How to Control the Cost of Medical Care

Neil A Kurtzman, MDGrover Murray ProfessorUniversity Distinguished ProfessorTexas Tech University HSC

Medical costs in the US are now $1.7 Medical costs in the US are now $1.7 trillion – 2003trillion – 2003

Every year grows at 2-3 times GDPEvery year grows at 2-3 times GDPThe burden of supporting our current The burden of supporting our current

system is unsustainablesystem is unsustainable

• In 1960 healthcare was about 5% of GDPIn 1960 healthcare was about 5% of GDP• Today its triple thatToday its triple that• The reasons for the increase are manyThe reasons for the increase are many

- Medicare 1965- Medicare 1965

- Separating service from payment- Separating service from payment

- Technology- Technology

• The last contract signed by the Big three US The last contract signed by the Big three US auto makers and the UAW will make health auto makers and the UAW will make health insurance costs even higherinsurance costs even higher

• The contract will make US autos even less The contract will make US autos even less competitive against foreign carscompetitive against foreign cars

• It's also unsustainableIt's also unsustainable

June ‘05

• More than 200 years ago the philosophers of More than 200 years ago the philosophers of the Scottish enlightenment concluded that the Scottish enlightenment concluded that politics could not solve virtually all of the politics could not solve virtually all of the great problems of lifegreat problems of life

• Nobody seems to have learned anything from Nobody seems to have learned anything from themthem

• Consider the politics of healthcare over the Consider the politics of healthcare over the past yearpast year

• Congress passed and the President signed a Congress passed and the President signed a prescription drug plan prescription drug plan

• That wasn’t neededThat wasn’t needed• That nobody understandsThat nobody understands• It’s 600 pages longIt’s 600 pages long• That costs no one knows how muchThat costs no one knows how much

• Why did we focus on drug costs when the Why did we focus on drug costs when the problem clearly lies elsewhere?problem clearly lies elsewhere?

• Why have we failed to realize that we are Why have we failed to realize that we are faced with an economic problem – how to faced with an economic problem – how to provide an important service to all at an provide an important service to all at an affordable price while avoiding shortagesaffordable price while avoiding shortages

• Who is to blame? Who is to blame?

• The drug companiesThe drug companies• The hospitalsThe hospitals• The insurance companiesThe insurance companies• The doctorsThe doctors• The patientsThe patients• The pressThe press• The politiciansThe politicians• The medical schoolsThe medical schools• In short, everyoneIn short, everyone

• Solutions aboundSolutions abound• But none discuss the problem that But none discuss the problem that

requires fixingrequires fixing• How do we pay for healthcare?How do we pay for healthcare?

The doctors contend that there will be at least $200 billion in administrative savings in a single-payer national insurance plan

8/13/03

• Reps Conyers and McDermott have introduced Reps Conyers and McDermott have introduced the National Health Insurance Actthe National Health Insurance Act

• Promises to save $150 billion in paperwork Promises to save $150 billion in paperwork and $50 billion by single payer bulk purchases and $50 billion by single payer bulk purchases of drugsof drugs

• This from the government that has no idea of This from the government that has no idea of its administrative costsits administrative costs

• And which if it were a private corporation And which if it were a private corporation would be in jail for accounting fraudwould be in jail for accounting fraud

“In the latter third of the (20th) century, no positive program for universal, comprehensive health services was enacted. That left the financing and organization of health services to market forces and converted health-care services to a for-profit arm of the insurance industry.”

Richmond and Fein Science, 26 Sept

2003

One wonders what alternative universe these One wonders what alternative universe these Harvard professors inhabit, because if there’s Harvard professors inhabit, because if there’s any part of our economy sheltered from any part of our economy sheltered from market forces it’s health care. Our current market forces it’s health care. Our current difficulty with high cost medical care results difficulty with high cost medical care results from the lack of market forces, not their from the lack of market forces, not their presence.presence.

• Neither the buyer or the seller negotiates the priceNeither the buyer or the seller negotiates the price• There is no price competition There is no price competition • The biggest payer is the government which writes The biggest payer is the government which writes

the rules and sets the pricesthe rules and sets the prices• This apparently is a Professor of Medical This apparently is a Professor of Medical

Economics idea of Economics idea of Market ForcesMarket Forces

“ “The lack of a comprehensive health plan leaves The lack of a comprehensive health plan leaves almost 20% of the US population without health almost 20% of the US population without health insurance. Many other individuals are insurance. Many other individuals are inadequately insured, in a complex array of inadequately insured, in a complex array of financing arrangements that result in heavy financing arrangements that result in heavy administrative costs. Because financiers have administrative costs. Because financiers have largely taken over the financing and management largely taken over the financing and management of health services, they have become politically of health services, they have become politically potent forces in maintaining the current chaotic, potent forces in maintaining the current chaotic, but largely profitable, system. Physicians and but largely profitable, system. Physicians and patients alike are being held hostage to decision of patients alike are being held hostage to decision of for-profit insurers.”for-profit insurers.”

