BOOK REVIEW

The Cure
by
Dr. David Gratzer

FUTURECASTS online magazine
www.futurecasts.com
Vol. 9, No. 8, 8/1/07

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Failures of socialized medicine:

  The weaknesses of the socialized medicine alternative to the U.S. health care system are emphasized by Dr. David Gratzer at the beginning of "The Cure: How Capitalism Can Save American Health Care."
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Treatment delays are always inconvenient, often painful, and on occasion deadly.

 

"According to the government's own statistics, some 1.2 million Canadians couldn't get a family doctor."

 

The Canadian Supreme Court ruled invalid the Quebec ban on private health insurance and the private practice of medicine because it forced dependence on the inadequate public health care system.

 

"Once-socialized systems in countries from Britain to Sweden are embracing market reforms."

  The much vaunted Canadian system is increasingly plagued by limits on quantity and quality of the health care offered as the Canadian government is forced to resort to forms of rationing to contain costs. Treatment delays are always inconvenient, often painful, and on occasion deadly.
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  Gratzer provides a lucid explanation of the developments in medical science and practice since WW-II. He is a practicing psychiatrist in both Canada and the U.S.

  "The more I was exposed to the system, the more familiar I became with the shortcomings of government run health care. I trained in emergency rooms that were chronically, chaotically, dangerously overcrowded, not only in my hometown of Winnipeg, but all across Canada. I met a middle aged man with sleep problems who was booked for an appointment with a specialist three years later; a man with pain following a simple hernia repair who was referred to a pain clinic with a two-year wait list; a woman with breast cancer who was asked to wait four more months before starting lifesaving radiation therapy. According to the government's own statistics, some 1.2 million Canadians couldn't get a family doctor. In some rural areas, town councils resorted to lotteries: the winners would get appointments with the only general practitioners around."

  In Canada, the problems are becoming too apparent to ignore any longer. In 2005, the Canadian Supreme Court - one of the most liberal in the world - ruled that the Quebec ban on private health insurance and the private practice of medicine conflicted with a citizen's right to life because it forced dependence on the inadequate public health care system. Clearly, the author emphasizes, the Canadian system offers no solutions to the health care mess in the U.S.  Indeed, health care in Canada is moving in the opposite direction - towards increased privatization.

  "Despite the proven economic benefits of competition and choice, many pundits would junk the present system of public and private insurance, and replace it with a Canadian- or European-style system of universal public coverage. As single-payer proponents love to claim, these systems 'cost less' overall, provide modern health care, and do so for every single citizen. But these 'compassionate' systems can't escape basic health economics, and they end up rationing care in the most draconian ways. For that very reason, once-socialized systems in countries from Britain to Sweden are embracing market reforms."

Failures of third party payer systems:

  The American health care system remains the best and by far the most innovative in the world. The American health care market subsidizes the development of innovative drugs and procedures for the whole world. It has driven the revolution in medical care since the introduction of penicillin in 1940.
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Rationing, price controls and managed care have been tried and have failed as outraged citizens rebelled against arbitrary constraints on needed care. Such efforts fail because "they remove choices from patients and give them to government or corporate bureaucrats."

  The noxious impacts of government tax and health care policies that since WW-II have been undermining health care market discipline are briefly summarized by Gratzer. "American health care is stuck in an outmoded economic model, dating back to the Second World War." As a result, costs are now reaching unsustainable heights and the system is in crisis. Most Americans now fear that a major illness could bankrupt them. This is the inevitable result of a third party payer system that removes market constraints on costs.
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  Unlike other basic needs - food, clothing, shelter - employers and government bear the burden of providing health care.

  "These two forces, the insurance model and technological advances, are mutually reinforcing; because insured patients don't pay directly for their own state-of-the-art care, they can't make the consumer choices that would curb the cost of this high-end treatment. As costs have increased to the point of crisis, reformers have sought to reduce them."

  Rationing, price controls and managed care have been tried and have failed as outraged citizens rebelled against arbitrary constraints on needed care. Such efforts fail because "they remove choices from patients and give them to government or corporate bureaucrats."
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"Consumer-driven health care" moves the choices back to the people, so that the prices for medical technology such as pacemakers will decline over time instead of persistently rising.

 

Government policies push private insurance costs out of reach for increasing numbers of people.

 

A delivery system that has become dramatically inefficient - and is rapidly getting worse - threatens the collapse of the whole health care system.

  Market-based alternatives are advocated by Gratzer. "Consumer-driven health care" moves the choices back to the people, so that the prices for medical technology such as pacemakers will decline over time instead of persistently rising.

  "[Patient] choice can be used to insure the uninsured, provide cheaper prescription drugs, and even save Medicaid and Medicare."

  The author provides several chapters on the Medicare and Medicaid crisis and the way government policies push private insurance costs out of reach for increasing numbers of people. Current prescription drug policy is now moving down this failed road. He emphasizes the permanent improvements achievable through market-based alternatives. These "embrace the solutions used to improve every other aspect of the economy - that is, to recognize that innovation and choice can exist only when we unleash the forces of capitalism."
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  The revolutionary advances in medicine since 1940 are summarized by Gratzer. They have had profound impacts on the quality and duration of life. The poster child for these improvements is Dick Cheney - serving two terms as a very active Vice President despite severe chronic heart problems.
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  However, this has also been accompanied by a revolution in health care costs - moving in the wrong direction. Some treatment costs have risen into the tens of thousands of dollars. There is no question that the public is getting good value from modern medicine - but that is not the question. It does not mean that we are not being overcharged by the delivery system. A delivery system that has become dramatically inefficient - and is rapidly getting worse - threatens the collapse of the whole health care system.
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Third party payer systems undermine market cost discipline and lead to the rapidly rising costs that have become standard in the health care market.

