Healthcare, the 16% problem, and a leaky roof

by: Darcy Burner

Thu Dec 24, 2009 at 13:53

Until we get our hands around the problem of paying twice as much as the rest of the world for healthcare that doesn't keep us as healthy as people who pay half as much, we're not actually fixing the real problem with healthcare. We are merely putting bandaids on bullet wounds and pretending like that's all we need to do.

So indulge me in a metaphor, if you will. Imagine you have a leak in your roof. If you fix it now, it's going to cost you $500. If you don't fix it, the water getting into your attic will eventually breed mold, which will cost many thousands of dollars to mitigate - if it hasn't already gotten to the point where your house is unsalvageable.

So what do you do? Do you spend the $500 to fix the leak, or wait and pay the thousands of dollars later?

If you plan on living there for the rest of your life, you will fix the roof now.  But what if you know you are going to move next year?  Do you hope that the prospective buyer doesn't notice the leak?  That by the time the mold sets in, it isn't your problem anymore?

The tenets of capitalism suggest you should defer - you have, after all, deniability.  "A leak?  Thanks for catching that!  It could have ruined the whole house!"

That's exactly the behavior the insurance companies engage in. This kind of distortion of incentives is at the heart of the problem with our healthcare system. They don't do the relatively inexpensive things that would keep Americans healthy, because they figure they won't be the ones footing the bill later when people need really expensive care.

And the current Senate bill isn't going to fix it.

While there are many problems with our healthcare system, the most fundamental problem with the healthcare system in the U.S. is that we're paying too much for the care we're getting.

I don't mean to minimize the other issues.  It is true that insurance companies frequently deny care that people need and are entitled to, that there are huge disadvantages for anyone without insurance provided by large employers, and that is nearly impossible to get adequate coverage for care if you or your child has a pre-existing medical condition.  We need to address all of these, as well as to expand the Medicaid social safety net to everyone who needs it.

But affordability is at the heart of nearly all issues with the system.  Healthcare in this country is unaffordable not just for particular individuals and families and businesses, but for all of us in this country.

We are all paying too much for too little.

We're paying roughly twice what the rest of the world does, and yet our life expectancies are lower and our infant mortality rates are higher. We're overpaying because the incentives are all messed up for the insurance companies, doctors, hospitals, and patients. We're overpaying because instead of keeping people healthy, the whole system is geared around giving people expensive care once they get sick.

And the current Senate bill isn't going to fix it.

Between 16% and 17% of our national GDP is consumed by healthcare costs. In most of the industrialized world, costs are around 8% of GDP. The next highest to us is a mere 11% of GDP in Germany. With an annual GDP of about $14.2 trillion, we're spending about $2.3 trillion every year on healthcare, and that means we're overspending by at least $710 billion per year.

$710 billion per year, every year, wasted.

That's about $2,335 for every man, woman, and child in this country - wasted every year.

Our failure to fix this problem is bankrupting families. It's destroying small businesses. It's making American businesses less competitive globally. It's making Americans sicker, and killing them prematurely. It's busting the budget of our government.

And instead of fixing it, we've decided to let the roof go on leaking while we repaint the walls.

Fixing the incentives

So why do we waste so much money?

Most of the issue is that we're failing to do routine and preventative maintenance, and end up instead with huge bills when things get really bad. Instead of sending people to nutritionists to lose weight, we end up treating type 2 diabetes. Instead of sending type 2 diabetics to podiatrists to take care of their feet, we end up amputating them. Instead of having people do physical therapy for lower back pain, we wait and end up doing surgery. In each of these cases the best treatment is usually the less expensive treatment - but the incentives are all aligned towards the less effective, more expensive treatment.

Why?  It's the trickle-down theory of bad medicine.

Insurance companies:  Why would insurance companies discourage routine and preventative care?  As much as I'd love to engage in the "because they're evil!" rhetoric, it's actually just because they are trying to maximize profit (as publicly-traded corporations are required by law in this country to do). We, the people of the United States, have set up the system so that any good profit-maximizing insurance company will behave as I've described.

"Why," you might reasonably ask, "would insurance companies rather spend more money than less in taking care of patients?"  Because when the dancing is done, they rarely have to pay the piper. Or, to use our earlier analogy, they're usually not the ones who have to pay for mold damage if they don't fix the roof.

