make mistakes, and — ironically enough — order more tests to compensate for lack of hands-on assessment. They are also more likely to make more referrals to specialists for procedures they could perform more cost-effectively themselves, given adequate time and compensation. And the gap between generalist and specialist pay is widening.

Another cost-containment tactic is to increase deductibles and copayments in order to:

…dissuade people from going to the doctor. But sometimes seeing the doctor is medically indicated, and waiting until conditions are dire costs the system far more money than it saves. Moreover, at some point during each year, more than 80 million Americans go without coverage, which makes them even less likely to seek preventive care.

Furthermore, a strategy used by hospitals to maximize their revenue involves fierce defense of their profit centers, investing heavily in facilities for lucrative procedures that will attract physicians and patients (such as cardiology). It would be better for our healthcare system as a whole, however:

…to shift resources from subspecialists to primary care [where many things can be done for much lower cost]. But in an uncoordinated, commercialized system, specialists might take their business elsewhere, so they have the leverage to maintain their incomes and privileges — and thereby distort cost-effective resource allocation.

And physician entrepreneurs are increasingly moving toward "boutique medicine:"

...in which well-to-do patients pay a premium, physicians maintain good incomes, and both get leisurely consultation time. It's a convenient solution, but only for the very affluent and their doctors, and it increases overall medical outlays. Other doctors opt out by becoming proprietors of specialty hospitals, usually day surgeries. In principle, it is cost-effective to shift many procedures to outpatient settings that are less expensive but still offer high-quality care. In a government-organized universal system, the cost savings can be usefully redirected elsewhere. But in our system, the savings go into the surgeons' pockets, and their day hospitals often have a parasitic relationship with community hospitals, which retain the hardest cases and give up the remunerative procedures needed to subsidize those which lose money.

I propose a healthcare system that focuses on bringing value to the consumer by fostering high quality care delivered efficiently (i.e., cost-effective care) through better use of clinical research, evidence-based guidelines, and health information technology. It would also have incentives for:

• Delivering high value care to consumers
• Making quality and cost transparent to enable consumers to make better healthcare decisions
• Offering consumers wellness tools, counseling and guidance to enable them to take better care of themselves. 

Presidential Candidates’ Healthcare Proposals Comparative Analysis

This post presents a small part of the Presidential Candidates' Healthcare Proposals Comparative Analysis, which is still in development. After studying the details of the candidates' proposals, it seems that the main issues relate to these two questions:

1. Should all citizens have healthcare coverage (universal healthcare)? If so, what's the best way to do it?
2. Should healthcare value be improved? If so, how?

Following is an introduction to answering the first question.

To help answer this question, key points are presented followed a commentary and brief overview of the candidates' proposals. In my next post, I will give the details of their proposals, along with comments.

Universal Healthcare: Key Points

The case for universal coverage based on the philosophy that it is shameful for our wealthy nation to have approximately 47 million uninsured plus 16 million people underinsured, a number that's been growing constantly, along with the rising healthcare costs [reference]. Some argue that everyone in our nation should be covered since it is our moral responsibility, i.e., it's about communal spirit. And some claim that having a healthy, well cared-for population is a strategic imperative since you can't have a strong nation with a large percent of people at risk for serious illness and death due to lack of access to good, affordable care. That means, to the extent possible, it is in our country's vital interest to help our people lead longer, healthier, and more productive lives.

Of course, some argue that it is not their responsibility to sacrifice their hard-earned money for the well-being of others. These folks tend to be young, healthy or wealthy and resent having to pay more in taxes for publicly funded healthcare programs just because others have done irresponsible things in their lives that have made them sick or unable to afford good care. In other words, they don't deserve the care they need because they were not responsible and failed to make wise decisions. In addition, some opposed to universal coverage justify their position by claiming that the uninsured just don't want insurance, that the American system relies primarily on private enterprise to support health care, and that it's only the liberals and the urban poor who want a stronger public sector in health care. To help make sense of these arguments, consider the following commentary.

Universal Healthcare: Commentary

It is certainly understandable how young and healthy Americans do not want their tax monies going to help pay for the care of an older person with chronic illness. This kind of self-centered mind set is promoted in our culture. People in most other countries, where universal coverage is the norm, are willing to pay more in taxes to cover their needy. It's a cultural and moral issue, of which many Americans have been conditioned to think in terms of "me" rather than "we." Nevertheless, there is something to be said about personal responsibility.

To be responsible, people ought to take good care of their health by, for example:

• Eating foods lower in fat and carbohydrates, not smoke tobacco, avoid drinking much alcohol and using dangerous drugs, breath clean fresh air, stay out of the sun, exercise, etc.
• Earning good money, invest it wisely and save in order to afford treatment should they someday have a catastrophic or chronic condition.
• Rejecting short-term pleasures that have a potential negative health consequence.
• Going to the doctor, dentist, therapist, etc. only when necessary and selecting providers and treatments that are the most cost-effective.

