Skyrocketing Medical Costs

Their Causes, and How To Bring Them Under Control

Wednesday, October 14, 2009

Jonathan Hill
America First Party Chairman

With Congress and President Obama proposing a "solution" to our nation's health care woes, the issue of health care is becoming more of a focus for all. Truth be told, it is hard for most of us to not focus on it anyway. With the national average cost of insurance for a family of four at $12,700 ($16,897 in Massachusetts), the financial squeeze is severe, especially during tough economic times.

Unfortunately, proposals being floated on Capitol Hill are not a solution, and are likely to make matters worse. Tellingly, a similar insurance system in Massachusetts is teetering financially, and according to the New York Times "may not be sustainable over the next 5 to 10 years ...[without] significant steps to arrest the growth of health spending."

There, it was touted as legislation that would reduce costs, with large drops in insurance premiums predicted. Instead, in 2007, the year after the new system's inauguration, premiums rose 7.4%, and the meltdown keeps getting worse. Last year, Massachusetts premiums rose by 8-12%, with a 9% rise expected this year. In contrast, the national annual increase has been under 2% for the same three year period.

Rocket science is not a prerequisite for understanding that prices go up when there is a surge in demand without an increase in supply, and that whenever you make free or subsidized access to services available, demand for those services will surge. The result in Massachusetts should have been expected.

In response, some might argue that present imbalances will be rectified when increasing demand stimulates medical providers to increase the availability of services. This can happen, but in Massachusetts, the increased demand appears to be part of a double-blow for medical practitioners; there, reimbursements have been cut, in particular for hospitals which serve the largest proportion of poor, and Medicaid reimbursements, according to providers like Boston Medical, are only about 60 to 70 percent of actual cost. If providers are being asked to deliver more for less, a situation which eliminates any market stimulus to increase the supply of medical services, then there are only two options remaining: costs will continue to be shifted from those who can not pay to those who can (i.e. premiums will continue to rise), or care will be rationed to control the cost.

The crisis of rising health care costs should not be dismissed, but to solve the problem the real causes need to be addressed. Government health care does not seem to come close to this objective. But what is the solution?

Many remember a time when one's family doctor did house calls and it was manageable to pay out-of-pocket for care. The fees were reasonable. But today, despite the much higher cost of care, house calls are virtually unheard of. So what has happened between then and now to so dramatically change the average cost of care and the way medicine is now practiced?

There are multiple reasons for rising costs, such as the aging of the population, but the impact of insurance on cost is of special interest. It is both a major factor and amenable to change. For those who pay the full cost of their health insurance, there is no question that premiums bear an uncanny resemblance to a powerful vacuum that devours more and more of our annual revenue every year. Even though we find premiums heavily burdensome and make great sacrifices to pay them, few of us really know how the money is spent, and if most of the premium is actuarially justified. What percentage of the premium is wasted on unnecessary overhead?

Health insurance providers, which constitute a third party payment network, have become the middlemen of health care services. Most people buy their health care through them. We frequently feel a sense of security when the insurance company pays the bills, partly because it relieves perceived financial risk while also transferring the responsibility of negotiating with providers. Doctors are also somewhat satisfied because they have confidence that they will be reimbursed, even if the compensation is marginal.

But there is a huge cost for all this comfort, as it is widely known that insurance bureaucracies impose a burdensome reimbursement system on the medical establishment; it is estimated that a whopping 50% of the cost of primary care in the United States is due to the administrative cost of insurance reimbursements. Additionally, enrollment in insurance can increase an individual's propensity to use health care services, especially when the insurance plan's out-of-pocket expense requirements are low; since 1975, out of pocket expenditures have steadily decreased from 33% to 15% in 2005, a factor in increased demand for medical services. More demand always equals more cost unless there is a commensurate adjustment in supply.

The National Bureau of Economic Research published a paper (No. 11619) by researcher Amy Finkelstein, indicating that insurance played a huge role in the increase in health care spending in the last half century. Finkelstein posits that insurance may be responsible for "at least 40% of that period's dramatic rise in real per capita health spending." She also estimates that Medicare brought a 23% increase in health care spending between 1965 and 1970, with even more dramatic increases through 1975. This increased demand for health related services is a factor in annual cost increases.

