NEARLY every student of government agrees, the state government is the weakest part of the American system. Almost every academic or federal congressman, at least, seems to hold that belief, while almost any lawyer would prefer to have his case in Federal court rather than before a state judge. Although the followers of Thomas Jefferson kept the nation in an uproar for forty years pursuing his notion of government identical with the will of the people, the public opinion he prized nevertheless remains scornful of state government. Such scorn by itself can undermine legislative quality, creating a destructive cycle.
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Small Town
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Students of government point to instability and unpredictability as main features of concern about state government. The legal profession values a central principle, called stare decisis: Leave the Law Alone. Stability, or order is desired so highly that dictatorship, corruption, and poverty may be tolerated in order to achieve it. Conversely, an inability to predict what is coming next is highly destabilizing, a sign of amateurism at the controls. Any decision is better than no decision, even a bad decision is better than no decision. The public hesitates to act in the face of indecisive governance, and dynamism drains from the environment. Most of the time it doesn't make much difference what a rule says as long as it is emphatic and prompt. And it's usually the case that bad decisions are quickly reversed. Test it yourself: how much difference does it make whether a one-way street runs East or West? But it would make a considerable difference if almost any street changed Eastward to Westward to Eastward again, several times capriciously. Suppose someone did make a bad mistake: Eastward to Westward and back to Eastward again. Everyone can now see that Westward was a dumb idea, you bonehead. It will be a very long time before anyone tries that, again.
A second general characteristic of state government is the location in a small remote town. The capital of Michigan is in Lansing, not Detroit. In New York, it is in Albany, not New York City, and in Pennsylvania, it moved from Philadelphia to Harrisburg. Even in little Delaware, it is in Dover, in Maryland, it is in Annapolis rather than Baltimore. And so through most of the fifty states, we see the same pattern. No doubt it could be argued: getting away from big-city bosses and political machines is positive, and stretching a network of highways through the open countryside to the new capital is a source of real estate development for the state. But it definitely creates weakness of the governing system to locate it in towns that have little newspaper coverage, no think tanks, few universities, and even poor airports, school systems, museums, and civil society. These are generally one-industry towns, where the children of the bureaucracy all go to school with each other, along with the offspring of lobbyists. Voices in the past have been raised against the development of a ruling class, as might have been seen in Potsdam outside of Berlin and similar political suburbs. But we have just as surely developed a bureaucratic subclass in Bethesda, Maryland and Alexandria, Virginia. No doubt there are many other similar clusters, in other states. Where the children of bureaucrats are clustered in the schools near the Washington Post and the National Journal it can be argued they know the inside game of politics, as well as the children of Boston, know the inside baseball of the Red Sox, and there is a certain value to developing such a political artisan class. But in the vast majority of the country, the dominant problem is that the voters of the state have not the faintest idea of how their state government is functioning. The children of bureaucrats may still learn at the dinner table how to adopt "Yes, Minister" behavior or how to find lifetime bureaucratic jobs with accidentally high fringe benefits. The big flaw is the rest of the state does not realize the smallest part of how prevalent such behavior is in the capital. If the politician who is caught in a scandal is largely unknown to the general public, it is an advantage to the political class. With less notoriety, there is less scandal, possibly even lighter punishment from judges he has been involved in appointing. Rising above this sort of sorry behavior, the quality of legislation is surely diminished when there is diminished fame for doing a good job, diminished scorn for incompetence.
To a certain extent, this pressure for mediocrity is augmented by the reduced importance of the subject material. The federal government is involved in foreign policy and monetary issues Constitutionally forbidden to the state legislature. Even at the bottom of the hierarchy of public notice, the activities of mayors and city councils have a more direct effect of the lives of the local voter than state government does, with importance shaved off at both the top and the bottom. Such activities really can possibly afford to be relegated to some rural small town with nothing to do except play poker and drink in the bar of the local hotel; it's a question which is a cause, which is the effect. The Constitution provides that the Federal government shall be limited to a dozen specified activities, while everything else is governed by the states. Unfortunately, two hundred years of chipping away at the wall separating two governments of limited powers have left the states with little scope to govern anything substantive except the insurance industry. That does not prevent most state governments from considering more than two thousand bills a session, but these are matters of little import, boring, boring.
