read this if you want a workable solution to Health Care reform

I know this is probably too long a read for most of you bafoons here
but this guy makes sense. It is neither a radical solution nor is it
steeped in political ideology. It balances personal responsibility
with government obligation.

Ignore the sensational title, it does not really reflect the contents
of the article.
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http://www.theatlantic.com/doc/200909/health-care


After the needless death of his father, the author, a business
executive, began a personal exploration of a health-care industry that
for years has delivered poor service and irregular quality at
astonishingly high cost. It is a system, he argues, that is not worth
preserving in anything like its current form. And the health-care
reform now being contemplated will not fix it. Here’s a radical
solution to an agonizing problem.

by David Goldhill


How American Health Care Killed My Father

Almost two years ago, my father was killed by a hospital-borne
infection in the intensive-care unit of a well-regarded nonprofit
hospital in New York City. Dad had just turned 83, and he had a
variety of the ailments common to men of his age. But he was still
working on the day he walked into the hospital with pneumonia. Within
36 hours, he had developed sepsis. Over the next five weeks in the
ICU, a wave of secondary infections, also acquired in the hospital,
overwhelmed his defenses. My dad became a statistic—merely one of the
roughly 100,000 Americans whose deaths are caused or influenced by
infections picked up in hospitals. One hundred thousand deaths: more
than double the number of people killed in car crashes, five times the
number killed in homicides, 20 times the total number of our armed
forces killed in Iraq and Afghanistan. Another victim in a building
American tragedy.

About a week after my father’s death, The New Yorker ran an article by
Atul Gawande profiling the efforts of Dr. Peter Pronovost to reduce
the incidence of fatal hospital-borne infections. Pronovost’s
solution? A simple checklist of ICU protocols governing physician hand-
washing and other basic sterilization procedures. Hospitals
implementing Pronovost’s checklist had enjoyed almost instantaneous
success, reducing hospital-infection rates by two-thirds within the
first three months of its adoption. But many physicians rejected the
checklist as an unnecessary and belittling bureaucratic intrusion, and
many hospital executives were reluctant to push it on them. The story
chronicled Pronovost’s travels around the country as he struggled to
persuade hospitals to embrace his reform.

It was a heroic story, but to me, it was also deeply unsettling. How
was it possible that Pronovost needed to beg hospitals to adopt an
essentially cost-free idea that saved so many lives? Here’s an
industry that loudly protests the high cost of liability insurance and
the injustice of our tort system and yet needs extensive lobbying to
embrace a simple technique to save up to 100,000 people.

And what about us—the patients? How does a nation that might close
down a business for a single illness from a suspicious hamburger
tolerate the carnage inflicted by our hospitals? And not just those
100,000 deaths. In April, a Wall Street Journal story suggested that
blood clots following surgery or illness, the leading cause of
preventable hospital deaths in the U.S., may kill nearly 200,000
patients per year. How did Americans learn to accept hundreds of
thousands of deaths from minor medical mistakes as an inevitability?

My survivor’s grief has taken the form of an obsession with our health-
care system. For more than a year, I’ve been reading as much as I can
get my hands on, talking to doctors and patients, and asking a lot of
questions.

Keeping Dad company in the hospital for five weeks had left me
befuddled. How can a facility featuring state-of-the-art diagnostic
equipment use less-sophisticated information technology than my local
sushi bar? How can the ICU stress the importance of sterility when its
trash is picked up once daily, and only after flowing onto the floor
of a patient’s room? Considering the importance of a patient’s frame
of mind to recovery, why are the rooms so cheerless and uncomfortable?
In whose interest is the bizarre scheduling of hospital shifts, so
that a five-week stay brings an endless string of new personnel
assigned to a patient’s care? Why, in other words, has this
technologically advanced hospital missed out on the revolution in
quality control and customer service that has swept all other consumer-
facing industries in the past two generations?

I’m a businessman, and in no sense a health-care expert. But the
persistence of bad industry practices—from long lines at the doctor’s
office to ever-rising prices to astonishing numbers of preventable
deaths—seems beyond all normal logic, and must have an underlying
cause. There needs to be a business reason why an industry, year in
and year out, would be able to get away with poor customer service,
unaffordable prices, and uneven results—a reason my father and so many
others are unnecessarily killed.

Like every grieving family member, I looked for someone to blame for
my father’s death. But my dad’s doctors weren’t incompetent—on the
contrary, his hospital physicians were smart, thoughtful, and hard-
working. Nor is he dead because of indifferent nursing—without
exception, his nurses were dedicated and compassionate. Nor from
financial limitations—he was a Medicare patient, and the issue of
expense was never once raised. There were no greedy pharmaceutical
companies, evil health insurers, or other popular villains in his
particular tragedy.

Indeed, I suspect that our collective search for villains—for someone
to blame—has distracted us and our political leaders from addressing
the fundamental causes of our nation’s health-care crisis. All of the
actors in health care—from doctors to insurers to pharmaceutical
companies—work in a heavily regulated, massively subsidized industry
full of structural distortions. They all want to serve patients well.
But they also all behave rationally in response to the economic
incentives those distortions create. Accidentally, but relentlessly,
America has built a health-care system with incentives that inexorably
generate terrible and perverse results. Incentives that emphasize
health care over any other aspect of health and well-being. That
emphasize treatment over prevention. That disguise true costs. That
favor complexity, and discourage transparent competition based on
price or quality. That result in a generational pyramid scheme rather
than sustainable financing. And that—most important—remove consumers
from our irreplaceable role as the ultimate ensurer of value.

These are the impersonal forces, I’ve come to believe, that explain
why things have gone so badly wrong in health care, producing the
national dilemma of runaway costs and poorly covered millions. The
problems I’ve explored in the past year hardly count as breakthrough
discoveries—health-care experts undoubtedly view all of them as old
news. But some experts, it seems, have come to see many of these
problems as inevitable in any health-care system—as conditions to be
patched up, papered over, or worked around, but not problems to be
solved.

That’s the premise behind today’s incremental approach to health-care
reform. Though details of the legislation are still being negotiated,
its principles are a reprise of previous reforms—addressing access to
health care by expanding government aid to those without adequate
insurance, while attempting to control rising costs through centrally
administered initiatives. Some of the ideas now on the table may well
be sensible in the context of our current system. But fundamentally,
the “comprehensive” reform being contemplated merely cements in place
the current system—insurance-based, employment-centered,
administratively complex. It addresses the underlying causes of our
health-care crisis only obliquely, if at all; indeed, by extending the
current system to more people, it will likely increase the ultimate
cost of true reform.