 

Cost ceases to be a factor in treatment decisions even for discretionary treatments.

  Third party payer systems were essentially dictated during WW-II by the tax laws. Gratzer explains how the economic benefits to both employer and employee of compensation in the form of health benefits came to dominate the system. In the 1960s, the government stepped in to extend third party payer coverage through Medicare and Medicaid. Today, about half of  all health care dollars come from government.
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  Unfortunately, third party payer systems undermine market cost discipline and lead to the rapidly rising costs that have become standard in the health care market. Economic anomalies have proliferated. Standard insurance features like copays and deductibles are neglected or minimized so that even $50 claims may be submitted to a system that costs $20 per claim to administer. Patients have no incentive to check their bills for even gross overcharges since the money isn't coming out of their own pockets. Cost ceases to be a factor in treatment decisions even for discretionary treatments.
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  On the other side, health care providers are more concerned with their relationships with the private or government insurance providers than with their patients - who are reduced to mere throughput.
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  The primary beneficiaries of this system are, of course, not the working poor, but the wealthy and middle class employees who receive substantial tax benefits.
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"What would car insurance cost if people insisted on plans that had limited deductibles? Or policies that included not just major body work, but also oil changes and gas and a paint job every time your spouse got tired of the car's color?"

  These third party payer systems are not really "insurance." They are either compensation systems or government welfare systems. They are more like prepaid health care. They cover many discretionary health care purchases, regular medical checkups and dental cleanings, with copays and deductibles uniformly low enough to be easily paid by even the working poor.
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  Real insurance covers only costs that are uncertain and catastrophic or difficult to bear. It covers "accidents" that beneficiaries would rather not incur - "insurable events." Premiums are reduced by copays and deductibles that are as high as each individual feels he can handle. 

  "What would car insurance cost if people insisted on plans that had limited deductibles? Or policies that included not just major body work, but also oil changes and gas and a paint job every time your spouse got tired of the car's color?"

Healthcare cost inflation:

  Do the advances in medicine explain the increase in health care costs?
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Unit costs decline for higher quality goods over time due to the magic of competitive capitalist markets. As a share of national income and as a share of the personal income of the average income worker, everything gets cheaper except medical care.

  The enormous technological strides in every other field since the industrial revolution have resulted in rapidly declining prices for higher quality goods when adjusted for inflation. As economist Milton Friedman points out, unit costs decline for higher quality goods over time due to the magic of competitive capitalist markets. As a share of national income and as a share of the personal income of the average income worker, everything gets cheaper except medical care. Spending on medical care has risen from 7% of national income in 1965 to 17% in 1997 and is increasing at double digit rates.
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  Friedman explains that competitive capitalist markets drive productivity increases. Administered alternatives don't. Third party payer systems don't. (Nor does competition have to be anything near "perfect" for the market to deliver a cornucopia of benefits.)
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  For example, prices for cosmetic surgery keep falling even as quality improves and innovative treatments are developed. Cosmetic surgery is sold primarily in a competitive market.

  Health care advances are not completely analogous to those in most other fields. To a substantial degree, health care advances provide entirely new capabilities, rather than just increasing efficiency and effectiveness by substituting for less efficient treatments. Such advances inevitably add to costs. Nevertheless, there is no question as to the greater effectiveness of competitive market mechanisms over administered or heavily regulated alternatives.

  "Nobody spends somebody else's money as wisely as he spends his own," Friedman points out. Out-of-pocket expenses account for only 14 of every dollar spent on health care in the U.S. No wonder costs keep rising out of control.
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Administered alternatives to competitive markets inevitably remove the cost/benefit calculation from the hands of the patient and make him dependent on the tender mercies of the bureaucracy

  Some manner of cost control inevitably becomes essential. Administered alternatives to competitive markets inevitably remove the cost/benefit calculation from the hands of the patient and make him dependent on the tender mercies of the bureaucracy of the private or government payer. Inevitably, dissatisfaction with the results are high amongst both patients and doctors. Inevitably, a growing bureaucracy sucks in the resources intended for the providers of health care.
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  Gratzer goes at some length into the distortions caused by the removal of market disciplines. Without any effective pressure for cost containment, a myriad of factors keep pushing costs higher.
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"The success of a physician depends less on service to patients than on meeting requirements of third-party reimbursement formulas. Whereas innovation and technological change in a normal market are viewed as good for consumers, health care providers are hostile to new technologies because of their high prices."

  A competitive market for insurance has been substituted in place of one for health care. Professors Michael Porter and Elizabeth Olmsted Teisberg explain that, instead of striving to increase prevention, diagnosis and illness management skills, providers strive to increase income from third party payers through "supply induced demand" and by increases in health care costs. They reduce their costs of providing health care by reducing any health care that is only marginally profitable. (See, Porter & Teisberg, "Redefining Health Care," for an account of ways to introduce real competition into the health care market and the massive benefits that effective competition would bring.)

  "Costs are high and rising, despite efforts to reduce them, and these rising costs cannot be explained by improvements in quality. Quite the opposite: Medical services are restricted or rationed, many patients receive care that lags currently accepted procedures or standards, and high rates of preventable errors persist. There are wide and inexplicable differences in costs and quality among providers and across geographic areas. Moreover, the differences in quality of care last for long periods because the diffusion of best practices is extraordinarily slow. It takes on average 17 years for the results of clinical trials to become standard clinical practice. Important constituencies in health care view innovation as a problem rather than a crucial driver of success. Taken together, these outcomes are inconceivable in a well-functioning market."