Hospitals: Hospitals can be the place where specialty clinics exist to treat conditions like diabetes, with experts in the wide range of areas complicated diseases require. Experiments in places like New York, however, have demonstrated that specialty clinics for chronic conditions such as diabetes lose hospitals tremendous amounts of money. By keeping people healthier, they reduce the amount of money hospitals get reimbursed. Hospitals can't afford to keep people healthy - so instead they're geared around providing the care for which they're more generously reimbursed when people are allowed to get very ill rather than being kept well.

Doctors: Doctors need to keep themselves afloat, pay for equipment and staff and insurance, repay student loans, and maximize profit like any other business. So they go where the money is.  The money is not in keeping people healthy - where insurance reimbursements are horrible - but in the specialties where you deal with severely unhealthy people.  Doctors are disincented from "pushing" preventative care both by their own reimbursement issues and by a reluctance to ask patients to pay out of pocket for preventative care insurance won't cover.

Patients: Patients generally trust that their doctors will tell them to do the right things, and that their insurers will pay for doing the right things. Additional out-of-pocket costs for things their doctors aren't telling them to do and that their insurers won't pay for aren't high on the radar of most patients. So if doctors aren't pushing them towards less expensive ways of keeping themselves healthy or managing chronic conditions, and insurance companies aren't going to pay for them, it's unlikely they'll pursue them.

So why do insurance companies screw up these incentives?

There are two basic reasons: adverse selection, and too short an ROI lifetime.

Adverse selection: trying not to insure expensive people

The most profitable patients for insurance companies are the ones who never need medical care. They make a bundle on people like my husband Mike, who I drag in for a regular check-up every couple of years and who is otherwise blissfully healthy. And they lose a bundle on people like my brother Jason, a type 2 diabetic, who over the course of his lifetime is going to require lots and lots of costly care.

So they try to make sure that they end up insuring people like my husband rather than people like my brother.

Given that Jason is a type 2 diabetic, great care for him would include regular visits with an endocrinologist, a dietician, a podiatrist to check on circulatory problems, and so forth. So how to insurance companies make sure they don't end up with people like Jason? They offer poor care for diabetics. After all, the last thing you want is to be the insurance company that all of the diabetics love and flock to.

Unfortunately, that dramatically increases the odds he's going to have terrible problems caused by not adequately managing his chronic health condition.

And they can get away with giving him poor care because the odds are they're not going to pay the piper when he gets really sick...

Short term return on preventative care vs. long term return on preventative care

For the most part, when an insurance company doesn't pay for preventative care or management of chronic conditions, they don't end up footing the bill for the consequences. Usually they're only going to insure someone for a few years, so they can just kick the can down the road. As long as things don't get really bad while they're covering someone, it's more cost effective to say they're not going to pay for the cheap stuff that will keep people healthy; often it means they don't pay at all. Another insurer somewhere down the line will pay - most often the American taxpayer through Medicare or Medicaid will pay - and it doesn't cost the insurer a dime to push the problem off onto them. So they do.

This is the incentive problem for the insurers. And it's a doozy. Their incentives are all aligned against keeping Americans healthy, and towards making someone else pay - even if it's orders of magnitude more expensive. It creates all of the other incentive problems down the chain. It doubles the overall cost of healthcare in the U.S.

And the Senate bill doesn't fix it.

Can it be fixed?

Yup. But only if insurers have incentives to consider the total cost of care over somebody's lifetime when they're deciding whether to cover preventative care or how to manage chronic conditions.

So how do you fix the incentives for insurers? Make them pay for the damage their inaction causes.

One way to do it - the way favored by most progressives - is a single-payer healthcare system. If one entity pays for your healthcare over your entire lifetime, you can bet they'd rather you be as healthy as possible for as long as possible.

Alternately, you could put in place all kinds of regulations that prevent insurers from externalizing costs onto future payers. You could charge insurers for future care of people they once insured. You could set it up so that once an insurer was responsible for somebody, they were responsible for that person's entire life.

Or you could at least start to set in place some dynamics which would gradually help the system move itself in the direction of such changes. The public option in the House bill at least made that possible. The current Senate bill eliminates the possibility for the foreseeable future.

So at the end of the day, my problem with the Senate bill is this: healthcare costs in this country are going to continue to rise, and we're effectively foreclosing any real possibility of fixing the underlying problems.

I'll be honest: I was hoping for more from this President and this Congress. Barack Obama is better than what we're getting from him. He is not living up to the potential we all see in him. And that failure is going to be incredibly costly to our country.