Whither the public option?

Thomas Edison, Ice Cream, and Healthcare (III)

(cont'd from part II)  So a guiding principle for a successful and cost-effective health care system - help the consumers feel the financial pain of their health care decisions to keep costs manageable.  Private insurers and the federal government have known this for years.  Many private insurance plans carry a deductible - e.g. how much money you pay before your insurance kicks in.  For co-pay plans, co-pay dollar amounts tend to increase as a function of the expense of the service:  ER co-pay> Urgent Care > Office Visit.  The federal government operates more of a sliding scale deductible - you can only write off health care expenses above and beyond 7.5% of your annual income. 

Unfortunately, the "feel the pain" principle is in direct opposition to another key principle of a successful health care plan:  "visit your doctor regularly".  Your standard deductible setup actually discourages consumers from their routine doctors visits and preventative care.  Even with a small deductible, that regular check-up is $100+ out of your own pocket, plus blood work and x-rays, etc.  And while statistics aren't as clear-cut as you might expect, most studies agree that regular check-ups and preventative care save cost in the long run. 

So how does a health care package simultaneously promote financial accountability and encourage regular use of its services?  One method is a "bridge" system, which is essentially how Medicare works.  Medicare allows its users a base amount of benefits to cover routine medical costs.  Medicare also kicks in catastrophic coverage when out of pocket costs get out of hand.   Healthy users have access to routine and preventative care but also have incentive to keep their costs within base benefits.  The chronically ill are covered against utter financial ruin.  The trouble comes in the in-between space between base benefits and catastrophic coverage.  An article in today's paper calls this the "doughnut hole" - I've heard it also called the "bridge".  In Medicare, the bridge is set up such that users pay 100% of costs above base benefits until catastrophe coverage kicks in.  This again presents a weird sort of economics, in which (for example) the first ten doctor visits are free and the eleventh is full price.  Obama, to his credit, is taking some action to fix this by negotiating "sliding-scale" prescription costs for Medicare recipients. 

Private "bridge"-type insurance may operate differently.  One of the plans offered by my employer covers ~$3000 worth of base benefits for a family of four (roughly equal to the cost of the premium).  Beyond $3000, medical costs are covered via co-insurance, with the insurance company paying 50-90% of covered costs.  Once out-of-pocket costs exceed $2000 (above and beyond the $3000 premium), catastrophic coverage kicks in and covers everything.  This maintains accountability for cost - a family has strong incentive to keep total costs below $3000 - but cushions the blow of exceeding base benefits.  Total annual out-of-pocket costs are capped at $5000.   Moreover, unused monies roll over year to year, allowing a "healthy" family to potentially accrue $10k or more as protection against catastrophic medical expenses. 

These sorts of things seem to be a winner for everyone.  The insured aren't throwing money into a pit - they are essentially funding an account managed by their insurance company.  If they overspend they are protected.  If they underspend, they get to keep the difference.  The insurance company wins because clients are aware of the cost, and more likely to use cheaper pharmacies, in-network physicians, urgent care instead of ER, etc.  Plus, given the strong incentive to stay within the $3000 mix, the insurance company will likely incur few costs above administering the account.    The employer wins because his contribution is lower overall - in the case of my employer about 1/3 of a conventional PPO and less than half of a Kaiser-type HMO.   Doctors don't exactly win, but they're no worse off.

How much will cost-accountability save us in the long run?  Not sure and even reliable sources of information have very different opinions, but here's some ballpark figures.  Excess money spent on non-emergencies treated at emergency rooms contributes "$5 billion to $7.2 billion to the nation's annual health care bill."  A cost-aware consumer will be more likely to use cheaper urgent care services or, better yet, schedule an office visit.  Cost-awareness will discourage price-gouging by pharmacies and minimize brand name markup when generic brands are available.  With 4 billion+ prescriptions filled in the U.S. each year, it's reasonable to expect tens of billions of dollars of savings from simple comparison shopping and generic substitution.  So we're looking at something in the neighborhood of maybe $50 billion.  Nothing to sneeze at, but only a couple of percent of our $2 trillion annual health care bill.   Cost-accountability is a key principle to keeping health care costs down and probably has important long term effects, but it's not going to drastically reduce overall health care spending. 

Of more interest is the $400+ billion in "administrative and marketing costs" that Obama calls unnecessary overhead.    (cont'd)

Thomas Edison, Ice Cream, and Health Care (II)

I took off work early last week to catch a movie (alone - pathetic, but neither mad or my church friends were that into Drag Me to Hell).  Said theater sold me a bowl of ice cream (two scoops) for $3.75.  My first scoop of tart honey yogurt was really about three or four scoops - my server just kept packing it in.  By the time she started the second scoop the bowl was already overflowing.  Our conversation went something like this:

SD:  "Those sure are generous scoops"
Theater Employee:  "Well, I figured for $3.75 you could pretty much buy a half gallon of ice cream, and these scoops are really small"  (starts on third "second scoop")
SD:  "No, seriously, that's enough."

I won't fault generosity, but she was giving something that wasn't hers to give.  Said theater employee collects the same paycheck every week whether she scoops big scoops or small scoops.  And while her indulgence with the customers presumably impacts the bottom line of her employer, she's far enough removed from the financial consequences not to care.

The average American health care consumer is in the same boat as this theater employee.  Those with private insurance rarely pay anything beyond a small copay for prescriptions and doctor visits - their monthly premium (if any) is a fixed cost and often heavily subsidized by their employer.  Public insurance operates the same way, although usually without the premium or co-pay.  And even among the uninsured, many bills are forgiven or drastically reduced - with the attending doctor or hospital writing off much of the cost.