  Instead of "productive self interest," there is only the self interest of the third party payers and the health care providers.

  "Although producers in a normal market continuously search for ways to reduce costs, physicians and hospitals face only limited pressure to do so. The success of a physician depends less on service to patients than on meeting requirements of third-party reimbursement formulas. Whereas innovation and technological change in a normal market are viewed as good for consumers, health care providers are hostile to new technologies because of their high prices."

  The result is that the quality of care varies dramatically in different regions - with no observable relationship to the costs incurred.
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  Managed care was the cure of choice for these woes in the 1990s. Gratzer summarizes the rise and fall of the Health Management Organizations. Efforts to restrain costs generate adverse publicity and political opposition. There were horror stories in the media of denials of coverage, and there were multimillion dollar lawsuits.
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  Subsequent studies failed to disclose any overall reduction in the quality of health care under HMOs. In the most notorious case - involving denial of coverage for a bone marrow transplant for a dying breast cancer patient - denial has since been shown to have been justified by the lack of effectiveness of such treatments for that kind of cancer.
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  However, the damage had been done. Public antagonism had been aroused and the HMO gatekeeper role had become politically untenable and fatally vulnerable to law suits. Economic results were disappointing and investors became increasingly disenchanted. HMOs responded by abandoning their "gatekeeper" roles and shifting into other healthcare products.
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  Gratzer notes that the lack of choice was a fatal flaw. People were often assigned to an HMO by their employer, and the HMO assigned them to a doctor. American consumers reject such paternalism. They demand choice. They demand control.
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  Once again, there was no effective restraint on health care costs. Healthcare costs had been in fact effectively restrained for several years in the 1990s, but by 2001 they were again soaring at nearly double digit rates.
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Market alternatives:

  The application of market mechanisms is the only rational approach to providing health care services - just as it is for all other economic goods and services.
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Without competition, there is no information, and intelligent choices are almost impossible.

  Health savings accounts are one of those mechanisms. "Give  consumers more control by giving them health dollars to spend, and good things such as innovation will follow," Gratzer points out.
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  Consumer driven health care will force providers to compete for patients. They will be forced to provide information needed by patients to make intelligent choices - just like hotels and airlines do. Without competition, there is no information, and intelligent choices are almost impossible.
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  Under the current system, even most doctors do not have the information needed to make the vital choice of best hospital for various medical procedures. However, information is abundant about hotels and airlines. It will be available about hospitals, too, when they have to compete. Basic surgery outcomes, mortality rates, and even costs, would be made available, among other data.
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  Consumer driven health care also provides choices of insurance benefits. Should long term care be included or pediatric care? Should coverage be $1 million or $5 million? Should the term be one year or five? What should the tradeoff be between premium costs and copays and deductibles? Only individuals know what is best for themselves.
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Health savings accounts:

  As a health savings account ("HSA") system is currently envisioned, employees would get health savings accounts and "tax free dollars to pay for their smaller health-care expenses" along with high-deductible insurance for catastrophic events. Thus, individuals would make the bulk of their own health care decisions.
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A massive RAND study has found that those with HSA-style plans remained as healthy as those with free health care, but the latter group spent 40% more for health care.

  Deductibility for contributions to HSA's was not enacted until 2003. Since that time, plans that include HSAs have proven their value. They are offered by an increasing number of employers. They have restrained cost increases and have been accepted with approval by a majority of enrolled employees. Gratzer provides details of one of the first plans - offered by Whole Foods. The results were dramatic.

  "Overall medical claims fell 13 percent in the first year. About 90 percent of employees had money left over to use next year. Claims rose in the second year -- but overall health costs have risen just 3 percent per annum and total costs per employee are well below most company plans."

  About 95% of the Whole Foods employees have chosen the benefit package based on HSAs. New businesses have sprung up to collect and disseminate insurance and health care information and assist those that have HSAs in their benefits package. Insurance companies are also increasingly offering such information as well as "health coaches" for those who want advice.
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  Most health needs are not emergencies, Gratzer points out. For these, patients have time to get information and referrals. They have time to make choices. A massive RAND study has found that those with HSA-style plans remained as healthy as those with free health care, but the latter group spent 40% more for health care.

  "For the uninsured, in particular, health savings accounts are probably quite attractive, given their lower cost. According to the online insurance brokerage eHealthInsurance, nearly half of their HSA customers earn less than $50,000 a year. A full 70 percent pay under $100 a month for the coverage. One-third were previously uninsured. Assurant Health, a large insurer, notes that many new HSA purchasers are over forty, often with chronic health problems."

  However, HSAs are as of 2006 still too small a part of health care benefits to bring real competition to the health care market. Gratzer estimates that they would have to cover at least one third of all patients before health care providers might feel driven to respond competitively. The tax code still imposes restrictions that reduce their popularity. There is no reason why Congress should be micromanaging health insurance.
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Government micromanagement:

  There is also no reason why state and federal regulators should micromanage the health care system - rendering it too rigid to respond to competitive incentives.
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Medicare alone imposes far more than 100,000 pages of regulations, reporting requirements and much more that all add to costs and inhibit innovation.

