If We Want to Fix the Healthcare Mess, We Better Understand the Real Problem

This is the most depressing – but revealing – thing I have read in a long time: “the health-care sector has twice as many clerical workers as nurses and nine times as many as doctors.”

That passage is from a very good column by Robert Samuelson, in which he covers a lot of ground. He starts by expressing contempt for the demagogues attacking Congressman Ryan’s budget plan.

This predictably partisan reaction — preying upon the anxieties of retirees — must depress anyone who cares about the country’s future. It is only a slight exaggeration to say that unless we end Medicare “as we know it,” America “as we know it” will end. Spiraling health spending is the crux of our federal budget problem. In 1965 — the year Congress created Medicare and Medicaid — health spending was 2.6 percent of the budget. In 2010, it was 26.5 percent.

Demagoguery is part of politics, however, which is why I think proponents of reform are making a mistake by allowing the left to characterize this issue as a fight between the status quo and the Ryan plan. As Samuelson notes, there is no alternative to change. The only question is whether we will get consumer-oriented reform as proposed by Ryan or top-down rationing, as would be the case with Obama’s “death panel” approach.

Samuelson’s column also noted that the Congressional Budget Office is hardly a reliable source for cost estimates. I had a post yesterday discussing how the bureaucrats dramatically underestimate costs for new entitlement programs. Well, Samuelson points out that they also have a history of overestimating costs when looking at the impact of reforms that involve giving consumers some control over their health care spending.

CBO may be wrong. When a voucher system was adopted for Medicare’s new drug benefit, the CBO overestimated its costs by a third; the Centers for Medicare and Medicaid Services’ overestimate was 42 percent. When fundamental changes are made to a program, the green-eyeshade types can’t easily predict the results. Moreover, as health expert James Capretta notes, “managed care” plans in the Medicare Advantage program in 2010 did not have higher costs than Medicare’s fee-for-service for similar coverage. Under Ryan’s plan, incentives would shift. Medicare would no longer be an open ATM; the vouchers would limit total spending. Providers would face pressures to do more with less.

I don’t pretend to be an expert on healthcare, but I am firmly convinced that third-party payer is one of the big reasons for rising costs and pervasive inefficiency in the healthcare sector. When we buy goods and services with our own money, we try to get maximum value, and producers respond by trying to be efficient as possible.

In the healthcare sector, by contrast, we shop with other people’s money. Or, to be more technical, we shop in an environment where government policies result in us bearing very little out-of-pocket cost for each additional increment of health care.

As a result, we tend to be unconcerned with price. And producers respond accordingly. Here’s a rather long excerpt from a study mentioned in Samuelson’s column. Published by the National Bureau of Economic Research, it offers a neutral and dispassionate analysis of the healthcare market, but I think the information presented helps make the case that government intervention is a major problem.

In most industries, higher quality is associated with higher prices. That is not true in medical care, however, largely because of the public sector. Medicare accounts for 25 percent of physician and hospital services, and Medicaid accounts for another 13 percent. Since the 1960s, Medicare has paid providers on a fee-for-service basis, without reference to the quality of care delivered. Medicaid reimbursements are more flexible, but they are so low that many providers view Medicaid patients as effectively uninsured. As a result, about 40 percent of the market transmits incentives to provide more care but not more efficient care (Medicare) or to avoid patients who are sick (Medicaid). With so much of compensation pegged to volume, not value, inefficient care is the natural outcome. …The low level of service quality in health care is ironic given the enormous investment in non-clinical personnel. There are 9 times more clerical workers in health care than there are physicians, and twice as many clerical workers as registered nurses. This investment has not paid off in superior outcomes or better customer service, however. …Every analysis of medical care that has been done highlights the significant waste of resources in providing care. Consider a few examples: one study found that physicians spent on average of 142 hours annually interacting with health plans, at an estimated cost to practices of $68,274 per physician (Casalino et al., 2009). Another study found that 35 percent of nurses’ time in medical/surgical units of hospitals was spent on documentation (Hendrich et al., 2008); patient care was far smaller. …The obvious question about health care is why the market has not evolved to become more efficient. …who is the appropriate customer when payers consider care management. In retail trade, the customer is the individual shopper. If Wal-Mart finds a way to save money, it can pass that along to consumers directly. In health care, in contrast, the situation is more complex, since patients do not pay much of the bill out-of-pocket. Rather, costs are passed from providers to insurers to employers (generally) and on to workers as a whole. If this process is efficient, the system will act as if the individual is the real customer, since they are ultimately paying the bill. It may be, however, that the incentives get lost in the process, and efforts to innovate are not sufficiently rewarded. …About one-third of medical spending is not associated with improved outcomes, significantly cutting the efficiency of the medical system and leading to enormous adverse effects.