The feedback loop on healthcare

The following is an outlook paper of The Jacksonian Party.

I have written about the problem of healthcare a few times in the past.  The first time was to outline the problems in 'health insurance' which is not insurance at all but a form of trying to manage costs for health care.  This 'problem' arose due to political interference in another part of the economy, which is the retirement system.  That system was set up to remove older workers from the workforce at a given age with guaranteed payments.  This was an 'economic stimulus' system to try and get the US out of the Great Depression... which it was already doing before this was passed.  After the end of that era came another one that would soon require the very, same individuals who were retiring to stay and work: World War II.  To do that manufacturing and service sectors were allowed to subsidize something that was only offered to executives and the rich:  'health insurance'.  That subsidy remains as a non-positive economic stimulus to this day.

In regular insurance you would place a bet that you will need a service, like health care, or as a contingency for an event, say death or accidental dismemberment.  That is where the insurance company is banking on you not needing to cash in your insurance by having the event and you are betting that the event will happen and that you will then get the payment.  Or your estate will.  'Health insurance' is neither of those as those who are not healthy need medical services, and so they are guaranteed to get an immediate return on their health care 'insurance' and are betting that their cost of services and medicine will be larger than their payments.  In large pools of mixed individuals the average can be given for that chance and payout, and the insurance company has overhead to ensure they are not being defrauded.  This is a health management system in which you, the patient, claims a need for medical services and the insurance company tells you if you are allowed to get those services at its cost schedule.  The two political parties seek to increase the pool of healthy, non-payers and turn them into payers into this system, either via direct law or indirect tax incentive.

What neither party addresses is the cost of overhead in the system: the cost to run the health management system on the part of the insurance companies which is bundled into the cost of the overall system, itself.  Your payment to the health system run by an insurance company includes this overhead on the part of the company.  Thus your final cost is burdened with the entire cost of the system: every insurance payment, every 'co-pay', every procedure that is covered and allowed is all burdened with this overhead.  As the tax breaks to offer this system were only offered to employers, those individuals seeking individual insurance would pay the whole cost, while, due to the tax break, the federal government assured businesses that they could foot part of the bill at a lower cost.  Your regular cost for the insurance (not co-pays) is thus not the entire bill of the cost of insurance, and yet it comes from your income and a portion of that is taxable.  Thus the employer gets a tax break (the subsidy) on what it pays, and you get a minimal tax break for your side if you pay over a certain percent of your income into health care costs.  If you don't you get a standard deduction.  If you sought this on your own, you would pay taxes on everything.

The problem with the costs involved I examined in a piece looking at how to move away from the insurance based model.  There are many ways to do this, including ending all the tax breaks for insurance so that the full, burdened cost is taxable as a service.  That would lead to unaffordable insurance companies ending their offerings, and those that demonstrate good and prudent means of choosing doctors, procedures and finding ways to reduce overhead would prosper.  An alternative I discuss is to see that this is really an 'assured service delivery' system and to treat it as such for given procedures, tests and other medical necessities.  By creating a 'voucher system', or medical services market, individuals could purchase guaranteed services at a given, current rate.  The voucher (or e-voucher) never expires and what one has done is *invest* in the system to get a guaranteed service return regardless of future cost.  This removes the overhead and fraud part of the system of improper services and puts the patient in control of assuring that such services have been properly rendered.  Fraud can still happen, but it becomes collusion and conspiracy, with much, much tougher sanctions against it if found.

What such a system would do is create a trade market for commodities from suppliers, so that an open-heart procedure performed at a hospital would have a higher value than one at a lesser hospital.  If you hold a voucher for that service at that facility or with that medical care provider, you are not refused it by them (scheduling and emergencies excepted, of course).  This also means that one can trade a number of lesser vouchers for a higher value one, so that services that you though you might need can be re-utilized for other services.  This removes the 'management' part from companies and places it with you, the actual user of the services.

There is another way to move out of the current system, however, and that is to require a feedback system into it.  Instapundit links to an article at the NYT on the topic of quality health care which looks at the cost system based not on its delivery of services but of the quality of services.  This quality factor is something that bundles a few things together:  overhead costs (paperwork, management), quality of care provided (by individuals who utilize the health services), quality of service (examining complications and attempts to mitigate them), and just the ability to provide the given service.  Here the actual ability of the health service user, being you, is taken into deep consideration, along with the burdening the system of each provider.  A provider that renders good quality care with low overhead and few mistakes gets a higher rating.  This is important as it impacts two venues that are currently critical to the health care cost system:  quality of care and overhead.

One of the major expenses in the insurance model is actually keeping track of the paperwork and making sure that reputable and reliable reports get reimbursed.  This is no small matter as the bulk of the payments goes to those providing the services, and the problem of fraud or mis-applied treatment is a major cost overhead for everyone in the system.  Fraud generally increases overall costs as it requires illegitimate payments and the time and energy to ensure they are tracked down and stopped.  Quality providers offer not only good service but offer accountability, too.  Accountability works to reduce overhead in that fewer poor procedures are done and the doctor has put in place a system to ensure that paperwork is quickly processed and procedures are accounted for.  Additionally, input from patients then changes those ratings as does the favorite problem harped upon by politicians:  torte reform for minimalizing malpractice suits.

