National Healthcare Policy

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Introduction. The United States healthcare industry is not a coordinated system (1). It is a mixture of nationalized medicine, single payer insurance, and the free market. Costs have risen dramatically and will continue to go up, so much so, that the current way the industry is regulated will have to change. This paper examines 4 options for the future framework of US healthcare and ends with a conclusion.

Backdrop. A brief review of basic economics is required in order to understand what is going on in the industry and to understand what will and won't work. Competition results in lower prices. "Perfect" competition lowers price to the "marginal" cost. This means that if there are enough competitors, and the product they produce is similar enough, then prices will go down to the variable cost to make one additional unit. This variable cost doesn't include the cost for property, plant and equipment. It doesn't include salaries for full time employees. Airlines are a great example of an industry with very large fixed costs and very low variable costs. When an airliner is scheduled to take off, the cost to add one more passenger is basically zero. That plane is going to take off from point A and land at point B whether another passenger gets on or not. The airline's cost won't change. The total cost for the aircraft, the flight crew, the ground crew, the gate agents, and the fuel are all fixed costs. An airline needs to charge more than its total cost in order to make a profit. But because that seat is so perishable, if there is a passenger out there that has a choice, and the airline has room, it will lower the price dramatically to capture that extra revenue. If the airline is forced to compete with rivals, then it will very quickly lower its cost to below what its total cost is and lose money. It will lose less money by lowering its price than by keeping it high, but it will still lose money. The airline industry is one where you can't have competition. It's unsustainable. And they don't. For the longest time, the airline industry was government regulated, like a utility. The government set limitations on competition, prices, routes, order to keep the rival companies from putting each other out of business. It was deemed necessary, in the country's national interest to have a functioning airline industry. Then in the early 1980's the US deregulated the airline industry and many new companies entered the market and the legacy carriers expanded. This led to fierce competition and massive losses of money, but prices went down and most consumers were happy. Most carriers went out of business (remember PanAm?), and we are now left with only a few, an "oligopoly". Now, with so few, they are able to collude on pricing. Basically, they don't compete anymore, and prices are back up. The healthcare industry is similar to the airline industry. It has very large fixed costs and low marginal costs. The fixed costs of the facility, the salaries, and the equipment will have to be paid whether another patient walks through the door or not. The marginal cost is small, only the money to pay for that extra little bit of electricity to run an MRI machine, for example, or the cost of the chemicals used in a lab test. There are some marginal costs that are more; an artificial knee for example, or chemotherapy drugs, but overall healthcare is a low marginal cost business. If a healthcare organization has to compete, then it, like an airline in the 1980's, will lower its prices. And it will keep them low until it goes out of business, or doesn't have to compete anymore. If it doesn't have to compete, then it will raise prices. Having competition in the healthcare industry poses problems, and having no or little competition poses problems too. Right now, healthcare providers don't have to compete. They enjoy monopolies, or oligopolies (2) (3). Healthcare insurers don't have to compete either. They enjoy an oligopoly (2) (3). And patients aren't price conscience because they don't have to pay (3). Employers pay, and they have limited choices provided by insurers who are enjoying their oligopoly. This is all a perfect medium for a constant, sustained increase in pricing. So, what can you do with a vital industry that has high fixed costs? You either make it a government run operation, or you regulate it. The utility industry is one that is both vital and has high fixed costs. It costs a lot of money to put up a system of power poles and transformers, and very little to actually run it. Power generation requires an expensive plant, and extra capacity for peak periods of demand. If utility companies had to compete with each other, they would either go out of business or evolve into monopolies. Electricity is so vital to our society that we could not very well cope with either scenario. If electric utilities went out of business, we would have power outages. If they were monopolies, we would have very high prices. As a result we have a nice solution in place where the government grants monopolies to private companies and regulates prices. Sewage and water are other vital industries where we have chosen to nationalize with a positive result (nationalize at a local level). With that backdrop, let's look at 4 options for the direction of US healthcare.