And, it is only sensible that our culture, government, and economic system more likely that our citizens do such responsible things by making radical changes, such as:

• Making junk food more expensive than high-quality food
• Making tobacco and alcohol extremely expensive, while discouraging advertising to young people
• Putting businesses that blatantly pollute our air and waters out of business
• Down-playing the vanity of a sun tan
• Stopping the use of TV as the opiate of the masses, which creates so many "couch-potatoes," and start promoting more physical activity
• Rewarding healthcare providers for delivering high-value (cost-effective) care and preventive services, and insurers for offering high-value policies, as well as enabling consumers to select them through robust transparency of quality and cost
• Being role models of responsible money management, such as balancing the Federal budget rather than pushing incredible debt onto our children
• Making wise investing something that anyone can do rather than making the system so complicated and full of underhanded practices that it's so easy to get ripped off and make poor financial decisions
• Encouraging business to focus on long-term societal benefits rather than short-term investor returns
• Increasing the incomes of the working poor, so they have a chance to save for the future and purchase health foods, etc.
• "Leveling the playing field" so the disparity between the haves and have-nots aren't so drastic (the top 5 percent currently have more wealth than the remaining 95 percent of the population combined)
• Linking profit to value for the patient/consumer
• Putting at least some of the money currently being spent on political pork (estimated to be over $50 billion per year) and war (now about $500 billion and expected to go to $2 trillion) into improving our healthcare system.

Unfortunately, our nation often does just the opposite, so it's no surprise our citizens are often irresponsible. Under these destructive forces, does it really make sense to punish ill people for not taking good enough care of themselves? For more, see: Are you worthy of health insurance and high-value care? and Three stories about the dilemma modern consumers face in this era of "personal responsibility"

Also consider the myths--recently disputed by the Centers for Disease Control and Prevention (CDC)--that may affect one's point of view (quoted from New CDC Report: The Nail in the Coffin for Health Care Myths).

Myth: If people don't have health insurance or get medical care, it's because they don't want it.

Reality: Actually, the big issue with access is cost. According to the CDC report, more than 40 million Americans—almost one in five Americans over the age of 18—have foregone one of the following in the past year because they couldn't afford it: medical care, prescription medicines, mental health care, dental care, or eyeglasses.
It's not that uninsured people don't understand the value of coverage. Last year a study from the Urban Institute found that less than 3 percent of uninsured adults and children have never had insurance or report having no need for insurance. That same report also found that the high cost of coverage alone explained over 50 percent of those cases where people are uninsured

And even when the uninsured cite job-related difficulties as the reason why they can't access employer sponsored coverage, the problem isn't just that they can't get it through work—it's also that they can't afford individual policies. (Individual policies are much more expensive than group policies, and in many states private insurers can charge individuals astronomical premiums if individuals have any "pre-existing conditions.) According to the Urban Institute, for 79 percent of adults and 74 percent of children who are uninsured because of job-related problems, the high cost of individual insurance is a major problem.

Myth: The American system relies mostly, if not exclusively, on private enterprise to support health care.

Reality: Yes and no. While the U.S. does have the biggest private sector share of health expenditures in the world, making up 55 percent of our funding, personal health care expenditures (i.e. spending on actual patient care) is mostly public. The CDC reports that in 2005 the federal government and state and local governments combined paid 45 percent of personal health care expenditures; private insurers only paid 36 percent, with 15 percent coming from out-of-pocket payments. …

There's also a bigger public sector coverage presence than many would like to admit. Though two-thirds of insurance policyholders have private coverage, a Census Bureau report from earlier this year noted that more than one quarter of Americans (about 27 percent) are covered by government insurance. The [current] American model is much more of a private-public mix…

Myth: East coast liberals and the urban poor are the only ones who want a stronger public sector in health care.

Reality: Health care reform is often stigmatized as being something that only socialist, bleeding hearts dream of...But in fact, one particular area that could greatly benefit from a more proactive public sector is Middle America.

The CDC report notes that 4 percent of counties across the nation have no physicians. None. And more than 90 percent of these physician-less counties are non-metropolitan, i.e. do not contain a town of at least 10,000 people. In fact, across the nation only 9 percent of all of the nonfederal patient care physicians in the U.S. are located in these rural counties.

These sparsely populated locales are pretty much where you'd expect them to be: the Plains states and the Southwest (think Texas, the Dakotas, Oklahoma, Alaska)—home to many good old fashioned middle Americans. Initiatives to connect patients in these regions with physicians have come from the government, not the private sector...
[Both liberal and] conservative folks across the nation could benefit from a revitalized public sector [that makes] care accessible to regions where the medical market is non-existent.