This detachment from the actual cost of health care leads to some bizarre economics.  A couple of stories:

#1:  Several years ago I was at the Target pharmacy.  The woman in front of me was uninsured and filling a prescription for Amoxicillin for her child.  The "pink stuff" that we get around here for routine ear infections costs about six or seven bucks, less than the average copay.  But this woman's doctor had filled a prescription for some new-fangled time release Amoxicillin that you take once a day instead of three times a day.    Cost of the prescription:  $77.  To their credit, the Target pharmacists tried several times to call her doctor to rewrite the prescription for garden variety Amoxicillin, to no end.  Finally, she sighed and muttered "I guess it will make her better" and plopped down the eighty bucks for the prescription. 

How do pharmaceutical companies get away with charging $77 for a drug that's therapeutically equivalent (yet slightly more convenient) than a $7 drug?  12-hour Tylenol don't cost no eighty bucks.  Easy:  the health care consumers don't usually pay $77.  They pay a co-pay (often not much more than $7) and are wowed by the convenience.  Easy to do when you're spending someone else's money.

#2:  Oregon was one of several states to pilot an "in-pharmacy nurse" program at a major chain pharmacy.  The premise of the program was simple : instead of spending big bucks to go to a doctor's office for routine prescriptions, the pharmacy had an RN on staff to write them for you.  The scope was limited to basic antibiotics, steroids, and maybe allergy medicines.  The cost of the service was covered by some insurance.  The cost to the uninsured was about $25 (vs $80+ for a doctor visit).  This program was ultimately discontinued in Oregon for lack of interest, the conclusion being (in part) that the public and private health insurance was "too good".  Why spend $25 for a visit when you can spend $80 of someone else's money? 

#3:  While I was a grad student we swapped one of Mad's prescriptions from a local discount store to a major chain pharmacy.  At the time, our insurance required us to pay for pharmaceuticals out of pocket and submit receipts for reimbursement.  The generic drug that cost $30 for 30 days at the discount store cost nearly $90 for 30 days at the chain pharmacy.  Same drug.  Same dose.  Same pills.  Why the premium?  Hard to say, but in general you'll find that retail pharmacies charge exorbitant prices relative to their discount store counterparts.  In any sort of sane economy the discount stores would drive the retail chains out of business or corner them in a niche after-hours pharmacy market.  But if you're spending someone else's money, there's no point in comparison shopping.

#4:  My first couple of years in Oregon I was miserable for allergies.  I considered buying Claritin over the counter but my starving grad student family couldn't stomach the $30/month for OTC pills.  My insurance, however, would provide me with 90 days of Allegra for a more manageable ~$25.  Never mind that the total cost to my insurer was closer to $200.  It was someone else's money.

The trick is that "someone else's money" is only applies to the very poor, who pay nothing because they have nothing, or the very sick, who pay for only a small fraction of what they consume.  For the rest of us, someone else's money comes back to haunt us as higher premiums or reduced benefits or, in the case of public insurance, higher taxes or cuts to existing services. 

To rein in costs, therefore, it's important that the consumer feel the (financial) pain of reckless spending or overconsumption of health care services.  Insurers already have some safeguards in place for this sort of thing, with tiered copays for brand name vs. generic drugs, emergency services vs. routine office visits, and specialists vs. primary care physicians.   But there are more novel approaches taking hold in the world of private insurance.

Thomas Edison, Ice Cream, and Health Care

In the past, I've used this forum as an opportunity to work out my own opinions on complicated matters and then shamelessly prostitute said opinions in exchange for comments.  Memetic narcissism and all that.  After two months off I finally have the health care issue to wake me from my semi-voluntary slumber.

What intrigues me about the health care debate is that, despite near universal agreement that the system is broken, no one seems to have any sort of concrete solutions.  At least not any that make any sense.  On one extreme is the notion of a single payer system - sort of like Medicare for everyone.  This option is appealing for its simplicity but brings with it an astronomical long term price tag.  With Medicare set to go bankrupt in the next decade or so, it seems unwise to add yet another unfundable entitlement to the mix.  On the other extreme are the Adam Smith fiscal conservatives who assume that the invisible hand can take care of this whole business.  Just get the government out of the health care business and prices will go down.  This sort of thing warms the libertarian soul, but ignores the fact that the business of healing and saving lives demands a different morality than, say, the business of selling cars.  All but the most callous among us recognize the need to provide our fellowcitizens with basic health care, regardless of ability to pay.  The invisible hand may indeed find room to care for the poor, but it's not unreasonable for the government to intervene just to be sure.

Since there's no solution at the extremes, we assume that there is a solution somewhere in the middle, and thus put up with a mixed marketplace of public and private entities authorizing and paying for health care.  As a consequence, just about any debate on health care reform entails a philosophical discussion of the proper role of government in the health care industry.  This is great fun for the philosophers but it doesn't do much in the way of practical solutions.  The private and public sector are equally capable of high administrative overhead, restrictive access to necessary services, and cost-based health care rationing.  Costs can and will spiral out of control, regardless of who's at the wheel, unless we understand *why* health care costs are out of control in the first place.  Hint:  it's not as simple as corporate greed.  Hint:  it's not as simple as government mettling.  There are dozens of reasons that health care costs are spiraling out of control that have nothing to do with the role of goverment or tainted profit motives.  Unless these issues are addressed individually there's no hope of fixing the problem.

... and I haven't even gotten to Thomas Edison and ice cream ...

Old-fashioned recession busting

My employer has a novel strategy for beating the recession.  It's called "selling high quality products that people want to buy for more than it costs to make them."  A few weeks ago we announced a new commercial product that outperforms our previous generation of products nearly 10:1 but uses considerably less power.  If our business customers replace their existing product with said new product, the product will pay for itself in reduced energy costs in less than eighteen months.  Recession notwithstanding, the orders are pouring in.

Next week - how to buy an automobile using money you save.