 Although more flexible than in other major nations, the U.S. health care system is the most intensively regulated sector of the U.S. economy. It is "riddled with laws and regulations that govern financing, billing and basic practice." Medicare alone imposes far more than 100,000 pages of regulations, reporting requirements and much more that all add to costs and inhibit innovation. (Hospitals routinely hire expensive consultants to guide them through this regulatory morass.)
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  One consequence of over regulation has been the closure of scores of hospital emergency rooms. The regulations permit people to use emergency rooms as clinics - a vastly inefficient use of resources. The costs of health care regulations have been estimated at over $300 billion per year.
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The uninsured:

Many would be able to insure if government requirements didn't make insurance so expensive.

  The headline number of the uninsured as this book went to press in 2006 was 46 million. However, Gratzer counters that more than half of the uninsured could afford insurance if they wanted it. Many more would be able to insure if government requirements didn't make insurance so expensive. Even though the number keeps rising, it remains at about 15% of our growing population.
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Perhaps 50% of the uninsured at any one time will have it within 6 months. Only about 16% of the uninsured will be without coverage for 2 year or longer.

 

Perhaps 1/3 of the uninsured are eligible for government sponsored health programs but haven't signed up.

 

Survival rates among those on Medicaid is worse than for those without insurance.

  Moreover, about 20% of the uninsured aren't even citizens. Many of the rest are uninsured for only part of the year - frequently because they are between jobs. Perhaps 50% of the uninsured at any one time will have it within 6 months. Only about 16% of the uninsured will be without coverage for 2 year or longer.
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  It is not the "poor" who lack insurance.
They qualify for Medicaid. A Blue Cross - Blue Shield study shows that about 1/3 of the uninsured earn $50,000 per year or more. Half of those are at or above $75,000. Perhaps 1/3 of the uninsured are eligible for government-sponsored health programs but haven't signed up. Since those who qualify for Medicaid can sign up when in a hospital, that is not a dire failure. More than half of the uninsured are in excellent health and don't consider health insurance a priority.
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  The uninsured do get health care. Those with money pay for it, and the rest get it through a variety of sources. These include workers compensation, free clinics, Medicaid and Veterans Administration and other government programs and grants and payments to hospitals.
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  The widely quoted figure of 18,000 unnecessary deaths due to lack of insurance is the result of some very dubious - ideologically inspired calculations. In fact, survival rates among those on Medicaid is worse than for those without insurance.
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  The working poor who lack insurance and are unqualified for Medicaid get care for serious problems, but lack access to primary care physicians and preventive care. Unfortunately, political policies ostensibly designed to help have driven the cost of insurance increasingly out of reach for these people.
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Coverage mandates:

  In Vermont, for example, individual insurance has been changed by law from risk-based to "one-size-fits-all." There are community rating and guaranteed issue requirements, among other things. The result is that the number of uninsured has increased more than 50%.
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Perhaps 25% of the uninsured have been priced out of the market because of the costs of government mandates.

  After all, in Vermont, you can now wait until you get sick to get insurance. Premium costs for the healthy are about 80% higher than in neighboring New Hampshire - 250% higher than in South Carolina. Most carriers have left the state. Where there were once 33 insurance carriers competing for business, now there are just 2. Guaranteed issue requirements have had a similar impact on individual insurance in New Jersey.
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  Many states mandate coverage for particular ailments or treatments. Chiropractic treatments, breast reconstruction and maternity stay coverage is widely mandated, but many states also mandate coverage for acupuncture, social workers, message therapists, hair prosthesis, IV fertilization, off-label drug use, and much more. Naturally, all of this has driven up insurance costs.

  "Politically, these regulations reflect the power of lobby groups at the state level. Because large employers often self-insure and many of the above requirements exempt the small group market, there isn't a counterbalance to the advocacy of, say, chiropractors. Add to the mix legislators eager to regulate fairness, and finding a simple insurance plan is a formidable task."

  The results are startling. A simple family plan that costs $170 per month in Kansas City, Mo., costs $750 per month in Boston. HMO coverage for a New Jersey business costs 33% more than in California. Perhaps 25% of the uninsured have been priced out of the market because of the costs of government mandates.
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  While Hillary Care collapsed at the federal level, a plethora of programs were added at the state level - pushing up insurance and health care costs - and observably worsening the problems of the health care system.
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Lower cost insurance options:

  Providing lower cost insurance options is an obvious remedy.
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  • HSAs would do exactly that. By moving away from all-inclusive coverage to high-deductible coverage for serious health care problems, costs can be brought down dramatically. By removing or liberalizing current restrictions on deposit amounts, they could be made even more attractive.
  • Allowing interstate competition for insurance would dismantle the expensive tangle of state mandates. If you can obtain a mortgage loan from an out-of-state provider, why not insurance?
  • The tax preference for employer insurance contributions should be removed - or extended to individuals.
  • Block grants that permit state experimentation should be substituted for the welter of expensive bureaucratic federal health care programs. Gratzer advocates a voucher program.

  "By excluding the high-income uninsured, as well as those already eligible for assistance, a state created voucher program could potentially offer more than $7,000 a person for coverage -- enough to buy insurance in any state of the union."

Medicaid:

  The growth of the Medicaid spending monster is explained by Gratzer.
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Although the federal government pays most of the costs, some states now spend more on Medicaid than on K-12 education and are threatened with bankruptcy.

 

Bureaucratic waste is immense, and fraud notoriously widespread. Yet the program is politically untouchable and aggressive litigation stymies reform.

 

Just filling out the reimbursement forms in compliance with voluminous payment regulations dramatically raises the costs of health care.

