With well over 25,000 visitors per month to THCB, undoubtedly many are not well grounded in critically looking at published research studies. This, of course, also is true in the media at large.  With the recent publication in the American Journal of Public Health of a study touting the relative greatness of the Canadian healthcare system over that in the United States, I thought it would be valuable to share an appropriate way to begin to look at published studies.

As an aside, remember to distinguish scientific studies from opinion pieces (like those found on THCB).  In opinion pieces, the writer is, of course, expressing an opinion, though the opinions can certainly be based upon facts.

Ok. The first thing you do when looking at a study is: read the title.  This is generally what will (or, more likely, will not) get you reading further.

What next?  Find out who wrote the study.  Biases of researchers are very hard to overcome.  Many researchers have devoted their professional (and activist, in many cases) lives to promulgating certain points of view.  Sometimes these views are heretical, and the researcher finds himself (or herself) at odds with nearly everyone else in the field.

Now that does not mean the researcher is wrong.  Case in point is Dr. Stanley Prusiner’s discovery of prions—better known as the agent responsible for Mad Cow disease.  Dr. Prusiner suffered the withering criticism of nearly everyone for years until it looked like he was right.  Now he is the proud owner of a Nobel Prize.

But I digress.

In the aforementioned article, who are the authors?  Dr. David Himmelstein, Dr. Steffie Woolhandler and Dr. Karen Lasser, all of Harvard.

I had the pleasure of interviewing Dr. Woolhandler on my program.  She is very well spoken and articulates her views very well.  But she (and Dr. Himmelstein) is one of the founders of Physicians for a National Health Program.  For nearly two decades, she has devoted much time and energy to pushing the concept of a national healthcare system in the US (Canada-like).

Do you think that this bias might creep into the study design?  Would you be suspicious of a drug study that was funded entirely by the manufacturer of the drug?

After you get the names of the authors, you must find out if they have any potential conflicts of interest.  This will generally be found at the end of the article, where a single-line biography of study authors are found.  The much-maligned-here-at-THCB American Medical Association has been a big proponent of financial conflict-of-interest disclosures in publications.  And financial disclosures have become the standard in most scientific (or nearly scientific) journals.

But what do we find at the end of the AJPH article we are discussing?  Nothing implying the depth of ideological fervor of the authors.  Not even a mention of the association of the authors with PNHP.

And this is wrong- because it implies that the authors of the study do not have a potential stake in the study’s outcome.  It is no different than a drug or implants study funded by the manufacturer.  It does not make the conclusions necessarily invalid, but it sure does bring them into question and worth corroborating independently before they become headline news.

In this, the internet age, when you hear about a study in the mainstream news—use your considerable internet acumen to do some brief checking up—find the study, find the authors and find out if there could be a major conflict of interest.  Then check out the ‘rest of the story’.

I found Eric’s Novack’s June 13 post, “The Three Percent Myth,” provocative, though I’m afraid I can’t agree. Medicare is, in fact, more efficient than private insurers.

In his comment on the post, Rick underlines a key difference: In contrast to private insurers Medicare doesn’t have to spend millions on marketing, advertising, and Washington lobbyists. 
On top of that, private insurers must generate profits for their shareholders. In 2003, the HMO industry as a whole reported total earnings of $5.5 billion—up 83 percent from $3 million in 2002 , according to Weiss Ratings, a firm that assesses the financial strength of banks and insurance companies.

In 2004 the industry’s profits jumped another 10.7 percent to $11.4 billion,  and in the summer of 2005 industry leader WellPoint told investors that it expected its profits to continue to levitate by an average of 15 percent a year for the next five years. That same week Wellpoint announced its plans to boost average premiums by 16.6 percent in 2006.

In my 2006 book, Money-Driven Medicine: The Real Reason Health Care Costs So Much, I quote Weiss vice-president Melissa Gannon, who is remarkably candid about
the impact the insurance industry’s fat profit margins have on society:

“While this bodes well for the industry’s overall health, rising premiums have forced many consumers to select more restrictive health plans or opt not to purchase insurance entirely.”

