Aligning Incentives with Reality in Government Healthcare Programs, on the State Level

Americans want to help the disadvantaged and the elderly acquire quality healthcare.  However, both The Patient Protection and Affordable Care Act (PPACA) and the current system will hasten a British like healthcare system where care is rationed.  We need to take courageous steps and completely reinvent third party funded healthcare systems.

Rationale
There are primarily two major issues with the current third party payer system. The first is inherent in the basic human response to incentives. Another is the impact of government price fixing.

When government or any entity picks up the cost of someone’s healthcare, the result is a lack of concern for costs. People become incentivized to spend. In many cases, they spend well beyond what they would be willing to pay themselves even if they had the resources. With no cost barrier, and as the supply demand curve of economics 101 shows, demand exponentially increases as the price falls.  At zero prices, or free, demand is infinite.

Concomitantly, as the supply curve falls it leads to a significant shortage. Or, in other words, when there is no cost barrier, there is no end to the demand. With unlimited demand, there is no supply that can ever meet the demand.

The evidence of this is easy to find by looking at a healthcare system where 100% of people are covered for “free.”  Though Utah has proven the point eloquently with his story concerning his sleep studies, I would like to expand his point. In England, mortality rates foremost diseases significantly exceed the US. Two examples are prostate cancer, mortality is 19% in the US and56% in the UK, and mortality for breast cancer in the US is 25% while in the UK it is 46%. As demand exceeds supply rationing, or whatever politically correct word you chose, must occur. The consequence is a system where screening occurs later in life.

Current abuse of the emergency department and other visits to physicians for conditions that our grandparents would treat on their own is taxing the system substantially. Much of the increased costs in our current system are due to unnecessary visits. For those on “free” or low cost systems, there is no incentive to save, and again no supply that can ever meet the demand.

An additional problem to the current system is the effect on health insurance and other payers when government sets the price so low. When Medicare and Medicaid decide to only pay X for a procedure, and X is substantially below the market equilibrium price, one of two things happens. Either providers stop doing that service and create a shortage, or they increase the price charged to others, a process called cost shifting.

The effect of cost shifting has devastated the Health Insurance Industry. As the government pays less, physicians, hospitals and other healthcare entities raise the price for others leading to increased cost of care for those with health insurance or no coverage at all. This increase is then in turn passed to their customers in increased cost. As the cost escalates, fewer people can purchase health insurance leading to a need for insurance companies to increase prices further (rationing of healthcare that we have discussed before). What followed was a vicious cycle and put us where we are today. The PPACA does little to almost nothing correct this, and in fact, the industry itself states that The PPACA in fact pushes us further down this road of cost escalation. This is one of the major flaws in the bill/law.

Essentially, with Medicare and Medicaid price fixing, the free market in healthcare is dead. The free market will drive price down for everyone, even in the healthcare industry. LASEK is an excellent example.

LASEK involves a very precise “laser,” trimming microns of cornea to reshape the cornea and focus the image on the retina. Health insurance and government medical care do not cover the price of this procedure. Meaning, true market forces are setting the price. What has happened? When LASEK was introduced it cost $5,000 to $6,000 dollars. Over the years, the price has dropped naturally ophthalmologists competed for the dollars people were willing to spend, the price fell. I saw an ad yesterday for LASEK for $499 per eye. Granted the average LASEK procedure is roughly $1,800 dollars, but even this amount is significantly less than where it started. This year’s average was less than last year’s. Falling price for a complex surgical procedure on the eye, in the face of healthcare inflation twice the standard inflation rate is proof; the free market can work in healthcare.

We need to compel the government to stop fixing the price. The free market will adjust itself and with competition find a price at a supply demand equilibrium point.

The challenge then is to design a government run program to help people who need assistance, and yet allow free market practices to set the price?

The government already has a program in place that does just that.   However, our proposal would occur on the state level (if adopted), and I believe would work much better for business, physicians, and most importantly – the individual (you, the patient).

Proposal
The food stamp program, now called the Supplemental Nutrition Assistance Program, or SNAP, is where millions of Americans receive assistance to purchase food. This program is an excellent paradigm for healthcare. People who qualify are given a debit card and allowed to purchase the food they desire. The market price for food remains unchanged for the most part because the consumer is choosing how to allocate the resources he or she has. The consumer recognizes there is a limited amount and thus chooses prudently on how to spend the money.  Should the person foolishly buy filet mignon, they have little to nothing else for the remainder of the month.