  Originally designed to help welfare recipients, Medicaid has been expanded to cover now about 50 million people - only about 30% of whom are on some form of welfare. Although the federal government pays most of the costs, some states now spend more on Medicaid than on K-12 education and are threatened with bankruptcy.
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  Bureaucratic waste is immense, and fraud notoriously widespread. Yet the program is politically untouchable and aggressive litigation stymies reform. Studies show no relationship between Medicaid costs and health care outcomes.

  • State government efforts to apply managed care options have, as might be expected, resulted in increased bureaucracy and increased costs without any discernable benefits in health care outcomes.
  • Price controls have also proven counterproductive - as they always do. (See, "Administered Prices & Health Care Systems.") The result is that Medicaid underpays providers. As a result, there has been about a 20% reduction in Medicaid providers nationwide, but the decline in some states and in some specialties has been especially dramatic. Just filling out the reimbursement forms in compliance with voluminous payment regulations dramatically raises the costs of health care.

  The states have responded to their growing Medicaid financial problems with a variety of "creative accounting" techniques that shift more of the burden onto the federal government. Gratzer provides a major example involving payments by counties ostensibly for state services, with the state government transferring the money back to the counties.
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  Effective reform will be complex because Medicaid has become such a complex program. There are no easy answers - but Gratzer offers some broad principles.

  "Medicaid needs to be more focused; choice is key; payment should be based on output, not input."

  • Providing lower cost private insurance options would reduce Medicaid expenses by enabling more individuals and small businesses to obtain private insurance
  • Block grants to reduce federal regulatory involvement and to focus responsibility at the state level would materially reduce the noxious incentives of the current system. States would have more freedom - and incentive - to innovate and experiment. States would become more accountable for their actions. However, block grants are feared because of the rapid rate of Medicaid cost inflation. The grants would have to be increased at several times the overall inflation rate to make them acceptable.
  • States could be allowed to opt out of Medicaid regulations to permit state experimentation. For example, Medicaid has become so inefficient that in some states it would be cheaper to purchase private insurance for beneficiaries. But, of course, that is part of HSA plans.
  • The long term care commitment is the costliest individual part of Medicaid. It has become an inheritance insurance program for middle class and wealthy people who find ways to tap Medicaid to cover long term care needs. With an aging population, this is an exploding expense. Reform for this middle class entitlement is a political minefield. However, at least, Gratzer suggests, payments should be for outcome - not input. Instead of paying for long-term care beds - many of which are empty - states should contract for care for individual patients - on the basis of competitive bids.
  • Patient choice rather than paternalistic programs provide superior outcomes even for the chronically ill. Several states have experimented with "cash and counseling" programs, with cash going to the equivalent of HSAs. Patient satisfaction is very high, even if actual savings don't show up until several years into the program. By saving money on covered health care, funds are made available for other life-enhancing equipment and treatment. For the mentally disabled, a family member or social worker can be authorized to make health care decisions.

  "Devolving decisions to individuals would transform Medicaid," Gratzer asserts.
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Medicare:

 

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  Medicare as we know it is doomed. It is structurally flawed, Gratzer explains. By "largely divorcing recipients from the financial consequences of their actions," the program has become "an expensive and bureaucratic program" that is becoming a national financial disaster.
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Only about one dollar in sixteen will go to help low income seniors purchase drugs they couldn't otherwise afford.

 

Inevitably, there will be price controls for prescription drugs - and possibly the drying up of incentives for further research and development.

  The government has an alternative program that works, Gratzer asserts. It is the health plan used by members of Congress and about 8 million others. But instead, the government has opted to go further down the disastrous Medicare road with a massive entitlement program for prescription drugs. It provides benefits for all at great expense although only a small minority of people lacked drug coverage or the ability to pay for their medicinal drugs. Only about one dollar in sixteen will go to help low income seniors purchase drugs they couldn't otherwise afford.
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  Inevitably, this will mean price controls for prescription drugs - and possibly the drying up of incentives for further research and development.

  "[Medicare] was crafted at a time when the population was young; the number of elderly, relatively small; and the cost of medicine, minimal. A generous program, free at the point of care, seemed to make sense. But today, the high-tech, high-expense medical revolution has transformed care -- and costs. When Medicare was created, officials projected that the hospital insurance would cost $9 billion in 1990. In fact, it cost more than seven times that amount." (In fairness, it should be noted that about half that overrun - but only about half - was due to the general inflation of the 1970s and 1980s caused by Keynesian policies.)

Medicare is inefficient, inequitable, insolvent - and still inadequate.

 

Medicare covers many of the frequent, small, generally affordable expenses instead of some of the occasional catastrophic expenses - exactly the opposite of the way insurance should work.

 

Many any physicians refuse to participate.

  Medicare costs keep rising at or near double digit rates - much faster than either inflation or workers' earnings. This is clearly unsustainable. Its unfunded liability over the next 75 years is over $68 trillion. It is inefficient, inequitable, insolvent - and still inadequate.
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  Medicare covers many of the frequent, small, generally affordable expenses instead of some of the occasional catastrophic expenses - exactly the opposite of the way insurance should work. Indeed, those who can afford it get supplementary insurance to cover the gap in Medicare coverage.
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  "Medicare isn't designed to reward performance or manage chronic care." There is no check on quality - which varies widely and is completely unrelated to cost. Waste is everywhere.
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  "Kremlin-style" central price controls and voluminous regulations - at least 130,000 pages of regulations - result in half an hour for paperwork for each hour of care. The result is that many physicians refuse to participate - leading to shortages of care in many places and for many specialties. Some services are over-compensated - leading to over-availability and over-use - while others are unprofitable and scarce.
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The Federal Employee Health Benefits Program is based on choice, competition, and light regulation.

