Sep 162015

I’m pretty interested in healthcare reform because it’s a hard problem and, being someone who likes to solve problems, I’m drawn to hard problems. It’s also such a damned divisive issue that it seems like it should be pretty easy to come up with a solution that’s better than what most politicians believe should be done.

Some things to note before we get started. First, this is a really complex issue. If anyone came up with an optimal solution, it would be purely by luck. Anyone who claims they have¬†the solution or confidently claims that their solution is better than another is full of shit. In other words, be wary of anyone who fails to explicitly acknowledge that a predicted outcome is highly speculative. Second, I have very little background knowledge in the medical industry, so some of my ideas may be asinine. Feel free to let me know, but also fill me in so that we can make progress…the whole point of this is to foster discussion. If you’re response is merely “you don’t know what you’re talking about,” don’t bother. Third, there are plenty of details that aren’t discussed here. If you like the high level ideas enough that you want to start talking details, I’m available for a paid consulting gig. Fourth, instead of jumping into some complex analysis of the issue, I’ll start with high level talking points and then after those, start discussing the reasons behind them. Ask me a question that’s answered later in the post and I will mock you like you have probably never been mocked before (unless you’re an acquaintance of mine, in which case it’ll be par for the course). Fifth, most of these ideas are likely stolen from other people. I can’t remember who/where, but I do not claim credit for any of this (except maybe some portion of the last one).

Healthcare Reform Concepts

  1. Insurance becomes real insurance, not prepayment for medical services. It covers stuff like broken bones and cancer, not yearly physicals and flu vaccines. Or, to put it another way, it is designed to cover unexpected and expensive stuff, not stuff that we can predict ahead of time and adequately plan for.
  2. Employers can provide an allowance for said (real) medical insurance, but the employee shops on their own. The allowance can be a flat amount for similarly situated people (e.g., based on dependents, etc.). If the employees pick a cheaper plan, they can pocket the difference (to encourage them to price shop). However, they are required to buy the insurance or forego the allowance (i.e., they can’t take the entire allowance and elect not to purchase insurance). Minimum coverage requirements can be mandated.
  3. Everyone must set aside a portion of their income in something like an HSA account, which is used for routine medical stuff, like physicals. The amount set aside can vary based on age, number of dependents, etc. Government subsidizes people based on their income and their expected medical costs (e.g., typical sliding scale based on income).
  4. Doctors are required to publish either fee sheets with flat fees for all services or an hourly rate. These rates are uploaded to a central database maintained by each state that allows for direct price comparisons between doctors. Fees can change at will, but can’t go into effect until uploaded to the central database and published. This would be aimed at services that are routine or can reasonably be anticipated, e.g., those performed by general practitioners/primary care physicians.
  5. Patients pay the doctors directly out of their HSA account unless something is covered by the medical insurance.
  6. Prescription drug prices are tied to R&D costs with a small portion of the drug price being available for marketing (to medical professionals, not to consumers). Related patents (whether drug patents or medical device patents) are reformulated to allow for the patent owners to recoup their costs and make a respectable profit.

Digging Deeper

I’ll go into each of the above concepts and provide a little background and point out some of the details that are missing.