Healthcare credits via a debit card would place the decision-making back in the hands of the consumer. We have the actuarial data and can calculate the exact amounts needed to be kept in reserve for catastrophic care.  We can even tier the money based on the individual’s chronic conditions.  The money used for routine visits as well as non-emergent use of the emergency department can be allocated to the health debit cards.  The state government would issue qualifying personnel a set amount yearly in conjunction with a catastrophic health plan. The individual would chose to save money by waiting to go to a primary care doctor instead of an emergency department and thus have money remaining for preventative care should they desire it. The individual has a choice, the market forces of supply and demand are thus reinstated and assuredly the right price will surface.

Lastly we need to address the incentive issue.  Patients who have dollars left at the end of the year will be given fifty percent of those dollars back as an earned income credit provided that their state has a state sales tax.  For states that do not charge a state tax, the patient could be given this bonus money as a direct deposit to assist with their cost of living (this would also impact the costs of section 8 housing on municipalities as patient’s increase their net worth). This incentivizes the patient to spend less for their care.  It may serve as a strong incentive to improve their health to increase the size of their credit. The remaining 50% can either stay in the program to cover expansion or better yet, be given back to the state taxpayers who ultimately funded this program.

This system reverses the current incentive to spend regardless of the cost.  It would remove the local, state, and federal governments from price fixing and thus allow the market and competition to push the price down.  This system also removes the need for the Federal mandating or punitive taxation of the individual.  As this system is geared at the state level, it does not impact the national debt.  Most importantly, this system maintains the all important patient/physician relationship … while giving the patient their choice.

12 thoughts on “Aligning Incentives with Reality in Government Healthcare Programs, on the State Level

  1. Actually, I like this proposal. And it goes along with what I commented to a post on another blog…that patients, if they are able, to shop around. The example I used was the price of a CT scan at our local hospital which costs about two grand plus another 400 bucks or so for the radiologist to “read” the scan. Yet, across the street is a for profit medical imaging office which charges 500 bucks inclusive for the same service with a ten percent discount for immediate payment. Ylour example using Lasek surgery was a good example also. I’ve even seen it advertised cheaper.

    The main thing is to price check your doctor just like you price check your groceries or cell phone service, ect.

  2. It’s about time you posted! I really dig your proposal; I just cannot fathom the govt. disbanning Medicare and Medicaid. If they would rework a proposal like you suggest for these programs, I think it would indeed be beneficial. Your proposal is logical, but I wonder on a person that must enter the emergency room and have a very expensive treatment……..

    Speaking of the SNAP program, look at the tax-payer funded incentive advertisement: http://www.youtube.com/watch?v=yFe8VBRcCN0
    Actually, the add I watshed was on a Huckabee interview with West. It went like something like this:

    Lady: I don’t qualify because I’ve got a house and a car.
    Friendly Man: That won’t disqualify you. Come and apply. (Something to that effect.)

    • The Federal Government cannot (well, actually they can because of LOL Obama penning his every desire into an executive order), adopt this proposal for a national healthcare mandate as it is not only unconstitutional, but would be unsustainable on a Federal level (just as is the SNAP program that is killing our national budget).

      Remember, this is but an alternative idea that actually sustains freedom, not reduce it.

      To your concerns about “expensive treatment”, I will repeat … We have the actuarial data and can calculate the exact amounts needed to be kept in reserve for catastrophic care. We can even tier the money based on the individual’s chronic conditions.

      Hope that clears it up for you a bit. 🙂

  3. Augger,

    This is a very thoughtful proposal and much of it appeals to me. There are a few concerns though.

    I think some of the costs with healthcare might also be associated with pharmaceutical reps selling the latest and greatest drugs to doctors or directly to patients without much additional proven clinical benefit. Do you see this proposal as a way to get patients more involved with inquiring about cheaper drugs?

    My dentist still uses equipment from the 70s, but his patients have to come up with much of the payments themselves. Lasik would have decreased even further if newer and more advanced machines weren’t being introduced all the time with high price tags that have to be recouped before the next machine comes out. Are you concerned that medical equipment sales would suffer under this proposal, and what do you think would be the impacts on innovation and investments in equipmnent?

    Do you find the thought of a walmartesque medical clinic mode that might emerge that could address patient’s needs in a more asseembly line, cheaper fashion with older equipment encouraging or disconcerting?

    I think you may be overstating that with a free cost, demand for medical services becomes infinte. That may be oversimplifying your argument too much. The wait and rationing alone would dissuade people without serious ailments, even at todays level of care. Rationing and delay in treatment exist in today’s marketplace.