Although Medicare may technically not be insurance, both Medicare and private insurance companies are third party payment systems. And just as there is a distinction between your stock broker's interest and your own financial interest, the same holds true for a third party payer. Their bottom line multiplies with increasing premiums and decreasing pay outs. If it is dangerous to trust in your stock broker's love for you, it is an illusion to think that insurance companys' primary financial incentive is in the reduction of your costs or in maximizing the quality of your care.

This fact, and the degree of added cost resulting from third party payment systems, are evident when a comparison is made with low cost medical services in some states. The comparison suggests that where insurance networks are not as much of an influence on health care spending, costs are lower. Why? Because these lower cost services seem to be available in states with a high incidence of uninsured persons, like in Oklahoma.

There, remarkably, quality surgery services can be obtained for 10 to 50 percent of the cost at so-called nonprofit hospitals! For example, at the Surgery Center of Oklahoma, a facility which is physician owned and controlled, special low pricing is offered for those paying cash in advance. The center offers a Cochlear Implant for only $8,000, whereas the nearby hospital charges about $80,000! A Mastectomy costs $4,550. A hernia ranges from $2,150 to $6,800. These prices include the facility, surgeon, and anesthesiologist's fees, as well as the cost of the initial consultation and simple follow-up care.

But you may ask, is this quality care? Reportedly, the preference of surgeons for this facility over hospital-based operating centers allows the Surgery Center to be selective in its choice of surgeons. A consequence of the center's quality of care and pricing, according to Dr. G. Keith Smith, is that patients are coming in significant numbers from Canada.

A similar phenomenon with respect to quality of care and pricing is seen in primary care, when doctors have adopted a cash-only payment structure. This is also referred to as "retainer" or "concierge" medicine. Dr. Juliette Madrigal Dersch is one of thousands doctors nationwide who have adopted this practice model. Her testimony is intriguing, and might inspire medical students at a time when only 2% are inclined to go into primary care. Dersch maintains that a direct payment system (as opposed to third party payment) gives doctors more of an incentive to take care of the patient, because the patient pays the bills.

In contrast, the third party payment system may result in situations where someone is not given tests that would discover a condition requiring expensive treatments; from the standpoint of the third-party payer, whether it is government controlled or not, this life-threatening curtailment of diagnostic care might be considered "cost-effective." All this is not to suggest that there are not decent people working in the insurance industry, or that patient care is always bad within the insurance network. Nevertheless, there are definitely practices which can maximize an insurance providers profit which also tend to be at odds with the best patient care. In a society where morality is declining, that should concern us. On the other hand, direct-payment providers have an incentive to provide the best patient care per dollar spent, as the patient has more control as the sole payer. Under this scenario, it is in the physician's financial interest to satisfy the patient, not a third-party payer.

At Dr. Dersch's Texas-based direct-payment practice, patients rarely have to wait, and she is able to spend more time with them than insurance-based providers, who often must see a patient roughly every 15 minutes. As a result, she sometimes gets hard-cases referred by other physicians, not because she is a more capable doctor, she says, but because she can afford to spend the necessary time in diagnoses and treatment. As is often the case with cash-based practices, her patients have extraordinary access to her services; all have her personal phone number, and can contact her whenever they need to.

Her patients pay a fraction of what insurance-based doctors would charge. For example, Dersch charges $15 for a Complete Blood Count, while the local "charity" taxpayer-subsidized hospital charges $79. She recently provided an MRI at a cost of only $250, whereas a hospital would have charged $1,200.

There are different type of cash-based practices. Some are pay-as-you-go, where you pay for services at the time of your visit. Some are mixed practices, where you pay a supplemental fee for services not included in Medicaid or insurance plans. Other concierge practices charge a monthly or annual fee. According to Dr. Thomas LaGrelius, president of the Society for Innovative Medical Practice Design (SIMPD), those fees vary depending on the provider, and range from $39 to $1,000 per month, but average about $150 per month.

As Dr. Dersch explains in Emergency Medicine News, "...my patients (wealthy and poor) pay far less at my office than they would at an ED (emergency department) or at another doctor's office. Ninety-five percent of adult visits are less than $85, and 95 percent of child visits are under $60, including labs. My patients also get a doctor who is board certified in two specialties and immediate appointments, and they spend under 10 minutes in the waiting room and get an unrushed, comprehensive visit from a real doctor who knows them personally, a doctor who can even see patients for free and make house calls. For my part, I enjoy taking the time to treat my patients as people, not symptoms, and though I see fewer than 20 patients a day and work four days a week, I can still provide a comfortable living for my family.