1. Nationalize Healthcare. A nationalized healthcare system is one where a government organization would own medical facilities, employ clinicians, and provide healthcare for its residents. How well would this work in the US? We are lucky to have a great model operating right now, the VA. The VA had traditionally been a hospital network for veterans injured during their service. It was almost disbanded in the early 1990's in exchange for a voucher system. Starting in 1995 it began a sweeping change and received congressional support in 1996 with a new codified mandate to provide primary care in addition to hospital care. The VA flattened its management structure, reallocated money to different areas and opened new outpatient clinics. In 1999 it committed to a network-wide EHR system. The result was that in spite of the sicker population that it serves, the VA provides healthcare for a lower cost, with better quality, and better access than it's privately run counterparts (4). The VA has lower costs. In 2004 medicare cost $6,800 per patient while the VA spent $5,000 per patient (4). The VA is able to enjoy low costs because it has the ability to standardize, it doesn't require as much administration as a provider-insurer model does, it requires no profit, and it is not subject to billing restrictions. Because the VA is a single entity, it can dictate that certain procedures and processes be standardized. Standardization improves outcomes and lowers cost (5). The VA does not have as much of an administrative burden as private industry. Private industry spends 20% on administration and profit, and another 12% on insurance billing, totaling 32% (2). There is no insurance billing, and no profit required. In addition to no insurance billing costs, the VA is also free of restrictions insurers place on providers for repayment, so the VA is free to innovate more cost effective means of delivering healthcare. One example is their new "medical homes" program which attempts to triage primary care and limit the use of higher cost clinicians (6). This would not be possible in a system that rewards more use and more care such as a PPO. Financing cost is a factor in favor of the VA too. Most providers have to pay rent or interest on property they own, or pay interest on bonds they issue to finance their properties and operations, but the VA does not (4). Finally, the VA is able to negotiate good prices with drug companies because of its size (4). The VA is able to deliver better quality than its private counterparts. Why? Because there is no incentive to over-treat, because the VA is free to innovate, and because they use information really well. There is no incentive to use more care than is necessary. A PPO model, in contrast, rewards providers for providing more care and procedures, whether they are needed or not. Patients that only receive the right amount of care do better. Studies show that patients without the ability to pay who are treated at community hospitals that know they will not be reimbursed, have better outcomes (7). New approaches can help quality. The VA is free to innovate more efficient means of care, and implement wide use of strategies that work (see paragraph above). The VA uses information really well. It has a system-wide EHR that has achieved 100% chart availability for clinicians at the time they see a patient since 2004 (4). In addition, they use information in low-tech means. They use information as an incentive of sorts. The VA publishes quality results system-wide so there is a sort of friendly competition amongst its different geographical divisions(4). Finally, they have very high patient satisfaction (4). This is especially surprising when you think of this compared to a PPO model where a touted benefit is freedom of choice. The VA has an incentive to keep its patients well. It has no profit motive, and it usually has its patients for life (7). This is different than an HMO's incentive in a subtle but powerful way. The profit motive taints an HMO. An HMO has a financial incentive to under-treat its patients or put them off. One could make the argument that the VA too has pressure to keep costs down, but there is no profit involved. There is a sort of attitude in the VA that is different than at an HMO. If another test is required, then it is no problem. The government will pay for it. There is no negative repercussion. And there is no incentive to do it unless it helps the patient. Having a patient for life adds a subtle mandate as well. The corporate culture is to take care of issues early to prevent bigger issues later. HMO's, in contrast, have a more transient population where members may change jobs or move locations to a venue outside its network. The VA is nationwide and almost always within a member's access. Another advantage of a big nationalized organization like the VA is that it can take on roles that are in the national interest. Medical doctor training for example. The VA employs one third of all US medical residents (4).

2. Single Payer. A single payer system is where only one entity pays bills to providers. It would be having only one insurer instead of many. The chief benefit of a single payer system is the cost savings from standardized billing, and eliminating the profit from private insurers. It does little to promote standardization of care, or alleviate the power of providers to charge high prices. Social Security is a good example of a single payer. As discussed in previous paragraphs, the combined administrative and billing cost of the current PPO system is about 32%. Instituting a single payer system would save about half of that, providing enough money to pay for the uninsured if we wanted to do that (2). In addition, a single payer would be better able to negotiate prices for drugs and to negotiate prices with providers (8). Also, a single payer would have access to a larger amount of data, so it could analyze and potentially influence best practices (8). A single payer would not be able to dictate standardization, however, and it wouldn't be able to stop prices from going higher. A single payer would be better able to negotiate with providers, but it would also have an obligation to accommodate them (3). It can't just dictate prices, it has to negotiate them. And it can't force clinicians to work in certain areas or in certain specialties (9). This could lead to shortages in some specialties, and in some geographic areas. Finally, another disadvantage is that it would make the system hostage to government rule changes, arbitrary budget cuts, and cuts because of recessions (8).