I’m a Democrat, and have long been concerned about America’s lack of a
health safety net. But based on my own work experience, I also believe
that unless we fix the problems at the foundation of our health system—
largely problems of incentives—our reforms won’t do much good, and may
do harm. To achieve maximum coverage at acceptable cost with
acceptable quality, health care will need to become subject to the
same forces that have boosted efficiency and value throughout the
economy. We will need to reduce, rather than expand, the role of
insurance; focus the government’s role exclusively on things that only
government can do (protect the poor, cover us against true
catastrophe, enforce safety standards, and ensure provider
competition); overcome our addiction to Ponzi-scheme financing, hidden
subsidies, manipulated prices, and undisclosed results; and rely more
on ourselves, the consumers, as the ultimate guarantors of good
service, reasonable prices, and sensible trade-offs between health-
care spending and spending on all the other good things money can buy.

These ideas stand well outside the emerging political consensus about
reform. So before exploring alternative policies, let’s reexamine our
basic assumptions about health care—what it actually is, how it’s
financed, its accountability to patients, and finally its relationship
to the eternal laws of supply and demand. Everyone I know has at least
one personal story about how screwed up our health-care system is;
before spending (another) $1trillion or so on reform, we need a much
clearer understanding of the causes of the problems we all experience.

Illustration by Stephen Savage

Health Care Isn’t Health (Or Happiness)

“Money is honey,” my grandmother used to tell me, “but health is
wealth.” She said “health,” not “health care.” Listening to debates
over health-care reform, it is sometimes difficult to remember that
there is a difference.

Medical care, of course, is merely one component of our overall
health. Nutrition, exercise, education, emotional security, our
natural environment, and public safety may now be more important than
care in producing further advances in longevity and quality of life.
(In 2005, almost half of all deaths in the U.S. resulted from heart
disease, diabetes, lung cancer, homicide, suicide, and accidents—all
of which are arguably influenced as much by lifestyle choices and
living environment as by health care.) And of course even health
itself is only one aspect of personal fulfillment, alongside family
and friends, travel, recreation, the pursuit of knowledge and
experience, and more.

Yet spending on health care, by families and by the government, is
crowding out spending on almost everything else. As a nation, we now
spend almost 18 percent of our GDP on health care. In 1966, Medicare
and Medicaid made up 1 percent of total government spending; now that
figure is 20 percent, and quickly rising. Already, the federal
government spends eight times as much on health care as it does on
education, 12 times what it spends on food aid to children and
families, 30 times what it spends on law enforcement, 78 times what it
spends on land management and conservation, 87 times the spending on
water supply, and 830 times the spending on energy conservation.
Education, public safety, environment, infrastructure—all other public
priorities are being slowly devoured by the health-care beast.

It’s no different for families. From 2000 to 2008, the U.S. economy
grew by $4.4 trillion; of that growth, roughly one out of every four
dollars was spent on health care. Household expenditures on health
care already exceed those on housing. And health care’s share is
growing.

By what mechanism does society determine that an extra, say, $100
billion for health care will make us healthier than even $10 billion
for cleaner air or water, or $25 billion for better nutrition, or $5
billion for parks, or $10 billion for recreation, or $50 billion in
additional vacation time—or all of those alternatives combined?

The answer is, no mechanism at all. Health care simply keeps gobbling
up national resources, seemingly without regard to other societal
needs; it’s treated as an island that doesn’t touch or affect the rest
of the economy. As new tests and treatments are developed, they are,
for the most part, added to our Medicare or commercial insurance
policies, no matter what they cost. But of course the money must come
from somewhere. If the amount we spend on care had grown only at the
general rate of inflation since 1970, annual health-care costs now
would be roughly $5,000 less per American—that’s about 10 percent of
today’s median income, to invest for the future or to spend on all the
other things that contribute to our well-being. To be sure, our
society has become wealthier over the years, and we’d naturally want
to spend some of this new wealth on more and better health care; but
how did we choose to spend this much?

The housing bubble offers some important lessons for health-care
policy. The claim that something—whether housing or health care—is an
undersupplied social good is commonly used to justify government
intervention, and policy makers have long striven to make housing more
affordable. But by making housing investments eligible for special tax
benefits and subsidized borrowing rates, the government has stimulated
not only the construction of more houses but also the willingness of
people to borrow and spend more on houses than they otherwise would
have. The result is now tragically clear.

As with housing, directing so much of society’s resources to health
care is stimulating the provision of vastly more care. Along the way,
it’s also distorting demand, raising prices, and making us all poorer
by crowding out other, possibly more beneficial, uses for the
resources now air-dropped onto the island of health care. Why do we
view health care as disconnected from everything else? Why do we spend
so much on it? And why, ultimately, do we get such inconsistent
results? Any discussion of the ills within the system must begin with
a hard look at the tax-advantaged comprehensive-insurance industry at
its center.

Health Insurance Isn’t Health Care

How often have you heard a politician say that millions of Americans
“have no health care,” when he or she meant they have no health
insurance? How has a method of financing health care become synonymous
with care itself?

The reason for financing at least some of our health care with an
insurance system is obvious. We all worry that a serious illness or an
accident might one day require urgent, extensive care, imposing an
extreme financial burden on us. In this sense, health-care insurance
is just like all other forms of insurance—life, property, liability—
where the many who face a risk share the cost incurred by the few who
actually suffer a loss.

But health insurance is different from every other type of insurance.
Health insurance is the primary payment mechanism not just for
expenses that are unexpected and large, but for nearly all health-care
expenses. We’ve become so used to health insurance that we don’t
realize how absurd that is. We can’t imagine paying for gas with our
auto-insurance policy, or for our electric bills with our homeowners
insurance, but we all assume that our regular checkups and dental
cleanings will be covered at least partially by insurance. Most
pregnancies are planned, and deliveries are predictable many months in
advance, yet they’re financed the same way we finance fixing a car
after a wreck—through an insurance claim.

Comprehensive health insurance is such an ingrained element of our
thinking, we forget that its rise to dominance is relatively recent.
Modern group health insurance was introduced in 1929, and employer-
based insurance began to blossom during World War II, when wage
freezes prompted employers to expand other benefits as a way of
attracting workers. Still, as late as 1954, only a minority of
Americans had health insurance. That’s when Congress passed a law
making employer contributions to employee health plans tax-deductible
without making the resulting benefits taxable to employees. This
seemingly minor tax benefit not only encouraged the spread of
catastrophic insurance, but had the accidental effect of making
employer-funded health insurance the most affordable option (after
taxes) for financing pretty much any type of health care. There was
nothing natural or inevitable about the way our system developed:
employer-based, comprehensive insurance crowded out alternative
methods of paying for health-care expenses only because of a poorly
considered tax benefit passed half a century ago.

In designing Medicare and Medicaid in 1965, the government essentially
adopted this comprehensive-insurance model for its own spending, and
by the next year had enrolled nearly 12 percent of the population. And
it is no coinci­dence that the great inflation in health-care costs
began soon after. We all believe we need comprehensive health
insurance because the cost of care—even routine care—appears too high
to bear on our own. But the use of insurance to fund virtually all
care is itself a major cause of health care’s high expense.

