Abstract: We try to understand the nature of spending in healthcare. We will uncover alternativse to rein in the inflationary trend.
I. Background
Over the last several decades, healthcare spending in the USA has steadily climbed. Although several attempts have been made to restrain the trend, none so far (regulation, public programs, voluntary effort by insurance companies, market competition) has had a lasting impact. The problem of healthcare spending is not a singular one and hence does not have a single solution. Unless the challenge is addressed comprehensively, we will continue to see symptomatic and short sighted reforms.
II. Who Pays
Most people believe that it is the government, employers or the business that pays for the healthcare. In reality, it is the individual who eventually pays all and any form of healthcare expense. Following are some of the ways:
· Employers don’t give healthcare benefits as they claim. They merely set aside a part of employee compensation (Cost to Company) to pay for the health insurance premium.
· Government collects taxes and funds its Medicare and Medicaid program. It is uses a number of channels like
o Income tax - FICA (Federal Insurance Contribution Act), Federal Tax, State Tax (not applicable in Texas)
o Sales tax – controlled by states on goods and services purchased.
· Patients pay additionally through deductible, copayments and other out of pocket expenses
III. Why does it cost so much
A brief analysis of soaring healthcare expenditure is presented below.
· In a typical care transaction, the consumer of medical services is not the payer. The patient does not know the cost of an episode of care and hence does not care. As a result the patients have no interest to monitor their spending or to maintain their health through preventive care programs.
· Patients want the best and the latest and not value-for-money. When it comes to healthcare, less expensive medical services or drugs are often perceived to be of inferior quality.
· Multi-payer system builds in inefficiencies and cost (claims processing, management overhead, and administration) that translate to higher premiums.
· Medical innovation raises cost of care. America is responsible for leading the majority of the medical innovations and path breaking research for the rest of the world to follow. However when new procedures and medicines are invented, the companies try to recover the cost of the innovation through high pricing. When patients want the most advanced medical care available, they land up paying more. The pharmaceutical companies charge more for their drugs in America. There are 3 reasons to it
o Novelty factor – The new drugs are marketed only in America for the first few years and are aggressively promoted.
o Drugs patents lead to market monopoly and high prices. There is no government control in determining the market price for the drug.
· Healthcare is a “superior” good. It means that those who can pay higher premiums demand disproportionately higher levels of care. Senior executives in Goldman Sachs who have $40,000/year “Cadillac” plans will demand five star hospital suites and state of the art services. However we must examine the rationale of providing the same level of care/luxury (not to be mistaken with outcome of care) to those having simple $8000/year insurance plan.
· A significant part of the national health expense is due to an aging population (Baby boomers) who have greater episodes of care and greater number of co-mobilities (meaning more complications and more cost of care).
· The uninsured either utilize emergency services or postpone their treatment. Using trauma centres to address routine illness is expensive for providers. They recover this cost by charging their insured patients more. Postponing medical care eventually leads to complication and warrants more expensive care being required in the future.
· Shifting care. Medical care has shifted from primary physicians to specialty caregivers and from in-patient to out-patient setting. Both have ramifications. Specialty care givers charge higher fees for the same service that could have been provided by the primary care physician. They will also be inclined to recommend higher number of high end test and procedures. With rising demand for out-patient services caregivers have invested in infrastructure and facilities. This cost is reclaimed through inflated fees.
IV. What may be our position to rein in cost
Each point in the previous section may be looked in greater detail for areas of improvement. For this paper we will focus on some of the most important ones.
· Empower primary care physician to treat patients for more medical conditions. Incentivize caregivers to keep patients healthy and not make money through a barrage of tests. Resolve the inequality in the number of primary care physicians and specialists. Put moratorium on building new speciality units.
· Encourage consumers to get value-for-money treatment and drugs. Encourage Health Savings Accounts (HSA). Mandate employers to put their contributions to the HSA and not combine it with the compensation. Exempt taxes for contributions to HSA. Get individuals to be aware of how much their cost involved in each episode of care.
· If insurance is mandatory, then allow the insured to purchase plans that where they will decide how to spend the indemnity value (how much for inpatient, drugs, dentist, diagnostics etc). This will motivate people to seek insurance and spread the risk. Regulate insurance sector to become not-for-profit. Mandate the insurance to do away with pre-existing conditions and denial of care.
· Regulate the drug companies by fixing price of drugs. Offer patents only for radically new drugs - the ones that enhance the quality of life significantly and not those that are mere alterations at a molecular level causing marginally higher benefits than an existing or substitute drug.
In sum, healthcare cost a result of interplay of several factors and must be dealt with holistically.
No comments:
Post a Comment