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Big City
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The Progressive Movement of the early Twentieth century saw much the same problems, being handled by much the same sort of people; but they over-reacted to it. Like most reform movements, the Progressives wanted to make a big splash and then go home. A century later, it is difficult to assess how outrageously corrupt the Senatorial process may or may not have been at that time in the past. Somehow, the public became convinced the U.S. Senate was a terribly rotten organization because of the terribly rotten selection system for U.S. Senators. Consequently, the Seventeenth Amendment passed with little fanfare, taking the selection process away from "the states" and giving it to a statewide popular election. In states with large urban political machines, this change meant giving the nominating process to big-city bosses, taking it away from the legislatures. That is definitely a distinction without much difference. Most big-city political bosses are content to select obedient hacks for nomination to the legislature, but this is the source of most rotten boroughs, gerrymandering, corruption, and mediocrity. In the areas of rural machine politics, the boss himself is more commonly attracted to the appointive legislative jobs. In New Jersey, the election law prohibits more than small campaign contributions to legislators but permits unlimited contributions to the county boss. Either way, the progressive reform of 1913 has not had much progressive effect. One thing is very certain. When the method of selection of the state's U.S. Senator is left to the legislature, the resulting Senator is pretty certain to be a current member of the Legislature. And in the instant you aspire to be U.S. Senator, it becomes very clear you will greatly enhance your chances if you first run for the legislature. There were once likely to be half a dozen senatorial aspirants within the Legislature at any one time, so there was an appreciable improvement in the quality of the Legislatures. True, there was probably more grand-standing and maybe even vote-swapping in return for assistance on the Senatorial seat selection. But there was also much more attention paid in return to the state's interests, by the U.S. Senate. The state's voice on the national scene was considerably louder. The value of a legislative seat and the later experience it provided were much enhanced by possessing the power of selecting a U.S. Senator.
A measured assessment of the effects of the Seventeenth Amendment is long overdue. My own view is that ripping the selection process away from the state legislatures and substituting a second popularly elected national legislative house, was both an over-reaction and a careless gesture without much improvement. Because vested interests have been created, it is now nearly useless to ask the present Congress to study the matter. We have to hope that some rich private citizen will see the need for a serious study of these issues, and both fund the effort as well as leave it alone. If it gets captured by ideologues, it will require a second study, or maybe even a third.
And finally, we get to Earl Warren. former governor of California, and President Eisenhower's choice for Chief Justice of the Supreme Court of the United States. Eisenhower later once referred to the appointment as the worst decision he ever made. Two decisions are said to have been his pets: Baker v. Carr and Reynolds v. Sims. Prior to these two decisions, it was really only possible to gerrymander Congress and the fifty state Legislatures. The U.S. Senate and the various state Senates were elected by geographic boundaries, and couldn't be gerrymandered. Tracing back to a corridor conversation between John Dickinson and James Madison, Dickinson had caucused with the other small states and was in a position to block almost any Constitutional Provision at the Convention. He used words to the effect of, "Do you want a Constitution, or don't you?" and went on to describe his total unwillingness to allow big states to dominate small ones. Out of this, Ben Franklin cobbled a compromise of a two-house Legislative Branch. To pass, any legislation would require the approval of both houses. The House of Representatives would have proportional representation, while in the Senate each state would have two senators, regardless of its population. Eventually, almost every state Legislative branch followed this pattern, although it was not a provision of the Constitution.
The hidden dissention in 1789 was over slavery, but Dickinson was a shrewd and experienced lawyer. He knew human nature, and the best example of the power of his insight has later emerged as California has become the largest state. Every new insurance design first seeks to conform to California laws, because it's expensive to launch a new project, and you might as well assure yourself of conforming to the rules of the largest market, first. The smallest state, Delaware, was not about to be pushed around like that, even on many unrelated issues. But centuries later, Earl Warren had learned the same lesson in reverse and lunged for it when he became Chief Justice. Using the argument of "equal justice", he forced 49 state Senates to adopt proportional representation, just like the other house in their branch. New Jersey, which I know best, is typical in being forced by this decision to change its Senate from one vote per county to voting by population. The subtlety was that both houses of state legislatures became dominated by big-city machines and hence were capable of being gerrymandered. They thus gained control of the nomination process, and gerrymandering nation-wide has assumed the posture of machine politics dominating the selection of candidates. It's certainly true that in the Pennsylvania legislative process, you can regularly observe party hacks drive up, and vote on the floor in accordance with a little card which the "leadership" hands them as they step on the floor. The beauty part of this is that decades later, most citizens haven't a clue what had happened.
This second Foreword is a summary of a radically modified proposal. It cannot be implemented without further changes in the law or at least some clarifications of the Affordable Care Act. To state the issue, it is that increasingly larger proportions of American lifetimes are not employed, and therefore are not able to take full advantage of an employer-based system. It becomes increasingly doubtful that thirty years of employment can sustain sixty years without earned income if you include childhood. Further, there is every reason to expect further migration of illness out of the employable age group. And finally, while there are signs of reasonableness, the mandatory stance of Obamacare is not greatly different from a package of mandatory "benefits" imposed on all attempts at innovation before they can be tested. If changes in the law are required before implementation, liberalization might as well be in place before innovations are proposed. No private company could proceed at arm's length without advance assurances resembling cronyism. Everything else is negotiable, but the notion of mandatory pre-approval of any modification must be softened to something less sovereign.
