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August 26, 2021

The Medical Cost Problem [Joe Mannix]

Let’s start with the root premise: American medical costs are too expensive and they need to be reduced. At this point, they must be reduced because the growth in medical costs is unsustainable and that which cannot go on will not go on. We do, however, have some choices in how to do this. If we do nothing, my fear is that the answer we’re going to go with is “convert it to single-payer state-run medical care.” This will even probably work to some degree in terms of cost reduction, but it will have catastrophic consequences on availability. It is an outcome I would like to avoid.

As an additional note, a lot of the below is based on some of my prior work in this area that I did back around 2017. It still applies, but some of the data are now dated. The general themes are still correct, though I have not updated the research to reflect the past few years.

So what to do, and what will some of the consequences be? I propose a three-fold answer. This is not comprehensive and there are many more things that can and should be done. For example, I am not going to touch on things like tort reform, prescription drug pricing and reimportation or EMTALA at all. Those are valuable, but I think they are marginal. They are worth doing, but there are other priorities. The other priorities are all around increasing real competition for medical services so as to drive prices down. The three key areas I think about are:

1. Price transparency
2. Interstate competition for medical insurance
3. Breaking the employer/employee medical relationship

Price Transparency
There is no transparency in medical pricing in this country for vast tracts of the industry. Try it out yourself. Call up your local hospitals to get a price for, say, a cardiac stent. Good luck. If you have months to burn, you might get a couple of answers. They will likely be nowhere near each other in cost and this is odd because they should be. If there were a market, they would be. But there isn’t a market. We have destroyed it and now we need to rebuild it.

In areas where there is price transparency, we can see the disconnect immediately. Let’s take vision and cosmetic surgery as examples. There is a robust market for eyeglasses and contacts because insurance often doesn’t cover that. Ditto for Lasik procedures. Ditto for cosmetic operations. In these areas, there is robust competition and open pricing unless you are using one of the odd insurance plans that cover them. In these areas, we also haven’t seen out of control inflation.

Let’s start with cosmetic surgery using data from American Society for Aesthetic Plastic Surgery, the plastic surgery industry’s trade and lobbying group and compare median prices from 1998 and 2017 for a few operations. The cost of a “tummy tuck” increased by 50% during that time. A nose job went up by 56%. Boob jobs went up by about a third. Face lifts went up by 55%. CPI inflation during that time was about 50%.

So of four common procedures, one stayed the same price, one got cheaper and two about 10% more expensive in inflation-adjusted terms. At the same time, per-capital medical spending went up by more than 150%. Mainline medical care grew at around three times the rate of cosmetic surgery. Importantly, technology radically improved during this time, which should be a cost saving, not a broad-spectrum cost contributor. To see how big technology savings can be, we can look at another competitive market: Lasik.

When Lasik was new in the late 90s, it cost more than two grand per eye. Within a few years, it had fallen to about $1,400 – a decline of nearly half. It has since bottomed out and if you find a sale (and sales exist, because there is a competitive market), you can often get out the door for about $1,500 or less for both eyes. Lasik followed a now-familiar progression: the hot new technology was bad-ass and expensive, then more people got involved, then it got cheaper, then more people got involved to chase those profits, then it got cheaper still, then it bottomed out at a modest profit level that can sustain it. This is normal. This is expected. This doesn’t happen in mainstream medical care, and I think this is because there is no competition in mainstream medical care.

The single most important step we can take is to mandate transparent pricing and eliminate variable price based on who is paying. Refusing to publish a menu of prices and differential pricing based on method of payment are already illegal. These violate antitrust law. The medical industry is exempt from all of this for reasons that I imagine have everything to do with cronyism and corruption. This needs to change, and change immediately. Medical providers – like any other business – must disclose prices. If there are differentials – say “Price X for cash, Price Y for Insurance from Company A” or some such, that has to be disclosed, too. Anyone who wants to should be able to go to any hospital’s website – or call their customer service department – and find out how much a procedure is likely to cost. As medical outfits start to compete more, they’ll give better estimated prices like “your cardiac stent also involves charges like an overnight stay, nursing, these drugs, etc. Your likely total cost for the procedure is approximately X.”

It is absolutely preposterous that you can’t find out how much something is going to cost until after the fact. Medicine is interesting in that shit can go wrong and the final bill will always be variable, but competition and price disclosure helps keep it contained. Every procedure and drug offered has to have a price. The menus will be complicated – sometimes exceedingly complicated. That’s okay. As it stands now, you have no way to even estimate what something is going to cost, and you have no way to identify whether or not you’re getting good value. Medical care is an opaque, anti-competitive mess that can do nothing but grow in cost because market forces don’t apply. Market forces need to be made to apply.

A very common objection to this is “it doesn’t matter because no one is shopping price when he’s hit by a car and need emergency surgery and is unconscious. Price transparency is irrelevant in an emergency and this is just a canard.” I disagree. It’s true enough that when you’re bleeding out and need emergency care, you’re not going to shop around. This is also what insurance is for, but even that is beside the point. Most medical care is not an emergency and you can be very sure that in those non-emergent situations, people will shop around. Beyond that, very few procedures and drugs are exclusively related to emergencies. Price transparency and competitive pressure will still improve emergency care costs, even though you are not shopping around while you’re bleeding out. Remember, in this idea, differential pricing has to be disclosed or eliminated – so charging more for emergencies isn’t permitted unless an emergency surcharge is disclosed.

