I’ve just been through a horrendously busy three weeks, including several trials, a surprisingly short-term cold, and the High Holidays. So I haven’t had much time to post, or even to read the excellent stuff on here with any degree of serious attention. And in the meantime we have stumbled into a certified recession which may at any moment get officially declared to be a depression; the odds in the election have shifted to the point where the GOP may be unable to steal it even if they like McCain well enough to try; and I am starting to think seriously about writing a book. So right now I’d like to talk some more about health care, with apologies to anybody who has already said what I’m about to say, or has already provided irrefutable facts to contradict it, because I haven’t had the time to read your posts with the care they deserve.
II. Health Care
Much though it pains me to say it, McCain’s proposals are not all bad. In particular, yes, they would ultimately destroy the current link between employment and health care. Which I have long believed would be a really good idea.
That link was created when FDR and John L. Lewis made a deal with the devil for reasons having nothing whatever to do with providing health care for everybody who needed it. That deal was made back when most people not only didn’t have health insurance, they didn’t need it. It was a nice luxury, but not a necessity. When I was a kid, the local hospital charged $11.00 a day. Admittedly, that was about two or three times the average daily rental for an apartment or a house. But it was still a whole lot cheaper, both relatively and absolutely, than hospital costs today. When I was in college, doctors made house calls, and made them for only ten dollars more than the cost of an office visit. And those doctors had gotten their education at schools that charged what their (usually middle-class) parents could afford to pay, and a few scholarships thrown in. None of them had even heard of student loans.
But third-party payment keeps the free market from doing its job. Pop quiz: what do the following have in common: health care, higher education, and legal fees? There are in fact two answers: the costs for all three have increased much faster than the rate of inflation in the economy at large, and they are all, to a very great extent, paid for by third parties, rather than by the actual recipients of services. This is not a coincidence.
If I want to buy a widget from Joe the Widget-Maker, I will decide:
v how badly I want or need that widget
v whether the widgets made by Joe provide what I particularly want/need from a widget, and then
v how much I am willing/able to pay for a widget that does what I want/need.
At the same time, Joe will be deciding
v how much he has to charge for a widget, to cover the costs of making and selling it and his household’s reasonable cost of living, and
v how much more than that he can squeeze out of me.
Somewhere between the maximum I am willing/able to pay and the minimum Joe wants/needs to charge, we will probably arrive at a bargained-for price. If, after buying the widget, I am disappointed in its quality or functional capability, I will buy my next one from somebody other than Joe. If enough other customers have the same response, Joe may improve his product or service, or lower his price, or both. That’s the free market, at its ideal best.
But introduce a third party payor and the picture changes. Let’s say my rich uncle wants to save me the trouble of shopping for widgets, and tells me he will take care of shopping them and paying for them. At the outset, this sounds lovely, and I gladly take him up on it. But my uncle may have totally different ideas on what I want a widget for, and what kind of quality and function I expect of it. He may make a deal with Joe, based on an annual contract, so that every year all of my widgets come from Joe, and my uncle therefore gets a special price. About halfway through the year, I become dissatisfied with the quality of widgets I am getting from Joe. I call him and complain. He says, “Sorry to hear that, but your uncle seems perfectly satisfied.” So I call my uncle, and he says, “Sorry you’re having a problem. I’ll see if I can get Joe to straighten up. But he gives me a really good price.” In all likelihood, Joe is not going to straighten up. And, over the years of comfortable dealing, he and my uncle may allow the price of my widgets to go up. I don’t much care about that, since I’m not paying for them. I may not even know how much my uncle is paying. What I do care about is the quality of the product/service. And I can’t get any action there, since my uncle doesn’t much care about it, and may not even know what kind of service I am getting.