Insurance is probably the most complex, costly, and distortional
method of financing any activity; that’s why it is otherwise used to
fund only rare, unexpected, and large costs. Imagine sending your
weekly grocery bill to an insurance clerk for review, and having the
grocer reimbursed by the insurer to whom you’ve paid your share. An
expensive and wasteful absurdity, no?

Is this really a big problem for our health-care system? Well, for
every two doctors in the U.S., there is now one health-insurance
employee—more than 470,000 in total. In 2006, it cost almost $500 per
person just to administer health insurance. Much of this enormous cost
would simply disappear if we paid routine and predictable health-care
expenditures the way we pay for everything else—by ourselves.

Illustration by Stephen Savage

The Moral-Hazard Economy

Society’s excess cost from health insurance’s administrative expense
pales next to the damage caused by “moral hazard”—the tendency we all
have to change our behavior, becoming spendthrifts and otherwise
taking less care with our decisions, when someone else is covering the
costs. Needless to say, much medical care is unavoidable; we don’t
choose to become sick, nor do we seek more treatment than we think we
need. Still, hospitals, drug companies, health insurers, and medical-
device manufacturers now spend roughly $6 billion a year on
advertising. If the demand for health care is purely a response to
unavoidable medical need, why do these companies do so much
advertising?

Medical ads on TV typically inform the viewer that a specific treatment
—a drug, device, surgical procedure—is available for a chronic
condition. Many also note that the product or treatment is eligible
for Medicare or private-insurance reimbursement. In some cases, the
advertiser will offer to help the patient obtain that reimbursement.
The key message: you can benefit from this product and pass the bill
on to someone else.

Every time you walk into a doctor’s office, it’s implicit that someone
else will be paying most or all of your bill; for most of us, that
means we give less attention to prices for medical services than we do
to prices for anything else. Most physicians, meanwhile, benefit
financially from ordering diagnostic tests, doing procedures, and
scheduling follow-up appointments. Combine these two features of the
system with a third—the informational advantage that extensive
training has given physicians over their patients, and the authority
that advantage confers—and you have a system where physicians can, to
some extent, generate demand at will.

Do they? Well, Medicare spends almost twice as much per patient in
Dallas, where there are more doctors and care facilities per resident,
as it does in Salem, Oregon, where supply is tighter. Why? Because
doctors (particularly specialists) in surplus areas order more tests
and treatments per capita, and keep their practices busy. Many studies
have shown that the patients in areas like Dallas do not benefit in
any measurable way from all this extra care. All of the physicians I
know are genuinely dedicated to their patients. But at the margin, all
of us are at least subconsciously influenced by our own economic
interests. The data are clear: in our current system, physician supply
often begets patient demand.

Moral hazard has fostered an accidental collusion between providers
benefiting from higher costs and patients who don’t fully bear them.
In this environment, trying to control costs is awfully tough. When
Medicare cut reimbursement rates in 2005 on chemotherapy and anemia
drugs, for instance, it saved almost 20 percent of the previously
billed costs. But Medicare’s total cancer-treatment costs actually
rose almost immediately. As The New York Times reported, some
physicians believed their colleagues simply performed more treatments,
particularly higher-profit ones.

Want further evidence of moral hazard? The average insured American
and the average uninsured American spend very similar amounts of their
own money on health care each year—$654 and $583, respectively. But
they spend wildly different amounts of other people’s money—$3,809 and
$1,103, respectively. Sometimes the uninsured do not get highly
beneficial treatments because they cannot afford them at today’s prices
—something any reform must address. But likewise, insured patients
often get only marginally beneficial (or even outright unnecessary)
care at mind-boggling cost. If it’s true that the insurance system
leads us to focus on only our direct share of costs—rather than the
total cost to society—it’s not surprising that insured families and
uninsured ones would make similar decisions as to how much of their
own money to spend on care, but very different decisions on the total
amount to consume.

The unfortunate fact is, health-care demand has no natural limit. Our
society will always keep creating new treatments to cure previously
incurable problems. Some of these will save lives or add productive
years to them; many will simply make us more comfortable. That’s all
to the good. But the cost of this comfort, and whether it’s really
worthwhile, is never calculated—by anyone. For almost all our health-
care needs, the current system allows us as consumers to ask
providers, “What’s my share?” instead of “How much does this cost?”—a
question we ask before buying any other good or service. And the
subtle difference between those two questions is costing us all a
fortune.

There’s No One Else to Pay the Bill

Perhaps the greatest problem posed by our health-insurance-driven
regime is the sense it creates that someone else is actually paying
for most of our health care—and that the costs of new benefits can
also be borne by someone else. Unfortunately, there is no one else.

For fun, let’s imagine confiscating all the profits of all the
famously greedy health-insurance companies. That would pay for four
days of health care for all Americans. Let’s add in the profits of the
10 biggest rapacious U.S. drug companies. Another 7 days. Indeed,
confiscating all the profits of all American companies, in every
industry, wouldn’t cover even five months of our health-care expenses.

Somebody else always seems to be paying for at least part of our
health care. But that’s just an illusion. At $2.4 trillion and
growing, our nation’s health-care bill is too big to be paid by anyone
other than all of us.

In 2007, employer-based health insurance cost, on average, more than
$12,000 per family, up 78 percent since 2001. I’ve run several
companies and company divisions of various sizes over the course of my
career, so I can confidently tell you that raises (and even entry-
level hiring) are tightly limited by rising health-care costs. You may
think your employer is paying for your health care, but in fact your
company’s share of the insurance premium comes out of your potential
wage increase. Where else could it come from?

Let’s say you’re a 22-year-old single employee at my company today,
starting out at a $30,000 annual salary. Let’s assume you’ll get
married in six years, support two children for 20 years, retire at 65,
and die at 80. Now let’s make a crazy assumption: insurance premiums,
Medicare taxes and premiums, and out-of-pocket costs will grow no
faster than your earnings—say, 3 percent a year. By the end of your
working days, your annual salary will be up to $107,000. And over your
lifetime, you and your employer together will have paid $1.77 million
for your family’s health care. $1.77 million! And that’s only after
assuming the taming of costs! In recent years, health-care costs have
actually grown 2 to 3 percent faster than the economy. If that
continues, your 22-year-old self is looking at an additional $2
million or so in expenses over your lifetime—roughly $4 million in
total.

Would you have guessed these numbers were so large? If not, you have
good cause: only a quarter would be paid by you directly (and much of
that after retirement). The rest would be spent by others on your
behalf, deducted from your earnings before you received your paycheck.
And that’s a big reason why our health-care system is so expensive.

The Government Is Not Good at Cost Reduction

Every proposal for health-care reform has featured some element of
cost control to “balance” the inflationary impact of expanding access.
Yet it goes without saying that in the big picture, all government
efforts to control costs have failed.

