Ross Douthat in the Times this morning summarizes our healthcare problems succinctly:

The Catastrophic Option

Three major problems plague American health care. The cost of premiums is eating up an ever larger share of take-home pay. The cost of our public health care programs is eating up an ever larger share of the federal budget. And millions of people who need insurance are priced out of the market.

Now that Max Baucus’s version of health care legislation has been blessed, at least provisionally, by the hands of Senator Olympia Snowe of Maine, it’s increasingly likely that Congress will pass reforms that address the third problem, while making the first two problems somewhat worse.

There is a more fundamental problem with our healthcare that will undermine all current attempts at reform.  John F. Opie looks at one small part of the debate:

What is Fundamentally Wrong With Health Care Plans…

There is one thing fundamentally wrong with the current House and Senate Health Care Reform plans.

Both ignore market realities.

By market realities I mean how and why the markets function: supply and demand.

Insurance sellers offer coverage for health-related expenditures in return for a cash flow from their customers. The size of this cash flow is dependent on two things, and two things only:

1) Risk
2) Coverage

Tamper with either of these, and you destroy the business model of insurers: if they cannot charge for increased risks, they will have to absorb those costs, which, given the fact that the insurance companies are businesses, means that they will increase base rates to cover those costs.

The same is true for increasing what is covered and who is covered. There are people out there whose lifestyles are so risky that no one wants to provide them with coverage, since there is little or no likelihood that extreme costs cannot be avoided; there are coverages out there as well that provide services that have virtually nothing to do with health-related issues, but rather are for comfort or for having fun. My insurance, for instance, doesn’t cover going to the spa for relaxation; if it did, I’d be paying extremely high insurance rates that would, in sum, exceed what I would pay if I paid for the spa trips myself.

The crux of the problem is that Medical care costs more than people would like it to cost.  Our insurance system hides the true cost of insurance and has engendered the belief that medical care is, or should be, essentially free.  A variant is the shibboleth that “healthcare is a right not a privilege.”

(A radio commercial that I recently heard features a little boy explaining why his mother should buy him a new video game because they have no co-pays or deductibles with their new insurance plan!)

Our current set-up hides costs, shifts expenses, and leaves everyone unsatisfied.  All the incentives are skewed away from efficiency.  Patients do not know the true cost of the services they are using.  Doctors usually do not know the true costs of the various treatments they offer.  Large insurers, especially government programs (Medicare and Medicaid) use their heft to pay below market fees for services which means that costs must be hidden and borne by private insurers and those who pay out of pocket or out of network.

Government regulations add expenses that make medical insurance and care more expensive than it should be.  For example, the various mandates in all insurance programs means that we all must share the cost for expensive treatments that are used by a tiny minority (and are often elective) or are of uncertain efficacy.

The current plans working their way through Congress all depend on the kinds of top down management that leads to shortages, rationing, decreased innovation, and a decline in care.

Only a Congress that fails basic math and economics would press ahead with plans promising to add millions to the insurance rolls while also insiting they will be saving money.  It is a farce and a travesty.  We are going to exchange a system that works for most people for a system that works less well, and increasingly so, for almost all, and as a bonus, the price tag will escalate out of sight.  As I have mentioned before, the worst impact will be on the pace of innovation, innovation which now assures that most of us who are relatively healthy in our 40s and 50s have a good chance to make it to our 90s and 100s in good health and with a good quality of life.

As noted in past posts on healthcare:

The effects on innovation:

Killing the Goose

Medicine is in the early stages of becoming an information science.  It is following the same arc as other information technologies, with extremely expensive innovations available for wealthy adopters (eg, laser eye surgery for $5000 per eye in 2000) and a rapidly declining price making it available to everyone else shortly thereafter. (Laser surgery is now available for ~$250 an eye in 2009.)  We are beginning to understand the fundamental defects in cancers, heart disease, even many brain illnesses, the entire gamut of biological errors that our flesh is heir to; to abort our progress now in the name of fairness would be unfair to all of us.  We would be destroying the goose that lays the golden egg of medical progress so that we could all equally share in the roast goose; perhaps delicious today but impoverishing us all down the road.