Another report outlines questions American should consider when evaluating healthcare reform proposals. It contrasts proposals built around these three distinct philosophies, which assesses proposals "based not only on their ability to achieve universal coverage, but also on their potential to move the nation's health care system toward high performance …

1. Tax incentives for individual market insurance. Proposals that rely primarily on individuals' responsibility for obtaining coverage, with tax incentives to subsidize purchase of insurance in the individual insurance market.
2. Mixed private–public group insurance with shared responsibility for financing. Proposals that build on our current mixed private–public system of health insurance with shared responsibility for financing coverage by government, employers, and households.
3. Public insurance. Proposals that would cover nearly all Americans under public insurance programs, such as Medicare, with everyone covered through the same public system.

…both the mixed private–public group insurance and the public insurance reform proposals have the greater potential to move the health care system toward high performance. Both approaches have the potential to provide everyone with comprehensive and affordable health insurance, achieve greater equity in access to care, realize efficiencies and cost savings in the provision of coverage and delivery of care, and redirect incentives to improve quality. From a pragmatic perspective, however, the mixed private–public approach would cause far less dislocation by allowing the more than 160 million people who now have employer-based health coverage to retain it, instead of asking them to enroll in a new program. This approach would build on the best features of our current system while addressing its most serious shortcomings: gaps in coverage and the absence of the incentives, organization, and infrastructure required for a high performance health system.

…Extending health insurance coverage to people who currently lack it is a necessary, but not sufficient, condition for achieving high performance. The way in which a universal coverage system is designed will have a deep impact on its ability to make sustainable and systematic improvements in access to care, equity, quality of care, efficiency, and cost control. With these goals in mind, the following are some key principles policymakers and the public should consider in developing or evaluating health reform proposals:

Access to Care

• Provides equitable and comprehensive insurance for all.
• Insures the population in a way that leads to full and equitable participation.
• Provides a minimum, standard benefit floor for essential coverage with financial protection.
• Premiums, deductibles, and out-of-pocket costs are affordable relative to family income.
• Coverage is automatic and stable with seamless transitions to maintain enrollment.
• Provides a choice of health plans or care systems.

Quality, Efficiency, and Cost Control

• Health risks are pooled across broad groups and over lifespans; insurance practices designed to avoid poor health risks are eliminated.
• Fosters efficiency by reducing complexity for patients and providers, and reducing transaction and administrative costs as a share of premiums.
• Works to improve health care quality and efficiency through administrative reforms, provider profiling and network design, utilization management, pay-for-performance payment models, and structures that encourage adherence to clinical guidelines.
• Minimizes dislocation; people can maintain current coverage if desired.
• Simple to administer.
• Has the potential to lower overall health care cost growth.

Financing

• Financial commitment to achieve these principles.
• Financing should be adequate and fair, based on ability to pay, and is a shared responsibility of federal and state governments, employers, individual households, and other stakeholders.

…Conclusion
Ultimately, we must move the health care system to high performance using goals and properly aligned incentives that orient all participants in the same direction: toward improved access, quality, equity, and efficiency. The most important feature of any health insurance reform proposal is whether it can succeed in providing health insurance and access to care to all. In addition, proposals should be examined for their ability to produce better access, higher quality, and greater efficiency. Whenever possible, we must seek synergy between coverage expansion and reform that will move the U.S. to a high performance health system.

Achieving universal coverage will require engaging everyone in a debate on values, our commitment to a healthy and productive life for all, and the merits of different strategies for achieving improved coverage and better performance from our health system. …Serious reform will require broad consensus and a significant financial investment by federal and state governments, employers, households, and other stakeholders. A shared responsibility among all stakeholders will be needed to achieve the goals of reform in a way that is effective and fair.

Brief Overview of the Candidates' Proposals

All the Democrats propose universal healthcare (coverage for all Americans). Only Kucinich supports HR 676, which is a single-payer, "Medicare for All" plan that gives everyone comprehensive coverage. Gravel also proposes a single-payer solution, but through use of federally funded vouchers. All the other Democrats propose a public Federal Employees Health Benefits Program (FEHBP) type program and/or Medicare, Medicaid, SCHIP, which are supported by subsidies (e.g., through tax credits or vouchers) to low income persons.

Republicans, on the other hand, do not propose new public programs, the expansion of existing public programs, nor universal coverage. Instead, they all propose market-based private insurance solutions through tax deduction/credit subsidies to lower insurance premiums and deduct medical expenses from the taxes of lower income persons. Other strategies include increasing competition, tort reform, and payment changes to providers.

The strategies related to universal coverage, which are discussed below, include:

• New and expanded public programs
• Allowing private insurance
• Mandates for individuals and businesses
• Insurance pooling (community ratings)
• Changes in Private Insurance
• Subsidies/tax credits/deductions for individuals and businesses
• Funding it through taxes and savings

In my next post, I discuss whether government can be trusted to run a single-payer system.