Interstate Insurance
Although I think that price transparency and competition are the primary answer to the problem, we have a couple of big items in medical insurance that I think would help tremendously. The first of these involves purchasing and coverage. There is little interstate availability in what passes for the private insurance market, and since Obamacare in some cases there isn’t even intrastate, intercounty coverage on the same plans from the same companies. This would be relatively easy to fix, though would do little on its own.

To get here, we should have a minimum federal standard. The minimum standard should be a true insurance product with an emphasis on “minimum.” This is akin to the old-fashioned hospitalization insurance policy. The minimum plan should cover emergent care with a high deductible and nothing else. If you want more, you can buy it. If you don’t, don’t. But a low federal minimum standard would enable insurance carriers to offer any plan that meets that minimum across state lines. This makes the risk pools bigger, can increase participation and will permit real, even-field competition between insurance products and carriers. It will increase choice and keep costs contained by the market. Like the larger medical industry, there is very little competition in insurance products today. We need more competition, and creating a larger market will help. This alone, however will not be enough – it needs to be coupled with the next point.

Divorce coverage from employment
Our system of employer-centric medical care has a long legacy and many causes. Part of it comes out of union negotiation, and another big chunk comes from War-era wage and price controls. Medical care as an employment benefit became much more normal – especially in non-union fields – during WWII because it was a way to end-run wage controls. Your benefits aren’t part of your pay, but they do increase your total compensation. This system survived the War and it is now effectively locked in.

The major downsides to this system are two-fold. First, it increases cost of employment but not wages and this makes us less competitive as a country. Second, it dramatically reduces the size of available risk pools in the private market. Interstate competition for insurance will help with this, but not enough because giant tracts of the population with employer-bound medical coverage won’t be in that market. Employer-bound coverage needs to be disincentivized.

The method I think would work best for this is the least conservative part of anything that crosses my mind and it makes me feel somewhat dirty to even talk about it, but it is the best answer I can come up with: tax it. Medical and other benefits should be taxed as income. If your employer covers $500 per month of your medical insurance, that $6,000 per year should count as taxable income. This, combined with minimum standards and interstate competition in insurance products, will destroy the incentive to bind medical coverage to employment. It will instead create real incentive to buy from the bigger, more dynamic, more competitive and thus cheaper private market. This will be a major cost savings overall and will result in a massive increase in market dynamism. This will also improve competition in wages and conditions rather than fringe benefits between companies.

Under such a system, the employer’s cost of carriage for employees is more predictable and simpler because now it’s just money instead of money+benefits. For the employee, he has greater control over his medical coverage because he is now free to shop around and pick whatever plan he likes. The medical benefit will just become part of the paycheck fairly quickly. If you’re paying taxes on it, you’re going to want market choice rather than a dictatorship. Importantly, the employee decision around sticking around or moving jobs is easier. He is no longer bound to his employer because it’s both the only way to get coverage and because his coverage is cost-reduced by a tax incentive (although perversely it is still much more expensive than it could be if there were a market). Everyone’s costs will go down.

This step on its own, however, would be an abject disaster. Taxing benefits as income in the absence of introducing transparent pricing and broad competition in both medical care and medical insurance will be an unmitigated nightmare that makes every problem we have worse and every price we pay higher. In no circumstance should we consider a change to benefits taxation on its own and without the other measures. This is the final piece of the puzzle, but if implemented on its own it will have appalling and disastrous consequences.

Speaking of consequences…

What would happen if we were to do something like this? If it works, it certainly won’t be consequence-free. It will in fact, for some segments of the population, be disastrous. Prices are going to drop significantly. This is going to eat in to the capital structure of most of the medical establishment. There is going to be a lot of bankruptcy, consolidation and diversification – and that’s just the beginning.

Such changes will technically cause a recession, and perhaps a technical depression. If we cut the costs of medical care by half – and I think that’s possible – that is in the neighborhood of 10% of GDP that is going go whooshing out of the economy. That 10% is also perverse malinvestment and rent-seeking, but GDP is going to go down short-term, and perhaps contract very dramatically. It will be a painful few years for everyone, but especially on the current medical industry. Unemployment in the medical industry will increase dramatically, and it will be structural. There is going to be a lot less opportunity in areas like hospital administration and there are going to be a lot of permanently displaced workers. The medical billing and coding industry might actually vanish.

While the economy realigns it is going to suck for a whole lot of people. Tremendous numbers of people and organizations have made long-term plans around the status quo continuing. There are some things we could do to soften the blow like extended (though not increased) unemployment, but there will be no way to avoid it. The amount of structural rot and abuse in the medical industry cannot be corrected or fixed without paying the price. And we’re going to pay it. We can rip the band-aid off, take our medicine and try to get it over with quickly, or we can continue to grind our way toward civilization-scale bankruptcy, but the problem has to be dealt with one way or another.

And it will be dealt with. Even if we go single-payer, the reduction in GDP and major structural unemployment are going to happen. It will take longer, and the outcomes will be worse, but there is no avoiding it in total.

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posted by Open Blogger at 11:06 AM

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