Why? One reason is a fixation on prices rather than costs. The
government regularly tries to cap costs by limiting the reimbursement
rates paid to providers by Medicare and Medicaid, and generally pays
much less for each service than private insurers. But as we’ve seen,
that can lead providers to perform more services, and to steer
patients toward higher-priced, more lightly regulated treatments. The
government’s efforts to expand “access” to care while limiting costs
are like blowing up a balloon while simultaneously squeezing it. The
balloon continues to inflate, but in misshapen form.

Cost control is a feature of decentralized, competitive markets, not
of centralized bureaucracy—a matter of incentives, not mandates.
What’s more, cost control is dynamic. Even the simplest business faces
constant variation in its costs for labor, facilities, and capital; to
compete, management must react quickly, efficiently, and, most often,
prospectively. By contrast, government bureaucracies set regulations
and reimbursement rates through carefully evaluated and broadly
applied rules. These bureaucracies first must notice market changes
and resource misallocations, and then (sometimes subject to political
considerations) issue additional regulations or change reimbursement
rates to address each problem retrospectively.

As a result, strange distortions crop up constantly in health care.
For example, although the population is rapidly aging, we have few
geriatricians—physicians who address the cluster of common patient
issues related to aging, often crossing traditional specialty lines.
Why? Because under Medicare’s current reimbursement system (which
generally pays more to physicians who do lots of tests and
procedures), geriatricians typically don’t make much money. If seniors
were the true customers, they would likely flock to geriatricians,
bidding up their rates—and sending a useful signal to medical-school
students. But Medicare is the real customer, and it pays more to
specialists in established fields. And so, seniors often end up
overusing specialists who are not focused on their specific health
needs.

Many reformers believe if we could only adopt a single-payer system,
we could deliver health care more cheaply than we do today. The
experience of other developed countries suggests that’s true: the
government as single payer would have lower administrative costs than
private insurers, as well as enormous market clout and the ability to
bring down prices, although at the cost of explicitly rationing care.

But even leaving aside the effects of price controls on innovation and
customer service, today’s Medicare system should leave us skeptical
about the long-term viability of that approach. From 2000 to 2007,
despite its market power, Medicare’s hospital and physician
reimbursements per enrollee rose by 5.4 percent and 8.5 percent,
respectively, per year. As currently structured, Medicare is a Ponzi
scheme. The Medicare tax rate has been raised seven times since its
enactment, and almost certainly will need to be raised again in the
next decade. The Medicare tax contributions and premiums that today’s
beneficiaries have paid into the system don’t come close to fully
funding their care, which today’s workers subsidize. The subsidy is
getting larger even as it becomes more difficult to maintain: next
year there will be 3.7 working people for each Medicare beneficiary;
if you’re in your mid-40s today, there will be only 2.4 workers to
subsidize your care when you hit retirement age. The experience of
other rich nations should also make us skeptical. Whatever their
histories, nearly all developed countries are now struggling with
rapidly rising health-care costs, including those with single-payer
systems. From 2000 to 2005, per capita health-care spending in Canada
grew by 33 percent, in France by 37 percent, in the U.K. by 47 percent—
all comparable to the 40 percent growth experienced by the U.S. in
that period. Cost control by way of bureaucratic price controls has
its limits.

Uncompetitive

In 2007, health companies in the Fortune 1,000 earned $71 billion. Of
the 52 industries represented on Fortune’s list, pharmaceuticals and
medical equipment ranked third and fourth, respectively, in terms of
profits as a share of revenue. From 2000 to 2007, the annual profits
of America’s top 15 health-insurance companies increased from $3.5
billion to $15 billion.

In competitive markets, high profits serve an important social
purpose: encouraging capital to flow to the production of a service
not adequately supplied. But as long as our government shovels ever-
greater resources into health care with one hand, while with the other
restricting competition that would ensure those resources are used
efficiently, sustained high profits will be the rule.

Health care is an exceptionally heavily regulated industry. Health-
insurance companies are regulated by states, which limits interstate
competition. And many of the materials, machines, and even software
programs used by health-care facilities must be licensed by state or
federal authorities, or approved for use by Medicare; these
requirements form large barriers to entry for both new facilities and
new vendors that could equip and supply them.

Many health-care regulations are justified as safety precautions. But
many also result from attempts to redress the distortions that our
system of financing health care has created. And whatever their
purpose, almost all of these regulations can be shaped over time by
the powerful institutions that dominate the health-care landscape, and
that are often looking to protect themselves from competition.

Take the ongoing battle between large integrated hospitals and
specialty clinics (for cardiac surgery, orthopedics, maternity, etc.).
The economic threat posed by these facilities is well illustrated by a
recent battle in Loma Linda, California. When a group of doctors
proposed a 28-bed private specialty facility, the local hospitals
protested to the city council that it was unnecessary, and launched a
publicity campaign to try to block it; the council backed the facility
anyway. So the nonprofit Loma Linda University Medical Center simply
bought the new facility for $80 million in 2008. Traditional hospitals
got Congress to include an 18-month moratorium on new specialty
hospitals in the 2003 Medicare law, and a second six-month ban in
2005.

The hospitals’ argument has some merit: less complicated surgical
cases (the kind specialty clinics typically take on) tend to be more
profitable than complex surgeries and nonsurgical admissions. Without
those profitable cases, hospitals can’t subsidize the cases on which
they lose money. But why are simple surgeries more profitable? Because
of the nonmarket methods by which Medicare sets prices.

The net effect of the endless layers of health-care regulation is to
stifle competition in the classic economic sense. What we have instead
is a noncompetitive system where services and reimbursement are
negotiated above consumers’ heads by large private and government
institutions. And the primary goal of any large noncompetitive
institution is not cost control or product innovation or customer
service: it’s maintenance of the status quo.

Our Favored Hospitals

In 1751, Benjamin Franklin and Dr. Thomas Bond founded Pennsylvania
Hospital, the first in America, “to care for the sick-poor and insane
who were wandering the streets of Philadelphia.” Since then, hospitals
have come to dominate the American medical landscape. Yet in recent
decades, the rationale for concentrating so much care under one roof
has diminished steadily. Many hospitals still exist in their current
form largely because they are protected by regulation and favored by
government payment policies, which effectively maintain the existing
industrial structure, rather than encouraging innovation.

Between 1970 and 2006, annual Medicare payments to hospitals grew by
roughly 3,800 percent, from $5 billion to $192 billion. Total annual
hospital-care costs for all patients grew from $28 billion to almost
$650 billion during that same period. Since 1975, hospitals’ enormous
revenue growth has occurred despite a 35 percent decline in the number
of hospital beds, no meaningful increase in total admissions, and an
almost 50 percent decline in the average length of stay. High-tech
equipment has been dispersed to medical practices, recovery periods
after major procedures have shrunk, and pharmaceutical therapies have
grown in importance, yet over the past 40 years, hospitals have
managed to retain the same share (roughly one-third) of our nation’s
health-care bill.

