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Increase Health Care Satisfaction, Reduce Costs

by Sherwood R. Kaip, M.D. 1992

skaip799@gmail.com

Healthcare is Different

Health care differs from other necessary services such as food and heating oil in only two important respects. First, no one ever suddenly needs twenty times as much food or heating oil for a year as they did previously. However a small percentage of families every year will have health care costs far greater than average. This is why real health insurance, not what is called health insurance today, is needed.

     The second difference is that even ordinary or average health care and its attendant costs are not steady but come in fits and spurts. This means that the health insurance should be written for a longer period than one year. This will be discussed further.

     Therefore, even though health care, like food and heating oil, is a necessity, the economics of health care should be handled no differently than the rest of the economy, taking into account these two differences. The fact that health care has been handled differently will be shown to be the source of the cost problems.

The Problems

     There have been three major contributors to increasing health care costs which are unique to the way health care has been 'managed' differently from food, heating oil, furniture, etc. These are: 1. displacement of patients as consumers of and direct payers for health care by government health plans and private insurance as currently written; 2. defensive medicine to protect from runaway liability awards; and 3. application of sophisticated technology, including both hardware and new types of services and occupations to provide them. Each of these factors is impressive by itself. However, each works synergistically with the others to make the cost pressures much greater than would occur if the factors worked independently.

     I think the above three factors, unique to health care, are the worst offenders. Aging of the American population, which results in more illnesses that are more severe and last longer is another factor but can only be remedied by causing people to die younger and quicker. Two other major problems are inflation and excessive regulation but these are not unique to health care.

Health 'Insurance'?

     Private health insurnace actually started as prepaid surgical care and has almost never been true insurance.  With true insurance, most people would not receive any money from the insurance company.  They would pay their health care costs diraectly and keep watch of costs.  For those unfortunate enough to have health care costs substanatially in excess of the average, their insurance would cover most of their extraordinary health care costs.

     At the present time almost any hospitalization will exceed the deductible.  Even if there is some co-insurance, the patient has little incentive to watch out for costs.  Because of the low out of pocket cost to the patient there is not only increased demand for medical services but also plenty of willingness to 'satisfy' this 'demand' by designing treatments, tests, and facilities without much concern for costs because it will be paid by insurance or paid by government.

     For example, there have even been corporations formed specifically to deliver home care to the elderly—but only those services for which Medicare will pay!  Also, hospital emerg4ency rooms are far more expensive for illness and minor trauma than are doctor's offices.  Why do people go there?  Because their insurance or the government will pay for it.

"Foodicare"

     We have had Medicare, a system which displaces patients as direct payers for health care, for many years. Because patients pay only a fraction of costs directly out of pocket, costs have skyrocketed. Imagine if we had had "Foodicare" which had operated in a similar manner. There might be a $10 deductible each shopping trip to be paid by the shopper and then the government (or insurance company or employer) would pay 80% of the rest of each grocery bill.

     Almost everyone would have steak and lobster at least daily. Consumers would show little interest in comparative shopping for the best way to spend their food dollars. The technology of providing more exotic and expensive foods would grow rapidly.

     Then there would be complaints about the high cost of food, the rapidly increasing "Foodicare" insurance premiums, and the terrible cost to the government of "Foodicare" for the elderly. The hue and cry would be for cutting amounts paid to food providers and for rationing food to consumers. Of course, this is exactly what has happened with Medicare—except that in health care there is also a liability problem.

Liability

     The cost of malpractice insurance is often phenomonal.  This cost too has to be passed on.  Yet the cost for procedures done mainlly or solely to reduce the liability risk is probably much greater than the malpractice insurance premiums.  A doctor cannot afford to take a 'wait and see' cost saving attitude in deciding whether something needs to be done.  If he does, it may leave him defenseless in a lawsuit.

Technology

     Some technology would simply not have developed if most people were paying their own health care costs directly. While elegant, it is not worth its cost. Other technology is more useful. If the technology results in faster and/or simpler diagnosis or treatment, such as a CAT scan versus angiography, then that health care cost will be reduced. If the technology results in a cure instead of just treatment, e.g., a new antibiotic where all others have failed, then this also reduces costs for that illness. But keep in mind that the lowest health care cost is still to die before you get to a health care facility the first time you get sick. Anything else adds to health care costs.1

     However, there is still a problem of balance as to which technologies should be carried forward. A technology may be horrendously expensive and benefit only a few people, and even those people for only a relatively short time. It might be better to spend the extra cost on something entirely different that would help more people in other ways.

