A Socially Equitable, Needs-Based, Consumer-Driven Solution
American health care stands at the dawn of an era of increasing centrally directed control, and a progressive shift of decision making away from the physician and patient. As the Federal takeover of one sixth of the economy proceeds, is there a way to redirect control back to the patient and physician by reintroducing market mechanisms? Can the market be a solution to reining in medical costs without strangulating regulation and arbitrary limits imposed by a one-size-fits-all bureaucracy? Can market mechanisms be made to work for the working poor and the well-to-do at the same time? Can the actual needs of the patient be the primary force that directs the allocation of resources?
In this paper, I argue that a system of means-tested progressive cost sharing is compatible with a socially equitable healthcare system that responds to the true perceived needs of patients and their physicians, while going a long way toward mitigating the medical malpractice crisis.
Is American Healthcare an example of free market failure?
The media is typically full of accusations that the problems of health care in America are due to failure of the free market. Calling our system a free market is the worst kind of strawman argument, since the US consumer has so little interest in the cost of health services that he rarely asks how much a CT scan, a hernia repair, or a doctor’s visit will cost, and providers of health care never post prices because the prices are recognized as a fiction. A free market system is entirely dependent on price signals, and those signals are virtually absent in American health care. Regrettably, our health care has far less in common with Adam Smith’s “Invisible Hand”[i] than with Garrett Hardin’s “Tragedy of the Commons”[ii].
In Adam Smith’s free market, individuals and businesses make transactions based on cost and value. However, the marketplace of Adam Smith simply does not apply to American medical economics. In the US, medical transactions are initiated by the patient and provider, but nearly all the cost is borne by third parties, either commercial insurers or the government.
More apropos to American healthcare is Garrett Hardin’s “Tragedy of the Commons”: Hardin tells a tale of cattle herders in a community where all were entitled to the use of a common grazing area. Each herder found it to his benefit to add more and more animals to his herd so as to enhance his personal gain. But as the overall size of the herd grew, overgrazing by the ever larger number of animals inevitably degraded the Commons. As each herder tried to improve his own position, all the herders suffered the tragedy of despoliation of the Commons, and ultimately everyone’s livelihood was destroyed.
In our current medical system, much like the “Tragedy of the Commons”, the individual patient and provider garner all the advantage of a medical transaction, while the cost of care is shared broadly by all insurance premium payers and taxpayers. This has been a guaranteed formula for the perennial rise in aggregate American medical costs at a multiple of the inflation rate. The current response is to imagine top-down rationing schemes, such as the Independent Payment Advisory Board, commonly referred to as “Death Panels”.
The public debate in this area has inexplicably focused primarily upon reform and regulation of the “Commons”, that is, the insurance companies and Federal agencies responsible for the purchase of health care. However, virtually no attention has been paid to the root source of medical costs, namely, the personal and individual interactions between those who provide care and the patients who consume it.
In the not so distant past, a typical insured patient paid a straight 20% of most medical costs out of pocket, and so retained an interest in deciding whether a particular medical interaction provided enough value to justify the expense. Physicians had a reciprocal obligation to patients to be judicious in their recommendations, so as to maintain their reputations as good diagnosticians who did not rely on excessive or unwise testing and treatment to make a diagnosis or remedy a disease.
Over the past several decades, there has been a concerted and largely successful effort to reduce and eliminate economic barriers to healthcare. The decoupling of individual financial responsibility from the consumption of medical care has all but erased cost vs value considerations from patient–physician interactions. Today, patients and doctors seldom have any knowledge of what an individual service actually costs.
As far back as 1984, it was estimated by the Stanford health care economist Victor Fuchs that at least 20% of American health care is either harmful or low yield[iii]. In 2008, Peter Orszag testified in the US Senate that the figure is actually 30%, or $830 billion per year.[iv]
The rationale for eliminating cost barriers to medical care has been that those on the lower rungs of the economic ladder may, to their detriment, forgo or delay necessary care. However, evidence of a detrimental effect of cost sharing on outcomes is scant[v], and the effects that have actually been measured are far less than imagined.
For instance, the well-known and highly rigorous RAND study randomly assigned patients to free medical care vs cost sharing. The group of patients assigned to cost sharing had 1/3 fewer ambulatory visits and 1/3 fewer hospitalizations than the free care group, and yet there was no difference in health outcomes between either group, except for an inconsequential difference in corrected vision of 20/22 vs 20/22.5. Even in a selected subgroup of low-income high-risk patients, there was only a trivial 3.3 mmHg difference in diastolic blood pressure, but there were no differences in smoking rates, weight, cholesterol or any one of five self-assessed measures of health[vi].
Overall, it has been difficult to show that the high utilization of health care resources in America yields significantly better health outcomes. We spend more money on health care than any developed country and have little to show for it. On the contrary, excessive health care utilization may well be the greater harm. For example, the widespread use of CT scanning for questionable indications is a major source of dangerous and unnecessary radiation exposure, and a cause of an estimated 1.5 to 2% of all malignancies[vii].