• The medical establishment clearly wants a The medical establishment clearly wants a single payer system of health insurancesingle payer system of health insurance

• FinancersFinancers and for and for profit-insurersprofit-insurers are the are the villainsvillains

• Is this the solution to ruinous medical costs?Is this the solution to ruinous medical costs?• Should we create a $1.6 trillion dollar federal Should we create a $1.6 trillion dollar federal

bureaucracy that will both ensure adequate bureaucracy that will both ensure adequate medical care for all while simultaneously medical care for all while simultaneously restraining costs?restraining costs?

• A single payer system would effectively A single payer system would effectively double the size of the federal governmentdouble the size of the federal government

• Certainly notCertainly not• Why? Because it’s impossible (just for Why? Because it’s impossible (just for

startersstarters))

• Consider the rule book that would resultConsider the rule book that would result• The government took 600 pages just to define The government took 600 pages just to define

organicorganic• Costs would inevitably rise and services be in Costs would inevitably rise and services be in

shorter supplyshorter supply• The economic history of the 20The economic history of the 20 thth century has century has

been the failure of central planningbeen the failure of central planning• Affordable health insurance is not possible Affordable health insurance is not possible

unless affordable health care existsunless affordable health care exists

• An insurance company invests some of the An insurance company invests some of the premiums it receives thus earning money premiums it receives thus earning money allowing it to charge lower premiums than it allowing it to charge lower premiums than it would if it didn’t investwould if it didn’t invest

• The government spends, it doesn’t investThe government spends, it doesn’t invest• That medical insurance companies don’t do That medical insurance companies don’t do

much of the above is because they avoid much of the above is because they avoid competition with all their strengthcompetition with all their strength

• Why is medical care so expensiveWhy is medical care so expensive• Ask first why computers are so cheapAsk first why computers are so cheap• Every year they get better and less expensiveEvery year they get better and less expensive• Why?Why?

• DellDell• HPHP• GatewayGateway• IBMIBM• SonySony• Toshiba Toshiba

• NvidiaNvidia• ATIATI• AMDAMD• Intel Intel

Competition

A rare example of price competition in medicine.A rare example of price competition in medicine.

What would this cost if paid for by insurance What would this cost if paid for by insurance

or Medicare?or Medicare?

No one hates competition more than No one hates competition more than businessmenbusinessmen

People of the same trade seldom meet together, People of the same trade seldom meet together, even for merriment and diversion, but the even for merriment and diversion, but the conversation ends in a conspiracy against the conversation ends in a conspiracy against the public or in some contrivance to raise prices.public or in some contrivance to raise prices.

Adam SmithAdam SmithWealth of NationsWealth of Nations 17761776

• Everybody is for competition except as it Everybody is for competition except as it applies to themapplies to them

• Unions want tariffs on cheaper foreign goodsUnions want tariffs on cheaper foreign goods• School boards and teachers unions oppose School boards and teachers unions oppose

school vouchersschool vouchers• Farmers want subsidies and tariffsFarmers want subsidies and tariffs• Drug companies collude with government to Drug companies collude with government to

avoid price competitionavoid price competition

• Universities also hate competitionUniversities also hate competition• They lobby their state legislatures to help them They lobby their state legislatures to help them

avoid itavoid it• Texas A&M doesn’t want TTU to have a vet Texas A&M doesn’t want TTU to have a vet

schoolschool

• In free society goods and services are rationed In free society goods and services are rationed by priceby price

• In healthcare there is no price rationing or In healthcare there is no price rationing or competitioncompetition

• Thus demand is limitless and costs are ruinousThus demand is limitless and costs are ruinous

• A single payer system would eliminate what A single payer system would eliminate what little competition there islittle competition there is

• It would further stimulate demand and It would further stimulate demand and increase cost and/or create shortagesincrease cost and/or create shortages

• It is exactly the wrong approach to the It is exactly the wrong approach to the problem of affordable medical care for allproblem of affordable medical care for all

• Consider the movie Consider the movie The Barbarian InvasionsThe Barbarian Invasions• Winner of the Academy Award for Best Winner of the Academy Award for Best

Foreign Language film of 2003Foreign Language film of 2003• Depicts the most government controlled Depicts the most government controlled

medical system in the Western world – that of medical system in the Western world – that of Quebec Quebec

• It’s not about medicine, but its protagonist has It’s not about medicine, but its protagonist has a terminal illnessa terminal illness