But it’s not just the cost of marketing, advertising, lobbying and providing profits for investors  that makes a private insurer’s overhead so much higher. Insurers also have higher administrative costs because they are constantly enrolling and disenrolling customers as people change plans. (The average turnover in an employer-sponsored insurance plan is 20% to 25% a year. By contrast, Medicare patients stay put. Even if they could switch, most prefer Medicare’s coverage to the coverage they had under a private insurer.)

In Money-Driven Medicine, I quote former Medicare chief Bruce Vladeck who points out that:

“. . . even very efficient insurers must spend roughly 5 percent of their premiums just to enroll and disenroll customers  . . . . This is why, when I was in Washington, some of us talked about giving people age 55 to 65 the opportunity to voluntarily enroll in Medicare –letting them pay premiums to the government in exchange for full Medicare coverage . . Donna Shalala, who was Secretary of Health and Human Services at the time, said to me, ‘You really want to compete with the insurance companies, don’t you?’

And I said, ‘You bet,” Simply because our costs were so much lower, I knew I could beat them.’”

In his post, Eric also argues that Medicare is less efficient because its oversight is lax, and thus millions are lost to fraud. But if you look at cases where healthcare providers like National Medical Enterprises cheat insurers, you’ll find that they are just as likely to bilk private insurers.

If anything, private insurers may be more laid-back because they can “pass the costs associated with fraud on along their customers in the form of higher premiums,” notes The Wall Street Journal, quoting Louis Parisi, director of  the New Jersey Insurance department fraud division. (Medicare has a harder time finding funds to cover fraud.)

In the same story, the Journal quotes the medical director of an NME hospital saying that when he tried to inform the Prudential Insurance Company of possible fraud, company executives merely laughed, saying that for them, large bills meant large premiums and big bonuses.

Eric goes on to suggest that Medicare’s voluminous rules create “hidden overhead” for healthcare providers who must spend hours deciphering the coding. But Jonathan is right in pointing out that private insurers also create “hidden overhead”: for doctors who must deal with the 12 different sets of forms form 12 different insurers—all designed to make it difficult for the doctor to be reimbursed.

While interviewing doctors for my book, I found that the vast majority found Medicare’s paper-work far simpler. They also liked the fact that Medicare does not try to micro-manage their practice by forcing them to call and ask permission to keep a patient in the hospital an extra two days, or to perform a certain procedure. Medicare simply publishes a list of what it will and won’t cover—and that’s that. When dealing with private insurers, by contrast, physicians spend hours on the phone.

What’s interesting is that, in the course of interviewing doctors for Money-Driven Medicine, I found that the majority preferred Medicare—even when it paid less—because it was so much less hassle. As The New York Times recently pointed out, private insurers make a game out of delaying reimbursement,  and designing the forms so that the doctor leaves out one detail, he or she won’t be paid.

Finally, I agree with John when he points out in his comment that even if we switched to Medicare-for-All ( a bill now in Congress that would let people 55-65 and those under 20, voluntarily switch to Medicare, paying Medicare rather than a private insurer for coverage) —and even if Bruce Vladeck is right that because Medicare’s administrative, marketing, advertising and lobbying costs are so much lower, and because it doesn’t have to generate profits, Medicare could provide more coverage for less—this still doesn’t solve the larger problem of health care inflation of 8% a year. After a couple of years, inflation would exceed the lower administrative costs—then what?

Ideally, if more people were on Medicare, Medicare would begin to exercise its clout as the nation’s largest payer—the way other governments do—negotiating with drugmakers and device-makers for lower prices. (The high cost of drugs and devices is a major reason why our hospital bills are so high—drugs and devices account for 15% of the $2 trillion-plus  that we spend on healthcare each year. Private insurers are less likely to bargain because they can always pass the cost along to their customers—and they do just that.. In just the last five years the cost of an average insurance premium has risen 75%.)

Of course drugmakers and device-makers argue that Americans need to pay twice what patients in other countries pay for their products in order to cover the high  cost of research.

This is simply not true. Analysis by Families USA, a non-profit consumer group, shows that drugmakers spend roughly twice as much on advertising, marketing and administration as they spend on research.

Moreover, from 1995 to 2002, drugmakers took top prize as the nation’s most profitable industry, showing profit margins of 13 percent to 18.6 percent of sales each and every year. (In 2004, they fell to third place, but still posted profits equaling 16 percent of sales.) Meanwhile, in recent years, device makers have boasting profits margins as high as 20%.