An example from real life: some years ago, my godson, who was 7 years old at the time, had to have surgery to keep him from getting repeated ear infections. The hospital scheduled him for a particular day. The day before, he came down with a cold. His mother called the surgeon and told him, “The kid has a cold. Maybe he shouldn’t have surgery?” And the doctor said, “Don’t worry about it. Just bring the kid to the hospital tonight so we can prep him properly.” So she did. Early in the evening, they took a chest X-ray. The rest of the night, mother and child dozed in his hospital room, where there was, alas, absolutely no humidity in the air. At about two a.m., somebody finally read the chest X-ray, which indicated some congestion in the lungs and definitely contraindicated any surgery. At about five a.m., the people preparing the kid for surgery read the X-ray report and told his mother, “Sorry, we can’t do surgery right now, your child has a cold.” So she took him home. His cold, of course, was a lot worse than it would otherwise have been because of spending an entire night breathing dry air. And the hospital, of course, billed her insurance company for the night he spent there. She called the insurance company and asked them not to pay, If the doctor had listened to her in the first place, she pointed out, or even if the chest X-ray had been read immediately rather than twelve hours after it was taken, the kid wouldn’t have spent the night in the hospital at all. But the insurance company said, “Sorry, ma’am, we have a contract with the hospital. We have to pay this bill.”
I assigned this case to a couple of my legal writing classes at a local law school, just to see what kind of research skills it would generate. I got a lot of very good, well-researched answers, but they all came out the same. The only contractual relationship that mattered in this case was between the hospital and the insurance company. If that contract required the hospital to pay, they had to pay, period. The relationships between
v the surgeon and the child,
v the surgeon and the child’s mother,
v the surgeon and the hospital,
v the radiologist and the hospital,
v the radiologist and the child’s mother,
v the radiologist and the child,
and so on through all of the possible combinations and permutations of the people and entities involved in this transaction, might conceivably have generated other forms of legal liability. But for the purposes of whether the hospital got paid by the insurance company for a night of services which were not only unnecessary but actually deleterious to the patient, they were utterly irrelevant.
The same thing happens, mutatis mutandis, to higher education. You send your kid to college, or she sends herself to graduate school. You, or she, borrow money from some public or private lender to pay the tuition. You may think the tuition is outrageously high, especially if she comes out of college unable to get a job. But the lender doesn’t care, and will keep paying until she graduates or drops out. Kids graduate from college knowing less and less and owing more and more. The money the college gets paid is passed on to “star” faculty who spent more time at conferences and consulting than in the classrooms, and to the creation of luxurious buildings in which the students will live, and eat, and recreate, and attend classes, and study. The people actually doing the teaching are now mostly part-timers who get no benefits and are paid well below minimum wage per hour of teaching and preparation. They do a surprisingly good job, under the circumstances, but it isn’t worth what the lenders are paying. Probably nothing could be, short of the full-time attention of Stephen Hawking.
The third-party payment of legal expenses is a bit more complicated. Tort lawyers are mostly paid by the losing parties. Prosecutors and public defenders are paid by the taxpayer. Corporate lawyers are paid by the shareholder, ultimately. Only the lawyers at the bottom of the totem pole get paid directly by the client. Not coincidentally, they also make less money than tort and corporate lawyers, though still more than prosecutors and public defenders. Without getting into the exhausting details, the basic scheme is the same; in legal areas where third-party payment predominates, the actual client has no control over the costs and very little control over the quality of service. The market, once again, is stymied.
So anyway, I think weeding out the third-party payors in the health care system could squeeze out a lot of the cost inflation, and might improve the level of service. If we just went immediately to a fee-for-service model, the short-term results would be a public health catastrophe. Most Americans really can’t afford to pay for all their health care out of pocket at its current prices. But even the Republicans realize this is a bad idea. McCain is proposing to tax health benefits provided to employees by employers, which is perfectly reasonable, since those benefits are a part of compensation. Often a very large part of it.
Strictly speaking, the employers are actually a fourth-party payor. Getting them out of the picture, McCain says, will provide the government with enough money to be able to give workers a $5000 annual tax credit to spend on getting their own insurance. I’d be more comfortable with his scheme if he just destined the credit for payment of health care costs, either through insurance or directly. That might encourage more health care providers to demand direct payment and reduce their fees by the money they save not having to do insurance company paperwork. Some providers have already decided to do this. And an insurance company is still a third-party payor, regardless of who pays the premium. Weeding out insurance companies could squeeze out most of the cost inflation, and improve the level of service a lot.
Watch this space for Part II.