"I don't take insurance. I don't take Medicaid. I don't take Medicare. I have excised these non-medical aspects of medicine so that I may spend my time caring for my patients instead of trying to follow arbitrary, capricious, expensive, and cruel mandates from insurance and government that drive up costs, waste time, endanger health, and steal privacy. My calling is clear. I am a doctor. I work for my patients.

"The health care debate in America is a farce. Most health care money isn't spent on health care at all; it's paying $16-million-a-year insurance company CEOs, it's paying tens of thousands of insurance employees whose sole purpose is to deny or delay patient's claims and whittle down doctor's reimbursements, it's paying additional staff hours to bill and code, and re-bill and re-code Medicare and insurance. The torrent of health care money passes through a giant sieve of bureaucrats and profiteers before a few meager drops trickle out to be used by patients to pay a caregiver.

"The real penalty is paid by the hardworking backbone of America, the families with children who have been bamboozled into paying an insurance company $800 a month for a privilege of a $30 co-pay (when the insurance company pays the doctor just $29 dollars for that visit), it's paid by the small business owner who is forced to add another 28 percent of the cost of each employee, it's paid by the mechanics, the laborers, the self-employed, who, when they visit an ED or charity hospital are gouged $79 for a CBC lab that costs less than $3."

The points that Dr. Dersch makes about the high overhead caused by insurance are common. The heavy burden of administering insurance program requirements cuts into the resources available for patient care. By working out of the insurance system, Dersch is able to recreate a medical environment that was once more common in America, one where patients are able to get the attention and care from doctors that is commensurate with the money they are spending, and one that provides affordable and quality care for the uninsured.

These benefits of the cash-only medical practice are indicated in a number of ways. According to Dr. Thomas LaGrelius of SIMPD, there is a 60% to 80% reduction in hospital time among patients participating in a concierge medical plan, and among concierge practices, cases of medical malpractice lawsuits have been unknown. As a result, he states that SIMPD has been able to negotiate medical malpractice rates for concierge doctors which are up to 55% lower than for doctors participating in insurance networks! These are two indicators that the health care provided by cash-only providers is much better, on average, than that offered through the insurance and Medicaid system.

According to LaGrelius, there were 400 concierge practices in the U.S. in 2005, and that number has now grown to 5,000 to 10,000. Something growing this fast has the real potential to transform the medical field. The only thing that can stop it, according to LaGrelius, is a complete government takeover of the practice of medicine in such a way that private medicine is outlawed.

There is little doubt that this movement is a threat to the middlemen who benefit from siphoning off patient dollars -- the health insurance companies, who often do not add any value, except in catastrophic situations where there is a major financial risk to the insured. Insurance companies have leverage to penalize doctors, especially those not well-established, when they try to step out of their networks. In the case of Dr. Steven Knope, a concierge doctor from Tucson, Arizona, Blue Cross Blue Shield discovered through a newspaper article in the Arizona Republic, that he was taking cash-only for his non-insurance patients. Knope states that BCBS called his receptionist to verify the newspaper claim, and then informed her that they would be sending a written termination of Dr. Knope's insurance contract.

Unfortunately, the direction that many consider to be a solution for our nation's health care woes would likely worsen the situation. Taking the direction of Australia, Canada, New Zealand, or the United Kingdom by implementing a national health care system would not only be unconstitutional, but would also endanger lives. Let us look at the case of women of ages 25 through 64 who have been detected early for breast cancer via mammograms. According to a May 2007 report by The Commonwealth Fund, in the four countries mentioned, the survival rates range from 58% to 77%, whereas in the U.S. they are 84% to 85%. These nationalized health systems are underperforming: either patients are not getting quality care, and/or that care is being excessively delayed.

The solution to our nation's health care problems is multifaceted, but includes preventing excessive government intervention that would create a situation that is worse than what we have now. The people are capable of using their ingenuity and capability, without government prodding, to greatly alleviate or eliminate many of the causes of waste in the present system. Removing the shackles which excessive regulation and interference cause, would excelerate the implementation of solutions. In some cases, however, the shackles are not put in place by an outside agency, but by ourselves.

