The Shifting Landscape of HealthCare Economics Part I

by admin on 06/19/2011 1:31 PM

The rise of “managed care”, embodied most notably by the Health Maintenance Organization (“HMO”), has transformed doctor-patient relationships from the days when a doctor would come with their little bag to your home, to one of high costs and long waits. The battles over Healthcare Reform have only served to further confuse the dilemma we face and make solutions even harder to get at. The 25,000 page Affordable Care Act, called Obamacare by both critics and supporters, is perhaps the most obvious example of just how complex and confused our healthcare has become.

To understand where we are, we must first review how we got here.

What Happened to House Calls?

Once upon a time you’d start feeling that scratchy throat and you’d pick up a phone and within an hour or two, a knock at your door meant the doctor would see you now. He’d give you a look, perhaps write a prescription and you’d hand over some money and that would be the end of it.

That’s long gone. Very few of us are able to say we recall those days.

Today, no other professional service provider, not attorneys, real estate agents, accountants, auto mechanics, contractors, plumbers or anyone else is so far removed from their customer and getting paid than a physician. But why? Don’t people work harder for their money when they know ‘the boss’ (the person paying them), is watching? Medicine no longer works this way, but it did once.

The trend for physicians and patients alike for the last 40 years has been away from direct interactions and compensation to ones buffered by insurance company HMOs and government agencies such as Medicare and Medicaid. Need to see a specialist? Call your HMO and get a referral. The wait too long? Tough luck. Want that new device you saw on TV for your diabetes? Sorry, not covered by Medicare. Why does it work like this?

The Beginning of the End

In the not too distant past (the late 60s), over 75% of all healthcare expenses were covered in the private sector, with individuals paying nearly half of all costs. You read that right. Half.

Think of this for a moment. If you were an individual physician, this meant that most of your annual pay came directly from your patients paying you cash. If patients liked you, you likely made more and got busier. If they didn’t, you suffered as patients simply left your practice for Dr. Joe down the street.

The average doctor, even specialist, would not likely have even one full-time administrator handling insurance or government reimbursement. The next time you happen into your doctor’s office, take a look around. Ask the receptionist how many people work on reimbursement. It’s likely as many or more people than deliver actual care to patients. The cost to employ all those people, fill out all those forms and pay all the people on the other end who read and fill out more forms is tremendous and provides zero healthcare to anyone. None of this ever existed in medicine until the early 70s. So what changed?

Shift from Consumer-Pay to Government-Sponsored Insurance

The first major change was the introduction of Medicare and Medicaid to support insurance for the poor and elderly in 1965. The law’s passage marked the first real major intervention into healthcare by the federal government. The goal was to help expand medical coverage to populations who either were unable to afford it or were not receiving care. One unintended consequence, however, was that it put a third party between the caregiver and the patient. Payment for service and the incentives to control cost were limited as the actually payer (Medicare) was not reviewing the performance of the caregiver. Physicians needed additional personnel to process billing and receive payments which led to higher costs. Unexpectedly higher costs led to government needing to exercise greater cost-controls for various services rendered and direct control over services offered (“Mandated Benefits”).

As consumers enrolled in the program became less aware of the cost for services, overutilization of healthcare services grew. The chart here shows the growth in health care expenditures relative to the Consumer Price Index:

Whatever your political leanings, everyone agrees these programs are extremely expensive at over $600 billion annually. Medicare & Medicaid are projected to top out at one trillion annually by 2020. The non-partisan Government Accountability Office lists Medicare as a “High-Risk” program rife with fraud and abuse. Each year less than 5% of claims on the program are audited for accuracy.

To Make Matters Worse

Partly in response to the escalating cost of healthcare, in 1973 Congress passed The Health Maintenance Organization Act of 1973 (Pub. L. 93-222 codified as 42 U.S.C. §300e). The law’s principle sponsor was Massachusetts Senator Edward Kennedy and was signed into law on Dec. 29, 1973 by President Richard Nixon. It was touted then much as the Affordable Care Act has been touted now. Government needed to do something in order to get inflating healthcare costs under control. More consumers needed to be pushed into coverage and costs needed to be controlled.

The mechanism the law designed to cover more consumers and control prices was the “Healthcare Maintenance Organization”, the HMO. This new entity would be administered by the health insurance companies and would offer insurance HMOs which would be federally qualified by the government. Health benefits would be subject to federal requirements and costs were hoped to be controlled by limiting the kinds of care one would be able to secure under the HMO. Visits to specialists would need to be first approved. Certain tests and procedures would be limited. The hope was that by shifting more consumers into a ‘controlled’ market, their options would be limited and thereby costs could be controlled more effectively while not causing much harm to care.

While HMOs certainly don’t have the best reputation, we’ll leave the quality of care discussion to more experienced health care professionals. However, in evaluating their effectiveness on controlling costs, one need only look at the above chart. Here it is again as I think it tells the story well enough:

Purely as a cost-cutting measure, the HMO was an obvious failure. The increasing costs and overutilization of care which started in earnest under the Medicare & Medicaid laws only seemed to exacerbate with the HMO law. An ever-increasing number of consumers paid less and less of their own expenses, yet used more and more services. It’s as though they had an open bar tab that was never to be paid back. Whereas roughly half of all expenses were paid directly by patients, today it is only 1/10. Doctors are no longer accountable to patients, patients no longer accountable for their own expenses. Care suffers as medical innovation wanes. The incentives to invest in medical innovation which yields better treatments is increasingly becoming limited as government and insurance companies tried to get a handle on the ever-increasing costs they are forced to pay.

Never Too Much of a Bad Thing: To be continued in July 2014…

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Government is not the solution to our problems, government is the problem.

– Ronald Reagan

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