Hospitals have sought to use the laws and regulations originally
designed to serve patients to preserve their business model. Their
argument is the same one that’s been made before by regulated
railroads, electric utilities, airlines, Ma Bell, and banks: new
competitors, they say, are using their cost advantages to skim off the
best customers; without those customers, the incumbents will no longer
be able to subsidize essential services that no one can profitably
provide to the public.

Hospitals are indeed required to provide emergency care to any walk-in
patient, and this obligation is a meaningful public service. But how
do we know whether the charitable benefit from this requirement
justifies the social cost of expensive hospital care and poor quality?
We don’t know. Our system of health-care law and regulation has so
distorted the functioning of the market that it’s impossible to
measure the social costs and benefits of maintaining hospitals’
prominence. And again, the distortions caused by a reluctance to pay
directly for health care—in this case, emergency medicine for the poor—
are in large part to blame.

Consider the oft-quoted “statistic” that emergency-room care is the
most expensive form of treatment. Has anyone who believes this ever
actually been to an emergency room? My sister is an emergency-medicine
physician; unlike most other specialists, ER docs usually work on
scheduled shifts and are paid fixed salaries that place them in the
lower ranks of physician compensation. The doctors and other workers
are hardly underemployed: typically, ERs are unbelievably crowded.
They have access to the facilities and equipment of the entire
hospital, but require very few dedicated resources of their own. They
benefit from the group buying power of the entire institution. No
expensive art decorates the walls, and the waiting rooms resemble
train-station waiting areas. So what exactly makes an ER more
expensive than other forms of treatment?

Perhaps it’s the accounting. Since charity care, which is often
performed in the ER, is one justification for hospitals’ protected
place in law and regulation, it’s in hospitals’ interest to shift
costs from overhead and other parts of the hospital to the ER, so that
the costs of charity care—the public service that hospitals are
providing—will appear to be high. Hospitals certainly lose money on
their ERs; after all, many of their customers pay nothing. But to
argue that ERs are costly compared with other treatment options,
hospitals need to claim expenses well beyond the marginal (or
incremental) cost of serving ER patients.

In a recent IRS survey of almost 500 nonprofit hospitals, nearly 60
percent reported providing charity care equal to less than 5 percent
of their total revenue, and about 20 percent reported providing less
than 2 percent. Analyzing data from the American Hospital Directory,
The Wall Street Journal found that the 50 largest nonprofit hospitals
or hospital systems made a combined “net income” (that is, profit) of
$4.27 billion in 2006, nearly eight times their profits five years
earlier.

How do we know whether the value of hospitals’ charitable services
compensates for the roughly 100,000 deaths from hospital-borne
disease, their poor standards of customer service, and their
extraordinary diseconomies of both scale and scope? Might we be better
off reforming hospitals, and allowing many of them to be eliminated by
competition from specialty clinics? As a society, couldn’t we just pay
directly for the services required by the poor? We don’t know how many
hospitals would even survive if they were not so favored under the
law; anyone who has lost a loved one to a preventable hospital death
will wonder how many should.

You Are Not the Customer

What amazed me most during five weeks in the ICU with my dad was the
survival of paper and pen for medical instructions and histories. In
that time, Dad was twice taken for surgical procedures intended for
other patients (fortunately interrupted both times by our
intervention). My dry cleaner uses a more elaborate system to track
shirts than this hospital used to track treatment.

Not every hospital relies on paper-based orders and charts, but most
still do. Why has adoption of clinical information technology been so
slow? Companies invest in IT to reduce their costs, reduce mistakes
(itself a form of cost-saving), and improve customer service. Better
information technology would have improved my father’s experience in
the ICU—and possibly his chances of survival.

But my father was not the customer; Medicare was. And although
Medicare has experimented with new reimbursement approaches to drive
better results, no centralized reimbursement system can be supple
enough to address the many variables affecting the patient experience.
Certainly, Medicare wasn’t paying for the quality of service during my
dad’s hospital stay. And it wasn’t really paying for the quality of
his care, either; indeed, because my dad got sepsis in the hospital,
and had to spend weeks there before his death, the hospital was able
to charge a lot more for his care than if it had successfully treated
his pneumonia and sent him home in days.

Of course, one area of health-related IT has received substantial
investment—billing. So much for the argument, often made, that privacy
concerns or a lack of agreed-upon standards has prevented the
development of clinical IT or electronic medical records; presumably,
if lack of privacy or standards had hampered the digitization of
health records, it also would have prevented the digitization of the
accompanying bills. To meet the needs of the government bureaucracy
and insurance companies, most providers now bill on standardized
electronic forms. In case you wonder who a care provider’s real
customer is, try reading one of these bills.

For that matter, try discussing prices with hospitals and other
providers. Eight years ago, my wife needed an MRI, but we did not have
health insurance. I called up several area hospitals, clinics, and
doctors’ offices—all within about a one-mile radius—to find the best
price. I was surprised to discover that prices quoted, for an
identical service, varied widely, and that the lowest price was
$1,200. But what was truly astonishing was that several providers
refused to quote any price. Only if I came in and actually ordered the
MRI could we discuss price.

Several years later, when we were preparing for the birth of our
second child, I requested the total cost of the delivery and related
procedures from our hospital. The answer: the hospital discussed price
only with uninsured patients. What about my co-pay? They would discuss
my potential co-pay only if I were applying for financial assistance.

Keeping prices opaque is one way medical institutions seek to avoid
competition and thereby keep prices up. And they get away with it in
part because so few consumers pay directly for their own care—
insurers, Medicare, and Medicaid are basically the whole game. But
without transparency on prices—and the related data on measurable
outcomes—efforts to give the consumer more control over health care
have failed, and always will.

Here’s a wonderful example of price opacity. Advocates for the
uninsured complain that hospitals charge uninsured patients, on
average, 2.5 times the amount charged to insured patients. Hospitals
defend themselves by contending that they earn from uninsured patients
only 25 percent of the amount they do from insured ones. Both
statements appear to be true!

How is this possible? Well, hospitals bill according to their price
lists, but provide large discounts to major insurers. Individual
consumers, of course, don’t benefit from these discounts, so they
receive their bills at full list price (typically about 2.5 times the
bill to an insured patient). Uninsured patients, however, pay
according to how much of the bill the hospital believes they can
afford (which, on average, amounts to 25 percent of the amount paid by
an insured patient). Nonetheless, whatever discount a hospital gives
to an uninsured patient is entirely at its discretion—and is typically
negotiated only after the fact. Some uninsured patients have been
driven into bankruptcy by hospital collections. American industry may
offer no better example of pernicious “price discrimination,” nor one
that entails greater financial vulnerability for American families.

