Michael Smith, M.D.
P.O. Drawer 1037
Thibodaux, LA 70301
October 2, 1981
I have just finished reading The Hospital That Ate Chicago. Thank You for recommending it. I have some observations to offer:
First, you may be interested to hear the description of trying to control hospital costs by the President of the American Association of Foundations of Medical Care. He said it was like a balloon that when squeezed at the bottom made the top larger. He believes hospitals are the most serious problem facing medicine.
Second, some years ago I presented the AAP Committee on Third Party Plans with an estimate of the potential cost of paying first-dollar coverage of small fees. Making some assumption, it goes like this:
Cost of Visit $25.00
Cost of Filling out health insurance form $ 3.00
Cost of Insurance Company to process claim and Send Check $ 5.00
Cost of Health Insurance Collection and General Administration $ 2.00
Total Administrative Costs $10 for a $25 Charge = 10/25 = 40%.
Obviously this would be nonsense. Possible ways out would be:
1. Computers in office and in the insurance company which might reduce the costs to $2.00 for each and reduce general administrative costs to under 20%.
2. Packaging small fee charges into a single â€œLimited pre-payment package of service.â€ We have done this in our office and have been able to reduce overhead. However, insurance doesnâ€™t recognize the package and we ended up making out health insurance forms for each visit. On the other hand, our preprinted forms allow us to do this for a minimal cost. I believe that with or without CHIP or an IPA-HMO that this concept is worth consideration.
3. The Lifeguard IPA manages to survive and prosper in spite of complete prepayment with the exception of a $3.00 cash outpatient insurance charge and a $10.00 cash emergency room charge.
Third, I worked for two years in a complete prepayment scheme for a coal miners local union. I donâ€™t want to do that again!
Fourth, if we believe that indigents would not be able to self-insure, as Fisher seems to believe, then where do you draw the line? Large numbers of people are borderline and the young parent is more often than not in that group. For many, a $100 deductible is a catastrophe.
Fifth, as an employer I self-insure to a $500 deductible for my employees. I hear you.
The basic problem I see with CHIP or Fisherâ€™s self-insurance is that it leads to 100 percent coverage of expensive surgical and hospital charges and invokes the moral hazard where the damage can be the greatest. Fisherâ€™s contention that there is relatively little un-needed hospitalization ignores a lot of experience. It probably reflects the way he grew up learning about medical care. We all learned to practice in an era where almost all hospital bills for patients were paid by insurance. Therefore, we took full advantage of this for our patients and the average hospitalization rate has been 1200 days/1000 population. We act as the patients advocate and get the best deal possible for them, including that extra day. It has become an ingrained habit.
In our Lifeguard IPA our hospital rate is 375. We recognize that that one extra day in the hospital will pay for the babyâ€™s entire first year of medical care in the office. Our motivation is to get the best deal for our patients and make medical care affordable to them. So prepayment isnâ€™t all bad under some circumstances.
Call it what you will, insurance is a form of prepayment. I believe we should shake the insurance mentality and look at health financing without the catastrophic colored glasses. We recognize that the manner and amount in which insurance payment is made has an effect on the behavior of patients, doctors and hospital bureaucrats.
What do we need to do to maximize child health care?
1. Get every child into the medical mainstream.
2. Encourage health insurance supervision services with the preventive and anticipatory guidance services.
3. Encourage personal care and continuity of care to reduce costs and humanize medicine.
4. Encourage early illness care and early effective treatment.
5. Reduce administrative third-party costs.
6. Reduce the overutilization of emergency rooms, hospitals and reduce unrequired surgery.
7. Make hospitals costs conscious and more efficient.
8. Insure freedom of choice and practice.
9. Retain the principle of sharing the risks.
I find first-dollar coverage with deductibles and coinsurance on hospital and surgery fees faulty in items 5 and possibly 7. Yet for the poor, the near-poor and for a lot of young families with children, it is probably essential if we really want them to have care. Packaging services will help item 5.
I find CHIP most economical. It might be a problem in items 2 and 4. Actually, if properly done, it could encourage 2 and 4. Unless restructured, it would be a problem in items 6 and 7. If properly done, i.e., charging significant coinsurance on hospital, emergency room and surgery services paid for through the catastrophic policy, it should work. A total annual out-of-pocket cap should be part of the package.
Glenn Austin, M.D.
P.S. Just received the copy of Fisherâ€™s Letter. Thanks. Look forward to seeing you in New Orleans.