Eclectic commentary from a progressive voice in the red state

Thursday, November 21, 2013

Why health reform won’t work — a historical perspective - Part 2

Ronald Reagan had won the 1980 election and his pro-big business push for supply-side economics, lower taxes and deregulation changed the course of America’s economy. Remember the famous line from the movie “Wall Street,” uttered by Michael Douglas’ character, “The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA.”

And what of the health care industry?

First and foremost was the illusion that the entire American economy was classical free market. The rules that applied to food and air travel and other transactions now were said to apply to the health care industry. Some of this was sold as “consumer driven” health care.

But health care is not a “free market” commodity. The basic free market, supply and demand rules don’t apply. Here is why:

1. There is little price elasticity, which means no matter how many doctors there are, the price won't change much because (a) patients/consumers don't have free market knowledge of the price, (2) patients/consumers won't price shop because they don't choose their physician that way even if they could and (c) because the private insurance company sets the price through negotiation with the doctors, hospitals and other providers. And, don’t forget, these are products that, in the main, most people really don’t want to buy.

2. There's no free entry into the market. Physicians are licensed by the state and must graduate from an accredited school of medicine or osteopathy and not everyone can get into a school of medicine or osteopathy. Or pass licensure exams. You just can’t hang out your shingle and pretend to play doctor. And, to argue that the market action and lawsuits over bad outcomes would prevent this is illusory because it’s only the survivors could sue. Let that sink it.

3. There is no free choice among doctors and hospitals because private insurance provide high disincentives for patients going "out of network." Or your private HMO won't allow a certain test or x-ray — a decision made by a bureaucrat in private industry, not a qualified medical professional.

4. Buyers and seller don't have equal knowledge of the product or service — unless the patient is another clinician, the consumer can't choose by quality, which means "competition" is based on non-rational factors while the marketplace is supposed to be rational.

5. Supply creates its own demand and raises prices because with an over-supply there is under-utilization, leading to spreading overhead over a smaller patient base, which all insurers pass on as premiums.

In the 1980s, the reason for turning the patient into a “consumer” was easy because of a backlash against the medical profession. The paternalistic approach of many physicians was such that they bristled that a patient or patient’s family could question them. But after the tumultuous 1960s and early 1970s, aided by the women’s movement, all consumers wanted to be empowered. And, to be fair about it, many folks were better educated and could ask decent questions about their medical issues. The majority of the population still didn’t understand the sea change in the economics of health.

Then, with Kenneth Cooper and aerobics and the “get healthy” movement grew, the insurance firms saw another way to shift the burden of cost to consumers. If you weren’t in shape, exercising and eating health, any disease problem was the patient’s fault. Never mind that it as unfair to millions who became ill through no fault of their own. But, it was an easier sell to tell people they were responsible for their own health care decisions — and for paying for gym memberships — than it was to deal with lower profits from paying hospital and doctor bills.

Deregulation also dismantled the national mandate for Certificate of Need although some states retained their capital regulation programs; but, for the most part, Reaganomics opened the door to massive building booms and equipment acquisitions that continue to this day. Contractors, big equipment manufacturers (GE, Picker, Siemens), medical device makers and suppliers had a field day.

But the floodgates that opened the competitive free-for-all had consequences: overbuilding meant over-supply and those costs had to be recouped. So, the list prices of the services skyrocketed and some of the insurers and HMOs put their collective feet down. So did Medicare and, consequently Medicaid, which took much of its guidance from Medicare regulations. One could argue, by the way, that Medicare was the first to try reining in costs and insurance firms followed.

Either way, what matters is that the revenue that hospitals and others lost had to come from somewhere. And it came from those insurance plans that could hike premiums as they saw fit or from those without insurance or who chose to pay. The two “uninsured” groups were the very rich, who in their own way are self-insured; and the poor and working poor who couldn’t afford the premiums or whose employers didn’t have health coverage. For the former, the massive bills didn’t matter; for the latter, the burden was crushing.

The cost of health care in the aggregate for the nation soared.

But the deregulation also killed another program before it could really help rationalize the system. The comprehensive health planning legislation of the mid-1970s recognized that emergency medical and trauma services needed to be coordinated. The levels of trauma care were established and systems of routing patients to different levels of hospitals had begun. But the deregulation ended that initiative also.

And, the cost of health care in the aggregate for the nation soared.

Meanwhile, the hospital administrators had sold the doctors down the river a long time ago. Certificate of Need programs gave them the excuse they needed to not buy capital equipment, especially in non-competitive markets. Of course, that led to friction with physicians, who — especially in competitive markets — were no angels either. In those instances, medical staff played hospitals off against one another.

Hospital administrators also jumped on the marketing bandwagon. “Branding” became popular, so basic maternity services got an interior decorator and the name “Women’s Center.” Fitness services led hospitals to build or invest in health clubs.

The lack for regulation opened the door for some other moves. First, skilled nursing facilities, nursing homes and long term care facilities, boosted by Medicare and Medicaid revenues, burgeoned. For-profit companies dominated the industry, lured by promises of an aging population and Medicare’s focus on controlling hospital costs. Add to that, the rise of for-profit HMOs as part of the for-profit insurance industry and the focus become one of bottom line, not patient care. Then, to escape the scrutiny of hospital regulations and the controls on revenue, outpatient facilities blossomed, including the free-standing surgery centers, diagnostic imaging centers, GI labs and treatment centers.

And, the cost of health care in the aggregate for the nation soared some more.

Few hospital administrators stood up to the public policy makers to tell them that health care wasn’t just another commodity. Few hospital administrators saw the flaws in the deregulation and, out-numbered by the sycophants who dared not upset the powerful in Washington, cowered in the corner. Few hospital administrators really allied with physicians and their medical staff to create a real team.

While not much in the economic model has changed since the 1980s, two other trends have influenced the health care industry.