 

The program provides drug coverage and pays much of the bills, but it doesn't design benefits.

  The Federal Employee Health Benefits (FEHB) program would be a good alternative. It is based on choice, competition, and light regulation. Federal workers can choose from among a wide variety of plans, including HMOs, preferred provider organizations, and fee-for-service insurance policies. This forces providers to compete for clients and enables employees to choose plans that best meet their needs. Over 240 plans are available. Much information is made available to assist decision making.
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  The program is free of state regulation and premium taxes, and the federal government doesn't mandate standard benefits. The federal government merely subsidizes premium payments. The program provides drug coverage and pays much of the bills, but it doesn't design benefits.
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  This program is a big success. It is popular, innovative, and even cost effective. Gratzer favors reforms along FEHB lines, in addition to:

  • modest increases in the age of entitlement above the current 65 years of age;
  • a simplification of the current multipart plan;
  • the inclusion of plans based on HSAs;
  • adjustment of premium support to provide additional support for the poor and those in poor health; and,
  • elimination of the vast majority of regulations.

  The Medicare entitlement is a huge problem - much bigger than the Social Security entitlement problem - and is certain to rapidly get worse with time. Raising the age of entitlement - as was done with Social Security - is an obvious reform. People are not only living longer, they are on average healthier longer.
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  However, the real solution must involve a prefunding plan. This will mean huge extra expenses during the transition, but the longer it takes to adopt such a plan, the greater the expenses will be. 
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Drug programs:

  The reimportation of drugs to reduce drug costs for American consumers is properly skewered by Gratzer.
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If the American market is stifled, all drug innovation stops.

  Reimportation imposes foreign price controls on the American market, and price controls would quickly destroy the incentive for drug innovation that has saved millions of lives in recent years. Price controls - in any form - never work. (They actually ultimately make price inflation worse. See, "Understanding Inflation.") The sad fact is that American consumers are subsidizing innovation for the entire world - that the entire world is "free-riding" on the American consumer for its advances in medicinal drugs. If the American market is stifled, all drug innovation stops.
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One study showed a 13% increase in the use of generics, with an 11% drop in pharmacy charges, under HSA plans.

  How the third party payer system distorts the drug market is demonstrated by Gratzer. Since consumers pay little or nothing of the difference, they will opt for significantly more expensive medicines even if there is little or no advantage in treatment. Why not? The extra money doesn't come out of their pockets.
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  So drug companies spend millions developing new drugs as successors to effective popular drugs nearing the end of their patent protection period, and consumers purchase the successor drugs at substantially higher prices than the generic copy of the old drug - even if there is little or no increase in effectiveness. As with expensive consultants and diagnostic tests, third party payer systems give Americans no incentive to choose less expensive but equally as effective alternatives.
 &
  HSAs provide incentives for people to try the less expensive alternatives. One study showed a 13% increase in the use of generics, with an 11% drop in pharmacy charges, under HSA plans.
 &

The Food and Drug Administration:

 

&

  The Food and Drug Administration (FDA) is risk averse. It faces numerous Congressional investigations for approving drugs that prove risky and that hurt some patients, but is never criticized for the millions who suffer and die because of delays in approving new drugs. They are never criticized for the drugs not pursued because of the expense involved in the approval process.
 &

The FDA is never criticized for the drugs not pursued because of the expense involved in the approval process.

  The result is delay and huge expense. It now takes 15 years to approve a new drug - more than twice as long as 40 years ago. The cost has increased more than 6 fold - to about $900 million. Those drugs that are approved for narrow markets - like some cardiovascular drugs - cost in the tens of thousands of dollars per patient. There is no sense of balance between risk and benefits.
 &
  Gratzer offers some suggested improvements in FDA procedure.

Clinical trials involve a relatively homogeneous group of healthy individuals who collectively are totally unrepresentative of the people who actually take pharmaceuticals.

 

Inevitably, there will be unacceptably severe side effects that will not appear until a drug is used by hundreds of thousands or millions of sick people.

  • The FDA could accept certifications from private agencies. It has been shown that private agency reviews are much faster and cheaper and just as effective. This is used in other industries - like Underwriters Laboratories for electrical equipment and Consumers Union for a vast array of products. There might even develop a competitive market for private certifiers - with those offering faster reviews and lower prices attracting the most business.

  "[The FDA] should allow companies the option of an external review, financed by user fees. Such a move would be cost-neutral to the FDA -- but, judging from the pilot program, it would lead to faster reviews. The FDA is presently a certifier of products. With external contracting, the FDA would increasingly become a certifier of certifiers -- reviewing the reviewers, rather than exercising day-to-day oversight of drug approvals."

  Clinical trials have inherent limitations that are ignored by those who advocate ever greater expansion of clinical trials - at ever greater cost and time.

  "Here's the FDA's dirty little secret: clinical trials involve a relatively homogeneous group of healthy individuals who collectively are totally unrepresentative of the people who actually take pharmaceuticals. The FDA doesn't need to raise the bar higher, it needs to rethink drug safety."

  Inevitably, there are side effects with powerful medicinal drugs. Inevitably, there will be unacceptably severe side effects that will not appear in clinical trials of even thousands of healthy people. Inevitably, there will be unacceptably severe side effects that will not appear until a drug is used by hundreds of thousands or millions of sick people. (Could private certification survive such inevitable failures and the lawsuits they would generate?)

Childhood immunization is handled under the current no-fault legal system that had to be enacted to induce drug companies to manufacture vaccines.

