Minor Thoughts from me to you

The biggest problem in healthcare is that providers—doctors and hospitals—are allergic to straightforward pricing and refuse to give actual prices before providing services. This idea for a solution isn't perfect but I think it's worth trying.

Perhaps a solution in the healthcare arena would be to institute binding arbitration in cases where providers refuse to agree on prices before providing service. And perhaps the binding arbitration could be based on the fee the patient offered to pay upfront, but declined by the provider in favor of bureaucratic claims processing. For example, if a patient had offered (in good faith) to pay $5,000 for the surgery; but the EOB and claim came in at $50,000, the arbitrator would award one or the other. Common sense tells us that the arbitrator will almost always award the patient’s upfront offer.

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Here's something interesting from my files.

Medical personnel are fond of saying that you can't practice medicine like a business. They often believe that their work is unique and can't be easily optimized by industrial engineers. But there is some room for improvement. Take scheduling. What if you did today's work today? Worry about next week, next week. Don't try to schedule it today.

A few doctors have started applying that principle in their offices and have found that their patients spend less time in their waiting rooms and spend less time waiting for an available appointment. And the doctors spend less time being overbooked and overworked. The concept is called "open access scheduling" and allows doctors to leave most of their time unbooked.

[P]atients start calling at 9 a.m. and are assigned 15-minute time slots on a first-call, first-serve basis. Those who want a traditional scheduled appointment can try for the two to three hours a day he reserves for advanced bookings, usually for annual physicals or patients who need regular follow-ups. A few extra slots are left open for walk-ins or emergencies.

This is the type of innovation and experimentation that you'd see more of, if patients paid for their care directly, giving them the freedom to shop around and consult different doctors. That kind of open ended market would also give providers more freedom to experiment with how they practice healthcare, rather than being tied to the rules of large HMOs and large group practices.

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John Goodman links to a recent (gated) study from the Health Affairs Blog.

We examined both quality and actual medical costs for episodes of care provided by nearly 250,000 U.S. physicians serving commercially insured patients nationwide. Overall, episode costs for a set of major medical procedures varied about 2.5-fold, and for a selected set of common chronic conditions, episode costs varied about 15-fold…there was essentially no correlation between average episode costs and measured quality across markets.

That indicates to me that there is a lot of room for patient's to bargain for healthcare and push for lower prices. If more patients spent their own money, they'd do so. And, in so doing, they'd lower their own healthcare costs and the costs of the overall healthcare system.

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Steven Landsburg reminds people that prices actually represent something concrete in the real world. When the President demagogues against prices, he's playing the dunce because he thinks you're an idiot.

This morning I heard President Obama call for universities to lower their tuition rates so that “everybody in America can go to college”.

... To believe what the President wants you to believe, you’d have to be not just stupid but badly misinformed. At the University where I teach, we do not lack for applicants. The reason we don’t have more students is not that they can’t afford us; it’s that we don’t have room for them.

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There are a couple of things that I really wish the general public would understand. One is that gas prices (and oil prices) aren't, broadly speaking, under the control of any President. No President gets to take credit for prices falling and no President should take the blame for prices rising.

Is President Obama responsible for spiraling price of gasoline? Republicans say yes, but the facts say no.

Why have gasoline prices increased since the start of the year? The simplest explanation is that the price of crude oil has increased. Specifically, the spot price for Brent (North Sea) crude has increased $16 a barrel since January. Given that there are 42 gallons to a barrel, that works out to a 38 cent increase in the price of a gallon of oil. Spot prices for gasoline trade in New York have increased about 41 cents per gallon over the same time frame. So there you go.

Why is the price of North Sea oil relevant to the price of gasoline in the United States? Well, we import gasoline refined in Europe from North Sea crude. Even though these imports constitute less than 10 percent of U.S. gasoline consumption, they are necessary to satisfy domestic demand and their price sets the market price for all gasoline regardless of whether other cheaper crude sources are used to refine most of our gasoline.

You can also listen to the podcast version of this article.

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John Goodman returns to a theme of his blog: third-party payment really screws up the healthcare "market". In no sense is the American healthcare system a functioning market. Or, if it is, patients are certainly not true participants in the market.

Of all the people in the health care system, none is more central than the physician. Fundamental reform that lowers costs, raises quality and improves access to care is almost inconceivable without physicians leading and directing the changes. Yet of all the actors in modern health care, none are more trapped than our nation’s doctors. Let’s consider just a few of the ways your doctor is constrained, unlike any other professional you deal with.

No telephone.

No E-mail

Lack of Electronic Medical Records

Inadequate Advice About Drugs and Other Therapies.

Inadequate Patient Education.

What is the common denominator for all of these problems? Unlike other professionals, doctors are not free to repackage and reprice their services in customer pleasing ways. The way their services are packaged is dictated by third-party-payer bureaucracies. The prices they are paid are similarly dictated. Doctors are the least free of any professional we deal with. Yet these un-free actors are directing one-fifth of all consumer spending!