• Part of it is set in a Montreal hospitalPart of it is set in a Montreal hospital• Its physical plant is falling apartIts physical plant is falling apart• Its medical staff is monstrously indifferentIts medical staff is monstrously indifferent• It is inefficient and corruptIt is inefficient and corrupt• The only way to get decent care is to go to the The only way to get decent care is to go to the

US or bribe hospital administrators and union US or bribe hospital administrators and union chiefschiefs

• The movie was made by French-CanadiansThe movie was made by French-Canadians• If its depiction of local medical care is only If its depiction of local medical care is only

5% correct – don’t get sick in Quebec 5% correct – don’t get sick in Quebec • They have managed to They have managed to addadd shortages to ever shortages to ever

rising costsrising costs

• The perfect is the enemy of the goodThe perfect is the enemy of the good • Most poor people are poor temporarilyMost poor people are poor temporarily• A good but imperfect health care system is A good but imperfect health care system is

better than chaosbetter than chaos• Two generations of Americans have been Two generations of Americans have been

conditioned to see healthcare as an unlimited conditioned to see healthcare as an unlimited entitlement – in this regard they resemble the entitlement – in this regard they resemble the East Germans East Germans

• An American family that earns $50,000/yr and An American family that earns $50,000/yr and has pets spends about $1000/yr on Vet bills has pets spends about $1000/yr on Vet bills

• Spending a similar amount on human Spending a similar amount on human healthcare is seen by many as an onerous healthcare is seen by many as an onerous burdenburden

How Could Medical Care be Reformed?How Could Medical Care be Reformed?

Untie it from employmentUntie it from employmentEmployers would give what they Employers would give what they

currently spend on health insurance to currently spend on health insurance to their workerstheir workers

The government would mandate the The government would mandate the terms of a minimal health insurance terms of a minimal health insurance policy which would be required from allpolicy which would be required from all

• Everyone would be required to have the basic Everyone would be required to have the basic minimum policyminimum policy

• Proof of insurance would be required as it now Proof of insurance would be required as it now is for drivers licensesis for drivers licenses

• The poor would be given health insurance The poor would be given health insurance coupons similar to food stampscoupons similar to food stamps

• Insurance companies would compete for their Insurance companies would compete for their customers by offering lower prices or greater customers by offering lower prices or greater coveragecoverage

• No rates for services would be set by insurance No rates for services would be set by insurance companies or the government companies or the government

• Every patient would pay the provider directlyEvery patient would pay the provider directly• The insurance company would pay the patient The insurance company would pay the patient

whatever was billed less a deductiblewhatever was billed less a deductible• Each policy would have a limit, when it was Each policy would have a limit, when it was

exceeded the patient would bare the entire financial exceeded the patient would bare the entire financial burden until catastrophic health insurance kicked inburden until catastrophic health insurance kicked in

• Unused benefits would accrueUnused benefits would accrue• This would encourage patients to shop both for This would encourage patients to shop both for

insurance and medical careinsurance and medical care

• Price competition by providers and hospitals Price competition by providers and hospitals should be mandatoryshould be mandatory

• The part of the government that must be The part of the government that must be involved is not HHS, but rather the Dept of involved is not HHS, but rather the Dept of Justice – the Anti-Trust Division Justice – the Anti-Trust Division

• The government should encourage the growth The government should encourage the growth of specialty hospitals - it just put a of specialty hospitals - it just put a moratorium on new onesmoratorium on new ones

• They weren’t competing in any meaningful senseThey weren’t competing in any meaningful sense• They were just taking well insured patients away They were just taking well insured patients away

from full service hospitalsfrom full service hospitals• In a truly competitive system they would have to In a truly competitive system they would have to

offer better prices to surviveoffer better prices to survive• Any hospital administrator who threatened his Any hospital administrator who threatened his

medical staff with loss of privileges if they medical staff with loss of privileges if they worked at a competing hospital would be worked at a competing hospital would be vulnerable to the Dept of Justicevulnerable to the Dept of Justice

• Insurance companies would offer more Insurance companies would offer more expensive policies for those who wanted to expensive policies for those who wanted to pay more for better coveragepay more for better coverage

• Inherent in any workable system is that Inherent in any workable system is that coverage will be unequalcoverage will be unequal

• This is very hard for Westerners to acceptThis is very hard for Westerners to accept• The alternative, however, is bankruptcyThe alternative, however, is bankruptcy

• Ultimately we are all going to pay the cost of Ultimately we are all going to pay the cost of our healthcareour healthcare

• It is in our best interests to keep the costs as It is in our best interests to keep the costs as low as possible low as possible