It’s astonishingly difficult for consumers to find any health-care
information that would enable them to make informed choices—based not
just on price, but on quality of care or the rate of preventable
medical errors. Here’s one place where legal requirements might help.
But only a few states require institutions to make this sort of
information public in a usable form for consumers. So while every city
has numerous guidebooks with reviews of schools, restaurants, and
spas, the public is frequently deprived of the necessary data to
choose hospitals and other providers.

The Strange Beast of Health-Care Technology

One of the most widely held pieces of conventional wisdom about health
care is that new technology is relentlessly driving up costs. Yet over
the past 20 years, I’ve bought several generations of microwave ovens,
personal computers, DVD players, GPS devices, mobile phones, and flat-
screen TVs. I bank mostly at ATMs, check out my own goods at self-
serve supermarket scanners, and attend company meetings by video­
conference. Technology has transformed much of our daily lives, in
almost all cases by adding quantity, speed, and quality while lowering
costs. So why is health care different?

Well, for the most part, it isn’t. Whether it’s new drugs to control
previously untreatable conditions, diagnostic equipment that enhances
physician productivity, or minimally invasive techniques that speed
patient recovery, technology-driven innovation has been transforming
care at least as greatly as it has transformed the rest of our lives.

But most health-care technologies don’t exist in the same world as
other technologies. Recall the MRI my wife needed a few years ago:
$1,200 for 20 minutes’ use of a then 20-year-old technology, requiring
a little electricity and a little labor from a single technician and a
radiologist. Why was the price so high? Most MRIs in this country are
reimbursed by insurance or Medicare, and operate in the limited-
competition, nontransparent world of insurance pricing. I don’t even
know the price of many of the diagnostic services I’ve needed over the
years—usually I’ve just gone to whatever provider my physician
recommended, without asking (my personal contribution to the moral-
hazard economy).

By contrast, consider LASIK surgery. I still lack the (small amount
of) courage required to get LASIK. But I’ve been considering it since
it was introduced commercially in the 1990s. The surgery is seldom
covered by insurance, and exists in the competitive economy typical of
most other industries. So people who get LASIK surgery—or for that
matter most cosmetic surgeries, dental procedures, or other mostly
uninsured treatments—act like consumers. If you do an Internet search
today, you can find LASIK procedures quoted as low as $499 per eye—a
decline of roughly 80 percent since the procedure was introduced.
You’ll also find sites where doctors advertise their own higher-priced
surgeries (which more typically cost about $2,000 per eye) and warn
against the dangers of discount LASIK. Many ads specify the quality of
equipment being used and the performance record of the doctor, in
addition to price. In other words, there’s been an active, competitive
market for LASIK surgery of the same sort we’re used to seeing for
most goods and services.

The history of LASIK fits well with the pattern of all capital-
intensive services outside the health-insurance economy. If you’re one
of the first ophthalmologists in your community to perform the
procedure, you can charge a high price. But once you’ve acquired the
machine, the actual cost of performing a single procedure (the
marginal cost) is relatively low. So, as additional ophthalmologists
in the neighborhood invest in LASIK equipment, the first provider can
meet new competition by cutting price. In a fully competitive
marketplace, the procedure’s price will tend toward that low marginal
cost, and ophthalmologists looking to buy new machines will exert
downward pressure on both equipment and procedure prices.

No business likes to compete solely on price, so most technology
providers seek to add features and performance improvements to new
generations of a machine—anything to keep their product from becoming
a pure commodity. Their success depends on whether the consumers will
pay enough for the new feature to justify its introduction. In most
consumer industries, we can see this dynamic in action—observe how DVD
players have moved in a few years from a high-priced luxury to a
disposable commodity available at discount stores. DVD players have
run out of new features for which customers will pay premium prices.

Perhaps MRIs have too. After a long run of high and stable prices, you
can now find ads for discount MRIs. But because of the peculiar way we
pay for health care, this downward price pressure on technology seems
less vigorous. How well can insurance companies and government
agencies judge the value of new features that tech suppliers introduce
to keep prices up? Rather than blaming technology for rising costs, we
must ask if moral hazard and a lack of discipline in national health-
care spending allows health-care companies to avoid the forces that
make nonmedical technology so competitive.

In 2002, the U.S. had almost six times as many CT scanners per capita
as Germany and four times as many MRI machines as the U.K. Traditional
reformers believe it is this rate of investment that has pushed up
prices, rather than sustained high prices that have pushed up
investment. As a result, many states now require hospitals to obtain a
Certificate of Need before making a major equipment purchase. In its
own twisted way, this makes sense: moral hazard, driven by insurance,
for years allowed providers to create enough demand to keep new MRI
machines humming at any price.

But Certificates of Need are just another Scotch-tape reform, an
effort to maintain the current system by treating a symptom rather
than the underlying disease. Technology is driving up the cost of
health care for the same reason every other factor of care is driving
up the cost—the absence of the forces that discipline and even drive
down prices in the rest of our economy. Only in the bizarre parallel
universe of health care could limiting supply be seen as a sensible
approach to keeping prices down.

The Limits of “Comprehensive” Health-care Reform

A wasteful insurance system; distorted incentives; a bias toward
treatment; moral hazard; hidden costs and a lack of transparency;
curbed competition; service to the wrong customer. These are the
problems at the foundation of our health-care system, resulting in a
slow rot and requiring more and more money just to keep the system
from collapsing.

How would the health-care reform that’s now taking shape solve these
core problems? The Obama administration and Congress are still working
out the details, but it looks like this generation of “comprehensive”
reform will not address the underlying issues, any more than previous
efforts did. Instead it will put yet more patches on the walls of an
edifice that is fundamentally unsound—and then build that edifice
higher.

A central feature of the reform plan is the expansion of comprehensive
health insurance to most of the 46 million Americans who now lack
private or public insurance. Whether this would be achieved entirely
through the extension of private commercial insurance at government-
subsidized rates, or through the creation of a “public option,”
perhaps modeled on Medicare, is still being debated.

Regardless, the administration has suggested a cost to taxpayers of $1
trillion to $1.5 trillion over 10 years. That, of course, will mean
another $1 trillion or more not spent on other things—environment,
education, nutrition, recreation. And if the history of previous
attempts to expand the health safety net are any guide, that estimate
will prove low.

The reform plan will also feature a variety of centrally administered
initiatives designed to reduce costs and improve quality. These will
likely include a major government investment to promote digitization
of patient health records, an effort to collect information on best
clinical practices, and changes in the way providers are paid, to
better reward quality and deter wasteful spending.

All of these initiatives have some theoretical appeal. And within the
confines of the current system, all may do some good. But for the most
part, they simply do not address the root causes of poor quality and
runaway costs.

Consider information technology, for instance. Of course the health
system could benefit from better use of IT. The Rand Corporation has
estimated that the widespread use of electronic medical records would
eventually yield annual savings of $81 billion, while also improving
care and reducing preventable deaths, and the White House estimates
that creating and spreading the technology would cost just $50
billion. But in what other industry would an investment with such a
massive annual return not be funded by the industry itself? (And while
$50 billion may sound like a big investment, it’s only about 2 percent
of the health-care industry’s annual revenues.)