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John Goodman starts to explain one of the the major problems with American healthcare.

Every lawyer, every accountant, every architect, every engineer — indeed, every professional in every other field — is able to do something doctors cannot do. They can repackage and reprice their services. If demand changes or if they discover a way of meeting their clients’ needs more efficiently, they are free to offer a different bundle of services for a different price. Doctors, by contrast, are trapped.

… Medicare has a list of some 7,500 separate tasks it pays physicians to perform. For each task there is a price that varies according to location and other factors. Of the 800,000 practicing physicians in this country, not all are in Medicare and no doctor is going to perform every task on Medicare’s list.

Yet Medicare is potentially setting about 6 billion prices across the country at any one time.

Is there any chance that Medicare can get all those prices right? Not likely.

… In addition, Medicare has strict rules about how tasks can be combined. For example, “special needs” patients typically have five or more comorbidities — a fancy way of saying that a lot of things are going wrong at once. These patients are costing Medicare about $60,000 a year and they consume a large share of Medicare’s entire budget. Ideally, when one of these patients sees a doctor, the doctor will deal with all five problems sequentially. That would economize on the patient’s time and ensure that the treatment regime for each malady is integrated and consistent with all the others.

Under Medicare’s payment system, however, a specialist can only bill Medicare the full fee for treating one of the five conditions during a single visit. If she treats the other four, she can only bill half price for those services. It’s even worse for primary care physicians. They cannot bill anything for treating the additional four conditions.

Since doctors don’t like to work for free or see their income cut in half, most have a one-visit-one-morbidity-treatment policy. Patients with five morbidities are asked to schedule additional visits for the remaining four problems with the same doctor or with other doctors. The type of medicine that would be best for the patient and that would probably save the taxpayers money in the long run is the type of medicine that is penalized under Medicare’s payment system.

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Richard Epstein looks at the recent run up in gas prices and concludes that it's mostly because of an increasingly hostile posture towards Iran.

Without question, the problem can be traced back to a renegade Iran. For good and sufficient political reasons, the West has come to see that the Iranian nuclear threat is not just bluster. Indeed, it poses far greater risks to world peace and the political order than even a major disruption in oil supplies.

Hence an anxious West has now put into place a reasonably effective concerted effort to cut off Iran from the world’s banking system, and to block the use of Iranian oil internationally, which has been made easier by the Saudis’ willingness to expand their own shipments into the world markets. Nor have the Iranians sat back idly. They have cut off exports to the United Kingdom and France, a move that is largely symbolic. But the Iranian threat to close the Strait of Hormuz, through which about one-third the world’s oil supplies travel, is not symbolic. Nor is the movement of the U.S. aircraft carrier, the U.S.S. Abraham Lincoln, into the Strait of Hormuz, merely symbolic.

For both the short and the middle term, these developments have driven the base-line price of Brent crude from the North Sea up to around $119 per barrel. That translates into a potential price at the pump of about $4.25 per gallon, which undoubtedly will eat into the pocketbooks of many Americans.

He concludes that the worst possible thing, for gas prices, is for politicians to start looking for "something to do". (And, yes, he criticizes both Democrats and Republicans on this issue.) Rather, we should sit back and let individuals and companies figure out the best way to react to the increased risk and the possibility of sudden shortages.

The question on the table is how best to respond to the disruptions in oil supplies, not to pretend that these disruptions do not exist. On this score, the great advantage of a market system is that it forces Mr. Coudle (and everyone else) to think hard about the relative value of the goods and services he consumes and to make cutbacks in a cheap and rational fashion. In both good times and bad, people are always having to decide which goods and services to spend their incomes on, and which to forego.

Price movements give them an accurate, instantaneous, and impersonal picture of how other people value various goods and services. When oil prices rise, its least valuable uses are the first to drop out of the system. The decisions are typically made on a continuous basis, so that if some people find that they have cut back purchases by too much (or too little), they can increase (or decrease) their purchases in the next pricing period. Spurred on by these price increases, people can also make changes in their spending patterns elsewhere to offset the inconvenience of the higher prices for oil products. Purchasing a hybrid, insulating your home, and moving closer to work are just some of the many ways to save money. Good luck to Mr. Coudle, who provides an object lesson in how that task should be done.

The great risk is that the government will undermine the market by resorting to centralized devices to cap the price increases or to dictate its collective vision of the just price. Now is the time to recall the lessons of Friedrich Hayek’s best writing, the scholarly essay “The Use of Knowledge in Society” (1945), which is about the superiority of a decentralized price mechanism in response to system-wide shocks. As he reminds us, “The knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all separate individuals possess.”

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Jon R. Gabel writes in the New York Times today, saying that we shouldn't fear the cost of health care reform because the CBO has a long history of underestimating the savings from reforms.