  1. I discovered (i.e., read or had it pointed out to me) the distinction between “insurance” in almost every other context and “medical insurance” a while back. In particular, in all other contexts, you buy insurance for things that you don’t expect to happen and are generally very expensive (e.g., car wrecks, floods, etc.). You don’t buy “insurance” for oil changes. However, the medical insurance we buy covers things that we can adequately prepare for that generally are not that expensive (or shouldn’t be, in theory). In other words, it effectively becomes prepayment for routine services. One advantage of this is that the bargaining power of insurance companies is much greater than individuals, allowing them to dictate pricing to some degree, resulting in lower prices than the providers may want to charge. One disadvantage, however, is that you actually reduce competition between doctors. To be a preferred provider for a plan (“in-network” provider), all you have to do is accept their pricing structure; there is no benefit from undercutting their prices. So doctors need not compete among themselves. More on this later.
  2. This portion is pretty self-explanatory. One thing to note, however, is the purpose of not giving the allowance unless it is used to purchase medical insurance and enforcing minimum coverage requirements. The sad reality is that we (humans) can’t be trusted to be responsible. It’s just the nature of how we are (e.g., we are horrible at planning ahead and taking steps to prepare for things that may or may not happen, especially when we can sacrifice future security for immediate satisfaction). We know that, given the opportunity, a large number of people would elect to take the allowance as cash and not buy insurance. If something then happens to a person who made that decision, they end up getting treated on the dime of everyone else. In other words, they get the benefits without the downsides. Thus, we negate this by not allowing them the immediate satisfaction of receiving cash at the potential expense of others. Something similar can happen if you allow an unfettered choice of insurance policies; there will be plenty of people who elect to purchase a cheap plan that can’t adequately protect them or their family in order to get the rest of the allowance in cash. And, of course, insurance companies will be more than happy to offer inadequate plans for those who want to buy them. Thus, you mandate minimum insurance requirements so that people won’t purchase something inadequate. Given that this is pretty similar to car insurance, if you wanted to offer the possibility of not buying insurance, you could do something similar to car insurance requirements and require a person to purchase a bond or otherwise secure proof of financial responsibility.
  3. This also is fairly self-explanatory. The main point is that we should be able to do a fairly good job at predicting how much routine medical services will cost (within a range). Thus, it should be fairly easy to set aside enough money to cover our routine medical costs (e.g., require everyone to set aside an amount somewhere in the upper range of expected medical costs). The amount can be deducted from their pay check and transferred into something similar to an HSA. There are plenty of details that can vary. Do you cap the amount (e.g., allow them to stop contributing once they reach a certain amount)? How do you treat a deficit (e.g., if they have to spend more than they have in the account)? What are the details of the subsidies? While these are open questions, they’re not incredibly challenging. Most importantly, though, is how this particular concept is combined with the next two…
  4. I’m sure most people who have ever had to pay for their own medical services have been baffled at how backasswards the process is, particularly if you have insurance. At worst, you go to the doctor, tell them you have insurance, and they do whatever they do. At some point later, usually a week or two, you learn what your insurance ended up covering and what it didn’t. And you pay whatever amount they negotiated for the services that weren’t actually covered. In other words, you don’t actually know how much you’re going to pay before you go. The end result is that it’s virtually impossible to price compare between doctors. Take, for example, the last time I went for a physical. I needed a refill on my emergency inhaler for my asthma (albuterol), which I’ve had since I was a baby, and a physical therapist recommended a particular NSAID (celebrex) that can be taken more frequently than others (e.g., ibuprofen). Neither of these medicines are high risk; while they might be abused, in theory, I know of no reason why anyone would try (although this might differ if the albuterol was in pill form, this was for an inhaler). The entire process of evaluating whether to write me these prescriptions took less than five minutes. Turned out, however, that they were both considered pre-existing conditions, weren’t covered by my insurance, and thus the doctor tried to bill me ~$115 (insurance negotiated rate). Had I known beforehand that he might try to bill me that much to write a couple of simple prescriptions, I would have gone elsewhere. But I didn’t because I didn’t know (1) that my insurance wouldn’t cover the cost, or (2) that I would be billed the equivalent of ~$1300/hr if they didn’t. Thus, the purpose of this is to allow for price competition between doctors by requiring cost information up front and located in a central place, making price comparisons easy (easier, at least). Doctors would also be required to inform patients of additional costs prior to them being incurred during a visit to the extent that it is reasonably possible. Clearly this concept would not apply to scenarios in which the potential cost is so highly variable it can’t be anticipated.
  5. This concept goes along with the previous two. Namely, it forces consumers to actually be aware of what they’re paying for. They get pricing information up front, and can pick the doctors with the lowest price. Or, if they want to pay more, they have the option to pay more. Regardless, they are aware of the potential costs beforehand and get to directly reap the benefits of making wise pricing decisions. The actual cost is no longer hidden by the insurance company, and instead has a direct impact on the person receiving the services.
  6. I’ll discuss this a little more below.

Part of the underlying motivations for this collection of concepts is trying to restore some semblance of actual free market economics to the healthcare industry. The way the industry is set up now effectively negates many advantages of a free market. For example, there is rarely any clear pricing information; you can’t have legitimate competition without being able to compare prices. Most of the pricing details are hidden from consumers by the insurance providers, who end up dictating prices to doctors. The only real competition is between insurance providers. While that’s still competition, it’s much less competition than if you had doctors competing against each other. Additionally, consumers paying out of pocket are going to feel a much greater impact from overpriced services than an insurance company, which gets to spread much of this out across all of the insurance participants.