Sickness itself has moved into the retiree age group and will continue to migrate there. The means of payment cannot move from the employee group, so a two-step process is resorted to, with the middle-man government controlling the flow of money between age groups. If we are ever to remove middle-man costs, this feature must be removed, as well. Meanwhile, the paraphernalia of medical care, the medical schools, hospitals, and doctors, remain largely in the urban areas where employment formerly centered. So the government once more becomes a middle-man, and the system begins to resemble a virtual system, based on computer systems which do the job without actually moving. Until everyone stops moving, such duplication increases costs degrade the quality and start riots. We must move people less, and move money more. At one careless first glance, that sounds like shifting money between demographic groups, but picking winner and loser demography has repeatedly been shown to be too divisive; almost a prescription for a second Civil War. In short, we have fallen in love with a computerized virtual model, based on the faulty assumption that it is without cost. Here and there it might be tried experimentally, but it is far too early to make it mandatory. Consequently, it proves much easier to re-design the payment system, shifting money between different stages within individual lives, than to make everyone find a new doctor, just because the insurance compartment changed. It is absurd to make everyone move to Florida on his 66th birthday. Even redesigning transaction systems is not easy, but it is by far the easiest choice. Nevertheless, there is still too much friction in the various systems to make such improvements mandatory.
The best model to adopt is that of the university president who ordered a new quadrangle to be built without sidewalks. Only after the students had worn paths in the lawn along their favored routes to class, did he cover the paths with concrete sidewalks.
The issue at the moment is that money originates with employers, supporting the whole system, but their employees no longer get very sick. To reduce complaints, they are given benefits to spend which they really don't need, raising the cost of transferring the money to retirees who do need the money but are covered by Medicare. We are in danger of repeating that whole cycle with Medicare, piously calling it a single payer system, when in fact it would be a single borrower system as long as the Chinese don't collapse. Expensive sickness now centers in the retirees, but within fifty years a dozen diseases will be conquered, and we will then need the Medicare money to pay for retirement living. Constructing massive systems without that vision will just make it harder to replace them. We are, in summary, in great need of a gigantic funds transfer system, since moving the people and institutions to match the funding is preposterous. But as long as the system has two champions (Medicare and the Employer-based system) in possession of all the money, we flirt with collapses in order to force rearrangements.
All of this is divisive, indeed. For years to come, the easiest thing to move around will be money. Eventually, institutions and clients can sort themselves out for geographical unity, and probably improved efficiency. But a financing system with the money for sickness in the hands of people who aren't sick, plus a governmental, system dedicated to an age group with almost all the coming sickness but unsustainable finances -- is a wonder to behold. Therefore, we offer the Health Savings Account as having the flexibility to collect money from the young and healthy, invest it for decades, and use it for the same people when they get old. It can cross age barriers and follow illnesses, or it can remain with survivors and pay for their protracted retirement. If Medicare is modularized, it can supply the money to buy pieces as they begin to appear less desirable. It can redistribute subsidies to the poor if an agency gives it money, and it can adjust to changes in geography and science, since all it works with, is money. And it avoids redistribution politics by giving the same people, their own money.
For all these reasons, Health Savings Accounts on a lifetime or whole-life model seem the logical place to fix the broken vehicle, while we somehow keep its motor running. If successful, it will grow too big, so it should remain modular from the start. It has feelers in the insurance, finance and investment worlds. It could easily arrange branch offices for retail marketing and service. It should have networks for research and lobbying. But as long as it retains the branch concept and avoids the imperial one, it should manage to keep the doctors, patients and institutions functioning as the whole universe rearranges itself -- at its own speed. The first major step in this process would be to clear up some regulations which did not anticipate it. With Classical HSA adjusted for the interim role, the design stage can be undertaken to link the pieces of a person's health financing. Variations of lifetime Health Savings Accounts can be tried in demonstration projects, perhaps staying out of the way of the Affordable Care Act by unifying parts other than age 21 to 66, as the New Health Savings Account. And then seeing which version of lifetime HSA survives the squabbling. That isn't all. The really big picture is to absorb the pieces of Medicare, one by one, as sickness retreats from being the central cost, and the cost of retirement becomes the real threat.
(Healthcare for Citizen Lobbyists)
There are a few other ideas about the cost of medical care, which I would say are widely held, but the truth of which seems dubious. In fact, I would characterize them as misconceptions. If misconceptions are held long enough, they eventually work their way into the tax code.
Is Preventive Medicine Always and Everywhere Less Expensive?
