Opinion: Health care industry must conform to the laws of economics

By Francis M. Miller

Francis M. Miller

Francis M. Miller

Between the end of World War II and the enactment of Medicare in 1965, the U.S. was focused on building its hospital infrastructure under the Hill-Burton Act of 1946. The year 1965 is almost a B.C./A.D. divide because after that year, the focus shifted to providing access to specific population groups. These groups included the elderly (Medicare), the poor (Medicaid) and trade union membership and corporate employees (ERISA).

The Affordable Care Act is merely an encore to include uninsured individuals and small groups.

During the 1970s, the U.S. began experiencing a round of severe hyper-inflation. After Ronald Reagan was elected president in 1980, two key health policy strategies were devised to introduce prospective fee schedules and institutionalize the health maintenance organization as an ideal model.

As a result, the American health care system has experienced a cascade of unintended consequences.

Over the past 70 years, we have witnessed the growth in health care from less than 4 percent of our GDP to nearly 20 percent. Early in the period only 3 percent of our workforce was employed in health care. Today, nearly 17 percent of our labor force is health care workers.

Because health care is largely societal overhead and non-exportable, we are horrified as the health sector threatens to destroy our nation’s wealth-creating ability and dispossess us all before we die.

In spite of public policies that encouraged managed care, what has emerged as the truly outstanding health care system in terms of total value? There is little doubt that on the quality side, the Mayo Clinic and the Cleveland Clinic are renowned for their quality. Kaiser Permanente consistently is cited for its high quality care for the Medicare population in California.

Still, despite the appearance of quality, almost no American health delivery system has proven to be cost efficient.

A crude examination of Kaiser Permanente, for example, illustrates my point. Nearly 20 percent of its employees are doctors and nurses. These are the primary hands-on providers of care. Most of the rest of Kaiser’s 100,000 plus employees are clerical and support staff. Kaiser’s premiums are competitive, but no quality health care organization has been able to experience positive cost curves that you would expect from organizations achieving year-in, year-out efficiencies.

During the industrial age, virtually all products have had positive cost curves during their life cycles. Costs invariably start high, but as these organizations scale up, the per-unit cost of the product declines.

Henry Ford’s first automobile cost over $800, but by 1927 he had driven the cost down to a little over $200 a car. Ditto for household appliances, computers, cell phones, production homes and every aspect of our life. This is due to “learning curve phenomena” whereby producers figure out how to become more efficient over time but still manage to produce high quality products.

So, why is it that health care costs have defied economic laws of gravity?

The answer is simple. Health care policy initiatives designed to increase access removed most of the disciplining forces of the marketplace through an over-reliance on subsidy and tax preferences. The consumer became insulated from the realities of the market. This coupled with the prevalence of insurance ignited round after round of inflation.

Hospitals, doctors and other providers have not been forced to achieve optimal micro-economics within their firms. Health providers rarely go out of business. By and large they have a franchised monopoly in their service area and continue to be specialized and labor intensive with high level of fixed costs.

They have responded not by competing using marginal cost strategies; instead, they increase their intensity of clinical services to increase revenues. Administrative costs for every participant in the food chain have continued to grow as a percentage of total costs.

As a result, the American health care system is now more expensive than those of any of the Western European socialized systems. Over the past few years, U.S. quality has rightly been called into question. HMOs and managed care, which were supposed to be our salvation, have been a bitter disappointment.

You can analyze the root causes of our current dilemma without much difficulty. A descriptive analysis of the past is not the important question to be asking. We need prescriptions for future success.

Americans must come to grips with the future role and importance of health care in our economy and society.

Every country on the planet needs a set of abilities to develop and prosper. Good education, water, sewer and roads are obviously basic. But, health care is a key cornerstone in that edifice.

In a perfect world, the U.S. would have an efficient, high quality health care system to share with the developing peoples of our planet. They would obtain the dollars necessary to acquire our abilities by producing goods and services that we wished to buy. It would be a virtuous trading cycle.

If health care were a wealth-creating export industry, it could be encouraged to grow to dominate our GDP. Ideally, however, only 7 to 10 percent of our GDP should be necessary to satisfy our internal needs. The excess capacity should be exported.

This builds the case for imposing harsh disciplining forces on our health care system. It is necessary to achieve the means to an end.