There is no reason for drug makers and device-maker to make so much more money than other industries—especially when those industries are going broke trying to cover the high cost of healthcare for their employees.  Investors needed to be rewarded for taking a risk, but there’s just not that much risk when you invest in Pfizer or Johnson and Johnson.

Even on Wall Street, health care analysts say, that that if you cut  profit margins in these industries—and cut back on excessive  marketing, advertising and lobbying— and  drug-makers and device-makers could roll back prices without making a dent in their research budgets.

The Industry Veteran joins us this afternoon in the latest in THCB’s series by guest posters, following up on excellent posts by veteran financial journalist  Maggie Mahar and orthopedic surgeon turned talk show host Eric Novack. The Veteran found Eric’s comments on the health care system inspiring — to put it mildly. They set him to thinking about the true role of physicians in the healthcare system and in society at large. Needless to say, as always on THCB, his words are his alone.     
    
   

On this sunny morning I thought I might take time away from more productive pursuits to answer some of the typically narrow minded and self-serving posts of the physicians who attend THCB in the same way that dogs raise their hind legs at convenient lampposts.  The object of my opening disdain is someone by the name of Dr. Eric Novack.  Alas, Maggie Mahar demolished his drivel in a more cordial manner.  Novack’s transparently phony views suggest an analogy to Samuel Johnson’s comment about a dog walking on its hind legs.  Physicians writing about politics, health care economics or social policy are similar to this canine trick in that it is almost never done well; the wonder is that it is done at all.

Other physicians seeking to foist their miscreant views on THCB usually content themselves with illogical or poorly informed letters that disagree with some of my posts.  I don’t wish to be too caustic in responding to their blatant ignorance.  After all, they spent years performing brute rote memorization and other, low cognitive tasks, so their distorted thinking is a product of their trained incapacity.  While it isn’t terribly useful to disparage plumbers for being poor cooks, the pipe cutters who consider themselves master chefs despite an inability to boil a potato do merit some contempt.

A few themes of disagreement and bewilderment emerge from the physicians’ posts.  One chap, for example, asks about the “de-skilling” reform that I urge upon medical practice.  I realize that memorizing bones and ways to add carbonyls to benzene rings doesn’t leave much time for understanding history, so I’ll try to provide a remedial lesson.

In the late 19th and early 20th centuries, the pace and substantive nature of industrial production was largely directed by skilled craftsmen on the production floor.  This situation stymied the interests of managers who considered matters of volume, configuration, quality and cost as matters for their control. Their solution, as implemented by Henry Ford and others, consisted of the assembly line for which workers with far less skill could be inserted or removed as interchangeable parts.  Labor historians have actually documented many periods of de-skilling throughout the industrial revolution.

As applied to medical practice, the process consists of pushing the scope of practice, discretion and competence down the food chain.  Primary care practitioners should do a fair amount of the things that only specialists do at present.  Nurse practitioners should assume responsibility for many primary care functions, PAs should get other responsibilities, and so on.  Other health care professionals such as pharmacists and nurses should also assume more physician responsibilities.  Of course, physicians for years have berated such “assembly line medicine,” “therapeutic triads” and other labels for the process, despite the fact that studies have shown it produces better outcomes and lower costs.

Other affirmers of the Hippocratic oath who seek to recoup the costs of their medical education from their first four patients find fault with my call to feminize medicine and increase the number of foreign medical graduates.  They claim that even now, 50% of practitioners are women and most hospital physicians are FMGs.  Their figures are possibly correct, but their claim is equivalent to saying that Hispanics, blacks, Asians, poor whites and the aged infirm run the US because there are so many of them.  I merely ask these disingenuous posters to examine the ranks of service chiefs at major teaching hospitals, the senior faculty at top medical schools and the key opinion leaders who speak on behalf of the Big Pharma companies at medical conventions.  Only small percentages of these big, swinging schwanzes are women or FMGs.