As heads nod vigorously in support of prevention, please notice in general usage it suggests several different things. The overall implication is that small interventions for everyone are less expensive to society; less expensive, that is than large expenses for the few who get the disease. That is clearly not invariably the case, and unfortunately, in a compulsory insurance world, it may seldom be the case. The point is not that preventive care is a bad thing, because it is often a very good thing, even by far the very best thing. It's just not necessarily cheaper.
Take for example a tetanus toxoid booster, which ten years ago cost less than a dollar for the material. Recently in preparation for a vacation trip, I was charged $85 dollars by my corner drugstore, just for the material. If you do the math, $85.00 times millions of Americans is a far greater sum than the present aggregate cost of Americans actually contracting tetanus, especially following the advice to have a booster shot every ten years. This becomes more certain if one adds in the cost of administration. The vaccine is quite effective, Americans had almost no cases in the Far Eastern Theater in World War II. The British who did not vaccinate routinely had large numbers of often fatal cases. Furthermore, even if the tetanus patient survives, the disease is hideously painful. Is it better to immunize routinely? Yes, it is. Is it cheaper? I'm not entirely sure, because I have no access to the production costs of tetanus toxoid. But it certainly seems likely it isn't cheaper. Malpractice costs, which are a different issue entirely, complicate this opinion.
Better, yes. Cheaper? No.
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Preventive Medicine
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Something, probably malpractice liability, has transformed an effective preventive procedure from clearly cost-effective to -- probably not cheaper for a nation which no longer has horses on the streets, but still has horses on farms and ranches. This is presently mostly a malpractice liability problem for the vaccine maker, not a preventive care issue. Take another well-known example. In the case of smallpox vaccination, it is now clearly more expensive to vaccinate everyone in the world than to treat the few actual cases. The waffle currently being employed is to limit vaccination to countries where there are still a few cases, hoping thereby to eradicate the disease from the planet.
Over and over, an examination of individual vaccinations shows the answer to be: better, yes, cheaper, no; with the ultimate answer depending on accounting tricks in the calculation of cost, cost inflation because of third-party payment, and related perplexities. To be measured about it, excessive profitability of some preventive measures could act as a stimulant for finally calling off prevention, by taking on a briefly more expensive campaign to achieve final eradication. Somewhere in this issue is the whisper that "natural" gene diversity of any sort must never be totally eliminated, a viewpoint which even the diversity philosopher William James never openly extended to include virulent diseases.
Routine cervical Pap tests, routine annual physical examinations, routine colonoscopies and a host of other routines are in general open to questioning as to cost-effectiveness. The issue is likely to increase rather than go away. Much of the current denunciation of "Cadillac" health insurance plans focus on the elaborate prevention programs enjoyed by Wall Street executives, college professors, industrial unions, and other privileged health insurance classes. A more useful approach to a borderline issue might focus on removing such items from health insurance benefit packages, particularly those whose cost is subsidized, either directly or by income tax deductions. Those preventive measures which demonstrate cost-effectiveness can have their subsidy restored, or be grouped together into a category which must compete for eligible access to limited funds.
The inference is strong that unrestrained substitution of community prevention for patient treatment escalates costs rather considerably, and -- at the least -- needs to demonstrate more cost-effectiveness before subsidy is extended. While self-interest is a possibility if only physicians are consulted, total reliance on bean-counters could eliminate benevolent judgment entirely. Community cost effectiveness is a ratio, and both sides must be fairly argued. Don't forget many people quietly recognize the need for gigantic cost-shifting between age groups. Spending money on young workers to pay for shots is one way to shift the cost of elderly illness, backward to the employer they no longer work for. It can be a pretty expensive way to do it.
In the final analysis, without some form of patient participation in the cost, this issue is probably unsolvable. To launch a host of double-blind clinical trials to find out the truth will lead to answers of some sort, which will quickly be undermined by price/cost confusion, leading to increasingly futile regulation. Including preventive costs in the deductible at least allows public participation in the decisions and true balance to begin; which is to say, even universal preventive care admiration cannot be adequately assessed except in the presence of a substantial open market for the product.
Much "preventive" care is really "early detection" or "early management". That's entirely different. When the goal changes so subtly, it is often not possible to judge what is worthwhile, except by placing some price on pain and suffering. The abuse by the trial bar of the monetization of pain and suffering in the malpractice field, ought to be a gentle reminder of that. Preventive colonoscopy has clearly caused a decline in deaths from colon cancer; that's a medical judgment and a transitional one. Whether the cost of catching those cancers early was cost-effective is largely a matter of colonoscopy cost, and on digging into it, will be found to be as much an anesthesia issue as a colonoscopist one. In any event, it is not one where the opinion of insurance reviewers should be decisive. If the litigation industry moves to make an omission of prevention a new source of action, it will surely be a sign it is a past time, to caution the public about the direction of things.
