An Infinite Loop of Tough Questions & Hard Answers
By Kerry D. Moynihan
Almost no one can agree on anything in our fractured political landscape today. But just about everyone – policymakers, providers, patients, and third-party payers alike – realize that the American health care system is in crisis.
We spend far too much. And we get far too little.
For the few Rip Van Winkles out there or for those who have, like our Congress, been ululating loudly and covering your ears when the topic comes up, a few facts worth considering…
The U.S. spends roughly 18% of its GDP on health care and the number keeps rising. That translates to $10,500 for every man, woman, and child. Contrast this with other wealthy countries in the Organisation for Economic Co-operation and Development (OECD), which spend an average of $4,100 per capita, half of U.S. expenditures. The next-highest percent of health care spending is Switzerland and France, and the U.S. is still 50% higher.
Are we getting twice the value as other countries? Apparently not, as the U.S. ranked 31st in life expectancy by the World Health Organization, just below Costa Rica, whose per-capita GDP is just 30% of ours. And the French live three years longer than the average American, so pass the escargots and Cotes Du Rhone, but hold the excessive stent implants, please.
In business school nearly three decades ago, I took a class in health care economics. The professor, Bill Kissick, was a MD who also taught in the medical school at the University of Pennsylvania. He was extremely smart, knowledgeable, and engaging. He had been one of two physicians intimately involved in the drafting of the Medicare legislation and showed us pictures of himself shaking hands with President Lyndon B. Johnson. Unfortunately, the issues that we studied around 1990 are roughly 92% the same as the problems we face today, because, as Dr. Kissick admitted, “We had the best intentions, but no understanding of economics!”
Mere tinkering will no longer work and basic assumptions must change.
The typical economic system includes transparency of pricing so you know what you will pay for something before you buy it, the ability to shop for alternatives, and ratings of the goods or services provided. None of those three things are included in American health care.
The crazy patchwork of pricing on a typical hospital statement, often from providers you have no recollection of or direct contact with, is astonishingly opaque and complex. Compare the different rates for the same service or product among privately insured, government-paid, and the off-the-street “rack rate” patients. Woe to those in the last category.
It is rather like the scene in Casablanca where Humphrey Bogart as Rick and Ingrid Bergman as Ilsa are in the souk and a merchant offers her some linens first for 700 francs, only to be willing to part with them “for a special friend of Rick’s” for 100.
The creation of the Centers for Medicare & Medicaid Services (CMS) injected vast pools of government money into the health care system. Worse, it dissociated those paying and those receiving the service. When you do that, prices invariably rise.
More dollars chasing goods and services leads to inflation, as any Econ 101 student can tell you. When offered the choice between a Rolls-Royce and a Yugo at the same price, everyone will opt for the burled wood and leather interior with serious horsepower over plastic and vinyl and hamsters running on a treadmill pickup. Wouldn’t you?
We have a system of perverse incentives that leads to the delivery of more care that will be reimbursed, rather than the proper care, not to mention the practice of “cover-your-ass medicine” for fear of malpractice litigation. These factors combine to the common estimate that one in three health care dollars is spent in fraud, waste, or products that aren’t needed or have no demonstrable therapeutic benefit.
My late father was once the inspector general for all Medicare and Medicaid fraud in the state of New York, so I have a feeling that the numbers may actually be higher. A 2017 study of 3,000 medical treatments in randomized controlled trials by BMJ Clinical Evidence found that just 35% were deemed to be “beneficial” or “likely to be beneficial.” I guess that is why it is called “the practice of medicine.”
Yet while physicians are practicing, patients are charged what the insurer traffic will bear. Isn’t it time to just admit that doctors are also members of the genus Homo Economicus, and there is more than a distinct possibility that Adam Smith will trump Hippocrates on occasion, if not routinely.
To quote George Bernard Shaw:
Nobody supposes that doctors are less virtuous than judges; but a judge whose salary and reputation depended on whether the verdict was for plaintiff or defendant, prosecutor or prisoner, would be as little trusted as a general in the pay of the enemy.
Surgeons are paid to operate, so where does their natural incentive lie?
American health care finds itself at a crossroads… Mere tinkering will no longer work and basic assumptions must change. Part of our cultural heritage seems to be an unbridled optimism in expanding frontiers, yet we can no longer predicate our national health care policy (if such a thing truly exists) on the expectation of and demand for unlimited medical progress, maximum choice, perfect health outcomes, and rising profits and income.
A monochrome standard of care such as in single-provider, socialized-medicine countries is unlikely to solve or service the needs and demands of our diverse populace. Accepting this as the norm would not only radically alter the way that we think of health care, but also the way that we think of ourselves as Americans. We have come to think of health care as a right, and to the finest available as no less so. Extreme economic measures or even violence are not difficult to imagine from citizens denied access to privileges and benefits they formerly enjoyed.
Yet extending the highest standard of care that our society is capable of providing would crowd out almost all other forms of social welfare or indeed, goods and services of any kind, and soon after, lead to bankruptcy.
President Eisenhower warned of the military-industrial complex. But today, health care spending is more than five times the entire U.S. defense budget. It is a far greater fiscal danger to our country.
Both the perfect collective goods of a low-cost, minimum-bureaucracy health system coupled with highest-quality, maximum-choice individual health care cannot coexist. It is self-delusion to think that it can be so.