A few years ago I systematically examined the reasons for this paucity of women in the medical profession’s key positions.  Basically, the motivations and the personality profiles of influential physicians approximate those of senior executives at the largest 1000 companies.  The desire for wealth, status, power, ego and other forms of self-aggrandizement predominate.  For some of the same reasons that the numbers and influence of women in the corporate boardrooms remain small, their sway in the medical profession is also puny.  In most cases, women are just the working stiffs and peons of the profession.  That stratification of medicine won’t do.  I’m talking about making medicine a feminine profession in the same way as elementary school teaching, nursing and public librarianship.  That will incentivize you egocentric males and the small number of female-impersonating women in the profession to ply your greedy ways in business without the special dispensations that society grants to physicians.

Finally, I don’t know whether I’m amused or nauseated by the posts from physicians who seek to justify their claims to unconscionable incomes by citing the many years they spent in school and the related costs.  Along the same line, a cardiologist at the American College of Cardiology meeting told me that the country should guarantee cardiologists a starting salary of $250,000, at a minimum, because they had to forego the enjoyments of their years between the ages of 20 and 30.

Well, according to the logic of THCB’s greedhead physicians, veterinarians sure get a raw deal because they spend quite a few years in training and receive only a fraction of MDs’ salaries.  Of course PhDs really take it up the sphincter, with all the years they spend in graduate school, a series of post-doc positions in indentured servitude, and then some really chancy prospects of even getting a job.

The lesson here is not like memorizing the steps of the Krebs cycle or the twelve cranial nerves, so I’ll take it slowly for sawbones readers.  No mnemonic devices or acronyms are required. 

One’s income in a market economy is not based upon years of schooling, contribution to society (whatever that means), or any other assessment of intrinsic worth.  Instead, labor is a product that seeks its economic rent in a competitive market and, like any other product, it captures whatever willing buyers will pay for it.

Of course, if one’s profession obtains a legal monopoly through state licensure and then chokes off the labor supply, buyers in the market will have to pay more for that particular labor.

Alas, the day proceeds and I can waste no more of it instructing arrogant, ignoramus physicians.  I charge by the hour and since I don’t make the return on equity of a Big Pharma company, I see no need to coddle your swinish asses.

As a parting shot, I see that Dr. Novack identifies himself as an orthopedic surgeon.  This information reminds me of an old axiom that made the rounds in the pharmaceutical industry several years ago.  Before the prevalence of Ken and Barbie reps, the ranks were smaller and populated by pharmacists and others with graduate degrees in the health sciences.  Many of these sales people used to complain about the fact that they needed to dumb down the detail presentations so drastically for some specialties.  That’s when one wag passed around the story about the procedure used by residency programs for selecting new people.  According to his apocryphal tale, teaching hospitals would take the bottom 10% of med school graduating classes and if people in this tier could bench press 200 pounds or more, they were taken into orthopedic programs.  Those unable to push the bar to arm’s length went into OB/GYN.  I suspect Dr. Novack had two nurturing nurses spotting for him and they raised the bar from both ends.  —  Industry Veteran

Here is a quick hit for the day. We have read about Medicare (actually CMS, but it sounds better to give Medicare its own personality) publishing payments for 30 procedures. I encourage you check out cms.gov and try to actually understand the Excel file that you get for your efforts.

Only government could call that ‘disclosure.’

Private insurers are also getting into the mix. We have all heard about Aetna publishing the range of reimbursement
  for contracted physicians. Many other companies are announcing that they will
  follow suit. These news reports always include the comment that physicians and
  hospitals do not want this published. I disagree.

Two scenarios can emerge from this, once all insurers publish reimbursement 
rates (and they are not mutually exclusive).

As an orthopedic surgeon, I will use an orthopedic example. If insurer X reports
  publicly that the range of reimbursement for treating a broken wrist ranges from $500 – $750, I will obviously immediately go and check to see where I am
  on that scale. If I am at the low end, I will definitely not sign a new contract
  with that insurer for less than what my colleagues are getting for the same
  work. I will not be alone.

Scenario two is more intriguing. Once all insurers publish their fee schedules, doctors no longer need to participate in insurance plans. All I need to do is set my rates comparably- and reasonably- and drop all the insurance plans. And I can eliminate much of my billings/collection staff. I can also now account
  for the actual work it takes to do different things—and perhaps accept lower
  payment for some things, while charging more for much more complex work. (The example I use is joint replacement: a re-do [revision] joint replacement also pays about 20% more than a first time [primary] joint replacement, even though it can take 4x the work, with increased liability.)