     Yet there is no rational way (a single logical solution) to decide these things any more than there is a rational way to decide once and for all how much of each type of food to produce. The way to decide in the matter of health care technology, as in the food example and all other economic areas, is to let health care consumers and providers, the people directly involved, decide. This is what will occur if most people pay their health care costs directly. It is called a "market". That really is what freedom in economics is all about—people exchanging their resources, always limited, for satisfying their most urgent wants.

Synergism

     Now we must consider the synergism in the way the previous three cost facors accentuate each other.  (Synergism is when you add 2  of this and 2 of that and the effective result is 7 or 9 instead of 4.)

     You fall on your arm and it hurts. You go to your doctor. There is a tender spot on your arm but when he presses above and below that point the tenderness is not increased. If you had broken your arm, pushing above or below the sore spot would tend to move the ends of the broken bone and cause pain. Nowadays, the doctor will take an Xray even though he doesn't need it because if the arm turns out later to have a minor fracture, he may be sued for a substantial sum, even though he may have splinted the sore arm, which is all that a cast does for a minor fracture anyway.

     And, since your health insurance is paying for this emergency, you won't question the cost of taking an Xray in this situation. In fact, if your doctor even brought up the question of the cost of this Xray which your insurance is paying for, you would probably bad mouth him to your friends—perhaps even change doctors. Hidden deferred cost (through insurance, government program, or employer), liability, and high technology have teamed up synergistically to force up the cost.

     These are three problems of health care costs, probably the major ones. Let us look at solutions.

Reasonable Liability

     To solve the health care cost crisis we must get rid of the liability problems and the defensive medicine costs that go with it. There is a solution to this problem which is generic to all the ‘tort’ problems, such as personal (e.g., auto accident) liability and product liability, as well as the malpractice problem.

     The gist of this solution is simple enough. Families show how much they are willing to allocate to protecting themselves from the results of their own errors or negligence through the life and disability insurance they purchase. Then, by what right do American families think that others who inadvertently wrong them through error or negligence should pay them hundreds or thousands of times what American families carry in insurance to protect themselves from their own mistakes and accidents?

     In other words, the limits of liability must be brought down into the range in which people freely insure themselves. If someone is concerned about this not being enough if others injure him then that person can carry extra accidental death insurance or other insurance to cover such events. Perhaps "trip" insurance to the hospital covering untoward outcomes would be offered similar to flight "trip" insurance.

     Getting this huge monkey off the backs of health care providers would mean that when paying patients ask if something can be done less expensively, at least on the first try the provider can respond to their wishes. An Xray of the arm in the previous example need not be done. If the arm continues to hurt, then an Xray can be done. If headaches don't improve in a reasonable time on medication for sinusitis or whatever else seems to be the cause, then a CAT scan can be done to rule out a brain tumor on only those few people who didn't respond to the other treatment.

Your Furniture Came from Whom?!

     One of the ideas offered concerning the current health care system is actually one of the main problems.  This is the idea that the consumers of health care are employers, insurance companies, and government.  Consumers (patients) must be the consumers of health care, just as they are for food, calculators, furniture, and automobiles.

     You wouldn't pay money to an 'insurance' company to go into the marketplace to provide you with these things where the company, using your money, decided which food, calculator, furniture, and automobile you were to have. What if you did not like their choices? Is it possible that, after a while, the providers of those items might be more concerned about satisfying the company (or government) buying those items from them than about satisfying you?

     The only real solution to the problems of providing health care is having most people pay their own health care bills directly, rather than through their employers, health insurance companies, or taxes as is done now. Employers, insurance companies, and government consider the provision of your health care a "problem". You probably consider providing yourself health care an "opportunity" to avoid death, disability, and/or suffering.

     When most people pay directly for their health care, then they will decide, through the resulting market pressures, what is more desirable and what is less desirable in health care, just as they do in food, cars, furniture, and heating oil.