A Proposal for Progressive Cost Sharing to Restore Market Incentives.
It was clearly shown in the RAND study that cost sharing dramatically reduces health care utilization, with no important effect on health care outcomes, even among the poor. Nonetheless, many would predict that if cost sharing is not indexed to income or wealth, it could have disproportionate effects on the working poor versus the wealthy. It indeed is reasonable to presume that the relative effect of cost sharing on health care purchases would be greater for low-income patients than for others, since the value of a marginal dollar spent for health care would be far greater for low income patients.
While the RAND study showed that cost sharing beneficially reduces excessive health care utilization, there is a valid concern that cost sharing could have a disproportionate effect on low-income patients. Any proposal to re-introduce market based incentives into the medical system would need to be sensitive to concerns about inequitable effects on low-income patients.
This leads me to propose that cost sharing should be progressively indexed to income. In this way a mechanism is created than can level health care utilization across the spectrum from low to high-income groups.
In such a means-tested progressive co-payment scheme, one may for example, envision a co-payment of 0.5% of all medical expenses for the working poor, and 25% or 50% for the wealthy and super-wealthy. In such a scenario, those on the low end of the income scale are able to exert considerably more leverage with each of their health care dollars than the rich: In our example, a low income working person controls two hundred dollars for every dollar he spends on healthcare, while an upper income person controls only two or four dollars. In this way, the usual disadvantage of low income is turned upside down by the dramatic positive leverage of a progressive co-payment scheme.
If co-payment percentages are chosen correctly across the income scale, per capita healthcare expenditures will be equal across income groups. Adjustments in co-payment percentages may be made to bring expenditures into equilibrium among income groups, thus ensuring a truly objective and measurable degree of social equity.
In one version of the scheme, the insurance company would serve as a clearinghouse that uses the progressive co-payments to cross-subsidize low and high-income enrollees. On the other hand, there may be a concern that higher co-payments at progressively higher income levels will create disincentives for the working poor to increase their earnings. In that case, if the higher co-payments were used to reduce health insurance premium costs, the lower annual premiums would offset the disincentive to report higher income.
In an effective progressive cost sharing system, each patient would be issued a health care credit or debit card that must be used to cover co-payments. To be certain that consumers retain the appropriate incentives, they would not be permitted to use a supplemental insurance policy to insure co-payments, but patients would be encouraged to utilize prepaid health savings accounts (HSA) for such payments. Third party payers would be discouraged or prevented from disbursing the balance of a bill until the patient pays his co-payment, so as to prevent providers from skirting the system by relieving patients of their financial responsibility. Kicking back payments to patients would be strictly illegal or result in cancellation of provider insurance contracts. However, one could envision independent charities whose purpose would be to cover co-payments for the needy.
Inpatient hospital and rehabilitation stays may need to be dealt with on a separate basis, since patients have little or no personal control over inpatient expenditures made on their behalf. For example, a fixed daily hospital co-payment should be charged directly to the patient. Like the percentage co-payments, these charges should be progressive and income based, perhaps $50/day for low-income patients and $500/day for upper income patients. At a minimum, such a plan would align the interest of the patient with payers in terms of optimizing hospital length of stay.
Although it is invisible to patients, the amounts insurance companies pay for treating the same disease at different hospitals are widely variable, even in the same region. Larger hospitals routinely leverage their market dominance to extract higher payments from insurers. One may offset the market power of dominant hospitals by indexing the daily co-payment to the relative daily costs of hospitals. Patients will then need to consider whether a hospital’s daily cost is justified by a higher level of services, amenities, location, physician staff etc. This would lead to price competition among local hospitals, which currently is non-existent.
Maximum out of pocket expenditure caps or stepped decreases in percentage co-payments would need to be placed on policies. Such limitations would be progressive according to income. In this way, patients can be protected from ruinous financial obligations while maintaining a continued alertness to the cost of care.
The progressive cost sharing system described here would have the beneficial effect of forcing physicians to explain and justify the value and cost of their recommendations to patients. This alone would tend to reduce the volume of many low yield diagnostic and therapeutic interventions that today are recommended and provided with hardly a thought for cost vs. value. By low-yield testing, I mean that the likelihood of finding any expected abnormality is so low, that the cost and sometimes the risk are hardly justified. In the current system, even a vanishingly small potential advantage to the patient is seen as a benefit, since the cost burden is shifted to the “Commons”.
In truth, much of the high cost of medical care is due to the massive volume of low-yield testing that is routinely performed every day in America. In the last couple of decades, physicians have been conditioned to aggressively disregard cost as a consideration when deciding on whether to order diagnostic testing or prescribe therapies. Patients, who have been largely insulated from the cost of their care, have willingly submitted themselves to truly enormous amounts of low-yield testing and treatment. Even more than the cost of individual tests and treatments, it is the massive and ever expanding volume of low-yield tests and treatments that threaten the viability of the system.