By effectively making doctors compete directly with each other, you force doctors to differentiate themselves from a pricing standpoint and encourage innovative solutions to high costs. For example, Doctor A may elect not to upgrade to the latest X-ray machine because the cost doesn’t outweigh the benefits while Doctor B chooses to upgrade in order to market themselves as having the best equipment available (with a corresponding bump in prices). Price competition makes it difficult to pay off expensive student loans? Medical schools might have to come up with innovative solutions to keep costs down. On the other hand, price competition might reduce the supply of doctors, causing prices to go up. As I said, it’s a complex issue, so it’s hard to guess what the end result will be.

As it stands, however, we have a weird market that doesn’t really follow normal market dynamics. Going more to a single-payer route steps even further away from that. While this might be a better option in the end, it’s a purely speculative argument, and I would propose attempting to restore some of the free market dynamics before going to a single-payer system and see what happens. After all, we have plenty of single-payer healthcare systems that we can then compare against. In the end, we don’t really know what the result will be unless we try it; everything else is us trying to predict something that is inherently unpredictable.

How does the prescription drug/patent aspect fit into this? Well, I’m a huge proponent of capitalism when the predicate conditions for capitalism exist. As discussed above, some aspects of the concepts outlined above are directed to increasing competition by making pricing information transparent, which is a predicate for efficient markets. However, when we start looking at non-service-based areas (e.g., product-based) of the healthcare industry, the issue becomes much more complex. For example, there are few things in our lives that are true necessities besides water, food, and a means to procure those two items. Now imagine what might happen if someone controlled access to either of those two resources (insert Mad Max reference).

Many drugs are not much different; when they are needed they’re very, very important. To put it another way, when many drugs are needed, the strength of the need is high enough that it allows a person controlling the supply to set the prices almost at will (at some point the cost would become so prohibitive that it becomes unsaleable, of course). This is further exacerbated by decreased competition, whether it’s because the barriers to entry into the market are extremely high, because we allow the granting of a de facto monopoly via the patent system, etc. The main point is, the underlying fundamentals of the drug/medical device market permit pricing to be significantly skewed to the higher end.

While I am fully supportive of people making huge sums of money by producing things that people want to buy, I feel like the dynamics behind the drug/medical device market make unfettered pricing problematic and results in some outrageous scenarios (take a look at this NYT article for an example…I highly recommend reading the entire series as well). For that reason, I believe that the drug/medical device field is one of the very few in which some some type of cost control should be imposed. I fully believe that the industry should be profitable, but should not be able to take advantage of the underlying market dynamics (namely the reduced competition and the high necessity value of many drugs). One way to do this is to tie the cost of drugs/medical devices to the cost of developing the drug/medical devices and include some built-in profit. For example, the cost of a particular drug might be determined by the cost to manufacture the drug, the cost put into developing the drug, the cost to market the drug to medical professionals, and a 20% profit margin. You would, of course, want to roll in the cost associated with developing drugs that ended up failing as well. This is probably pretty similar to what insurance companies and single-payer systems impose on the drug industry as it stands, so this isn’t new.

As far as the patent aspect, I fully support the idea that a company should be able to recoup the cost of developing a drug/device, plus some profit. However, once the costs are recouped, there should be no additional impediment to competition. In other words, the length of the monopoly granted by a patent should extend until the cost of the drug has been recouped and no longer. If it takes five years to recoup the cost of developing a particular drug (not including built-in profit, as discussed above, of course), any associated patent would expire and competition could commence after the expiration of the five years. (This leads to some fun thought experiments about how you price a drug.)


This is not meant to be a comprehensive outline, but merely to foster discussion. There are plenty of things missing, and many aspects may be clear failures (and I may be failing to notice them). At the very least, it appears that these concepts reduce complexity a lot (thanks to reducing the involvement of the insurance industry in routine healthcare) and restore some semblance of normal market dynamics to the healthcare market. The concepts also seem fairly simple to implement compared to the current regime (except for the last point). I tend to think that a single-payer system would be an improvement over the morass we deal with now, but that something based on the concepts outlined above would be a better first experiment.

Thoughts and feedback?


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