February 15, 2010 Why Washington Can't Reform Healthcare
By Bill Frezza
It's not for lack of will. It's not for lack of power. It's not even for lack of money. Washington can never effectively "reform" healthcare for one simple reason. The healthcare industry runs on fake prices.
On any given day each of us makes a diverse array of price decisions. On rare occasions, like buying a car or a house, we haggle. Most often we simply decide to buy this or maybe that or instead save for a rainy day.
We make these choices based on knowledge unique to our own situation. Should I replace that moth eaten sweater my girlfriend hates? If I splurge on steak tonight does that mean Ramen noodles tomorrow? You cannot answer questions like this for somebody else.
Every purchase decision is a vote. Add them up and hundreds of millions of votes are cast every day. Each is based on a balancing of desires, means, and personal knowledge possessed by no one but each buyer.
Our votes not only tell sellers what to make but when to ship how many where, what color they should be, and how much to charge. Sellers that get it right win our votes and thrive. Sellers that don't disappear. Every day is Election Day. There's no need to wait four years to throw bums out.
Business works the same way, only with more haggling. Prices and the information they communicate are the nervous system of any market. Complex supply chains sprout, evolve, and die as every player in the chain responds to the price signals he can see. These signals tell businesses how much to pay for inputs, what to charge for outputs, when to take risks, where to best innovate, and when it's time to take a hike. If any link in a supply chain consistently loses money the chain breaks and a new one forms. Or not, in the case of buggy whips.
When it comes to running an economy, votes in Congress mean nothing compared to the votes of consumers and producers. Replace the votes of hundreds of millions of buyers and sellers with the votes of a few hundred Congressmen and what do you get? You get our healthcare system - a market whose nervous system has been paralyzed.
Imagine the world's smartest food expert with access to the best culinary research trying to decide what the right price is for a ham sandwich. Once the price is set, that's it - selling a ham sandwich for more or less is against the law. Oh, and homeless people get free ham sandwiches. Refuse to serve them and you lose your deli license.
Laughable, isn't it? Just imagine the mess freezing prices would create up and down the supply chain that makes it possible for us to walk into a deli and order lunch.
Regulations would have to specify what qualifies as a proper ham sandwich. Inspectors, accountants and lawyers would have to be roped into service to monitor compliance. Activists would picket if paying customers got fresh sandwiches and the homeless got stale leftovers. Ham sandwiches would mysteriously disappear from menus whenever pork belly prices spike.
Are you still laughing? So why don't you laugh when some expert claims he can set the right price for a colonoscopy?
Healthcare prices are fake, inflexible, and inflated because they are set not by the repeated interactions of buyers and sellers but by opaque acts of collusion between government bureaucrats and special interests. Even if this system were run by a benevolent genius who happened to set prices exactly "right" - whatever that means - these prices would be obsolete the moment they were published.
This state of affairs has turned the healthcare industry into a staggering zombie. It took several decades for Medicare price setting to swamp the price signals required to keep the market in balance, but we have clearly passed the tipping point. Lacking these signals and the constant corrections they engender, 16% of our economy is flying blind.
Add insurance to the equation, particularly insurance that the public has been encouraged to think of as free stuff paid for by someone else, and the problem only gets worse.
Can't we fix these problems by fixing insurance regulations? Contrary to popular belief, insurance companies love regulation. Regulation eliminates both business risk and pesky competitors. "Reforming" the insurance industry is not going to eliminate pricing dysfunctions, although it may eliminate insurance companies.
Who cares, you say? Wouldn't we be better off using all those insurance industry profits to pay for healthcare? One small problem. If you took all the profits that all the health insurance companies made in 2009 and used them to pay for medical care in 2010 you would cover the country's medical bills for ... two days. Then what?
Even if there were complete bipartisan comity, it is not possible for Congress to "reform" a system whose fundamental price signaling mechanisms are thoroughly broken. Howling politicians can only run up the tab as they lurch from one crisis to the next.