  • Post approval surveillance should become a focus of FDA regulatory efforts. The FDA should outsource the approval process and apply its resources to regulating the private certifiers and - especially - to post-approval surveillance - which at present is practically nonexistent.

  Today, it is not the FDA that determines post-approval withdrawal of drugs. It is the trial lawyers. Fear of suits induces drug companies to pull drugs off the market if reports of some adverse side effects start coming in.
 &
  With the increasing use of electronic medical records, Gratzer asserts, the FDA could efficiently monitor post-approval experience. The information technology infrastructure exists - it just has to be spread more widely and properly accessed by the FDA. This, in fact, is how childhood immunization is handled under the current no-fault legal system that had to be enacted to induce drug companies to manufacture vaccines.

  "Tort reform would provide a strong incentive for drug makers to work on post-approval monitoring. This would be a win-win for patients and pharmaceutical companies. The only losers would be the trial lawyers."

  • Certification requirements could be limited to safety, eliminating the efficacy requirement. The evaluation of efficacy could be left to the market. This would greatly reduce drug development costs and thus the costs of the drugs to the consumer.

  However, "safety" is not an absolute standard. All drugs have some side-effects which must be weighed against their benefits - their efficacy. The risks of even serious side effects can become acceptable for drugs that address serious maladies. Chemotherapy drugs, for example, are notorious for their severe side effects which have been deemed acceptable even when the benefits have been marginal.

Nationalized health care:

 

&

  The much-touted national health care systems in Canada and Europe are examined in considerable detail by Gratzer. Their difficulties are serious - and would be much worse without access to the benefits flowing from private health care and from the American market.
 &

Things are indeed simple under the Canadian system - "unless you need care."

  Drug innovation would dry up without the American market. It is no accident that most new drugs are developed in the U.S.
 &
  Canadians increasingly rely on private clinics
- especially for diagnostics. For many treatments, they go across the border to the U.S.

  "Canadians have found that government-run health-care systems, far from being an elegant solution, are universally plagued with deep structural problems. In fact, whether we look to Canada or Europe, we find that single-payer systems are fanciful temptations, like hoping that a new house will save a troubled marriage. As a result, politicians outside the United States are increasingly looking to individual choice and competition."

  Yet, many intellectuals and media entities ignore those problems and continue to advocate government-run "single payer" health care as the alternative to a current system rendered unsustainable by its manifold government encumbrances. Big business often sees government-run alternatives as a way to unload their own health care burdens on to the taxpayers. The government-run single payer system is presented as a simple "magic bullet" fix for the complicated problems of the current system. (See, Richmond & Fein, "The Health Care Mess," setting forth the case for establishment of a national single payer universal health care system.) Unfortunately, government-run systems add many more complications than they solve. Things are indeed simple under the Canadian system - "unless you need care."
 &

Waiting periods are long - often dangerously long. Access to specialists is limited. Access to expensive cutting edge treatment frequently unavailable. Equipment is often out of date.

  The rationing of care is the response of the Canadian system to the complications of health care. Waiting periods are long - often dangerously long. Access to specialists is limited. Access to expensive cutting edge treatment frequently unavailable. Equipment is often out of date.
 &
  For minor ailments, the Canadian system is fine. However, in cases involving serious problems, budgetary and bureaucratic complications arise. Treatment outcomes for serious illnesses are significantly lower than in the U.S.
 &
  Hospitals are funded by the government. Charges for doctor services are pursuant to billing schedules set by the state.

  "But how much should hospitals receive for their budgets? How much should doctors get to bill? These questions are not easily answered; so it takes armies of government officials to administer Canadian medicare." (How can doctor and nurse compensation be adjusted for differences in skill?)

"[The Canadian system] is just like the old Soviet system: everything is free, but nothing is readily available."

  Gratzer provides examples of the frustrations - and dangers - of relying on Canadian health care. For cases not deemed life threatening, it takes about six months for an MRI and months more for access to a neurosurgeon. Surgery for painful herniated disks - deemed "elective but urgent" - the most common category - can take more than 8 months. Many patients cross the border to the U.S. where diagnosis and treatment is available within days.
 &
  Lacking any market disciplines, the provincial governments have only blunt budgetary tools to constrain costs. They restrict the supply of health care. They restrict the number of hospital beds. They restrict the number of medical school graduates. They cap physician income. They limit the use of modern equipment. And so on.

  "Therein lies the dirty truth of Canadian health care. It is just like the old Soviet system: everything is free, but nothing is readily available."

The government-run facilities are invariably hugely wasteful, quirky, poorly equipped, untimely, increasingly unsustainably expensive, out of date, and in many instances offer quality of care significantly below U.S. standards.

  European systems suffer similar problems. Gratzer provides some details of frustrations under the British and continental systems.
 &
  Access to private care alternatives constitutes a critical difference among these systems. However, the government-run facilities are invariably hugely wasteful, quircky, poorly equipped, untimely, increasingly unsustainably expensive, out of date, and in many instances offer quality of care significantly below U.S. standards. Political and bureaucratic imperatives frequently encumber health care policy - sometimes in absurd ways. Innovation is delayed and even blocked by budgetary cost concerns.
 &

Private care alternatives are increasingly being make available in Canada. Elsewhere, privatization is alive and well - eating into the extent of nationalized health care systems.

  Statistics on breast cancer, prostate cancer and other cancers demonstrate a clear superiority for outcomes in the U.S.

  The latest cancer mortality figures per 100,000, for example, is 196 for the U.S., 235 for the UK, 244 for France, 270 for Italy, and 273 for Germany.