The key to a cost-sharing program is to encourage patients to start questioning the benefit of procedures and treatments vs. the out of pocket cost, and to force physicians to stand up and justify their recommendations to their patients.
Most commercial insurers have extensive pre-authorization systems that evaluate requests for diagnostic testing and therapeutic interventions in order to ascertain that physicians are appropriate in their recommendations. Under the current system, the pre-authorization process is viewed as a nuisance by physicians, and as a barrier by patients who often feel that it prevents them from getting care to which they are entitled. In a cost sharing system where patients may question whether physician recommendations are appropriate, the pre-authorization system may instead be viewed as a helpful resource to validate physician advice, or to test suspicions that too many tests or therapies are being ordered.
One may anticipate that a progressive cost sharing system could initially create resistance among providers as the current open checkbook style of medicine finds its limits. On the other hand, a progressive cost sharing system would provide something that has been lacking in medical care for some time: That is, a renewed sense of shared responsibility between patient and physician for their joint medical decisions. Such a sharing of responsibility would do much to relieve the burden of defensive medicine.
As an example, a test recommended to rule out a very unlikely diagnosis may have a relatively high cost and a relatively small benefit. Consider a patient with a chest pain that appears to have a low likelihood of being cardiac in etiology. The patient is offered a stress test, but after consideration of his out of pocket cost and the low likelihood of disease, he decides to decline. The odds are very high that he has made a correct decision based on the information available at the time, and the physician does not try very hard to convince him to take the test. However, months later he has a heart attack, possibly even unrelated to the symptoms he initially had. In this scenario, the onus for not performing the test falls as much on the patient as the physician. A system of shared responsibility for medical decisions will inevitably lead to a decline in malpractice suits, and will result in the benefit of lower costs for liability insurance. The common practice of defensive medicine would finally find an antidote.
What is the moral and ethical basis of a progressive cost sharing medical system?
It is widely recognized that aggregate medical costs threaten to overwhelm the American economy, and that something will need to be done to restrain or reverse the inexorable increase in health care expenditures. For instance, Arizona has made rationing decisions that restrict the availability organ transplantations for Medicaid recipients[viii].
In a cost sharing system, the excess demand for medical care is restrained at its source by providers and consumers, depending upon the perceived value of care vs. the fractional shared cost of care. Many will argue that physicians and patients cannot always make the best decisions: Some patients will forgo care that they actually need, and physicians will at times attempt to provide expensive care that is unnecessary. This point is conceded, but the decisions on what care to consume or not remains in the hands of the patient and family, so the responsibility and consequences of these decisions are borne by the individual decision makers. Such a system is wholly consistent with the philosophical underpinnings of America, where central control of individuals’ day-to-day decisions is deeply unpopular. The alternative of Federal or State regulation and control of physician-patient interactions creates a visceral reaction in much of the public who decry, perhaps hyperbolically, institutions such as “Death Panels”.
Arbitrary edicts, such as denial of expensive cancer chemotherapy, are often cited in arguments against government mandated based rationing. For example, the U.K.’s National Institute of Health and Clinical Effectiveness (NICE) Agency’s cost-effectiveness analysis denied all patients access to Herceptin for treatment of early stage breast cancer for 8 long years after the FDA had already approved the drug in the US. In the U.K. one size must fit all. But realize that the value of Herceptin may be vastly different for a moderately demented 85 year old living with 24-hour home aides, than for a 47 year old woman hoping to walk down the aisle at her daughter’s wedding. A complete ban on the use of this expensive drug is not ethically consistent with many situations in which it may be highly valuable to certain individuals. Blanket bans by Federal bureaucrats are not consistent with individualized medical care. In a cost sharing system, such decisions can be individualized to the situation at hand.
It is almost too obvious to state that medical decision making at times will be incorrect, whether made by individuals, or by Federal regulators. The basic ethical and moral question for our time, is whether the right to make these decisions should rest with citizens and their physicians, or with Federal bureaucrats?
A progressive cost sharing system is consistent with the same values that underpin our progressive income tax system. In fact, the inherent fairness of a progressive cost sharing system can be cross checked by ensuring that the per capita expenditure on health care is flat across income groups, ensuring equity of health care distribution.
Medicaid: A Backstop for Those Who Cannot Afford Any Copayments – The Government gets an opportunity to demonstrate how to ration and regulate medical care
While a progressive cost sharing system may be a good solution for the working population, it fails for those who do not have adequate disposable income to cover even 0.5% of their medical costs. Already, such patients are covered by Federal and State programs such as Medicaid and Social Security Disability.