The insidious notion of “best practices”:

A Dangerous Health Care Misunderstanding

The point is that at any given moment, our knowledge of best treatments for any individual is limited and constantly evolving. The “best practices” today may well be superseded or even contradicted by new “best practices” as our knowledge grows.

Further, Medicine is at a revolutionary moment:

We are in the earliest stages of Individualized Medicine.  We can already identify specific tumor markers and genes that indicate specific treatments.  One day this will be true for every tumor; today it is true for a small fraction of cancers.  Before we arrive at a time where an individual’s cancer treatment is inexpensive and routine, we must first pass through a time when an individual’s cancer treatment is extraordinarily time intensive, expensive, and anything but routine.

Government run health care will destroy, or at best indefinitely delay, the advent of Individualized medicine.  If the guiding principle behind the cost savings of Government Health care is “to concentrate on the general level of care and not to squander a lot on long-odds cases” and “comparative effectiveness research”  we will be effectively enshrining the status quo as the gold standard of affordable medical care. How could we expect an insurance plan that has an overriding interest in minimizing costs to pay for a new treatment that is unproven and much more expensive than the current “best practice”?  Even if there are some patients who will benefit, it usually (as above) takes a long time, and millions of cases, before significant outcome improvements can be conclusively shown to exist.  This is a prescription for stagnation in Medicine.

Finally, a look at some of The Healthcare Debate Premises, including the idea that American healthcare does not provide good value for the expense and the zero-sum thinking of the Obamacare proponents:

First of all, the comment that “our care is also not necessarily world class overall either” is simply incorrect.  There are reasons people from around the world come to America for care that they cannot receive at home.  But leaving such notions aside, there is much to agree with in my friend’s brief note.  It is a banal truth that “No system is perfect.”  If that were the end of it, there would be nothing to discuss.  However, the idea that “Our system is discriminatory and not available to all” is worth parsing.

I do not know what my friend means by claiming our system is discriminatory.  If by discriminatory he means that not every person can have access to any Doctor, I suppose there is some obvious truth to that.  Otherwise I am at a loss.  No one can be turned away from an Emergency Room.  No one is denied Medical care because they lack the means to pay.  Certainly, if someone has enough money they can afford to go to the best institutions and the most renowned Doctors (who often do not accept most insurance.)  People routinely go “out of network” for care when they are dissatisfied with their treatments.  Because their insurance premiums have been held down by using only approved in-network Physicians who accept lower fees for the privilege, the patients are expected to pay a premium to go out of network.  This, however, is hardly discriminatory except in the most literal meaning of the word.  Again, I am at a loss to understand what is discriminatory about American Medicine.

It seems to me that the issues we should be addressing when examining our healthcare system are two fold.

1)  How do we allocate scarce Medical resources?

2) How do we expand most rapidly the pool of scarce resources?

Those who propose wholesale reform of the healthcare financing system are making a systematic error.  Obamacare treats the healthcare pie as a zero sum system; they assume that the healthcare pie can only expand very slowly and that resources will remain limited forever.  For that reason none of the proposals in Congress address the supply side of medical care but only the demand side.  In fact, by attempting to expand the pool of patients for whom healthcare will be divorced from the actual cost of their care, the current plans will make the scarcity far worse, and permanent.

Were we to address Problem 2 and work on ways to increase the size of the pie, we could ultimately make healthcare more affordable and more available.

For example, there are a great many very bright young people who would at one time have been planning careers in the financial industry who are now faced with the necessity of changing career paths.  Many of them are quite talented in math and science (Physics PhDs have had an affinity for jobs as Wall Street “Quants”) and could become Doctors, Nurses, and other healthcare professionals.  The problem for the brightest, best students, is that going to Medical School means facing up to a $200,000 debt as an entry fee to a field where the compensation is being pared away year by year.  Obamacare will make this worse; fees to Doctors will have to either continue to decrease of fail to keep pace with expenses all the while the Doctors are expected to see more and more patients.  This is a formula for less Doctors, not more.

Beyond the supply of Doctors, there is the fact that healthcare is becoming an Information Science with all the implications that that has for the price curve.

The summary statement remains.

Healthcare:

1) Affordable

2) High Quality

3) Universal

Pick two of the three…