Matthew Holt

What’s good for General Motors is good for America

In 1953, Charles Erwin Wilson, then GM president, was named by Eisenhower as Secretary of Defense. When he was asked during the hearings before the Senate Armed Services Committee if as secretary of defense he could make a decision adverse to the interests of General Motors, Wilson answered affirmatively but added that he could not conceive of such a situation “because for years I thought what was good for the country was good for General Motors and vice versa”. Later this statement was often misquoted, suggesting that Wilson had said simply, “What’s good for General Motors is good for the country.” (From Wikipedia’s History of General Motors)

The American auto industry exploited the loophole by ramping up production of big passenger vehicles that sat on truck beds. The mini-van evolved into the the extended pick-up trucks and SUVs that proliferated during the next two decades. The American public loved the big vehicles, which were affordable because national energy policy made low gasoline prices a priority. The SUVs and trucks were hugely profitable for the manufacturers, offsetting losses incurred partly because of labor-related costs. Detroit’s dependence on these vehicles though was risky, as became clear last year when fuel prices rose steeply and the industry effectively crashed. (Peter J Boyer, The Road Ahead, The New Yorker, April 27, 2009)

This has been a tough couple of weeks for anyone believing in radical change, Obama-style. There has been unnecessary compromise over closing Gitmo and investigating torture. The lobbyists for America’s health care immediately recanted their promised voluntary cost cutbacks. The response so far from the White House has been a statement from Orszag that’s none too radical, essentially saying that bending the curve is OK.

And now there’s the revelation that some idiot at Blues of N. Carolina had already planned a smear campaign against reform, even while the AHIP crowd seems to be winning, as represented by the mealy-mouthed proposals coming out of Baucus’ committee—as Baucus himself ducks meaningful dialogue over alternatives.

So realistically, as I’ve been saying for several months, the best we can hope for from the current body politic is some kind of national exchange and a sorting out of the scummy underbelly of the individual health insurance market. (Incidentally I was watching The Rainmaker, made back in 1997, over the weekend and life has totally imitated fiction in the individual market since then—yes, I’m talking about MEGA but not just them!).

But even if we get some kind of exchange with some kind of vaguely unenforceable individual mandate and some type of guaranteed issue, the basic structure of health insurance passing through the excesses of the FFS system won’t change. Real sustainable change will only happen if we create a single universal pool and give the insurance intermediary some type of global budget, such as a fixed voucher payment per member. No one in the Baucus world or the White House, with the exception of Zeke Emmanuel is talking about that, so it’s not going to happen. And the second best choice—the establishment of a competing public plan that is budget limited—is likely to be bargained away.

So unless some secret mechanism that we’re not being told about will be sprung from the wings, realistically the best that can be done is that we’ll end up with the Massachusetts scenario. More people insured at more cost, unsustainably. And widespread practice and cost variation will continue.

The data of course tells us that on any metric you pick, spending doesn’t equal quality. Just this week the Dartmouth guys found a nil or negative correlation between spending per patient in individual hospitals and outcomes. It’s got to the point when you barely need to read the abstract on these studies. (I guess if you like you can read Atul Gawande running through the numbers yet again in this weeks New Yorker)

But if something can’t for on forever, it will stop (known as Stein’s law). Which is why I opened this piece with a reference to that wonderful New Yorker article about the meltdown in the auto industry.

The auto industry’s last two decades resulted from three irrational government policies that were kept in place by a weird combination of political forces. First, fuel prices were kept artificially low—in part by a deal between Reagan & the Saudi’s to break the Russians, and also by the reticence of American politicians to put European-level taxes on gasoline. Of course, fossil fuel producers and users didn’t have to bear the real costs of these cheap prices. But the planet and its (present & future) inhabitants do.

Second, as pointed out in the New Yorker article, the CAFE standards ridiculously excluded SUVs and mini-vans—proving that partial regulation is much worse than using taxes to do the same thing. We’re still waiting for a sensible carbon tax. Third, partial taxation is just as bad. For weird historical reasons there is a 25% tariff on foreign trucks and SUVs which means that the Japanese couldn’t compete effectively (e.g. destroy the lumbering big 3) in that market, and the big 3 could make far more profit on the SUVs than they would have done in a free market. A combination of the auto companies, the oil companies, the unthinking consumer, and bought-and-paid-for politicians enabled this to happen.

The parallels are obvious. In American health care policy, for the Big 3, substitute the AHA, PhRMA, AHIP, ADVAMED and the AMA. For the dumb carbon fuel policies, substitute an irrational employer-based insurance system with a wrap-around and uncontrolled Medicare and Medicaid system, all paying suppliers using Fee-For-Service. For the problems of global warming and pollution substitute the societal ill-effects of spending too much money on health care services that make outcomes worse, and leave less money for education, infrastructure and other more worthwhile spending. For SUVs and mini-vans substitute cardiology, orthopedics, neuro-surgery, general surgery, oncology drugs, and all the other service-lines that make hospitals profitable, but do very little for the overall health of the population. And of course the whole thing stays together because Congress is in the special interests’ pocket, the public responds well to prods from special interests (especially doctors), and it doesn’t understand the raw deal it’s getting in the bigger picture.