    I think there would need to be a lot of focus spent on the rates for people with more serious ailments or injuries. There’s a lot of variables there and that could get very messy.

    Incentives for Homecare and virtual care clinics might be a useful thing to consider. There should probably be a new category of medical person/expert that people could consult with to find the best low care option that meets their needs. An expediter, but not sure who would be the best person to create or fund such a role. Perhaps a state level employee?

    I think wellness needs to be addressed in some form. Financial incentives have not done much to stem the tide of obesity over the long term in any study I’ve found. Diabetes, heart attacks, stroke, etc are some of the more costly things to treat, but the current payment structure doesn’t incetivize people or doctors to proactively prevent these ailments. Diet, exercise, education, access to healthy affordable food choices, smoking prevention programs and ceaseless monitoring are needed for many people to win a battle against these chronic societal ills. I just don’t think a small monetary boost is going to get you there, and it won’t address the people already struggling. As a doctor, do you think this is a situation that will simply resolve itself, or do you see a need for more to be done to address this situation?

    • “Do you see this proposal as a way to get patients more involved with inquiring about cheaper drugs?”

      No. Case in point, Augmentin. Augmentin (amoxicillin) is an antibiotic used to treat bacterial infections, such as sinusitis, pneumonia and bronchitis. In 1984, it was quite expensive as a new drug. However, as competitors started producing it, the prices quickly fell. Today, Augmentin is given for free at retailers such as Publix.

      “Lasik would have decreased even further if newer and more advanced machines weren’t being introduced all the time with high price tags that have to be recouped before the next machine comes out.”

      You do realize that length of recovery, less pain, improved vision, etc, etc is also an outcome for development of newer ‘machines’ that perform LASIK. right? Of course there is costs that have to be recouped with development. You see that in every industry. Cell phones, and automobiles are an example. Am I concerned over impacts of the free-market development of medical equipment? No sir. I expect much better pacemakers, assistive technology, etc.

      “Do you find the thought of a walmartesque medical clinic mode that might emerge that could address patient’s needs in a more asseembly line, cheaper fashion with older equipment encouraging or disconcerting?”

      A lot less concerning than the emerging “Medical Clubs” at the average cost of $1650-3200 per year just for the privilege of being allowed to call Dr. (so and so) your primary care physician.

      “I think you may be overstating that with a free cost, demand for medical services becomes infinte. That may be oversimplifying your argument too much. The wait and rationing alone would dissuade people without serious ailments,”

      It’s is a simple healthcare plan, and obviously not a 2750 page bill prior to regulation, but of course, we’d have to plan it to know what’s in it. 🙂 <— had to slide that one in there for humor.

      "I think there would need to be a lot of focus spent on the rates for people with more serious ailments or injuries."

      I agree, and that would be why we would tier the amounts for those patients.

      "Incentives for Homecare and virtual care clinics might be a useful thing to consider."

      Again, I agree. Home-care is crucial. You do realize that Obamacare will begin a "bundling" of services quarter one, 2013 that will all but leave little funding for Home-care as the reimbursement funds are paid to the hospital making the claim. That hospital, will then treat the patient using those funds, and then pay ancillary services out of the unspent funds. Additionally for the first quarter, home-care patients will be paying to Medicare a co-pay for each certification period they participate in home-care. The amount is not set, but the leading figure is $150/per.

      "Perhaps a state level employee?"

      Never a federal employee. 🙂 One of the serious problems patient's complain about Medicare, is that they are not in tuned with the demographic "customs" of the patient. Any wedge between a patient and their physician places the patient at increased risks for poor outcomes. Having a Medicare rep in Hershey, Pennsylvania become involved in that relationship for someone living in Louisiana certainly might present some social decision deficiencies.

      "As a doctor, do you think this is a situation that will simply resolve itself, or do you see a need for more to be done to address this situation?"

      I think that you can lead a horse to the water, but you cannot make him drink it. Sadly, there is an ever growing portion of our society that gets paid for sitting on the couch watching Wheel of Fortune all the while eating donuts, and snacking on chips.

        • Greg, thanks.

          Most of our articles are pretty much rhetorical and diversionary….those are the ones that are ‘fun’.

          It’s diving in to the tough topics (healthcare, circumcision, etc. etc) that truly allows one to stretch ideas.

  4. Pingback: Aligning Incentives with Reality in Government Healthcare Programs; One Year Later … | The Rio Norte Line

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