The latter part is also a part of the overall rating, but a highly important one: doctors who have fewer suits against them can now point to insurance companies and demand better medical malpractice rates.  This overhead, as well as the time involved in such suits, has been a cost expenditure the system has had to absorb both on the doctor time and the insurance company's time (both malpractice insurer and health insurance provider).  Anything that lowers this cost and drives poor service providers from the market is a great boon in the long run and will help to lower overall delivery cost.

With that being said, the overall insurance model eats up a huge amount of time, capital and reduces the actual effective dollar being spent for health services.  Here the two Presidential Candidates offer different views, but neither tries to tackle the problem of actually having insurance.  I step through that overhead, but come to this conclusion:

Using government 'mandates' then becomes an effort to shift accountability out of the hands of patients, no matter how 'market oriented' a mandate is, and to meeting 'standards' set by a regulatory body that is appointed, not elected. As Mr. Stossel points out the average doctor utilizes 14% of their income to deal with *paperwork*, and even with most of that being electronic it requires the hiring of non-medical staff to handle insurance 'oversight' and paperwork. What you pay *into* health insurance becomes a fraction of what is paid out: you subtract of insurance company overhead, overhead of that burden on doctors who must change pricing due to it, and the increased cost of 'controls' and 'accountability' by the insurance company against fraud and just keeping track of the records. If you consider that 14% to be a baseline, just on the medical overhead side, then what is the baseline for the insurance company just to manage paperwork? 1% seems unlikely. 5% if it was run extremely well. In fact for most industries the non-work portion of the day for employees is considered at 20% and that is without profit added in.

If the insurance part is 20% and you throw in, say, a generous 12% profit... even 8% to be low... and you add in the cost of increase to doctors to keep track of the paperwork and pass that cost along, just what part of this 'insurance' is actually going to pay for medical expenses? You know, the stuff you use like doctor's visits and purchasing medications? 70% seems relatively fair, in that realm. So, if 15% of your overall budget goes to healthcare via insurance and you get a 70% useful return on that 15% you are actually spending, yes, 10.5% for healthcare. And that of your grandparents who didn't have insurance, back in the day when that was possible? I've read figures as high as 6-8% and as low as 3%.

That cost delta is lost money due to government mandates, regulations, tax subsidies and generally interfering with your health.

Getting accountability into the system will help to lower that 14% on the part of doctors, and that 20% from insurance companies, meaning that the 70% actual return will go up... maybe even to 75 or 80%!  The rest of that cost gets harder to drive out, although the actual amount necessary to pay in (the 100% you pay) can be lowered if the cost of medical malpractice insurance starts to drive less capable providers out of the system.  What you do not get to, save for a minority of cases, is a better than 100% return on your investment.  You do get health care, however, which keeps you alive and functioning.

The other side that is effected, however, is that of the ability of service providers to actually do something quite different from production line work.  The author of that article has not kept up with manufacturing and we are in an era of 'mass customization'.  That is where a basic production line can offer a wide variety of products off of its line-up, made directly to customer specifications.  That is a perfect analogy to dealing with health care as basic problems (medical conditions) can have a variety of variations due to individuals (due to metabolism, age, living circumstances, etc.) and with different complications (infections, slow healing rates, etc.).  Here the basic production line of medical services vary within known parameters for the various characteristics and known types of complications that arise.  Mass customized health care is different from personalized health care in that you, as a customer, have a specific set of variations based on *you* that are generally more typified into categories.  As those typical variations are known, the types of complications that can arise gets restricted into fewer categories which, thereby, limits risk.

This feedback system is possibly the most important part of medicine shifting to the modern world using modern feed-back systems for patient tracking.  By accumulating the non-personal categories and problems, the types of risks and complications can then be analyzed to see how diagnoses (services) are changing the system.  Diagnoses that lead to no improvement, or even minimal negative feedback, can then be examined against other diagnoses and treatments prescribed.  Those treatments (customized service) then allows for the diagnoses system to see what is happening with the treatments and offers feedback on effectiveness of them.  This, cumulatively, changes the response of the system as a whole: it ensures that better diagnoses and treatments are reinforced while lesser effective ones are marginalized.  That said for an individual with a suite of prior conditions and known variables, a personalized set of customized health provisioning can be made due to those things (and such things as patients actually doing their part in the system so those with lax attitudes may get a different set of treatments).

Here the goal is to provide better and more effective services and *reduce* end user cost as a percentage of their budget.  So, lets say it cuts a full 1/3 off the final cost to you, the person paying for it: that gets you to 10% of your budget (5% being 1/3 of 15%).  And that is the burdened cost and lets cut that burdening down to a mere 20%, thus your effective money towards health care is 8% of your budget!  Just like your ancestors!  And the 2% extra?  Service fees burdened into the cost.

Yes you get to pay for the privilege of getting the health care that your grandparents did... or great grandparents for many at this point.  And for better and more services?

Such a wonderful system.

The only major positive point is that it allows really nasty medical services to have less of an impact on the budget.  But then that is what traditional insurance is all about, isn't it?  Catastrophic care?  Accidental Death and Dismemberment?  You know, *regular* insurance.  That you pre-plan for and have it take a miniscule part of your budget as they are rarities in life... unless one happens to get you.

And for the rest... well that concept of pre-buying sounds pretty good, really.  And inflation-proof as it is for services expected in the future at some indefinite time.  An investment, in other words, where the cash-out is something critical to keeping you functioning.

Both of those would be helped by this movement, also, maybe even to the point of having you paying less for your health than those of 70 years ago as a percentage of your overall budget.