Technology is effective only when it’s properly applied. Since most
physicians and health-care companies haven’t adopted electronic
medical records on their own, what makes us think they will
appropriately use all this new IT? Most of the benefits of the
technology (record portability, a reduction in costly and dangerous
clinical errors) would likely accrue to patients, not providers. In a
consumer-facing industry, this alone would drive companies to make the
investments to stay competitive. But of course, we patients aren’t the
real customers; government funding of electronic records wouldn’t
change that.

I hope that whatever reform is finally enacted this fall works—
preventing people from slipping through the cracks, raising the
quality standard of the health-care industry, and delivering all this
at acceptable cost. But looking at the big picture, I fear it won’t.
So I think we should at least begin to debate and think about larger
reforms, and a different direction—if not for this round of reform,
then for the next one. Politics is, of course, the art of the
possible. If our health-care crisis does not abate, the possibilities
for reform may expand beyond their current, tight limits.

A Way Forward

The most important single step we can take toward truly reforming our
system is to move away from comprehensive health insurance as the
single model for financing care. And a guiding principle of any reform
should be to put the consumer, not the insurer or the government, at
the center of the system. I believe if the government took on the goal
of better supporting consumers—by bringing greater transparency and
competition to the health-care industry, and by directly subsidizing
those who can’t afford care—we’d find that consumers could buy much
more of their care directly than we might initially think, and that
over time we’d see better care and better service, at lower cost, as a
result.

A more consumer-centered health-care system would not rely on a single
form of financing for health-care purchases; it would make use of
different sorts of financing for different elements of care—with
routine care funded largely out of our incomes; major, predictable
expenses (including much end-of-life care) funded by savings and
credit; and massive, unpredictable expenses funded by insurance.

For years, a number of reformers have advocated a more “consumer-
driven” care system—a term coined by the Harvard Business School
professor Regina Herzlinger, who has written extensively on the
subject. Many different steps could move us toward such a system.
Here’s one approach that—although it may sound radical—makes sense to
me.

First, we should replace our current web of employer- and government-
based insurance with a single program of catastrophic insurance open
to all Americans—indeed, all Americans should be required to buy it—
with fixed premiums based solely on age. This program would be best
run as a single national pool, without underwriting for specific risk
factors, and would ultimately replace Medicare, Medicaid, and private
insurance. All Americans would be insured against catastrophic
illness, throughout their lives.

Proposals for true catastrophic insurance usually founder on the
definition of catastrophe. So much of the amount we now spend is
dedicated to problems that are considered catastrophic, the argument
goes, that a separate catastrophic system is pointless. A typical
catastrophic insurance policy today might cover any expenses above,
say, $2,000. That threshold is far too low; ultimately, a threshold of
$50,000 or more would be better. (Chronic conditions with expected
annual costs above some lower threshold would also be covered.) We
might consider other mechanisms to keep total costs down: the plan
could be required to pay out no more in any year than its available
premiums, for instance, with premium increases limited to the general
rate of inflation. But the real key would be to restrict the coverage
to true catastrophes—if this approach is to work, only a minority of
us should ever be beneficiaries.

How would we pay for most of our health care? The same way we pay for
everything else—out of our income and savings. Medicare itself is, in
a sense, a form of forced savings, as is commercial insurance. In
place of these programs and the premiums we now contribute to them,
and along with catastrophic insurance, the government should create a
new form of health savings account—a vehicle that has existed, though
in imperfect form, since 2003. Every American should be required to
maintain an HSA, and contribute a minimum percentage of post-tax
income, subject to a floor and a cap in total dollar contributions.
The income percentage required should rise over a working life, as
wages and wealth typically do.

All noncatastrophic care should eventually be funded out of HSAs. But
account-holders should be allowed to withdraw money for any purpose,
without penalty, once the funds exceed a ceiling established for each
age, and at death any remaining money should be disbursed through
inheritance. Our current methods of health-care funding create a “use
it or lose it” imperative. This new approach would ensure that
families put aside funds for future expenses, but would not force them
to spend the funds only on health care.

What about care that falls through the cracks—major expenses (an
appendectomy, sports injury, or birth) that might exceed the current
balance of someone’s HSA but are not catastrophic? These should be
funded the same way we pay for most expensive purchases that confer
long-term benefits: with credit. Americans should be able to borrow
against their future contributions to their HSA to cover major health
needs; the government could lend directly, or provide guidelines for
private lending. Catastrophic coverage should apply with no deductible
for young people, but as people age and save, they should pay a
steadily increasing deductible from their HSA, unless the HSA has been
exhausted. As a result, much end-of-life care would be paid through
savings.

Anyone with whom I discuss this approach has the same question: How am
I supposed to be able to afford health care in this system? Well, what
if I gave you $1.77 million? Recall, that’s how much an insured 22-
year-old at my company could expect to pay—and to have paid on his and
his family’s behalf—over his lifetime, assuming health-care costs are
tamed. Sure, most of that money doesn’t pass through your hands now.
It’s hidden in company payments for premiums, or in Medicare taxes and
premiums. But think about it: If you had access to those funds over
your lifetime, wouldn’t you be able to afford your own care? And
wouldn’t you consume health care differently if you and your family
didn’t have to spend that money only on care?

For lower-income Americans who can’t fund all of their catastrophic
premiums or minimum HSA contributions, the government should fill the
gap—in some cases, providing all the funding. You don’t think we spend
an absurd amount of money on health care? If we abolished Medicaid, we
could spend the same money to make a roughly $3,000 HSA contribution
and a $2,000 catastrophic-premium payment for 60 million Americans
every year. That’s a $12,000 annual HSA plus catastrophic coverage for
a low-income family of four. Do we really believe most of them
wouldn’t be better off?

Some experts worry that requiring people to pay directly for routine
care would cause some to put off regular checkups. So here’s a
solution: the government could provide vouchers to all Americans for a
free checkup every two years. If everyone participated, the annual
cost would be about $30 billion—a small fraction of the government’s
current spending on care.

Today, insurance covers almost all health-care expenditures. The few
consumers who pay from their pockets are simply an afterthought for
most providers. Imagine how things might change if more people were
buying their health care the way they buy anything else. I’m certain
that all the obfuscation over prices would vanish pretty quickly, and
that we’d see an end to unreadable bills. And that physicians, who
spend an enormous amount of time on insurance-related paperwork, would
have more time for patients.