Bill Frezza is a partner at Adams Capital Management, an early-stage venture capital firm. He can be reached at bill@vereverus.com. If you would like to subscribe to his weekly column, drop a note to publisher@vereverus.com.
http://www.realclearmarkets.com/articles/2010/02/15/why_washington_cant_reform_healthcare_97634.html
Showing posts with label Cost. Show all posts
Showing posts with label Cost. Show all posts
Monday, February 15, 2010
Thursday, January 28, 2010
What Do We Have A Right To?
I agree with the statement that people have a 'right' to quality, affordable health care. But once you get past the good feeling that statement engenders, you have to consider the question: What does it mean? What exactly do we have a right to? Quality compared to what? Affordable to whom?
Most reasonable people would agree that there have to be logical limits to this statement. But where?
Starting with an absurd example: There is a medical procedure that will keep someone alive for one more day and it costs $1MM dollars. They don't have $1MM. Do they have the right to expect that someone else (i.e. the rest of the USA via the US Government) will pay for that? Even in this extreme example, I would not want to be the person who says 'no' to that person. Would that everyone could have everything. But of course we can't.
What about $100,000 for an extra month of life? $10,000 for a year?
I'd be willing to pay $10,000 of my own money for an extra year of life. But, again, if I couldn't afford it, do I have the right to expect someone else to pay for my extra year of life?
Whichever entity (insurance companies, government) that we expect to subsidize care that we cannot otherwise afford on our own will have to establish limits to what they will and will not cover and at what price. As heartless as that may sound, there is no alternative since insuring everyone for everything is clearly not a realistic option.
In conclusion, one could say that we have an absolute right to any healthcare that we can pay for ourselves. But if some third party is going to paying for our healthcare, there will inevitably be some limit to what care we will receive. So, make sure that whichever third party you choose to assist you with your healthcare expenses mission is in line with your own values and care objectives.
Watch for future posts about rich vs. poor and 'fairness'.
Most reasonable people would agree that there have to be logical limits to this statement. But where?
Starting with an absurd example: There is a medical procedure that will keep someone alive for one more day and it costs $1MM dollars. They don't have $1MM. Do they have the right to expect that someone else (i.e. the rest of the USA via the US Government) will pay for that? Even in this extreme example, I would not want to be the person who says 'no' to that person. Would that everyone could have everything. But of course we can't.
What about $100,000 for an extra month of life? $10,000 for a year?
I'd be willing to pay $10,000 of my own money for an extra year of life. But, again, if I couldn't afford it, do I have the right to expect someone else to pay for my extra year of life?
Whichever entity (insurance companies, government) that we expect to subsidize care that we cannot otherwise afford on our own will have to establish limits to what they will and will not cover and at what price. As heartless as that may sound, there is no alternative since insuring everyone for everything is clearly not a realistic option.
In conclusion, one could say that we have an absolute right to any healthcare that we can pay for ourselves. But if some third party is going to paying for our healthcare, there will inevitably be some limit to what care we will receive. So, make sure that whichever third party you choose to assist you with your healthcare expenses mission is in line with your own values and care objectives.
Watch for future posts about rich vs. poor and 'fairness'.
Insurance Does Not Equal Health Care
First, we need to separate the question of how much we pay for healthcare from the question of who pays for health care.
In its most basic form, insurance allows individuals to pay a little to protect themselves from something that will cost them alot but has a low probability of occuring.
For example: In my hypothetical, greatly simplifed world, I pay about $1,000 per year to insure my car. If something catastrophic happened to my car, I would expect that to cost $20,000 that would be covered by my insurance. If I had to pay $20,000 out of pocket, that would be a hardship for me. So, I am willing to pay the $1,000 each year to avoid that potential hardship. Insurance 'saves' me money if I have to make a major claim.
Insurance companies can do this because they have lots of people paying them $1,000 a year. They pool our risk. If 20 people buy insurance each year and one person in that group has a $20,000 accident each year, then the insurance company breaks even.
Of course, basic auto insurance doesn't cover every automotive expense. Oil changes, new tires, car washes, etc. I pay those expenses myself. But becuase an oil change is only about $30, that's not a hardship for most people the way a $20,000 accident would be.