The Drug CompaniesThe Drug Companies

Why are their prices high?Why are their prices high? They avoid competitionThey avoid competition They all make statins, ACEIs, ARBs, etcThey all make statins, ACEIs, ARBs, etc And they charge more or less the same pricesAnd they charge more or less the same prices They should be forced to price competeThey should be forced to price compete

• Here’s where the government comes inHere’s where the government comes in• The full force of the anti-trust laws should be The full force of the anti-trust laws should be

usedused• See what happens to drug prices when the DOJ See what happens to drug prices when the DOJ

threatens to break up Pfizer threatens to break up Pfizer • Government also needs to monitor safety and Government also needs to monitor safety and

fight fraudfight fraud• But it must encourage, not discourage, But it must encourage, not discourage,

competitioncompetition

• Price controlsPrice controls• ShortagesShortages• Increased costs (taxes and fees)Increased costs (taxes and fees)• Rationing either by fiat or delayRationing either by fiat or delay

Single payer system

• Untie health insurance from employmentUntie health insurance from employment• Give currently insured workers what their Give currently insured workers what their

companies are currently paying for health companies are currently paying for health insuranceinsurance

• Make health insurance premiums tax Make health insurance premiums tax deductible as they are nowdeductible as they are now

• Allow people to buy whatever policy they can Allow people to buy whatever policy they can affordafford

Rationing by Price

• Competition would lower costs Competition would lower costs • People would shop for the best policy they can People would shop for the best policy they can

find – eg, do you need a mammogram every find – eg, do you need a mammogram every year? Will one every other year do?year? Will one every other year do?

• Reconnect the service with the paymentReconnect the service with the payment• Politically difficult to doPolitically difficult to do• Providers must offer price competitionProviders must offer price competition• Only them will costs fallOnly them will costs fall

• The most important factor driving costs has been new technology

• It incrementally improves care, but exponentially raises costs

• Medical care has increased 11% a year for the last four decades

• With price competition technology would lower costs

• Only in Medicine does better technology raise prices

• Also needed is tort reformAlso needed is tort reform• Politics trumps economicsPolitics trumps economics• Which is why we’ll probably make the wrong Which is why we’ll probably make the wrong

choice about how to manage healthcare choice about how to manage healthcare • But it’s not inevitable that we make the wrong But it’s not inevitable that we make the wrong

choicechoice• Our current system is bad, a single payer one Our current system is bad, a single payer one

could be even worsecould be even worse• We should consider other alternativesWe should consider other alternatives

Mancur Olson: The more important the system Mancur Olson: The more important the system the more likely it is to be reformed only after it the more likely it is to be reformed only after it collapsescollapses

• Why have we failed to debate alternative Why have we failed to debate alternative solutions to the healthcare crisis?solutions to the healthcare crisis?

• Virtual ignorance of basic economics by the Virtual ignorance of basic economics by the public and the presspublic and the press

• A few years ago the Nobel Prize in Economics A few years ago the Nobel Prize in Economics was awarded for showing the people don’t was awarded for showing the people don’t make rational economic decisionsmake rational economic decisions

- saving $15- saving $15

• The furious reaction to Chairman Greenspan’s The furious reaction to Chairman Greenspan’s warning about Social securitywarning about Social security

• No will to reform SS even though everyone knows No will to reform SS even though everyone knows it’s neededit’s needed

• People would rather get $1000 a month that buys People would rather get $1000 a month that buys $500 worth of goods and services than get $500 worth of goods and services than get $750/month that buys $750 worth of goods and $750/month that buys $750 worth of goods and servicesservices

• When I was chairman of the Dept of Int Med I When I was chairman of the Dept of Int Med I couldn’t get most doctors to understand that they couldn’t get most doctors to understand that they were better off making $100K in Lubbock compared were better off making $100K in Lubbock compared to $120K in New Yorkto $120K in New York

• The failure of America’s universities to The failure of America’s universities to seriously debate the funding of medical careseriously debate the funding of medical care

• An almost total lack of intellectual diversity in An almost total lack of intellectual diversity in America’s universities America’s universities

• Intellectual diversity is as important as any Intellectual diversity is as important as any other kind other kind

• It’s what tenure was created for It’s what tenure was created for

• Chairs and deans don’t want to fill their Chairs and deans don’t want to fill their faculties with professors who disagree with faculties with professors who disagree with themthem

• John Stuart Mill has recently been quoted John Stuart Mill has recently been quoted ridiculously out of contextridiculously out of context

• But he said that vigorous debate was the only But he said that vigorous debate was the only way to approach the truth way to approach the truth

• If we don’t have a debate about healthcare If we don’t have a debate about healthcare we’ll have a disasterwe’ll have a disaster