Average Hospital Profit Margins: Inpatient 2%, Accident Room 15%, Satellite Clinics 30%
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Payment By Diagnosis
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Outpatient is Not Necessarily Cheaper Than Inpatient For the Same Problem. Medicare provides half of the hospital revenue; the other half is often dragged into a uniform approach. The reimbursement mostly has nothing to do with the itemized bills hospitals send and may have little to do with production costs. The DRG (Diagnosis-Related Groups) system for reimbursing hospitals for inpatients is thus not directly based on specific costs in the inpatient area. It is related to clustered diagnoses lumped into a DRG group, and then assumes overpayments will eventually balance underpayments within individual hospitals.
That last point, depending on the Law of Large Numbers, is questionable, and especially so in small hospitals. When two million diagnoses are condensed into 200 Diagnosis groups, group uniformity just has to be uneven. Reimbursement means repayment, but this interposed step often interferes with that definition. Someone in the past fifty years discovered the reimbursement step was an excellent choke point. Manipulating the reimbursement rates without changing the service is a handy place to choose winners and losers; it's largely out of sight of the people who would recognize it for what it is. Furthermore, for various DRG groups, or for all of them, it becomes possible to construct a fairly tight rationing system for inpatient costs.
The degree to which actual production costs match a particular DRG reimbursement rate is blurred by inevitable imprecision in the DRG code construction. It is impossible to squash a couple of million diagnoses into two hundred code numbers without imprecision. It works both ways, of course. The coders back at the hospital will seek weaknesses out, experimentally. A grossly generalized code is placed in the hands of hospital employees, resulting in a system which suits both sides of the transaction, but is one which ought to be abolished, on both sides, by computerizing the process. At least, computers could avoid the issue of mistranslating the doctors' English into code.
The overall outcome with Medicare is an average 2% profit margin on inpatients during a 2% national inflation. This is far too tight to expect it to come out precisely right for everybody. And in fact, inflation has averaged 3% for a century but is 1.6% right now. The Federal Reserve Chairman desperately tries to raise it, but it just won't go up. If you don't think this is a serious issue, just reflect that our gold-less currency is supported by a 2% inflation target which the Federal Reserve is proving unable to maintain.
For technical reasons, the same forced loss is not true of outpatient and emergency services, which usually use Chargemaster values. Emergency services are said to approximate 15% profit margins, and outpatient services, 30%. It is therefore difficult to believe anyone would start anywhere but the profit margin, and work backward to managing the institution. In consequence, the buyer's intermediary has stolen the pricing process from the seller. Without the need to communicate one word, prices rise to the level of available payment and then stop there. But let's not be too specific in our suspicions. Some incentive to direct patients to the emergency and outpatient areas must develop, and is acted upon in the pricing. It just doesn't have to be so confusing and so high-handed.
Any assumption by the public that outpatient care is cheaper than inpatient hospital care is likely to be quite misleading. Short of driving the hospital out of business, revenue in this system is whatever the insurance intermediary chooses to make it. There was a time when the intermediary was Blue Cross, and behind them, big business. Nowadays, it is Medicare, but Obamacare probably aspires to the turf.
Let's test the reasoning by using different data. Because hospital inpatient care is reimbursed at roughly 106% of overall cost, while hospital outpatient care is reimbursed at roughly 150%, hospitals are impelled to favor outpatient care, no matter which type of care happens to have the cheapest production cost, the best medical outcomes, or enjoys the greatest comforts. Instead, the rates and ratios are ultimately determined by magazine articles and newspaper editorials. At some level within the government, a political system responds to what it thinks is public opinion, vox populi est vox Dei. No matter what their personal feelings may be, hospital management encounters more quarrelsomeness on wages in the inpatient area, less resistance in the outpatient and home care programs. So, true costs must actually rise in the outpatient area, sooner or later, following the financial incentives. Personnel shortages follow, as does friction between hospitals and office-based physicians. The process is circular, but the origin of favoring outpatient care over inpatient care was primarily driven by some accountant reading a magazine article.
A highly similar attitude underlies the hubbub for salaried physicians rather than fee-for-service. It's a short-cut to a forty-hour week, and following that, to a doctor shortage. And following that, to enlarged medical school budgets. If anyone imagines that will save money, the reasoning is obscure.
Everybody can guess what it costs to wash a couple of sheets and buy a couple of TV dinners. Everyone fundamentally understands Society's need to transfer medical costs from the sick population to the well population. Nothing known about hotel prices justifies a 50% difference in price between inpatient and outpatient care, all else being equal. The room price mainly supports overhead costs which are unrelated to direct patient care, so those fixed costs are like migratory birds, settling to roost where it's quiet. Remember, it doesn't cost driving the system, it is now profit margins.