There’s even a parallel lies and dissemination industry. The auto and oil industries fund their “global warming is a myth crowd”, health care has Betsy McCrackers, Grace Marie Turner and the rest of the free-market nut-jobs—all on the teat of some sub-segment of the health care business which should rationally be put out to pasture.

So assuming that we don’t fix this problem in 2009, what happens when health care has its meltdown moment, or when as Alan Greene and George Lundberg like to say, the health care bubble will burst?

Lundberg argued earlier this month on THCB that there was an excessive trillion dollars spent in health care—somewhere around 40% of current spending. Actuarial firm Milliman did more work on this and suggested that we can move health care spending from the current 16% of GDP to 12%. Now they and fellow travelers like George Halvorson seem to hope that this can be done in some seamless and painless fashion. But that hardly seems realistic. Instead my scenario is that some future cataclysmic event finds the next President offering the health care industry the kind of choices that Obama has just been offering the auto industry.

Which takes me back to Boyer’s wonderful piece about the auto industry. Essentially the industry has been given extremely limited choices of how to restructure itself. They were told to:

  • Massively restructure their obligations to their retirees and employees
  • Change their work arrangements to match those of the Japanese transplant factories
  • Close many factories and lay-off many employees
  • Change their present and future product mix to reflect the worldwide energy crisis
  • Reeducate the buying public as to what to expect from a car (50 miles range and being plugged in nightly?)

Note that many of the Senators from “transplant states” with like Tennessee and Alabama felt pretty aggrieved that GM and Chrysler were getting all this help to compete with their “foreign” imports. Those of you who get Sen Dave Durenberger’s occasional (and prescient) health policy commentary emails may note that he frequently describes Medicare as being a redistribution mechanism whereby doctors and hosptials in high costs states like Louisiana and Florida get subsidies from taxpayers in low cost ones like Minnesota.

The way these hard choices were made at GM and Chrysler were essentially that the Treasury took over the companies and their strategy. Both the CEOs of GM and Chrysler are either gone or going, and the Federal government is directing traffic.

There isn’t quite the centralization of production in health care that there is in autos, but a 40% fall in revenues would effectively mean the government would take over the industry. So what might the equivalent of a fast GM-type restructuring look like in health care?

  • Massively restructure their obligations to their retirees and employees. The health care industry mostly rewards specialists, technology & pharma manufacturers, and certain segments of the hospital business. Those payment schemes would necessarily be slashed. We’re not talking about narrowing the RVU imbalance here, we’re talking about some kind of massive fee-cut backed up by a global budget cap.
  • Change their work arrangements to match those of the Japanese transplant factories. No prizes for guessing this. Virgin Mason and a few others have already significantly reduced all of their costs by introducing Japanese-style quality innovation process. Under current payment schemes that was a crazy thing to do. But in this scenario those hospitals and physician groups that survive would not get the choice. If the accountable health care organization, or medical home ever gets off the ground, the customary relationship of referrals from PCP to specialist and from specialist to hospital will change remarkably.
  • Close many factories and lay-off many employees. If you replace the word “factories” with the words imaging center, hospitals and clinics, you’re getting the picture.
  • Change their present and future product mix. From inpatient care and intensive procedures to prevention and primary care, with extreme makeovers in terms of chronic care process management.
  • Reeducate the buying public as to what to expect from a car. This may be one of the hardest parts of all. The American public regards $4 a gallon gasoline as a pestilence sent to punish them. Similarly, the move to reduce inappropriate health technology use, overhauling end of life care, and changing how people approach their health, is fraught with political peril. But the need is the same, and at some point we’re all going to have to realize that the consequences of our orgy of medical care overuse are dreadful.

Any restructuring like this will cause extreme pain. In addition, we need to make sure that the reduction in health care spending is balanced by a comparative increase in wages, or other spending. In other words, we can’t suck 3–4% out of local economies without adding it back in.

But in the end, like the auto restructuring, we desperately need this health care restructuring. And what’s now necessary for GM will end up being a good thing for both the nation’s health care system and the nation.

This doesn’t mean it will happen, or at least not soon. But one way or another, the health care system needs to share Detroit’s fate.

Coda: Mike Cassidy, San Jose Mercury News Columnist wrote a not dissimilar piece piece on Saturday which I saw on Sunday. I’d started this piece last week, so this is a case of great (?) minds thinking alike—not plagiarism, honest!

Categories: Matthew Holt

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