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Posted by on Apr 20, 2011 in Economy, India, TG Roundup, USA

Anil’s Gripe about Healthcare Costs

Anil was my senior in college. He is the founder and CEO of a technology company based in California. He recently posted the following on his facebook: “The healthcare system is completely and ridiculously broken especially for small businesses. We get a renewal price increase of 35%+ with 20% less coverage every year. What is the solution?”

Here is the traditional view held by those like Professors Mohan, Sriram and Pres. Obama. I call it the socialist view. Insurance companies’ primary motive is to make profit. Providing quality healthcare at a low price is not their primary purpose. They are incentivized to pick healthy clients and deny coverage to those that are sick. These are essentially companies that suck blood out of patients on a death bed. Healthcare should not be a profit driven enterprise like Microsoft and Apple are. Healthcare is different as peoples’ lives are at stake and quality healthcare is a fundamental right.

Healthcare neither falls in the domain of the employers nor the government. The responsibility of getting healthcare should rest with individuals.

Till the 1940s, healthcare remained in the realm of patients, doctors and insurance companies. Thanks to government’s indiscriminate printing of money, annual inflation index used to wildly gyrate between 5% and 20% in 1940s. As it always is the case, government finds fault with the private sector and not with itself when things go wrong- not very different from the current financial and housing crisis. In 1940s, in order to control inflation, Congress restricted private companies from giving pay hikes to employees. Salary is the principal means of attracting talented employees. In the absence of that, companies started relying on incentive schemes like health insurance to attract talent.

Now, why is Anil’s cost of employee healthcare going up by 30% and coverage down by 20%? In capitalists’ frame of mind, the exact opposite should happen, i.e. real price of care should come down and/or quality of care should go up. Not very different from the way real price of televisions, iphones, laptops, and other goods go down.

You do not need to be a healthcare expert to figure out the reasons for this. Just go back and look at all your doctor visits in the last year. We go to an internal medicine doctor for a common cold. We run to a paediatrician every time our children have a minor ailment. Other than the co-pay of $10 or $20, have we ever looked at the actual cost of each visit? What if you were paying $200 from your pocket for every visit to the internal medicine doctor, would you still run to him for a common cold? Would you allow your doctor to do all those lab tests and MRI scans if the $500 was coming from your pocket? For your common cold, you probably would have found a nurse that charges $50. If the nurse feels that the case is more complicated, she would have referred you to an internal medicine doctor and then to a specialist if the case is worse.

Now to the retirees and senior citizens- many in the left, including Paul Krugman, believe that we waste too much money on treating the old. Medicare budget is projected to be $468 billion in year 2012 and the costs have been doubling every 4 years for several decades. Intellectuals on the left say that billions of dollars spent on treating old people should instead be spent on sick young men and women, who have decades of productive life left in them. Hence they design counselling schemes for “end-of-life” options for the elderly. This is when politicians like Sarah Palin scream death squads.

The issue is a little deeper than left’s social engineering schemes or the right’s claims of death squads. The fundamental problem lies in removing the patient and his family out of financial decisions of healthcare. Let’s say Joe had net savings of about $100,000 and needs that money for his children’s college and his 95 year older father is terminally ill and on a life support system. Would Joe be willing to incur the cost of extending his father’s life by a month at an expense of $100,000? Some people would, but there are also a large number of people that wouldn’t. The decision is deeply personal and should be left to the individual and his family. Instead, we now have Medicare, which is purportedly free. Families demand that their loved ones be on expensive care into perpetuity. Add the religious angle of “life” to the mix, and the battle becomes even more militant. Is it a surprise that the cost of care is going through the roof?

There is a claim that insurance companies with their profit motive cherry pick healthy patients. However, when markets are allowed to function freely without government intervention many schemes will emerge to meet all kinds of needs. There could be schemes where you sign-up early in life with fixed premiums for life. There could be schemes just to deal with emergencies and serious illnesses, while you pay through your pocket for basic care.

Some claim that insurance companies’ off the charts profits are contributing to rising healthcare costs. How come Microsoft, Apple, and Cisco’s off the charts profits result in lower cost and/or higher quality products? It is not the profits, but lack of cost/quality pressures from the individuals getting the care, is the primary reason for spiralling costs.

Lastly, capitalist societies are known for their charitable frame of mind. Only 18% of the hospitals in the United States are for profit, 62% are non-profit and 20% are government run. For the few that cannot afford care, charitable organizations abound.

The costs of healthcare in both employer provided and government provided systems are spiralling out of control as neither the government nor the employer are equipped to improve the quality of care nor to reduce the cost of care. A bureaucrat will not be as careful as you are with your money. No system is better than hundreds of millions of patients constantly putting $-pressure on insurance companies, doctors, and hospitals for better care on a daily basis.

What is the solution? It is a fact that the money to run both the employee and government provided schemes is coming from your pocket. If individuals get the same tax incentives that govt gives to employers, health insurance will gradually become an individual responsibility. If elderly patients are given cash vouchers to buy their insurance, it will put tremendous pressure on costs of elderly care too. This will be a good starting point to reign in the crisis in healthcare sector.
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Footnote:
Interestingly, Indian healthcare system today is on a good growth trajectory. Thanks to socialism, government healthcare system is in shambles and private healthcare is thriving. Individuals apply tremendous cost and quality pressures on the system. There is constant talk in the media and among people about how some hospitals and doctors fleece patients with unnecessary treatments. Patients closely pay attention to charges and get into arguments with administrative staff about why certain scans are prescribed. These pressures are healthy and efficiency boosters. As a result, healthcare industry is growing rapidly in India. There is a gamut of hospitals providing less complex care to those that offer highly specialized treatment.