In the early 1980s, Congress changed the way Medicare paid hospitals so that payments would no longer be based on costs incurred. ... The Congressional Budget Office predicted that, from 1983 to 1986, this change would slow Medicare hospital spending (which had been rising much faster than the rate of inflation) by $10 billion, and that by 1986 total spending would be $60 billion. Actual spending in 1986 was $49 billion. The savings in 1986 alone were as much as three years of estimated savings.

In the 1990s, the biggest change in Medicare came with the Balanced Budget Act of 1997, a compromise between a Republican-controlled Congress and a Democratic administration. ... The actual savings turned out to be 50 percent greater in 1998 and 113 percent greater in 1999 than the budget office forecast.

In the current decade, the major legislative change to the system was the Medicare Modernization Act of 2003, which added a prescription drug benefit. In assessing how much this new program would cost, the Congressional Budget Office assumed that prices would rise as patients demanded more drugs, and estimated that spending on the drug benefit would be $206 billion.

Actual spending was nearly 40 percent less than that.

I find it interesting though that his savings numbers only extend out a few years. For instance, he talks about how much was saved in 1986, from the 1983 bill, but doesn't talk about hospital spending trends since then. How much has the 1983 bill saved over the past 26 years? He talks about how much money was saved in 1998 and 1999 as a result of the Balanced Budget Act of 1997, but he doesn't talk about how much has been saved in the intervening 10 years. Did the trend continue?

Then I saw this graph, of Congressional health care underestimates. (Courtesy of John Goodman, courtesy of the Joint Economic Commitee. You can read the full report.)

It looks like health care costs are underestimated far more than they're overestimated.

I should know by now that whenever I try to explain something John Stossel has already explained it better. First, he delivers a great quote about why competition keeps prices low.

In a free market, a business that is complacent about costs learns that its prices are too high when it sees lower-cost competitors winning over its customers.

I posted yesterday about why "exchanges" are worse than free markets. Stossel takes that on too and does a far better job than I did.

... Competition is not a bunch of companies offering the same products and services in the same way. That sterile notion of competition assumes we already know all that there is to know.

But consumers often don't know what they want until it's offered, and their preferences and requirements change. Businesses don't know exactly what consumers want or the most efficient way to produce it until they are in the thick of the competitive hustle and bustle.

Nobel laureate F.A. Hayek taught that competition is a "discovery procedure." In other words, the "data" of supply and demand emerge only through the market process. We need open-ended competition not merely to see which rival is better, but to learn things we didn't know before and aren't likely to learn any other way.

"Competition is valuable only because, and so far as, its results are unpredictable and on the whole different from those which anyone has, or could have, deliberately aimed at," Hayek wrote.

The health care bills are perfect examples. If competition is a discovery process, the congressional bills would impose the opposite of competition. They would forbid real choice.

In place of the variety of products that competition would generate, we would be forced "choose" among virtually identical insurance plans. Government would define these plans down to the last detail. Every one would have at least the same "basic" coverage, including physical exams, maternity benefits, well-baby care, alcoholism treatment, and mental-health services. Consumers could not buy a cheap, high-deductible catastrophic policy. Every insurance company would have to use an identical government-designed pricing structure. Prices would be the same for sick and healthy.

Why does healthcare in America seem so broken? There's actually a very simply reason: the people receiving the care are not the people paying for the care. As always, he who pays the piper calls the tune. Russ Roberts breaks it down:

So why doesn't a hospital work better? The answer I think, is that the level of specialization in medicine has emerged from a process that has very few incentives to make sure that the level of specialization is as productive as it should be. There are very few informational feedback loops. Very little accountability. Sure, if a surgeon leaves a scalpel in your chest cavity and sews you back up, the surgeon bears a cost. And as a result, it doesn't happen very often. But the kind of errors that Arnold worries about, the kind of errors that I've worried about with my Dad in the hospital (and the kind I've seen made) are the ones that have little or no consequence to anyone other than the patient.

These errors are built into the system. When a drug leads to unexpected side effects because the right questions weren't asked, when an opportunity for a safer treatment is missed, when an aggressive treatment for one illness weakens the immune system and leads to other problems, who can you blame? Who bears a cost other than the patient?

You can blame the hospital of course, whatever that means, but the costs to the human beings who work in the hospital are small. There are no feedback loops within the hospital to reward generalists who look for the costs of specializations. And the reason there are not is because the patient is not the customer. The patient is not paying the bill. The financial incentives that do exist are coming from Medicare and Medicaid and the insurance companies. The normal feedback loops that protect the customer from error and greed and simple stupidity are missing. In a way, it's amazing it works as well as it does. It works as well as it does presumably because most doctors and nurses do care about the lives in their hands. But it's imperfect and could be much better.

( Via Cafe Hayek.)