Maybe it could be achieved through regulation. But, history has shown us that every nation eventually had to deregulate and reintroduce market forces to achieve both high quality and efficiency.

The practice of turning to large insurance companies to achieve competition and discipline in the health care marketplace is destined to fail.

If General Motors and Ford were not producing high quality cars, you would not complain to their financing arms, GM Acceptance or Ford Credit corporations. Asking the financial intermediaries to do the dirty work of disciplining buyers and sellers is stupid.

We need less insurance, not more.

Health insurance by its very nature creates dead weight loss and insulates the consumer from the bitterness of the environment. By its nature it encourages over-production and over-consumption.

If you do not buy this proposition, you need to study Paul Samuelson’s basic text for Economics 101.

Putting a man on the moon or sending a lander to Mars truly mystifies me. We build planes that defy the laws of gravity and huge ships that float.

But, health care economics is nowhere near this complex. We have made a mess of things by putting them in the hands of the wrong people.

I remain optimistic that we will see the light. Our old manufacturing industries are gone forever. Americans will continue to try everything until the right thing is the only avenue left.

Then, we will get on with making health care an economic engine for the 21st century.

Francis M. Miller is the past president of the Colorado Business Coalition for Health and the vice chairman of the Colorado Health Data Commission. He founded the first consumer cooperative for health care called the Alliance and is the current president of Health Smart Co-op. He blogs on www.thethoughtczar.com.

Opinions expressed in Health News Colorado represent the view of individual authors.

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2 thoughts on “Opinion: Health care industry must conform to the laws of economics

  1. Mr. Miller must be quite wealthy, and I wish him luck when his health fails and he discovers he has to sell the McMansion and the Mercedes to pay for his cancer treatment, or that artificial heart valve. “Let the market decide” can be made to work, though it’s not an ideal philosophy, if that market includes highly knowledgeable consumers, tight regulation of suppliers and providers, and widely-disseminated information about costs at every step of the way.

    None of those things characterize our current health care system, even under the ACA.

    Most consumers have no idea what health care costs beyond the occasional bottle of pain reliever, not just because their insurance coverage insulates them (for those with insurance, that insulation is quite real), but because those costs are often nowhere to be found until the bill arrives from the surgeon or hospital. Most members of the general public have no knowledge of medicine, and thus no knowledge of what their physician is telling them beyond “Is it serious?”

    Regulation of the health care industry is a pleasant fantasy, and I admit I engage in it occasionally, but it is merely that – a fantasy. Not many physicians are interested in seeing their incomes regulated, nor are the manufacturers of health care-related devices, from heart valves to crutches, to orthopedic shoes. Any serious suggestion of regulating devices, prices for procedures, room occupancy costs for in-patient hospital stays, etc., is routinely met with howls of outrage, predictions of the apocalypse, and stories of grandmothers dying at the side of the road because their medical provider went out of business due to the crushing burden of regulation, which typically would involve, for example, publicizing their prices BEFORE procedures were performed or hospital rooms booked.

    And finally, of course, largely because of our ad hoc insurance system, and the insulation it provides to patients, most people have no idea what, for example, an office visit, treatment of a sprained ankle, or repair of a broken bone from a ski accident, actually costs. Nearly 40 years ago, I was being charged more than $5 for a single aspirin in what was supposedly a “nonprofit” hospital. Things have only gotten worse since then.

    The “market” Mr. Miller describes for health care is as much a fantasy as any expert’s vision of reforming our current system so that affordable health care is available to everyone. What Mr. Miller proposes is health care for those who can afford it, illness and death for those who cannot. Those are interesting values he’s putting on display.

  2. Indeed, we do have too much insurance. We have a model for decreasing costs without rationing, but it is generally ignored, and Obamacare made it more difficult. A fairly recent Rand Corp study found that those who used high-deductible insurance and HSAs spent 21% less. Their spending was their choice; not the choice of a government or insurance company. When people spend their own money, they spend wisely. We could control a lot of cost simply by disconnecting insurance companies from providers – no more secret, market-inhibiting contracts, and no more secret prices. Prior to Obamacare, a young man could have a high-deductible plan for less than $50 (my zipcode). That plan is now more than $300 but it does include free oil changes and free tuneups.

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