 Availability of the most up-to-date equipment and improved drugs is also better in the U.S. Gratzer demonstrates weaknesses in the infant mortality statistics that appear to show higher rates in the U.S. White and Mexican American babies in fact enjoy very low mortality rates in the U.S. - although whites make extensive use of health care facilities and many Mexican Americans are not even born in hospitals. It is Native Americans and Blacks that suffer high infant mortality rates.

  "Infant mortality statistics -- like life expectancy -- reflect a mosaic of factors, such as parental diet, marital status, drug use, and cultural values."

  Increasingly, Canadian provinces are contracting out to private providers for expensive procedures like hip replacement surgery. Private care alternatives are increasingly being made available in Canada. Elsewhere, privatization is alive and well - eating into the extent of nationalized health care systems.

  • Britain's Labor government has given up trying to fix the National Health Service and now offers health vouchers permitting some surgical patients to choose from among various providers -  of which at least one alternative has to be private.
  • Australia now offers tax subsidies for the purchase of private health insurance and health care.
  • Stockholm, Sweden, privatized home care, ambulance services and diagnostic testing.
  • Germany is increasingly privatizing its hospitals.
  • Belgium, the Netherlands, and the Czech Republic are beginning to encourage competition among insurers in their social insurance health care system.
  • In Finland, privatization and contracting out have reduced employment in the public health care system from 215,000 to 127,000.

  Generalization is dangerous, and these different systems should not be lumped together. For example, Finland has a small homogeneous population and a vast countryside. Over time, its system has been shaped to those conditions. It is based on local provision of primary care with considerable contracting out to private providers rather than on a national system.
 &
  Costs in health care budgets are kept down in a variety of ways, including use of nurses for a considerable amount of basic health care, the provision of free university education that reduces the salary demands of medical professionals and pushes the cost of medical education into the education budget, and an absence of punitive damages for errors.
 &
  The Finnish system seems to be working well, but as with any complex system, it is not without its problems. For example, the more difficult cases are dealt with by regional health organizations, and the smallest regions have error levels up to eight times those of the larger regions. The regions, too, engage in much contracting out to private providers. Contracting out, among other things, prevents over-expansion of public facilities.
 &
  Interestingly, the Finns confirm what FUTURECASTS has long pointed out - that per capita health care costs don't go up with increases in longevity. The extra years are added to the middle years of life rather than to the period of fragility at the end of life when most health care expenses arise. That's encouraging news for us all.

Free market reforms:

Administered alternatives to market mechanisms always fail to achieve their stated objectives.

  Clearly, only free market reforms will work. Administered alternatives to market mechanisms always fail to achieve their stated objectives.

  Winston Churchill commented that the U.S. always does the right thing - after it tries everything else - and in this case it appears that some disastrous single payer experiment will be tried first.

The tax code has done tremendous harm - causing the medical care industry to develop in an inefficient and unnatural way.

  The Federal employee health care plan is a good place to start - and it has been recommended by the Breaux-Thomas Bipartisan Commission as the basis for reform. However, Gratzer believes we could do much better.
 &
  Health insurance in a free market should be encouraged. Individuals should enjoy the same tax subsidies for their health insurance costs as is extended to employees. Milton Friedman would go in the opposite direction, and remove the tax subsidy for employee health insurance. There is no such subsidy for other essentials - food and shelter - other than the minimal standard deduction, so why should there be one for health insurance or medical costs? "This loophole in the tax system has done tremendous harm," Friedman explains. "It has caused the medical care industry to develop in an inefficient and unnatural way." (Of course, provisions throughout the tax code routinely twist the economy in inefficient and unnatural ways.)
 &

"People typically buy insurance for an unforeseen or unlikely event; but with minimal deductibles, health insurance has effectively become a form of prepaid health care."

 

State regulation has resulted in such anomalous results as premium costs in Connecticut 75% lower than in N.Y. City.

  Health insurance in a free market would not be a one-size-fits-all system. There would be higher deductibles geared to each individual's particular needs. Premium costs would decline considerably.

  "People typically buy insurance for an unforeseen or unlikely event; but with minimal deductibles, health insurance has effectively become a form of prepaid health care. Faced with the high cost of comprehensive insurance, most Americans would probably do what they do when they buy, say, home insurance: choose a higher deductible. Not only would this end the overinsurance problems as people became price-conscious health consumers, but even older individuals would be able to find more affordable premiums."

  If legislative constraints could also be loosened, competition would quickly bring forth new types of individual and group plans offered by new insurers - again serving to reduce premium costs. Government support could be concentrated where needed - to subsidizing high risk pools. Variations in premium costs among the states could be eliminated if Congress imposed uniform regulation under the Commerce Clause, thus creating a national market. State regulation has resulted in such anomalous results as premium costs in Connecticut 75% lower than in N.Y. City.
 &

"Capitalism is not the cause of America's health-care problems. It is the cure."

  Portability would be another major advantage. Individual insurance and insurance offered by civic groups such as churches, unions and other associations would be portable as individuals change jobs.
 &
  Reform is not an option. It is a necessity. And only market-oriented reform can work, Gratzer emphasizes.

  "[If] Americans unleash the market forces that have transformed the other five-sixths of their economy -- if they choose more choice and more competition -- then American health care will become cheaper, better, and more accessible for everyone.
 &
  "Capitalism is not the cause of America's health-care problems. It is the cure."

  As FUTURECASTS has frequently pointed out in other contexts, government is not the answer - it is the problem.

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  Copyright 2007 Dan Blatt