And the health care industry will not surrender lightly… So-called “special interest groups” like health care providers, insurers, and pharmaceutical companies are likely to rouse enough popular support to derail any attempts to muzzle the current vast machine for the transfer of wealth to the health care sector. Spending on political lobbying by health care providers, insurers, and product manufacturers as a group far outpaced any other industry by $7.5 billion, a factor of more than three times from 1998 to 2017, according to Open Secrets.
I am reminded of a scene from Hemingway’s The Sun Also Rises, in which a character is asked “How did you go broke?” and he replies, in “Two ways, gradually and then suddenly.” It doesn’t take a PhD in actuarial science to figure that we are heading for a demographic time bomb. By 2050 there will be more people over the age of 80 than under the age of five.
If the U.S. nationalized the health care enterprise with the single-payer option, we can certainly bankrupt several heretofore major industries and replace the private sector’s function with that of the public sector. First slowly, then quickly. To do so in the name of Karl Marx would be one thing, but to do so in the name of efficiency is absurd. No municipal, state, or federal government has historically shown the ability to execute an undertaking so vast more efficiently than private markets could. It is the depth of naivete to rely on the benevolent wisdom of a state that has all too often demonstrated itself as neither good nor wise.
As the profitability and international competitiveness of American industry is every day more impaired by escalating health costs, we must make a choice. Much like police or fire protection, public health has long been regarded as a public good – not an explicit right – and as such should be granted some exemption from the strictest market ideology. A purely socialist solution is inadequate, as is a purely capitalist solution.
But today, it’s clear that a much greater degree of market forces is needed.
There has already been progress in the marketplace in reaction to spiraling costs. For example, some far-sighted third-party administrators, pharmaceutical benefit managers, and other firms are harnessing the power of data to deliver genuine “managed care,” as opposed to just beating down the reimbursement rates for service providers. And giving employers true visibility into their health care costs – such as a dashboard of their top service providers, the most frequent and expensive procedures and morbidities, and the delta among the providers for the latter – can provide powerful tools to bend down the cost curve and improve outcomes.
Charles Silver and David Hyman recently wrote a thoughtful book, Overcharged: Why Americans Pay Too Much for Healthcare, which is in large part predicated on long-established economic data that more insurance leads to more consumption of health care, not less. They show how transparency and competition in the private pay sectors of the health care services market – such as LASIK and cosmetic surgery – resulted in decreasing prices and better outcomes. They propose an innovative approach to only purchase insurance for catastrophic occurrences. No one expects their auto insurer to pay for oil changes, the authors argue – only if a driver wraps a car around a telephone pole. Likewise, the health care market would respond to market forces if consumers were not acquiescing to a CAT scan every time they had a check-up if they knew they would be billed for it. This approach is well worth exploring.
The old 80/20 Rule is nowhere more evident than in health care. For example, 25% of Medicare spending on seniors, which in 2016 was $672 billion, is spent on 5% of patients in their last year of life. This is roughly equivalent to the entire economy of the Rhineland in Germany or of New Zealand! And what for? Prolonging the inevitable end?
Not to be confused with Jack Kevorkian, but I agree with Drs. Ezekiel Emanuel and Atul Gawande (authors of The Ends of Human Life and Being Mortal, respectively) that the indefinite extension of human life, by any means necessary and at any cost, presents a moral conundrum that the medical profession and the general populace must face head on. And so you know that I am willing to eat my own cooking, I have specific advance medical directives in place for myself and my 94-year-old mother.
Despite the frequent lamentations that typically begin with the phrase, “Why can’t the richest country in the world do…,” Americans must finally recognize that merely containing the incessant rate of cost increases is not enough. A value shift denying some citizens access to the finest care that modern science has to offer is not the answer, either.
It is very difficult, if not impossible, to be both the lowest-cost producer as well as the highest-quality supplier. Both the perfect collective goods of a low-cost, minimum-bureaucracy health system coupled with highest-quality, maximum-choice individual health care cannot coexist. It is self-delusion to think that it can be so.
A plan that will improve the quality of care, lower costs, cut bureaucracy, and improve the access to and equity of the system is, of course, the Holy Grail. That noble quest will take some time.
What are the solutions in the meantime? Hell if I know…
Pick your parents well. Make a lot of money. Save more than you need. Don’t get unlucky. Import your own pills from Canada or India (a legally gray area). Get dental work in Mexico or Thailand. Have surgery in Argentina, Costa Rica, or at home (the “suture self” plan). Run, bike, lift weights, and eat oatmeal with blueberries. And if all else fails, choose to go with dignity and not saddle your kids and grandkids with the bill.
A good life not prolonged at all costs and a “good death” should be the goal for the individual… And fiscal responsibility tempered with compassion should be the goal for the state and the health care system.
Health care need not be the death of us all!
Kerry D. Moynihan has had a long career in executive search consulting, specializing in working with leveraged buyout and venture capital funds, public companies undergoing dramatic growth or rapid change, and restructuring boards of directors. He also does executive coaching and connecting management teams with capital partners. Kerry is a graduate of the University of Virginia in English literature and holds an MBA in finance from the Wharton School. He has worked with clients on six continents and holds dual U.S. and EU citizenship.