On the face of it, many advocates of centrally directed medicine would argue that these are the ideal medical programs: There are no financial barriers to obtaining medical care, and the government has the ability to write all the rules it wishes to make sure that everyone in these programs get what they need. In the eyes of many, a single payer program such as this would provide these advantages for the entire nation.
The unfortunate reality is that there can never be sufficient resources to provide every service that every person wants on demand. The portion of Federal and State budgets consumed by free or nearly free medical care (or any other free commodity for that matter) ever increases to the sky. This inevitably and necessarily results in reduced payments to providers, benefit cuts, or rationing.
Rationing is the inevitable consequence of services or products being sold at less than their market value. Only government has the ambit to design and execute a rationing system to control the inevitable insatiable demand for services. To the extent that the taxpayer must pay the bills for those unfortunate enough to require full government assistance, the government has a reciprocal obligation to the taxpayer. These decisions are inevitably political and not always medical, but that is the inherent nature of government administration.
Those who are unable to provide for themselves will need to avail themselves of government assistance, but expenditures cannot rise to the point that it becomes politically untenable to support the system. There must be incentives that encourage citizens to avoid government assistance or to opt out at the earliest possibility.
The rationing imposed by a fully covered government plan should be one of the disincentives that renders it less desirable. For instance, if generic drugs are available, they must be used unless there is no alternative. Lifestyle drugs such as those for erectile dysfunction may not be covered. Elective surgery for lifestyle issues would not be available. Canes, walkers and medications rather than joint replacements for patients with moderate arthritis, medications rather than stents for stable heart disease, strict criteria for elective use of implanted devices, restrictions on the use of expensive and minimally effective chemotherapeutic agents or bone marrow transplants for cancer therapy, are possible areas of rationing, but all this could well be unpopular and probably politically untenable. Pre-authorization of elective medical testing and procedures, as done routinely in the private sector, on the other hand should be made an integral part of the system to avoid the waste and fraud that are rampant in Medicaid and Medicare.
Fully covered government assistance programs such as Medicaid can be unattractive in many other ways. Outpatient care is mostly delivered in public clinics that incur the inconvenience of long waiting times, lack of personal connection with individual physicians and staff, poor accessibility to a limited number of facilities etc.
Such a system may compare unfavorably with private sector care, but the take-home point is that fully covered government assistance for health care is not to be as attractive as personally funded health care. This is not to be denied or papered over, but is an inherent feature of such plans, and is the incentive to leave such plans for those who are able to do so. Basic care will be provided within budget constraints, much as it is in other countries with socialized medical systems.
How to get into and out of Medicaid
As discussed above, fully covered government assistance for healthcare is inevitably rationed and may be less convenient or pleasant for patients. Nevertheless, many will need to avail themselves of such a system if they have no other choice. Once in the system, they will need an exit strategy to transfer back to the privately funded medical system. The exit cannot be so easy as to permit patients to game the system by going back and forth whenever a large medical expenditure looms.
Patients who are unable to pay their medical costs in a progressive cost sharing system will inevitably fall back into a fully covered government assistance program such as Medicaid. The Medicaid program will need to pay off the patients’ co-payments from the private system as they enter Medicaid, and then lock the patient into the rationed government administered program. To the extent that the patient’s previously provided services would have been covered by Medicaid, no future obligation would be imposed on the patient. However, unpaid copayments would be debited to the patient’s account. To exit the Medicaid program, the debit must be paid off, before transferring back to private coverage.
A means-tested cost sharing medical system that utilizes the tool of means tested progressive co-payments is a practical and socially equitable way to bring cost-value determinations into a newly functioning marketplace. It offers patients advantages of individualized personal decision making when determining medical need, a proven reduction in health expenditures by as much as one third, and a solution for the problem of defensive medicine and medical liability. It is a rational bottoms-up alternative to the bureaucratic top-down solutions that are currently the only solutions being offered to the American people.
[iii] Fuchs, VR. The ”Rationing” of Medical Care. N Engl J Med 1984; 311:1572-1573
[iv] Orszag PR. Opportunities to increase efficiency in health care: statement at the Health Reform Summit of the Committee on Finance, United States Senate, June 16, 2008. Washington, DC: Congressional Budget Office, 2008.
[v] Kullgren JT, et al. Health Care Use and Decision Making Among Lower Income Families in High-Deductible Health Plans. Arch Intern Med 2010; 170(21):1918-1925
[vi] Brook RH, et al. Does Free Care Improve Adult’s Health? N Engl J Med 1983; 309:1426-34
[vii] Computed Tomography — An Increasing Source of Radiation Exposure. David J. Brenner, Ph.D., D.Sc., and Eric J. Hall, D.Phil., D.Sc. N Engl J Med 2007; 357:2277-2284
[viii] Arizona Cuts Financing for Transplant Patients. The New York Times, December 3, 2010, p A1