The Return of a Discharged Hospital Patient Within 30 Days is not Necessarily a Sign of Bad Care. Rather, it reflects the fact that hospital inpatient reimbursement is entirely based on the bulk number of admissions, not the sum of itemized ingredients. Having undermined fee for service, Medicare must resort to taxing the whole admission.
Early re-admission can, of course, be a sign of premature discharge or careless coordination with the home physician. But these issues are so remote from the basic reason for admission, that bulk punishment is unlikely to change the criticized behavior. That behavior may mean a convalescent center is convenient to a hospital, making it reasonable to move the patient without much loss of continuity of care; and treating his return to the acute facility becomes a matter of small consequence. It is also a matter of cost accounting; when you claim a hundred dollar hotel cost to be worth thousands of dollars, many distortions are inevitable. If a hospital essentially shuts down on weekends, for example, there actually might be better care available somewhere else.
Imposing a penalty for returns to the hospital post-discharge has certainly changed behavior, but it is far from clear whether institutions are better as a result. Without a detailed study of longitudinal effects and costs, this threat is no more than an untested experiment. Without access to accounting practices, doctors assume the penalty for a high re-admission rate merely affirms that hospital insurance reimbursement by DRG is solely dependent on the discharge diagnosis, therefore bears little relation to the quality of care. Given a particular diagnosis, reimbursement is totally independent of any other cost. When all you have is a hammer, everything looks like a nail to the DRG.
The legitimate reasons for re-admission to the hospital are many and varied. Collectively, they could well constitute a general attitude on the part of a particular hospital that it is reasonable to send many patients home a little early in order to achieve greater overall cost savings -- in spite of sustaining a few re-admissions. But this is somewhat beside the point. The insurance companies accept the fallacy that favoring readmission is the only way a hospital can increase reimbursement under a DRG system. This is merely a debater's trick of redefining the issue, from true cost to reimbursement amount. More or fewer tests, longer or shorter stays have no effect, but readmission can double reimbursement. Consequently, re-admission has been stigmatized as invariably signifying careless treatment, justifying a penalty reduction of overall reimbursement. This is high-handed, indeed. It would require a research project to determine which of the alleged motives is actually operational.
The Doughnut Hole: Deductibles versus Copayments. To understand why the doughnut hole is a good idea, you have to understand why copay is a flawed idea. In both cases, the purpose is to make the patient responsible for some of the cost in order to restrain abuse. As the expression goes, you want the patient to have some skin in the game. The question is how to do it; the doughnut has not been widely tried, but the copayment approach is very familiar: charge the patient 20% of the cost, in cash.
This co-pay idea finds great favor with management and labor in negotiations because the premium savings are immediately known. If the copayment is 10%, then employer cost will be decreased by 10%; if it is 50%, the cost is reduced by 50%. In midnight bargaining sessions, such simplicity is much appreciated. However, the doughnut hole was not devised to make negotiations simpler for group insurance, it was devised to inhibit reckless spending, theoretically unleashed once the initial deductible has been satisfied.
Health insurance companies also like both co-pay and doughnuts for questionable reasons. Both offer an opportunity to sell two insurance policies as two pieces of the same patient encounter, adding up to 100% coverage, but eliminating the patient's skin in the game. Doubling the marketing and administrative fees seems like an advantage only to an insurance intermediary, while it totally undermines the incentive of restraining patient overuse. In practice, having two insurances for every charge has led to mysterious delays in payment of the second one, even though they are often administered by the same company. Physicians and other providers hate the system, not only because it involves two insurance claims processes per claim, but because it often makes it impossible to calculate the residual after insurance, i.e., patient cash responsibility, until months after the service has been rendered. Patients often take this long silence to imply payment in full, and disputes with the provider are common. Long ago, older physicians warned the younger ones, "Always collect your fees while the tears are hot."
It has long been a mystery why hospital bills take so long to go through the system; at one time, protracting the interest float seemed a plausible motive. However, the persistence of delayed processing during a period of near-zero interest rates makes this motive unlikely. It now occurs to me that the reimbursement of health insurance costs by the business employer is related to corporate tax payments, and hence to the quarterly tax system. Using the puzzling model of a monthly bank statement for online reporting would have some logic, but great confusion, attached to the bank statement approach for group payment utility. But in the end, I really do not understand why health insurance reimbursement or even reporting to the patient, should take so many months, and cause so much difficulty. Recently, the major insurance companies have started to imitate banks by putting the monthly statement continuously online on the Internet. If doctors find a way to be notified, the billing cycle could be speeded up considerably, and even the deplorable custom of demanding cash in advance may abate. The intermediaries probably won't do it, so it is a business opportunity for some software company, and a minor convenience for the group billing clerk.
