1. On medical innovation.
The third party payment system seriously distorts the incentives. I worked as both a consultant and then an investment banker in the healthcare sector for 12 years, and this element of the business drove me bonkers. In my experience, the companies that succeeded are the ones who successfully gamed Medicare, Medicaid and other third party payors. True innovation had little to do with their success. The exception were those sectors of the healthcare that were dominated by private payors (e.g., cosmetic surgery, dentistry, etc.).
There are four major stakeholders: patients, providers (clinicians), facilities (hospitals), and payers. They have different objectives, criteria, and decision processes. Getting material innovations imbedded requires concurrence from at least a couple and often three or four of the stakeholders. Coming up with innovations that (1) work, (2) have evidence of the type that the different stakeholders respond to, (3) have an economic model that keeps all stakeholders at least whole if not better off is really hard.
Complicating factors include:
* Key parts are highly local & fragmented (providers and facilities)
* Heavy regulatory overhang (FDA is one of many constraints)
* Low margins in some sectors means higher barriers to change (don’t rock the boat, esp given the high % of stable-ish gov’t payers)
* Little data to measure & compare real functional outcomes (vs. process outcomes like infection or readmission)
* The science is hard. Cancer is a hundred little diseases depending on what processes break, even within a disease site (e.g., breast). ‘Curing’ one doesn’t touch the other 99. (And it’s hard to prove that you ‘cured’ that one)In a fully open market environment, we might make progress on some of these issues. In the current one? It’ll be slow.
2. On how to study
I think I’ve mentioned this book here before, but a few years ago, I stumbled across ‘How to Study and Teaching How to Study’ by F.M. McMurry (1909). I certainly wish I’d been taught or found this book when I was student. To me, his 8 factors of studying are very useful in having a formula to punch through material that doesn’t come easy…One thing is for sure, McMurry’s opening paragraphs on the various study techniques of his fellow students when he was a boy could have been written yesterday about high school or even college students today.
On the topic of motivation, McMurry says that people will study intensively when they really need to learn something. His example is an Eskimo who needs to learn how to build an igloo in order to have shelter.
I not only agree with the statement, “The third party payment system seriously distorts the incentives.”, I would say the third party payment system critically distorts the incentives. Commenter “Fielding” lists a few issues, but there are quite a few more he doesn’t address. To illustrate, consider the following: (it’s an anecdote, but it’s an extensible anecdote, as I’ll explain.)
A lifelong friend of mine just had multiple bypass surgery in December. (He’s doing well.) The actual (itemized) medical bill came to about $300,000. He was “covered” under his employer-supplied health insurance – less his insurance deductible, of course. The interesting thing is that the ACA mandate is that “80 cents of every premium dollar collected by the insurer must be paid out in actual medical costs”, with the balance to cover health insurer “administrative costs”. Within that mandate, my friend’s insurance company got paid $75,000 for writing the check to the hospital/medical service providers for the $300,000 of actual medical treatment – to cover their “administrative costs”.
How is that anecdote extensible? Assuming an estimate of 50% of the roughly $3,200 Billion spent every year on “health care” is attributable to private insurance – as opposed to Medicare, Medicaid, VA, etc. Then some 25% of about $1,600 Billion – or $400 Billion – is being spent on just private health insurance carrier “administrative costs”. Note that doesn’t include hospital/service provider “administrative costs”, employer “administrative costs” or government monitoring “administrative costs”. As a matter of fact, that $400 Billion in private health insurance carrier “administrative costs” is a multiplier of hospital/service provider and employer “administrative costs”.
To put that (conservatively) estimated $400 Billion per year of just private health insurer “administrative costs” in perspective, note that, at the current price of about $50 per barrel on oil, the entire U.S. consumption of petroleum in 2015 will be less than $400 Billion.
(18.5 Million Bls/Day X $50 X 365 = $337.625 Billion)
The incentive distortions and exorbitant and multiplicative layers of “administrative costs” are only a part of the problem of the “third party payer” system. The real problem is the institutionalized and mandated exclusive reliance on “third party payer” systems.
Where is the “incentive”, or even the allowance, for individuals to pay directly for their own actual incurred health care costs, or those of others for that matter?
An “employer” is given tax incentive of having all health care insurance premiums paid for their employees being fully tax deductible as an “adjustment to gross income”.
Health insurance companies are given the tax incentive of having all actual medical expenses paid (the “80 cents of every premium dollar”) fully tax deductible as “adjustment to gross income”.
Where is the individual tax incentive, as an “adjustment to gross income”, for paying my own actual incurred health care costs – or those of others, for that matter – in the current tax code? The current ACA mandate is only that I pay a third-party-payer. And only to the extent that MY incurred actual health care costs exceed 10% of my gross income – over and above my health care insurance premiums – can be tax deductible. And then, only if I itemize.
At the end of his comment, commenter Fielding asks the question, “How do we manage patients born with high cost-to-treat genetic diseases?” I would suggest that diverting a substantial portion of those third-party-payer “administrative costs” to actual health care would go a long way to answering his question. And the only way I see of doing that is to afford the same “adjustment to gross income” tax deductibility to individuals as is currently afforded only to employers and health insurance companies. I’d be glad to contribute to others’ actual incurred health care costs, if I were only afforded the same tax incentives for doing so that are now afforded only to insurance companies and employers.
Are you sure you have the actual payment? Or is that an itemized list of charges? $300k for a CABG sounds more like charges than actual price. If it’s charges the payer likely paid a fraction of the $300k…hard to tell how much since each provider has a different approach to charges. As an aside, that’s where a lot of popular press articles on healthcare go off the rails.
That said, you’re right that there is an enormous amount of administrative overhead relating to payments. Both on the payer side and on the provider side. It consumes resources (FTE and $), removes transparency (see above), and slows innovation.
Maybe there’s enough to cover the really esoteric orphan genetic populations. There’s not enough to cover if it starts getting stretched into genetically per-disposed obesity or heart failure or cancer diseases. Not sure how to set up a policy line on that and hold it.
Self-pay also implicitly becomes an old-age tax. Since you have time to save for it that’s not a deal-breaker.
I’m mainly in favor of significantly more direct payment because I think it forces more informed tradeoffs. My anecdote: we discussed a potential course of treatment with an MD. He recommended three tests prior to initiation. When we said it wasn’t covered and we were self-pay he replied “you still need to do A, but I’ll use the B you already have and we’ll hold off on C”
When my boys were in school I noticed how little teachers taught about good ways to remember of learn better , almost as if schooling was all about signaling.