Diagnosis: Critical

Wednesday, July 30, 2003

The entire U.S. health care system must undergo fundamental change. Patients, doctors, and employers are dissatisfied. Costs are still going up, the system is bloated, and yet the government wants to add coverage and bureaucracy. It’s time to put the patient back in charge, expose health care to free market competition, and, most revolutionary, do away with the idea that every American deserves health care no matter the cost.

First and foremost, decisions to purchase medical care should be made by the patient desiring the care. People must spend money directly for medical care in order to become cost conscious. The current system encourages patients to neglect cost when they use medical care. Income allocated to health insurance costs is given special tax treatment if provided by the employer. Why is this done uniquely for health care costs? Other essential items, including even food and clothing, are not offered this exalted status. This was basically an accident of history, when companies began offering health benefits to lure employees during World War II. Because the tax code did not specify that these benefits were taxable, they were not taxed. Years later, this was codified.

Special tax treatment for health benefits has several deleterious effects. Offered a choice of receiving income as taxable or assigning that income to health benefits in return for exclusion from income taxes, people are induced to spend a higher proportion of income on health insurance and health benefits than they otherwise would. Moreover, they are sheltered from cost consciousness about health insurance. By assigning pre-tax dollars to health care, employees are encouraged to think that someone else is paying for their health care. This also propagates a general lack of thought about what the money is being spent for. Third-party-payer spending for health care is an unfortunate example of spending someone else’s money without regard to the relation between cost and benefit. The special tax treatment of health benefits for employers and employees must be eliminated, so that after-tax, not pre-tax, dollars are spent. This will ultimately de-link health benefits from employment because health benefits will be spent from ordinary income. When combined with government-required universal health insurance, all people will be insured regardless of employment status, and the problem of non-portability of health insurance will disappear.

The general structure of health insurance is another fundamental part of the problem. Instead of coverage being limited to significant medical expenses, like catastrophic insurance for one’s house burning down, health insurance has become coverage for nearly 100 percent of health care expenses. Even office visits and diagnostic tests amounting to only tens of dollars are covered. This has two major consequences: First, patients believe that essentially no out-of-pocket payment is necessary for any health-related event. This generates an incentive for them to over-utilize the medical system, to consider access to all diagnostic and therapy-related care as an entitlement. Changing medical insurance so that only major expenditures are covered would reduce the moral hazard of current health insurance. Raising insurance deductibles increases the incentives for healthy behavior and encourages cost consideration by the patient.

A second major consequence of having insurance cover even minor expenses is the excessive administrative burden placed on the system. It is estimated that almost 25 percent of overall health care costs are due to administrative costs. Clearly the vast majority, perhaps as much as 90 percent, of paperwork and monitoring of claims relates to minor charges. Changing the nature of health insurance to cover only major expenses would immediately eliminate most administrative costs in the current system.

Eliminating the administrative burden on health care providers would lessen the dissatisfaction felt by many of these providers. This would help reinstate the patient-doctor relationship, which is a key component of appropriate medical care as well as critical to the general level of satisfaction of all users of the health care system. Tragically, this once prized component of the American health care system has been significantly harmed over the past decade. (Some of this can be cured by allowing patients to select their own doctor.) Although the degradation of this relationship has many causes, the insertion of the third-party payer in between the patient and the physician is unquestionably a major cause. Also, the layering of added bureaucracy on the health care provider has left less time for doctors to spend with their patients.

The patient-doctor relationship is uniquely important to medical care because of the extreme nature of the information gap between patient and physician (i.e., the buyer and the seller). No other industry has such asymmetry of information, and perhaps no other information asymmetry is so permanent. Although some of this asymmetry can be reduced by access to sophisticated information due mainly to the development of the Internet, the gap cannot be eliminated. As medical care becomes even more technologically advanced, highly complex diagnostic and therapeutic algorithms will become even more commonplace. This asymmetry of information makes it crucial that physicians have an established relationship with their patients. This will help ensure that appropriate medical care is offered and accepted, while minimizing concerns for profits that are standard in other industries.

The accepted dogma that every American citizen is “entitled” to equal access to the ultimate level of health care, regardless of costs, is flawed. There is no precedent for that type of philosophy. Automobile safety offers instructive insights for health care. Safety statistics vary from manufacturer to manufacturer. Consumers are aware that certain cars afford better and more sophisticated protection—anti-lock brakes, traction-based acceleration, multiple airbags, impact-accommodating construction, emergency satellite systems for automated response to collisions, 24-hour emergency road service—all these are innovative improvements on standard automobile safety. Most of these are only available for extra costs; many are only available on luxury cars toward the upper end of the market in price. Yet the government does not decree that all cars need to have all of these safety features. Why? Because they cost money. It is noteworthy that once these initially expensive innovations become widely used and proven, they often become standard. This is one of the benefits of the free market system. Those affluent enough to pay for what are initially “luxuries,” even in items deemed important for automobile safety, are the test market for such technologies. Eventually, competitive forces prevail for worthy features and price comes down, so that larger populations gain access. Similar mechanisms will work for technologic advances in medicine.

The need is clear: Bring health care into the free market economy. Eliminating the special tax treatment of health care expenses will cause the patient to become the customer for the vast majority of medical purchases, not the insurance company or the employer. Larger deductibles in health insurance policies will empower people to decide how to spend their own money on medical care. Once people buy health care for themselves, the marketplace will determine what is worthwhile for customers to buy. Exposure to the free market will drive competitive practices among health care providers. Worthwhile medical technologies will be utilized; superfluous technologies will be revealed as just that. Best practices by physicians will become clarified. Costs will come down.