In fact, as a result of our fraying insurance system, you can already
see some nascent features of a consumer-centered system. Since 2006,
Wal-Mart has offered $4 prescriptions for a month’s supply of common
generic medications. It has also been slowly rolling out retail
clinics for routine care such as physicals, blood work, and treatment
for common ailments like strep throat. Prices for each service are
easily obtained; most are in the neighborhood of $50 to $80. Likewise,
“concierge care,” or the “boutique” style of medical practice—in which
physicians provide unlimited services and fast appointments in return
for a fixed monthly or annual fee—is beginning to spread from the rich
to the middle class. Qliance Medical Group, for instance, now operates
clinics serving some 3,000 patients in the Seattle and Tacoma,
Washington, areas, charging $49 to $79 a month for unlimited primary
care, defined expansively.

It’s worth pausing over this last example. Many experts believe that
the U.S. would get better health outcomes at lower cost if payment to
providers were structured around the management of health or whole
episodes of care, instead of through piecemeal fees. Medicare and
private insurers have, to various degrees, moved toward (or at least
experimented with) these sorts of payments, and are continuing to do so
—but slowly, haltingly, and in the face of much obstruction by
providers. But aren’t we likely to see just these sorts of payment
mechanisms develop organically in a consumer-centered health-care
system? For simplicity and predictability, many people will prefer to
pay a fixed monthly or annual fee for primary or chronic care, and
providers will move to serve that demand.

Likewise, what patient, when considering getting an artificial hip,
would want to deal with a confusion of multiple bills from physicians,
facilities, and physical therapists? Aren’t providers likely to
organize themselves to provide a single price to the consumer for care
and rehabilitation? And won’t that, in itself, put pressure on
providers to work together as efficiently as possible, and to minimize
the medical errors that would eat into their joint fee? I suspect we
would see a rapid decline in the predominance of the fee-for-service
model, making way for real innovation and choice in service plans and
funding. And the payment system would not be set by fiat; it would
remain responsive to treatment breakthroughs and changes in consumer
demand.

Many consumers would be able to make many decisions, unaided, in such
a system. But we’d also probably see the rise of health-care agents—
paid by, and responsible to, the consumer—to help choose providers and
to act as advocates during long and complex care episodes.

How else might the system change? Technological innovation—which is
now almost completely insensitive to costs, and which often takes the
form of slightly improved treatments for much higher prices—would
begin to concern itself with value, not just quality. Many innovations
might drive prices down, not up. Convenient, lower-cost specialty
centers might proliferate. The need for unpaid indigent care would go
away—everyone, recall, would have both catastrophic insurance and an
HSA, funded entirely by the government when necessary—and with it much
of the rationale for protecting hospitals against competition.

Of course, none of this would happen overnight. And the government has
an essential role to play in arming consumers with good information.
Congress should require maximum transparency on services, prices, and
results (and some elements of the Obama administration’s reform plan
would move the industry in this direction). We should establish a more
comprehensive system of quality inspection of all providers, and
publish all the findings. Safety and efficacy must remain the
cornerstone of government licensing, but regulatory bias should favor
competition and prevent incumbents from using red tape to forestall
competition.

Moving from the system we’ve got now to the one I’ve outlined would be
complicated, and would take a long time. Most of us have been paying
into an insurance system for years, expecting that our future health-
care bills would be paid; we haven’t been saving separately for these
expenses. It would take a full generation to completely migrate from
relying on Medicare to saving for late-life care; from Medicaid for
the disadvantaged to catastrophic insurance and subsidized savings
accounts. Such a transition would require the slow reduction of
Medicare taxes, premiums, and benefit levels for those not yet
eligible, and a corresponding slow ramp-up in HSAs. And the national
catastrophic plan would need to start with much broader coverage and
higher premiums than the ultimate goal, in order to fund the care
needed today by our aging population. Nonetheless, the benefits of a
consumer-centered approach—lower costs for better service—should have
early and large dividends for all of us throughout the period of
transition. The earlier we start, the less a transition will
ultimately cost.

Many experts oppose the whole concept of a greater role for consumers
in our health-care system. They worry that patients lack the necessary
knowledge to be good consumers, that unscrupulous providers will take
advantage of them, that they will overspend on low-benefit treatments
and under-spend on high-benefit preventive care, and that such waste
will leave some patients unable to afford highly beneficial care.

They are right, of course. Whatever replaces our current system will
be flawed; that’s the nature of health care and, indeed, of all human
institutions. Our current system features all of these problems already
—as does the one the Obama reforms would create. Because health care
is so complex and because each individual has a unique health profile,
no system can be perfect.

I believe my proposed approach passes two meaningful tests. It will do
a better job than our current system of controlling prices, allocating
resources, expanding access, and safeguarding quality. And it will do
a better job than a more government-driven approach of harnessing
medicine’s dynamism to develop and spread the new knowledge,
technologies, and techniques that improve the quality of life. We
won’t be perfect consumers, but we’re more likely than large
bureaucracies to encourage better medicine over time.

All of the health-care interest groups—hospitals, insurance companies,
professional groups, pharmaceuticals, device manufacturers, even
advocates for the poor—have a major stake in the current system.
Overturning it would favor only the 300 million of us who use the
system and—whether we realize it or not—pay for it. Until we start
asking the type of questions my father’s death inspired me to ask,
until we demand the same price and quality accountability in health
care that we demand in everything else, each new health-care reform
will cost us more and serve us less.

$636,687.75

Ten days after my father’s death, the hospital sent my mother a copy
of the bill for his five-week stay: $636,687.75. He was charged
$11,590 per night for his ICU room; $7,407 per night for a semiprivate
room before he was moved to the ICU; $145,432 for drugs; $41,696 for
respiratory services. Even the most casual effort to compare these
prices to marginal costs or to the costs of off-the-shelf components
demonstrates the absurdity of these numbers, but why should my mother
care? Her share of the bill was only $992; the balance, undoubtedly at
some huge discount, was paid by Medicare.

Wasn’t this an extraordinary benefit, a windfall return on American
citizenship? Or at least some small relief for a distraught widow?

Not really. You can feel grateful for the protection currently offered
by Medicare (or by private insurance) only if you don’t realize how
much you truly spend to fund this system over your lifetime, and if
you believe you’re getting good care in return.

Would our health-care system be so outrageously expensive if each
American family directly spent even half of that $1.77 million that it
will contribute to health insurance and Medicare over a lifetime,
instead of entrusting care to massive government and private
intermediaries? Like its predecessors, the Obama administration treats
additional government funding as a solution to unaffordable health
care, rather than its cause. The current reform will likely expand our
government’s already massive role in health-care decision-making—all
just to continue the illusion that someone else is paying for our
care.

But let’s forget about money for a moment. Aren’t we also likely to
get worse care in any system where providers are more accountable to
insurance companies and government agencies than to us?

Before we further remove ourselves as direct consumers of health care—
with all of our beneficial influence on quality, service, and price—
let me ask you to consider one more question. Imagine my father’s
hospital had to present the bill for his “care” not to a government
bureaucracy, but to my grieving mother. Do you really believe that the
hospital—forced to face the victim of its poor-quality service, forced
to collect the bill from the real customer—wouldn’t have figured out
how to make its doctors wash their hands?

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