Is Healthcare a Free Market? Lessons From Seattle.

In 2000, the state of Washington deregulated the healthcare insurance industry. Individual patients were finding it difficult to secure coverage in an environment of “overregulation.” In 2007, following deregulation and the robust return of the industry to Washington State, a proposed bill designed to return regulatory oversight to the state was defeated when the industry declared that no significant rate hikes were anticipated. The Legislature adjourned, and increases of between 20% and 40% were imposed by many in the industry — using a loophole that increased rates as those covered moved from one age bracket to the next.

 

Yesterday, the Washington State Senate responded, passing a bill that would return regulatory oversight to the insurance commission. The House of Representatives is expected to easily pass similar legislation, prior to approval by the Governor.

 

The insurance industry, in response, claims that health care expenses are rising significantly, as the added burden of treating Boomer-generation patients increases industry costs, and in the absence of any effort to address the underlying sources of health care inflation. http://seattlepi.nwsource.com/local/349344_insurance31.html .

 

All this underscores a question that I raised at a televised debate sometime back. What, precisely, is health care in the United States? Worldwide, as best I can tell, healthcare falls into one of three models.

 

In the United States, for the majority of our history, health care has been perceived as a free-market economy. Currently, the United States is more of a socialized medicine country (by a small fraction) if simply comparing private-pay and health care insurance, combined, to that proportion of patient treatments paid through government. We are more prominently a free-market health-care system once the pharmaceutical industry, the medical device manufacturing industry, the medical supplies industry, and the other sporting industries are taken into account, within this $1.7+ trillion amalgam of providers, payers, and adjacent industries.

 

There is, as well, in the United States an established recognition of public health as a government obligation. No private sector equivalent exists for the management of natural disasters and acts of terrorism – such as Katrina and the unrequited but prayed-for deluge of patients from the 9/11 attacks on the Twin Towers. Government coordination of a response to pandemic bird flu, just as the public health response to tuberculosis and polio in previous generations, would fall under this government role of public health, as well. Today, in fact, government is largely responsible for the public education initiatives related to the increasing number of Americans diagnosed with diabetes each year, and it was the states attorneys general that sued the tobacco industry for the cost and harm attributable to smoking and nicotine addiction (to say nothing of the original surgeon general’s declaration in the 1960s).

 

It may be argued that this is not a legitimate role for government – that, if compensated, the private sector might profitably undertake the exercise and do so with greater efficiency. The counterargument to such a model references the “domestic tranquility” clause in the Constitution as making this a compelling requirement of government. Philosophically, this goes back to Thomas Hobbes, who maintained that each individual enjoyed absolute freedom when no laws exist (including the freedom to steal, assault, and murder), and that we willingly give up a portion of those freedoms to avoid the resulting state of anarchy and pursue what Maslow later described as “personal actualization.”

Domestic tranquility and its promotion, therefore, is a basis on which government credibility is derived. The declared willingness of South Africa and Brazil, several years ago, to ignore international copyright laws and produce AIDS cocktails off patent (rather than suffer the debilitating expense and public health consequences of that epidemic), serve to support the legitimacy of this claim. The governments of neither Brazil nor South Africa could retain internal credibility if ignoring HIV AIDS or supporting patent protection for treatment medications over the public health of the population.

 

The third model is health care as a human right, which is, either, explicitly or tacitly declared by socialized medicine countries. In France, this declaration is explicit, while, in England, it is tacit. In the United States, it is tacit with respect to the impoverished and the elderly under Medicaid and Medicare, and it is extended to other selective classes of patients through smaller and targeted programs, such as healthcare provision for children, those suffering from black lung, et cetera.

 

It may be argued that this hybrid model in the US has served us well for at least 40 years, since the enactment of Medicare and Medicaid in 1965. The question going forward, however, is whether it can continue to do so and, in fact, whether it does so today.

