Tuesday, June 08, 2004

Health Care Costs

Brad DeLong says:
Two of the big things wrong with our health care system are (i) the enormous financial incentives HMOs and insurance companies have to figure out some way not to cover sick people, and (ii) cost shifting--the fact that those who buy insurance have to pay not only their own routine costs and their own catastrophic costs but the catastropic costs of others and the uninsured as well. The first means that--often--those who need health care the most have a hard time getting it. The second means that--often--those who could afford or would buy insurance if it were priced at its fair actuarial value don't because of this cost shifting.
Let's look at the first problem. After the fact, insurance companies have an incentive to figure out how to deny coverage. But this is true of all insurance policies. It's always a battle of incentives: When you are buying insurance, you have an incentive to pay as little as possible and to hide any risk. After some incident has already happened, you have every incentive to make the insurance company pay as much as possible.

And the opposite is true on their end. Every insurance company has an incentive to figure out how to argue that the car accident was really the other driver's fault, or how to argue that the death was really a suicide, or that the policy didn't cover acts of terrorism, or whatever. In many instances, of course, it is absolutely clear that the insurance company is required to pay. But in any case where there is room for doubt, the insurance company always has an incentive to try to avoid payment.

The thing that's important is the size of the incentive. There's a greater incentive to dispute a $100,000 heart surgery than a $100 checkup. And there's a greater incentive to dispute over cancer treatment than over a fender bender.

So it might indeed be a good idea to do as DeLong says in endorsing Kerry's idea, which is to have the federal government pay for most medical costs over $50,000.

On the other hand, this act in itself would create incentives. The thing to notice that is the federal government would only pay 75% of the bills above that amount. That's presumably so as to discourage the "moral hazard" problem wherein the insured person can demand more than is necessary or useful because he or she isn't paying the bill.

But will medical establishments create a 25% "discount" such that anyone can get the most expensive treatment paid for by the government? Many medical costs are incurred in keeping elderly people alive at a point when they might have died naturally. Not that I discount this; my own grandparents lived to their 80s, and I was immensely happy to have known them that long.

But they eventually died anyway. Indeed, all elderly people will die. Heck, all of us are going to die at some point. And the longer people are kept alive through artificial and expensive means, the more money it will cost. It sounds cold and cruel, but somebody has to make a choice that for certain patients, the treatment just isn't worth the money.

Don't believe it? As I've said, everyone dies. No amount of money, no style of insurance, will prevent that. So do we spend a trillion dollars keeping one person alive for a few months longer? No. How about a billion? No again. How about a million? Well, with medical treatment as expensive as it is these days, I wouldn't be surprised if this were the cost for a few people. But what if it was everyone in society being artificially kept alive for a few more months before death? There isn't enough money to spend a million on each person (that would be 280,000,000,000,000 dollars for everyone alive now). So there has to be some number where a rational person (not affected by sentimental involvement) would say, "Sorry, this person is going to die anyhow, and society doesn't have enough money to spend this much on every person."

So how would it affect incentives if hospitals and doctors figure out how to run up the bill keeping elderly people alive for that extra 3 months or 6 months?


Anonymous Anonymous said...

I like to put it this way. Suppose the government has decided to give you a one-in-a-lifetime gift of $100,000. Would you rather have:
a)a college education when you're twenty
b)a new Mercedes when you're forty
c)a coronary bypass when you're eighty

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Blogger Dr. Tom said...

It's going to be hard for the insurance, pharmaceutical, medical, and legislative monopoly to hold onto the facade that they provide the right approach to health care, esp since their system has vaulted MDs into the leading cause of death (See "Death by Medicine" by Gary Null et al online). 900,000 are unnecessarily dead each year from this system; that's over 2400 a day (Iraq is 2.1 US soldiers dead per day). Null's study is not the only one that exposes medical-performance shortcomings (See JAMA Vol 279(15) p1200 and the Barbara Starfield, MD, study in JAMA 2000. Or you could just read "Who's Representing the Healthy? by me and get all those studies in one place.)
As a CEO on Ron Insana's CNBC roundtable discussion pointed out recently, "At the bottom line, we need fewer people going to doctors, if we plan to control costs." That means having healthier people. What motivates people to be healthy? Does free insurance provide motivation? Such an approach is more likely to produce a tax increase to pay for the "free" insurance.
Rather than resort to socialism to attempt to repair our health-care problems, it might be worth asking if our current system provides incentives for good performance or disincentives for poor performance. It doesn't; everbody in the group pays the same premium. Group-health plans dump the poor-performance cost overruns onto the employer, the government and worst of all, onto the healthy policyholders, who pay a large portion of the premiums for those who fail to maintain their own bodies. Who is that motivating, and why do we punish our top performers?
Capitalism can fix the health-care problem by offering healthy people their own insurance. Such a plan will drive costs up for poor performers who will by encouraged to get healthier to acheive lower premiums. Suhc a plan is akin to pay-for-performance.
Corporations can go one step further by training and assisting their employees to learn and perform to higher standards.
Best regards,
Dr. Thomas N. Campbell, DC

11:40 AM  

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