Health Care, 'Rights', and the Poor

     Health care is often spoken of as a 'right' but it cannot be. A 'right' to health care means that if I don't provide it for myself, then you have to provide it for me. Economic goods cannot be a 'right' because one person's 'right' becomes another person's 'slavery' to provide those goods. Health care is an economic good just like furniture, dry cleaning, transportation, accounting services, houses, and food, and must be treated that way to avoid very serious problems such as shortages, excesses, or dislocations.2

     What about health care for the really poor? Why not ask, “What about food for the really needy?" "What about heating oil for the really destitute?"

Private charity helps protect people from starving or freezing and can and does give health care. Government programs also operate in these areas. Health care for the poor can be modeled along similar lines. In the case of other necessities like food and heating oil, prices and goods and services offered are determined mainly by the market forces generated by the majority of paying consumers and providers, not by the effects of programs for the poor. Health care can and should operate the same way.

True Insurance

     While most people should be paying their medical bills directly, just like their food and furniture bills, insurance will be needed for catastrophes. Like any insurance, health insurance should not cover most health care costs, only extraordinary health care costs. The majority of families should not collect on their health insurance, just as you don't really want to collect on your life or home fire insurance. The insurance is only there to protect you in case of disaster.

     The deductible should be set so only about 15-20% of families will exceed the deductible and collect on their health insurance during the time period. Then, the insurance could pay most of the excess cost beyond the deductible without causing much cost increasing pressure because prices would be determined mainly by the 80-85% of people paying directly for their health care.

     When patients are paying most health care costs directly, they, as consumers, will be watching and controlling costs. This is the same as the fact that the price of 2 x 4 lumber is determined much more by the demand of house builders than by the effects of insurance payments reimbursing for home fires.

     As mentioned earlier, the need for health care generally occurs in fits and spurts.  Therefore, the period of time the insurance covers needs to be greater than one year.  Five years might be good.  This insures that usual hospitalizations won't automatically go over the deductible.  Presently almost all hospitalizations exceed the deductible so patients pay little attention to costs.

An Insurance Proposal

     To summarize this point, health insurance should be written for perhaps 5 years, with a single deductible for the entire period large enough that about 80–85% of families will not collect anything from their health insurance during the five years  After the deductible is exceeded the insurnace company could pay 85%, or even more, of the excess cost.  This can easily be worked out by insurance actuaries.

     This means that most patients will be watching costs and while some families will pay more than average during the five years, really high 'catastrophic' costs to insured families will be prevented.  If defensive medicine costs are eliminated by solving the liability problem, the majority of patients paying their bills directly will reward physicians who provide good care at lower cost and most other physicians will emulate them out of necessity.

     A budget and loan provision added to such a true insurance plan could take care of high costs incurred early in the plan. Monies not used would be savings returned to the patient, not the insurance company, keeping the cost reduction incentives with the consumer of the services, the patient.3

The Correct Value of Technology

     The problem of increasing technological costs cannot be 'solved' by central planning.  Under a normal free market system, people spending their own money for health care will determine how much of Gross National Product goes for health care costs, just as people spending their own money determine how much of the GNP goes for food vs. cars. vs. furniture vs. movies. Central Planning was the system of the communist Soviet Union and we all know how well that system did.

     Furthermore, people spending their own money will determine what health care technology is worth developing and what is not.  If a technology well serves a lot of people or it serves fewer people extremely well, it will devolop.  Otherwise, that particular technology will languish and another health care technology which the consumers consider more useful ( as judged by their support of it with their own money) will develop to better serve patients.  This is no different than air conditionig in cars (which caught on) and TV sets in the back seat of cars (which didn't until recently).

Summary

     While some medical care will need to be purchased or donated as a matter of charity, we must in general get government out of the provision of medical care and third parties (health insurers) out of providing routine care.  Government, business, and insurance companies displacing patients as 'consumers' of health care, extra costs related to liability risks, and increasingly complex technology are factors that raise health care costs substantially.  Together, these factors act synergistically to cause far greater cost increases than they would individually.

     To avoid governemnt rationing and coexisting skyrocketing costs, provision of health care will require a viewpoint grounded in basic economies where most people pay directly for their health care, just as they pay directly for other necessities, and insurance protects those with catastrophically high health care costs. Otherwise we will have health care with the efficiency of the post office, the cost containment of Congress, and the compassion of the IRS.