 

Those arguing for the overhaul or reform of the healthcare system note that the cost of goods produced in the United States are less competitive in comparison to the rest of the world. A recent study indicated that $1600 in the cost of every car produced out of Detroit is attributable to healthcare, for example. An increasing number of employers are, in fact, no longer providing coverage (in whole or in part). When coupled with the high cost of care and the rate of healthcare inflation, the number of uninsured Americans has increased by roughly 15 percent to 47 million in roughly the last five years. This serves to further expand the cost of care as preventative services are avoided and inappropriate sources of care (such as the emergency room) substitute for family practice.

 

Beyond the competitive posture of the country, there is a long-standing realization that the Boomer generation will enter retirement starting in less than two years. This represents a significant burden on the US system and its finances, since greater than 70% of health-care costs are borne in the last five years of life. The Boomer generation is estimated to increase the senior population (those older than 65) by nearly double between now and the year 2030 – growing from 45 million, currently, to over 80 million. Couple this with the realization that Medicare is slated to go bankrupt, by its own estimate, in 2020, and the subject of intergenerational “warfare” seems a real possibility, if warfare is defined as a policy fight over limited resources. The Boomer generation, however, is clearly not to blame, since it contributed to the financing of Medicare costs for the previous generation AND largely funded the now-depleted Medicare Trust Fund – which was designed to cover the healthcare cost of Boomers in retirement.

 

It is certainly the case that the current model will require significant reform if the implosion of the US system is to be avoided. Recognizing the three current models in existence among first world countries may assist in identifying potential alternatives, but these three models should not be viewed as the only options available. Some different, uniquely creative and, as yet, unrecognized, alternative may exist, but this issue is far too important to represent a topic of interest and voter consternation only during presidential election cycles – simply to be forgotten in the intervening years.

 

In fact, I am nearly convinced that the problem has been ignored for so long that no viable solution exists. It was a moderate issue when Jimmy Carter ran for president, when Ronald Reagan defeated him, and when the first George Bush followed Reagan. Paul Erdmann lists it as a looming threat in his writings of that time, and Ross Perot made it a center piece of his first campaign for the presidency.

 

It was the leading issue for President-Elect Bill Clinton at his Little Rock Economic Conference the month before his inauguration, and a campaign focus when the current President Bush was elected his first term in office. It was such a significant issue in advance of Mr. Bush’s reelection that the new pharmaceutical benefit for seniors was enacted. We have, however, largely ignored the looming crisis of healthcare during the three-years-in-four when presidential politics are not at stake.

 

Given this, some reading the Seattle article may believe this to be the most important sentence, “Jeff Roe, president of Lifewise Health Plan of Washington, said increased rates are driven by the increased costs of providing health care for an aging population that relies on more and better medical technology.” (Emphasis added.)

 

For me, however, the more telling and important sentence is this one:

 

“Roe contends the bill would artificially suppress rates through a subjective rate authority but do nothing to address the underlying cause of rate increases.” (Emphasis added.)

 

Why?

 

No undertaking by government or industry has directly sought to address the “underlying cause(s)” of our health-care inflation problem. We have, instead, acted as though this were the rightful providence and role of the free market and its “invisible hand.” Health care, however, has not been an unmolested free market for more than 40 years.

 

 

California: The Problem in a Nut Shell — The Looming Crisis of Healthcare

The rising and unsustainable cost of health care inflation has prompted cutbacks in state funding of Medicaid in an assortment of states across the nation. I know this directly from my work with the government in Pennsylvania, and news reports from papers around the country indicate a similar experience. Yesterday, the state of California elected against pursuing Governor Schwarzenegger’s new health-care initiative – a modification of the approach undertaken in Massachusetts. Interestingly, a student in our executive program was one of the authors of this initiative. More interesting, still, a day later the state insurance commissioner vowed to strictly enforce the compensation laws, following a study indicating improperly denied and delayed payments by insurance firms.