So, the idea of a doughnut hole was born, after empirical observation about what was owed on two levels, one for small common claims, and another for big ones. Formerly, the patient either paid cash in full or was insured in full, so arriving at the Paradise of full coverage is purchased in cash within the first deductible. Unfortunately, once that last threshold was crossed, the sky became the limit. Some way really had to be found to distinguish between extravagant over-use, and the use of highly expensive drugs, particularly those still under patent protection. The idea was generated that if the two levels of the doughnut hole were calculated from actual claims data, there might often be a clear separation of minor illnesses from major ones. Since the patient would ordinarily be uncertain how far he was from triggering the doughnut hole, the restraint of abuse might carry over, even into areas where the facts were not as feared.
It is too early to judge the relative effectiveness of the two different patient-responsibility approaches, but it is not too early to watch politicians pander to confusion caused by an innovative but unfamiliar approach, while the insurance administrators simplify their own task by applying a general rule, instead of tailoring it to the service or drug. And by the way, the patients who complain so bitterly about a novel insurance innovation, are deprived by the donut hole of a way to maintain "first-dollar" coverage, which is a major cause of the cost inflations they also complain so much about. Some people think they can fix any problem just by loudly complaining about it. Perhaps, in a politicized situation, it works; but it doesn't fool anyone.
Plan Design. The insurance industry, particularly the actuaries working in that area, have long and sophisticated experience with the considerations leading to upper and lower limits, exclusions and exceptions. Legislative committees would be wise to solicit advice on these matters, which ordinarily have little political content. However, the advisers from the insurance world have an eye to bidding on later contracts to advise and administer these plans. They are not immune to the temptation to advise the inclusion of provisions which invisibly slant the contract toward a particular bidder, and failing that, they look for ways to make things easier, or more profitable, for whichever insurance company does get the contract. The doughnut hole is a recent example of these incentives in action; no member of any congressional committee was able to explain the doughnut for a television audience, so it was ridiculed. The outcome has been a race between politicians to see who could most quickly figure out a way to reduce the size of the hole. The idea that the size of the hole was intended to be an automatic adjustment to experience, seems to have been totally lost in the shuffle. Asking industry experts for advice is fine, but it would be well to ask for such advice from several other sources, too.
Fee-for-Service Billing. In recent years, a number of my colleagues have taken up the idea that fee-for-service billing is a bad thing, possibly the root of all evil. Just about everyone who says this, is himself working for a salary; and I suspect it is a pre-fabricated argument to justify that method of payment. The obvious retort is that if you do more work, you ought to be paid more. The pre-fabricated Q and A goes on to reply, this is how doctors "game" the system, by embroidering a little. I suppose that is occasionally the case, but the conversation seems so stereotyped, I take it to be a soft-spoken way of accusing me of being a crook, so I usually explode with some ill-considered counter-attack. My basic position is that the patient has considerable responsibility to act protectively on his own behalf. That is unfortunately often undermined by excessive or poorly-designed health insurance. Nobody washes a rental car, because that's considered to be the responsibility of the car rental agency. A more serious flaw in the argument that we should eliminate the fee for service, was taught me in Canada.
When Canada adopted socialized medicine, I was asked to go there by my medical society, to see what it was all about. That put me in conversation with a number of Canadian hospital administrators, and the conversation skipped around among common topics. Since I was interested in cost-accounting as the source of much of our problems, I asked how they managed. Well, as soon as paying for hospital care became a provincial responsibility, they stopped preparing itemized bills. Consequently, it immediately became impossible to tell how much anything cost. The administrator knew what he bought, and he paid the bills for the hospital. But how much was spent on gall bladder surgery or obstetrics, he wouldn't be in a position to know.
So I took up the same subject with the Canadian doctors, who reported the same problem in a different form. Given a choice of surgical treatment or a medical one for the same condition, they simply did not know which one was cheaper. After a while, the hospital charges were abandoned as a method of telling what costs more, and eventually, no effort was made to determine comparative prices at all. There's no sense in an American getting smug about this, because manipulation of the DRG soon divorced hospital billing charges from having any relation to underlying costs, and American doctors soon gave up any effort to use billing as a guide to treatment choices. We organize task forces to generate "typical" bills from time to time, but these standardized cost analyses are a crude and expensive substitute for the immediacy of a particular patient's bill.
