Healthcare policy

Wendell Murray Associates Inc. - Healthcare policy

Please note that this section is still being developed. Much more shortly.

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Articles on healthcare

There is a vast literature on healthcare issues. In that vast literature is a large subset of excellent analysis and many sources of useful data.

Below is information on two central issues involving the USA system of healthcare. The first section deals with the administrative system that determines pay to providers - to physicians and other individuals and to hospitals. Those two groups receive 70% of the $2 trillion paid for healthcare services annually in the USA as of 2006. This system in effect determines how much patients pay for healthcare services. Most people have no clue that this system exists much less how it works. There are many factors - see the excellent report of all cost factors in a McKinsey Institute study - that make the healthcare system in the USA so disproportionately expensive while at the same time generally leading to poorer health outcomes relative to the rest of the world. See this analysis for a comparison of per capita health spending to outcomes as measured by infant mortality and longevity at birth among the 30 OECD member states. The issue of provider compensation - its level and how it is set - is important to understanding the high cost. One of the reasons for the high level of provider compensation is outlined below.

Administrative costs

A relevant topic in regard to cost in the USA healthcare system is the cost of administration, i.e. any cost exclusive of payment for medical services or other direct healthcare-related activity, in financing/insurance. The USA system is either the only system or one of the very few systems in the world that allows a significant role for private - as opposed to government-administered - healthcare insurance. Studies on the topic show consistently that the administrative costs of private insurance - mostly for obvious reasons - are significantly higher in private insurance than in publicly-funded insurance. A notable study is available here Health care administration costs in Canada and the USA. The same authors have done several useful studies on various segments of the topic.

Provider payment

The mechanism whereby physician income is set is particularly eye-opening. See an explanation of the relative value unit (RVU) system that ultimately underpins all compensation. In effect physicians themselves set their own compensation administratively through the RUC (relative value unit committee). The forces of supply and demand for labor that operate in most other labor markets and which determine the wages paid in most occupations do not determine physician compensation in any direct way. This is a fact that is not adequately known. It is an issue that is almost never discussed in public policy forums or by politicians.

Compensation levels for physicians is a factor - physician compensation accounts for about 15% of overall healthcare costs in the USA - in the high cost of healthcare in the USA versus the cost in other OECD countries where compensation is usually half or significantly less than half of US compensation.

How compensation is set however a key issue for the American Medical Association and for the various specialty societies that determine the CPT codes which are the basis for compensation.

Another important point - certainly not particular to healthcare, but still relevant - is that the lobbying organizations that seek to influence policies set by the US Federal or by State administrations and laws passed by Congress or by State legislatures often seek to dismiss any person or organization that presents facts contrary to the interests of the organization that lobbies on behalf of an industry. In healthcare several strong lobbies are the American Health Insurance Plans which represents private health insurers, the American Hospital Association and the American Medical Association. The last, the AMA, is historically the most powerful. Physicians, individually and through various groups such as specialist societies and the AMA, have historically exerted the greatest influence over healthcare policy, including most importantly the flow of income to physicians.

The AMA as a group and many physicians as individuals generally oppose, often vehemently, any policies that favor private insurers. Private insurers are viewed as the enemy because most physician compensation is paid by private insurers. Since private insurers are profit-seeking or surplus-maximizing entities, their costs represent income to providers. Lower costs to insurers means lower income to providers. That is the primary basis for enmity.

This article is written by three authors. The lead author, Thomas Bodenheimer, is a physician and researcher who has written many good articles on various aspects of health policy. The article specifically addresses the large disparity in pay between primary care physicians and specialists under the Resource-Based Relative Value Scale system. Medicare and private insurers use this system to set payment amounts to physicians. Although the article addresses the pay gap specifically and why that gap is a problem, it also gives a good overview of how compensation is generally determined.

The paper accurately identifies the strong biases built into the fee-setting mechanism that (1) enshrine the extremely rapid run-up in physician fees from the time of Medicare's enactment in the late 1960s to the early 1990s when the the RBRVS system was first instituted then (2) strongly favors increases in reimbursement for the thousands of procedures performed by specialists largely at the expense of fees paid to primary care physicians for evaluative and good-health-management services.

This reimbursement system clearly illustrates one of many instances where one set of "actors" in the healthcare system - in this case providers of medical services - strongly favors its own interests, but almost exclusively at the expense of patients who "consume" the services. The free enterprise system works well where an individual "actor's" pursuit of self-interest fosters competition and innovation that drive costs down and value up to customers - in this case patients. This essential characteristic is mostly absent in healthcare.

One of the classic expositions of the peculiar, non-competitive-market characteristics of the medical services "industry" (generally referred to as healthcare services, but not the same thing, as Arrow points out) is a paper written by the eminent economist, Kenneth Arrow, in 1963 Uncertainty and the Welfare Economics of Medical Care. The issues he addresses concerning the economics of medical care and the analysis he provides continue to be valid - and usually ignored by commentators with an economic or financial interest to protect.

Another outstanding analysis of the healthcare system in the USA is by Prof. Robert Evans, a Canadian economist who has written on many aspects of healthcare in Canada, the USA and in other OECD countries. His paper Devil take the Hindmost cogently lays out the mechanics of the system in the USA whereby providers of services (primarily physicians) and products (primarily pharmaceuticals) gain from the ever-escalating cost of care with often no and at times negative benefit to patients.

Universal healthcare coverage in the USA

Here is the text of HR 676, a bill proposed by Representatives Conyers, Kucinich and others in the 108th Congress in 2003. It proposes universal coverage for American residents and citizens. The bill went nowhere in a right-wing Republican dominated Congress. It is not likely to see enactment in a marginally Democrat-controlled Congress, but it lays out one version of federal government-funded universal health insurance.

I have not reviewed the details of the bill sufficiently to recommend changes that I consider beneficial. An important point however is that most universal-care proposals - including this bill - fail to address the most important underlying cause of high healthcare cost in the USA: physician, particularly specialist, compensation.

Other proposals for universal coverage include the following. Each is an intelligent proposal that has merit.

Healthcare vouchers

Universal coverage

Single payer

An interesting historical sidelight is an address that Richard Nixon made in 1974 regarding healthcare policy in which he made a proposal for reform that ultimately went nowhere.

Richard Nixon's proposal in 1974

Determinants of health

A broader perspective on health status goes beyond medical services. There are studies and books which discuss the determinants of a population's (as well as individuals' within the population) health status. An excellent review of the issue is the so-called Lalonde Report, a Canadian government-commissioned report that was published in the early 1970s. The report discuss various issues in healthcare then identifies the 4 main areas of life that affect health status:

Lalonde report