 

Back in 1998, with my first quality improvement class, my students and I came up with a model for health care that has proven remarkably accurate. One of the items in that model was the recognition that the capacity constraints challenges that prompted the Balanced Budget Act of 1997 would only grow increasingly worse as the boomer generation approached retirement. We predicted then that the inveterate cost-shifting between insurance and government-sponsored payers, which prompted the arrival of DRGs, the failed Clinton health-care plan of 1993, and the Balanced Budget Act of 1997, would increase in intensity – pitting government against the insurance industry. This is based on the realization that we were approaching the limit of cost reduction and efficiency improvements available to practitioners. Unable to squeeze practitioners further, finger-pointing between payers seemed a likely act of desperation. http://www.latimes.com/business/la-fi-bonus30jan30,1,4329899.story?ctrack=1&cset=true This, however, was not the limit of our predictions with respect to health care insurance. We foresaw the arrival of high deductible plans, as a means of cherry picking those least in need of medical care. With subsequent classes, we became increasingly concerned that such plans would promote the death spiral of adverse selection for the insurance industry.

 

While a subscription is required to this Wall Street Journal article, the freely available introduction notes two tangent issues with the California initiative and its defeat. http://online.wsj.com/article/SB120165305949826973.html?mod=hps_us_at_glance_health .

 

The first item is the recognition that California represented a poor prospect for a Massachusetts-style initiative, due to the size of its indigent and uninsured population. The Massachusetts initiative requires health care insurance coverage by all who are financially able to afford it, while promising state coverage for those who are not. Given the size of California’s indigent population, the defeat of this proposal is understandable. This, however, suggests that relying on state initiatives represents an unlikely solution to the looming resource constraints crisis, because California is not the only state with a significant indigent and uninsured population.

 

The second item mentioned in this introduction is the recognition that the California initiative (like that in Massachusetts) does nothing to address the core causes for health care inflation. In fact, no initiative of which I’m aware directly determines the most significant drivers of health care inflation, much less attempt to constrain them.

 

Constrain them? Isn’t that the rightful role of the free market?

 

Absolutely, but healthcare is not a free market, where competition serves to increase quality while managing cost to the customer. Medicare, Medicaid, SCHIPS, state and federal coverage for government workers, local government contributions to augment indigent care, federal coverage of black lung and other special forms of workers’ comp cases, and government coverage of healthcare for the prison population, combined, exceed all other payer classes and account for more than 50 percent of healthcare payments in the US. Consequently, healthcare in the US is more akin to socialized medicine than a free market. And this has contributed the problems described above — an unintended consequence of the effort to do the right thing when Medicare and Medicaid were introduced in 1965.

 

To graphically demonstrate the problem, here is a chart showing the year-over-year inflation rate of health care (blue line) in comparison to inflation within the United States (red line) and wage inflation (green line) from 1989 to 2004.

 

 

 

 

The previous chart, which indicates the yearly disparity between health-care inflation and wage inflation (the capacity of our customer to purchase our services), fails to provide a sense of the accumulated problem over time. Therefore, it is necessary to index each to 1989, in order to identify the cumulated effect.

 

 

 

The next chart, which extends back to 1981, indicates that, if health-care costs were held steady for the foreseeable future while wage inflation continued to grow along a regressionary trendline, it would take 61 years for wage inflation to catch up.

 

 

It is worth noting that the coefficient of determination (r-squared) for the wage trend line is greater than 0.99.

 

This is the problem we face. It is the reason government and the insurance industry seek to reduce payment to practitioners on a yearly basis. It is the reason the American people list rising healthcare costs as a significant political issue when they vote. And, surprisingly, no initiative by government has sought to identify and address the core drivers of health-care inflation. Less surprising, but disconcerting, nevertheless, no organization within healthcare has sought to do that which government has avoided.

 

Is it too late to address the problem? Well, the Boomer generation starts retiring in less than two years (some have already started early retirement). Our 45 million seniors of today will grow to more than 80 million by 2030, and Medicare is slated to go bankrupt by 2020. So, I’m not very optimistic. But I am open to your suggestions.

 

Related stories:

California Governor vows to continue effort: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/01/30/MNHIUOK24.DTL&hw=Bill+%27over%27&sn=001&sc=1000

Article describing the defeat of the California proposal: http://www.latimes.com/news/local/la-me-health29jan29,1,1860303.story?ctrack=2&cset=true

 

Cost of Massachusetts plan expected to grow beyond $400 million: http://www.boston.com/news/local/articles/2008/01/24/cost_of_health_initiative_up_400m/