The disclosure would have the absolute opposite effect on insurers than they intended. Although I suspect the smart folks at Aetna, UnitedHealthcare, Healthnet, and others have considered this already, and it is why they are so reluctant to actually make public this information.

The Wall Street Journal reported in a June 13th article,
  Page D1 that several major insurers (Aetna, Cigna, Humana, UnitedHealth)
  as well as Medicare are disclosing the prices they have negotiated with doctors
  and hospitals for a number of common procedures. Some are beginning to include
  quality indicators with the pricing information. This is an apparently-growing
  trend that may spell doom for companies like HealthGrades,
  but this wasn’t noted in the article. One interesting thing: apparently at least
  a few insured people have used the system, even though they’ll be well past
  the deductible. Maybe some few will note a link between the premiums they pay  and the Medical Loss Ratio their insurer experiences. On the other hand, the
  article notes that in the absence of any other quality indicator, people may
  think that more expensive implies higher quality and choose the
  high-cost provider.

The insurer’s tools are restricted to their own plan members: this means if
  you’re covered through Cigna you can’t tell what out-of-pocket costs might be
  for somebody covered by (say) United. The article goes on to detail several
  of the limitations inherent in these disclosures, well-known to readers of The
  Healthcare Blog. Tools like these might actually be useful to those with HDHP
  coverage, or the uninsured.

But there’s more. The article says states are beginning to mandate that hospitals
  disclose their charges. Charges amount to the "list price" that almost
  nobody pays, so this isn’t very helpful to prospective patients. The list includes
  South Dakota, Minnesota, and Florida. I wonder who got the states to mandate
  that instead of something useful. Some state hospital associations are evidently
  taking proactive measures, and have created their own websites to disclose hospital
  charges before being told they must. But why would they do this?

Look at this from the New Hampshire Hospital
  Association PricePoint system:

How much do government programs pay compared to other payment
sources?
In many cases, Medicare & Medicaid reimburse hospitals at rates that do not
cover the costs they incur to provide care. Payments from privately insured
patients generally subsidize the shortfalls created by Medicare and Medicaid
and therefore represent a “hidden tax” on individuals and families not
covered by government programs.

Where have we heard this before?

When you ask for prices, you get median and mean charges with no promise that
  your bill will bear any resemblance to either figure, and this editorial.
  Apparently, they expect they’ll be forced to disclose someday, and this way
  they can control the content of the disclosure. If the legislature gets involved
  the hospitals might not be allowed to put their own "spin" on things. This actually
  is brilliant strategy. They’re not disclosing very much, but they can claim
  they’re being as transparent as they can be, given the vagaries of medical treatment.
  They can lobby commercially-insured patients to lobby congress to increase Medicare
  reimbursements with an implication that the amount they pay in "hidden taxes"
  will go down. But of course it won’t. They do not mention that there are many
  cases for which Medicare & Medicaid reimburse hospitals at rates that exceed
  the costs they incur to provide care. Imagine! Finally, they offer no assurances
  that the costs they incur to provide care are reasonable.

As the premier health policy blog on the net, I am honored that Matthew has asked me to occasionally guest post here. I also am regularly impressed with
  the level of thought and knowledge of so many posters of comments.
  Every once in a while, I think it is important to review, what I would believe
  so basic myths about our healthcare system. One of the greatest myths is the
  3% overhead myth for medicare. (This is often also cited as the 2% overhead
  myth.)
  Argument one in favor of the ‘medicare for all’ expansion of government
  regulated healthcare is the disparity in overhead between Medicare and private
  insurance plans. The Medicare overhead number is stated as 2% or 3%, depending
  upon where you read it. The overhead for private insurers is stated as 15%-25%.
  The disparity is used to explain the statement that, “if we just take the
  amount spent on wasted overhead and apply it to medicare-for-all, we could easily
  pay for everyone to be covered”. Where does that math come from? Here’s
  the brief skinny:
  $2 trillion in healthcare. 50% from private sector= $1trillion. Reduce overhead
  by 15-20%= $150- $200 billion available.
  Oh, if it was so simple.
  Let’s attack the 3% myth.