What if insurance covered oil changes - one $30 oil change per person per year? The insurance company would expect to have to pay out $600 per year ($30 x 20 people). How much would they charge their customers for this oil change insurance? At least $30, of course.
And because the insurance company has pay an employee to handle the paperwork, and buy them a computer to track the paperwork, and heat/cool the office in which they work, the company would have to charge their customers more like $32.
Why would you pay an insurance company $32 to insure yourself against an expected $30 oil change? That doesn't make any sense.
Putting this conversation back in the health care realm - Why would you pay an insurance company to cover your routine doctor visits? If you have a annual physical exam that cost $200, and so does everyone else, then you can expect your insurance for that exam to cost you MORE THAN $200 for the reasons we discussed above.
Therefore, I conclude that health insurance should be used to cover high cost, low probability medical events not every single medical expenditure an individual may incur.
Obviously, this first post ignore many issues about how insurance companies work (profit motives, ability to bargain for prices) and the fact that costs of medical services are very difficult to determine in advance. We will cover these topics further in future posts.
In its most basic form, insurance allows individuals to pay a little to protect themselves from something that will cost them alot but has a low probability of occuring.
For example: In my hypothetical, greatly simplifed world, I pay about $1,000 per year to insure my car. If something catastrophic happened to my car, I would expect that to cost $20,000 that would be covered by my insurance. If I had to pay $20,000 out of pocket, that would be a hardship for me. So, I am willing to pay the $1,000 each year to avoid that potential hardship. Insurance 'saves' me money if I have to make a major claim.
Insurance companies can do this because they have lots of people paying them $1,000 a year. They pool our risk. If 20 people buy insurance each year and one person in that group has a $20,000 accident each year, then the insurance company breaks even.
Of course, basic auto insurance doesn't cover every automotive expense. Oil changes, new tires, car washes, etc. I pay those expenses myself. But becuase an oil change is only about $30, that's not a hardship for most people the way a $20,000 accident would be.
What if insurance covered oil changes - one $30 oil change per person per year? The insurance company would expect to have to pay out $600 per year ($30 x 20 people). How much would they charge their customers for this oil change insurance? At least $30, of course.
And because the insurance company has pay an employee to handle the paperwork, and buy them a computer to track the paperwork, and heat/cool the office in which they work, the company would have to charge their customers more like $32.
Why would you pay an insurance company $32 to insure yourself against an expected $30 oil change? That doesn't make any sense.
Putting this conversation back in the health care realm - Why would you pay an insurance company to cover your routine doctor visits? If you have a annual physical exam that cost $200, and so does everyone else, then you can expect your insurance for that exam to cost you MORE THAN $200 for the reasons we discussed above.
Therefore, I conclude that health insurance should be used to cover high cost, low probability medical events not every single medical expenditure an individual may incur.
Obviously, this first post ignore many issues about how insurance companies work (profit motives, ability to bargain for prices) and the fact that costs of medical services are very difficult to determine in advance. We will cover these topics further in future posts.
Wednesday, January 27, 2010
Introduction
I've been thinking a great deal about the current health care debate. In as much as we are searching for the right answer, I wonder sometimes if we are asking the right questions. I believe there is a great deal of consensus around the goals of reforming health care, namely:
But I do have some opinions about how we define these problems, what the underlying drivers are and where possible solutions might lie. This blog is my effort to document my thinking on the matter to ensure that my own thinking is internally consistent, a place to aggregate data and statistics to prove or disprove my hypotheses, and generally a place to vent my spleen over the shoddy nature of the debate currently underway.
If anyone chooses to listen in on my musings, I encourage comments and guidance.
- Ensure that as many people as possible have access to quality health care (ACCESS).
- Reduce the overall amount of money we spend on health care (COST).
- Maximize the quality of the health care we receive (QUALITY).
But I do have some opinions about how we define these problems, what the underlying drivers are and where possible solutions might lie. This blog is my effort to document my thinking on the matter to ensure that my own thinking is internally consistent, a place to aggregate data and statistics to prove or disprove my hypotheses, and generally a place to vent my spleen over the shoddy nature of the debate currently underway.
If anyone chooses to listen in on my musings, I encourage comments and guidance.
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