3. More Government Regulation. More government regulation could come in the form of more laws like the US recently passed or like a system that Germany has with multiple payers and multiple providers, but strictly controlled. The aim is to ensure the country has reasonable access to healthcare, at a reasonable price. The benefit of more government regulation is that it can potentially transform the industry to something more like the utility industry where there is plenty of supply and reasonable consumer prices. The government would have to award monopolies, set standards, and set prices. The recent healthcare bill in the US does not go nearly far enough to have a positive impact on access or prices. In fact, it may make prices escalate and access decrease due to the insurance mandate. People working in the industry notice that it is economically unsustainable and anticipate more government intervention (3). One example of a positive government initiative that has helped balance supply and demand happened in California. California spent 95 million dollars over the last ten years to double the amount of nurses that graduate (10). This has relieved the nursing shortage, but the medical doctor shortage persists (11). A special case of government regulation is the model that developed in Germany. It has multiple insurers, an ample supply of providers, and a requirement that its residents purchase insurance. But prices are fixed, so that limits the adverse effects of competition that would otherwise occur. Insurance prices are fixed and provider prices are fixed. In addition, it maintains an ample supply of providers by making medical school free and accessible (12). Their system cost is only 11% of GDP compared to 18% for the US, and access and quality are better too (12) (13). This would not be feasible in the US unless we opened the floodgates to our medical schools and produced an adequate amount of medical doctors like California did with nurses (11).

4. Less Government Regulation. This is kind of what we have right now. This is a concept that appeals to most Americans, and is unsustainable if we want reasonable access and reasonable prices. It means let the free market sort it out. As described in the backdrop section, an industry left alone that has high fixed costs will go through a cycle of cut throat competition followed by escalating prices charged by the few survivors. In addition, we have a bottleneck in the production of medical doctors. During the 1980's and 1990's only one new medical school opened up (9). Today we have some two dozen planned or opening, but still that is nothing compared to the current and coming demand from the aging of the baby boomers (9). In 2011 we graduated 17,364 compared to 15,927 in 2006 (11). That is an increase, but hardly enough. Riverside County alone, in Southern California, has an estimated physician shortage of 3,000 (9). If you have unbalanced supply, there will be market distortions. And we see this manifest itself as an inadequate amount of providers who can charge ever higher prices. As Paul Krugman of the New York Times indicated, the free market has never worked for healthcare anywhere in the world, and that's all that Americans want (14).

Conclusions. Healthcare is a vital industry that cannot be left to the invisible hand of the free market. If it was, then we would get uneven access and eventual high prices. There are four approaches we can take with regard to structuring the US healthcare industry: Nationalization, single payer, more government regulation, and less government regulation. The four paths are listed in their ranked order of a combination of cost, quality, access, and satisfaction. Of these four paths, we are currently on the worst one. That is the one that we as "Americans" think best fits our values (14). So long as we cannot get over this mental block, we are doomed to ever higher medical care costs, and relatively poor outcomes. We have gotten over this mental block with other industries, why not healthcare? Eventually we will be forced to change paths because increasing cost will become too big of a burden. In preparation for that time, we need to decide which option to choose. Anyone in charge of choosing and implementing a new and vital system for a fortune 500 company would first conduct a beta test of the leading candidates. She would test them before releasing them. She would choose the one that performed the best with regard to her desired criteria, and then roll it out company-wide. We are so lucky here in The United States to have 4 such beta tests going on in healthcare at the same time. We have the VA (a government provider), we have Obamacare (more regulation), we have the current state of the industry (less regulation), and we have Medicare (single payer). All we have to do is pick the one that performs the best, and roll it out nationwide. And we have that information already.


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Submitted by Robert E. Mohle