Proponents say overhead should be calculated as: admin costs/ payout for services.
  However, medicare recipients use much more care, on average, than younger groups.
  So, for example (made up numbers), medicare recipients might use $5000 per year,
  while commercially insured people might use $3000 per year. If both groups consisted
  of 10,000 people, it would take the same amount of oversight, management, etc.,
  yet the perceived overhead to take care of the younger group would be much higher;
  or put the other way, medicare overhead would be much lower.Solution: calculate overhead on a ‘per enrollee’ scale. This alone
  accounts for 50% of the discrepancy in overhead between medicare and private
  payers. If you do not believe me, just check with the Kaiser Foundation research
  saying the same thing.
  Proponents focus on the low administrative costs, on the one hand, while denouncing
  the amount of fraud by hospitals, providers. This perhaps is because medicare  does not spend enough on administrative oversight of the program. This happens to be exactly what the GAO and the National Academy of Social Insurance has  said within the past 6 years. So, if medicare spent more on administration,
  the discrepancy would be decreased even further.
  Proponents fail to account that for every regulation, costs are incurred by
  providers to comply. The 100,000 plus pages of medicare regulations function
  as an unfunded mandate on providers. Currently, the coding is based on ICD-9,
  which has over 24,000 codes. ICD-10, slated to go into effect within the next
  2 years has over 207,000!!!! And does upgrading for the change count toward medicare overhead? Of course not.
  Proponents say that private insurance company rules would create as much hassle
  for providers. Perhaps, but we will never know since private insurance rules
  are based off of the medicare guidelines.
  Thus, the ‘medicare 3% myth’, is, in reality, just that: a myth.

But like most myths, true believers will never pay attention to facts.

Michael Cannon has written a response to my response to him. Even ignoring the issue about my personal HSA, we’re really talking past each other. Cannon doesn’t think our discussion is fruitful, and in truth it’s not. He wants to discuss the vast majority of his paper which looks at the role of HSAs within our current system. To me our current system is so broken, the introduction of HSAs (at least in the limited form they now exist which is all we’re likely to get for now) is pretty irrelevant, and a minor incremental change—albeit one away from the compulsory social insurance that, he correctly states, I advocate. Frankly in the next five years neither of us is going to get our way…so this argument is about what comes next.

The argument I want to have is a theoretical one about what would happen if we had essentially a completely personalized account-based system, as he advocates in his Large HSA proposal. As I explained at length before, I think that a significant number of people would take the money and by no or minimal insurance coverage. So apparently does he.

Large HSAs would give workers far greater freedom of choice. Workers could use their HSA funds (and non-HSA funds) to purchase insurance from their employer or any other source. Alternatively, they could forgo insurance to build larger HSA balances.

Now lets just assume that over say 20 years people really do build up huge HSA balances, and so when they need the money for their individual health crisis in year 20, they can pay for it all themselves. Even accepting that this would happen and that young healthies (His “students”) could buy a cheap heavily underwritten very high deductible policy for the early years, my question is what would happen in Year One? The money that would cover the sick in a compulsory social insurance pool, would have been extracted and instead be sitting in the personal accounts of the “students”. So when the sick start incurring huge health care costs, the money to pay them must come from somewhere. Unless the people who get sick had already saved up the huge amount they need or were allowed to buy into the cheap underwritten catastrophic plans, (both of which are totally unrealistic and the latter of which would destroy those plans as a profitable business), then that money must come from the taxpayer, or the providers (in the form of non-payment for services rendered).

This is the problem that I just don’t understand about the individual account theory. This is after all about the crux of insurance, which Cannon believes can work in a voluntary, HSA-based system. I just wish someone promoting those accounts would explain why I don’t understand how they overcome that issue rather than continually ignoring it.

Michael Cannon comments on my post about his paper yesterday, noting in passing that I have an HSA. C’mon Michael you can understand that people will take advantage of incentives, even though the policy behind those incentives is bone-headed, can’t you? After all like most of your colleagues at Cato I think that getting tax relief on my mortgage is bad policy, I think that paying taxes to support the war on drugs is terrible policy. But no one exactly gave me the choice…

But onto the real discussion. In his blog Cannon says I didn’t read his piece carefully enough. Actually frankly I’m not very interested in the attempt to figure out how HSAs fit into our current broken system which occupies most of the piece, and I despair of any of their supporters taking them very seriously. They all say that they’re “partial solutions”, or “incremental”. Frankly our care system is so screwed up that whether we force more problems on the sick in their decisions about accessing care (which Cannon agrees that HSAs/HDHPs might do) is pretty irrelevant when we have 15% of the population who’d love to have that problem.