Fear is sometimes the cause for this. For doctors, it may be fear of the consequences of stepping outside the insurance network; these may be sometimes justified, but not always. For individuals seeking patient care, it may be fear of the unknown, or lack of information about concierge medicine or providers (see www.simpd.org).

While these points are true, we should also be realistic. There is no doubt that Major Medical (less expensive high-deductable) insurance is usually important to have for catastrophic health problems and expensive medications, the costs of which are a major cause of personal bankruptcy nationwide. But as mentioned in the discussion above, basic primary care should be affordable on a cash basis, and evidence indicates that cash-only primary care is more likely to keep people out of the hospital due to its higher quality, on average. This, in turn, puts downward pressure on major medical costs by decreasing the demand for those services.

Fear and lack of information lead some to embrace the concept of a government health care system. One thing is for sure, though. There would be little risk of implementing a national health care system if lawmakers respected the basic requirements of the U.S. Constitution. Since many are likely to view this as an odd statement, given the long-standing federal sponsorship of the Social Security and Medicare programs, let us examine this critical point.

Under Article I, Section 8, there is no legal authority for the federal government to raise revenue except to pay "the debts," for "defense," and for the "general welfare of the United States." The last category is often misunderstood, because many fail to realize that the phrase "United States" is a legal term for the federal government. This is shown by the the use of the before-mentioned three quoted items in the same sentence in a number of instances in the Constitution, for instance in the 10th Amendment, making clear that all three terms denote legally distinct items. Therefore, the Constitution's authors definitely intended that the meaning of "United States" be separate and distinct from that of "states" and "the people."

The term "general welfare of the United States" does not authorize federal spending on items simply because legislators believe they might be beneficial for "the people." The reference "general welfare" merely authorizes the spending necessary for the federal government to effectively carry out the functions assigned to it in the Constitution. Under Article 10, all remaining functions are reserved to the states (i.e. state governments) and the people. Therefore federal spending on health care for the general population is illegal, since the Constitution assigns no power to the federal government for this purpose.

But if you question my interpretation, then at least consider what our founders said. James Madison played a major role in drafting the Constitution. The following is attributed to him: "With respect to the words general welfare ... To take them in a literal and unlimited sense would be a metamorphosis of the Constitution into a character which there is a host of proofs was not contemplated by its creators."

In 1791, Jefferson indicated that "general welfare of the United States" was correctly interpreted as referring to the welfare of the federal union: "To lay taxes to provide for the general welfare of the United States .... They are not to lay taxes ad libitum for any purpose they please, but only to pay the debts or provide for the welfare of the Union."

In 1817, he explained the original intent -- that the authority to spend for the general welfare only extended to spending relating to the enumerated powers of the national government: "Our tenet ever was... that Congress had not unlimited powers to provide for the general welfare, but were restrained to those specifically enumerated." In 1825, he vigorously denounced the positions of the Republic's deconstructionists and called into question their motives: "Aided by a little sophistry on the words 'general welfare,' [the federal branch claims] a right to do not only the acts to effect that which are specifically enumerated and permitted, but whatsoever they shall think or pretend will be for the general welfare."

As in so many instances, it can be seen that the solution to much of our nation's dire problems involves returning to the wisdom and original intent of the founders. Doing so would curtail about 75 percent of our federal government's present expenditures, and the harmful policies associated with those expenditures -- in the domain of foreign policy, education, health care, and so on. The result would be the return of power to state governments and the people, and a transformation of our nation that would bring it more in line with the principle of subsidiarity. Until Americans come to realize that this is simply not a quaint thought that can be safely pushed aside at election time, we will continue to put our nation's vital interests in jeopardy, as well as our own personal interests.

The basic constitutional principles raised here are easily understood and respected by congressmen who are both competent and decent; the fact that we continually elect congressmen who do not respect our basic law and the basic requirements of their oaths of office, indicates that we are electing people who grossly lack competency and/or decency. Either way, it is perilous to elect legislators who are absent either of these qualities.

There is great danger in this to the republic, but the danger becomes more intimate, more personal, when the subject becomes health care. I hope that you agree that trusting your health care to a congress composed largely of lawbreakers is both reckless and dangerous. And if anyone thinks that government is less corrupt and more effective -- especially in its present state -- than our nation's health insurance providers, then they should probably think again.