However, I am almost certain that when the industry starts humming along, government will intervene with its benevolent schemes. In fact they already have started. Indian Government recently imposed a service tax on hospitals that have an air conditioner. What will hospitals do to avoid the tax? Some will remove air conditioners and the rest will pass on the costs to patients. Who will suffer? Patients!

Another case is where Andhra Pradesh government introduced free healthcare in the name of Aarogya Sri. Now patients go to private hospitals to use this scheme. Patients are happy as government pays for the care. My relatives who work in the healthcare industry are also happy as they can now charge more and get paid by the government without having to haggle with the patients. Government is happy as they get votes to stay in power. Things look deceptively good. Wait till the scheme turns out to be another Medicare where costs spiral out of control and quality drops.

8 Comments

  1. Chakravarthy,

    Last week I began typing a detailed comment on some of the points you made. Then I accidentally closed the tab. I didn’t have enough time to retype all that. But, in simple terms I hated Nehru brand socialism as much as you hate (I was on record making this statement on my show several time).

    You are definitely more articulate than a typical rightwinger. But, you see everything in black and white. I don’t. I will retort with this small jab. Seeing you as a supporter of Sara Palin was definitely a shocker. But, I am so glad to know that you are not a birther.

    BTW, some of your arguments make as much sense as these South Carolinans, who also agree with you. 🙂

  2. Chakravarthy garu,
    Sure why not get a Ferrari when a Honda will do. The issue is whether you have money to buy Honda ? Forget HONDA, you can’t even buy a Yugo. The reason insurance came into existence is because cost of the medical treatment became expensive. If the doctors were charging “reasonable” then folks wouldn’t need to worry. I do agree with “doctor’s time and for nearly 20 years of expensive training”, however that doesn’t mean the doctor can print money for the next 20 years. Baring some specialists and doctors who treat serious conditions the regular doctors of the “Internal Medicine” medicine type does not need to be given “200” bucks for a 15 minute visit. The so called market forces forced the doctors to get the medical liability insurance. Why because the trust between the doctor and patient is broken. And both went at each other using lawsuits. Every one has a bit in this mess. TILA PAPAM TALA PIDIKEDU.

    Regarding Arogyasri, all I can say is its a scheme by medical industry to get money from the government. Its a total scam on a bigger picture. However there were many folks who got benefited by this.

    The big issue in India is exploitation of patients. Patients are so naive that they are taken for a ride by doctor’s in the districts. Market forces works when you have educated consumers.

  3. what is wrong with government sponsored insurance? doesn’t that act as market force? if that it incompetent it will bite the dust as it is open market, right ? when it comes to ethics oversight we cannot leave it to just market forces, as they will not have welfare in mind. anyone who is not so naive would know how well the ‘open market’ will sometimes form syndicates to loot in a systematic way.

    • Well said Ramana garu,
      “when it comes to ethics oversight we cannot leave it to just market forces, as they will not have welfare in mind”. In the past (60s – 80s) private practicing doctors in A.P did their practice ethically. Most of them were concerned about the patient first than making money. Now its a joke. Its almost as organized business.

      • Bhanu garu,

        Yes. I have first hand experience of that as my father is a doctor in A.P. and how he could not be a commercial success. He didn’t have the business man’s hat on him while doing his practice while quacks around him were thriving. It is a sad state of affairs.

  4. The $200 is for doctor’s time and for nearly 20 years of expensive training that they have gone through. Saying that, I do not know if it is a fair price or not. The only way fair price can be determined is via free market forces. We don’t need to go to a doctor for minor ailments, a nurse will do. But, if you are not paying for it, why not get a Ferrari even though a Honda will do.

    One of my family members has a large hospital in a rural area. They have been having difficulty breaking even on their operations for several years. The moment Aarogya Sri was introduced, in a matter of few years the hospital became debt free.

    The best way to keep unethical practices of doctors in check is through market forces, in other words via patients. A bad doctors reputation spreads in the community, which forces him to correct the course or lose business.

    I too have a few horrendous doctor stories. One of my relatives was critically ill and was on a ventilator. The hospital removed the venitlator without informing the family as they needed the equipment for another patient. My relative passed away after that. Sure it is tragic. But, the alternative of introducing government into the mix will make matters worse. There is no end to horror stories coming out of government hospitals like Osmania and Nizams.

  5. Chakravarthy garu,
    Nice article. Private healthcare is thriving in India . However the ethical values are gone. The private sector in India, especially doctors in the districts are looting money (not everyone, but the trend is growing).

    In US, Contrary to what you read in the media in US, insurance is not the only problem that is killing patients, its the doctor’s too. It is important to treat serious diseases with world class system but most common diseases (cold,flu,..) doesn’t need a $200.00 charge per visit. Then why charge more ?

    I would love to debate with you on this subject. I have bit of background on this topic.