My friends in the Legal Profession make a sort of similar complaint. The advent of cheap computers created the concept of "billable hours", in which some fictional average price is fixed to a two-minute phone consultation. In the old days, my friends tell me, they always would have a conference with the client, just before sending a bill. The client was asked how much he thought the services were worth to him, and often the figure was higher than the actual bill. In the cases where the conjectured price was lower, the attorney had an opportunity to explain the cleverness of his maneuvers, or the time-consuming effort required to develop the evidence. A senior attorney told me that never in his life did he send a bill for more than the client agreed to pay, and he was a happier man for it. Naturally, the bills were higher when the attorney won the case than when he lost it, which is definitely not the case when a hospital is unsuccessful in a cancer cure. Similarly, you might think bills would be higher if the patient lived than if he died, but income maximization always takes the higher choice. So the absence of this face-to-face discussion is a regrettable one in medical care, as well.
Pertinent Questions: Three Current Tweaks to HSA.
1. Tax Equity. An alternative way to achieve more equitable taxation is to reduce corporate income tax rates since the tax deductions for donated employee health insurance is a way of making health benefits cheaper for the employer than wages would be. And health benefits are a reason corporations pay so little of the published corporate tax rate. Once benefits become equal they can be reduced, as eighty years have demonstrated. Tax equity first, then reduction, may be the best way to get corporate taxes reduced.
2. The transition-to-a-cheaper-system needs help, time, and more brackets for those who are already close to retirement. The private sector is inherently more flexible than the public sector in dealing with inflation, stock market volatility, and changing occupations. However, the public sector could readily be streamlined a great deal.
3. Longer durations for compound interest add flexibility and far greater returns without added cost to the government or client. In long duration, 6.5% returns rise far more rapidly than 3% inflation. This spread is an inherent feature of compound interest and can be enhanced by lengthening the duration. The historic spread between the curves at 11%/3% underlined by Professor Ibbotson is astounding -- and so costless it long seemed unachievable to shift its benefit a percent or two by John Bogle.
Pertinent Questions: Four Future Deep-Rooted Changes For Health Care, using HSA.
1. Although the whole-life insurance industry managed to accomplish it, a 90-year transition period is very difficult to plan for. As they say, life insurance is not purchased, it is sold. The last year of life proposal cuts the transition period to a manageable size, thus providing funding flexibility from the start. The first-year of life addresses the otherwise impossible task of pre-funding the year of your birth -- without help from somewhere. The present extended period of education before employment is being "addressed" by a declining birth rate, thus straining immigration policy. National defense alone argues this is an unwise policy to pursue in a present way. Luckily, the anti-perpetuity laws allow inheritance up to one life-span plus 21 years, an adequate period. The great danger in this is a revenue-starved government. Unfortunately, if public sector revenue became 100%, they would still claim to be starved, so their argument appears discredited. No strong argument is improved by exaggeration.
2. The public does not realize that Medicare is 50% subsidized, and therefore a single payer system aspires for the same treatment. We are already borrowing from the Chinese to pay for Medicare. As long as we have nation-states, this is too dangerous to continue. Although Medicare is regarded as sacrosanct, anything which cannot continue will stop, one way or another.
3. The balance between the harmful effects of having a rentier class must be balanced against the harmful effect (of overtaxing them) on the incentives of elderly rich people. So the proper balance probably varies with the state of the economy. When two-thirds of the population is to some degree rentiers, the situation must be approached with care. More retired people must be employed at home, while the finance industry must make more effort to prove its worth.
4. The business school and the law school are fast replacing the medical school as the preferred route to control medical care. The computer industry is not yet ready to join them. Controlling the hours and conditions of the workplace is not an acceptable route to control of a service industry, and in the long run, is self-defeating. The only way to gain respect from a professional is to be able to do what the professional does, only better and overall cheaper. Just how you accomplish that without going to medical school has not yet been explained, and "price fixing" is not an adequate description of its essence. The Professional Standards Review Organization (PSRO) devised by Senator Wallace Bennett of Utah comes pretty close, and although the AMA narrowly rejected it, reconsideration is recommended.
Originally the "lower counties" of Pennsylvania, and thus one of three Quaker colonies founded by William Penn, Delaware has developed its own set of traditions and history.
Start in Philadelphia, take two days to tour around Delaware Bay. Down the New Jersey side to Cape May, ferry over to Lewes, tour up to Dover and New Castle, visit Winterthur, Longwood Gardens, Brandywine Battlefield and art museum, then back to Philadelphia. Try it!
Millions of eye patients have been asked to read the passage from Franklin's autobiography, "I walked up Market Street, etc." which is commonly printed on eye-test cards. Here's your chance to do it.
In 1751, the Pennsylvania Hospital at 8th and Spruce was 'way out in the country. Now it is in the center of a city, but the area still remains dominated by medical institutions.
Grievances provoking the American Revolutionary War left many Philadelphians unprovoked. Loyalists often fled to Canada, especially Kingston, Ontario. Decades later the flow of dissidents reversed, Canadian anti-royalists taking refuge south of the border.