What I like about Cannon (and Tanner and Kling) is that they’re among the very, very few on their end of the spectrum who’ll have a theoretical argument about the insurance “market”. So let’s get to our core “mis”understanding

Also, Holt accuses me of ignoring the fact that risk segmentation results in reduced subsidies to the sickest insureds. Yet that is a central theme of the “students & professors” hypothetical (pp. 6-8).

I don’t accuse him of ignoring the reduction in subsidies! I accuse him of both understanding that it happens and believing that it’s a good thing! And the conclusion to that hypothetical piece is

Though the professors would lose the cross-subsidies they received under Plan A,those losses would essentially be temporary transition costs. The higher health insurance premiums for today’s professors would convey to today’s students the importance of saving for their future medical needs. Thus tomorrow’s professors would face greater incentives to save for their future medical needs. Because their current premiums would be lower, they would be better equipped to do so.

In other words, the market would send a signal to the “students” that the if they didn’t avoid having any health care costs in the future, and hadn’t saved all their lives to finance them, they’d be lying bankrupt in the gutter with “professors” who also haven’t saved enough to afford the costs they’re paying for the care they need now. This is a “transition” cost, and Cannon and several of his colleagues believe that a) we really can get to a place where individuals accounts saved for over the years can cover all health expenses, and therefore insurance (with its implied social cross subsidy) is unnecessary, and b) the transition costs are small. Given the current savings habits of Americans  the first assumption is laughable, but it’s the next point that’s the real problem.

If you go to the logical extreme and do away with insurance, a) those transition costs are huge and b) the “students” who get sick will not be able to save enough over their lifetimes to deal with their future costs. The problem remains the 80/20 rule. If you allow the 80% to put all their money in an individual account and not in the social pool there will not be enough money to pay for the care of the few who need it—even the ones who’ve scrimped and saved all their lives.

But don’t fear Cannon has a solution for that. After we’ve eliminated the cross-subsidy of social insurance, we somehow or other bring it back

And on page eight I write:

Though HSAs may reduce hidden subsidies to sicker workers, they do not preclude subsidizing those workers in other ways.

Strangely he didn’t include the very next sentence

Other options include government subsidies or private charity, including assistance from family and friends, churches, civic associations, and uncompensated care from hospitals and doctors.

Which if I’m not very much mistaken is what we’ve got already and what the providers and employers are bleating about at the moment. Cannon just thinks that we should be pushing policies that will make the current zoo worse, and return more money to the healthy people who don’t need it.

His justification for all of this (which he continually says is “socially desirable”) is that putting people into HDHPs will reduce their spending overall and drive out that darned unnecessary care they’re all demanding. But as apparently although he will admit it he doesn’t want to consider that most health care spending is not under the control of a patient spending their own money, even if they have an HSA/HDHP. The stuff that costs the most money is the flat-of-the-curve medicine being visited on the nearly dead. And Cannon apparently has no interest in figuring out how to reduce that because it requires a supply-constraint. To be fair to him, not many other people want to do that either, as it means beating up on a bunch of doctors and hospitals. But other countries manage it!

So for the nth time, if you want to have a rational, fair and cost-efficient health care market you need compulsory social insurance, hopefully progressively based, so that those people who end up with large healthcare costs don’t end up being bankrupted. Then you need incentives for providers that induce them to provide cost-efficient care over a population, rather than to do as much as possible to those who can pay, and ignore the rest—which is the recipe for driving up costs. Cannon’s analysis suggest that he knows this, but his solutions drive us towards the opposite state, which is why I’m wondering about the color of his planet’s sky.

Kaiser Family foundation has an excellent slideshow introduction about the CDHP—how it works, what it’s supposed to do, who pays, etc, etc. Of course all you need to know is in the line below titled “Total Firm Contribution” as to why employers might think they like the HDHP.