McCain and the Myth of the Medical Market

The US annual health care expenditure is riding a nonstop escalator. The current spending of over two trillion dollars will reach an unsustainable four trillion dollars or 20% of the GDP in 2017. Yet, an estimated 47 million Americans had no insurance for a whole year in 2006 and 89.5 million people under the age of 65 did not have any insurance for one month. And last week, the AMA reported in the American Medical News that middle-income insured Americans have difficulty in accessing care. About 59 million Americans, either delayed or did not get health care in 2007, a problem that only low-income uninsured commonly face.

Current per capita expenditure of $6697 – the highest in the world - has bought financial grief for many but not good health for all. The US health infrastructure is probably the best in the world (probably overbuilt) and technology – even unproven - penetrates early and spreads fast. But each service costs more in the US compared to the OECD countries. Where does this place US in the quality of care? In a study by the Commonwealth Fund comparing six counties (Australia, Canada, Germany, New Zealand, UK, and the USA) in various indicators like quality care, access, efficiency, equity, healthy lives and expenditure, the USA ranked lowest – fifth or sixth- in almost all indicators except ‘right care’ (a subset of quality care) where it was at the top.

The catastrophe of unaffordable care is unfolding like a Greek tragedy before the national audience; the characters sense the looming disaster but the flaccid leaders seem powerless to stop it. The explanation lies in the way we finance health care - a global problem and not particular to the USA.

Nations have used three ways to finance health care: tax revenues, non-profit community health insurance and commercial insurance. They pool financial resources either with a single payer like in Canada, UK, Japan and Taiwan or with multiple payers (pluralistic systems) like in the USA, France, Belgium, Australia, Denmark, Germany, New Zealand and Netherlands. The pluralistic US health care depends mainly on tax revenues and commercial insurance.

These pooled funds purchase health services from providers – hospitals, doctors, pharmaceuticals and device manufacturers - on behalf of their clients. Allocation of funds (what to buy) and efficiency (for how much) control supply side costs. Currently, 30% of total expenditure goes to hospitals, 21% for clinical services and doctors, 10% for pharmaceuticals and 25% for other services.

A prepayment by individuals into a pool affords an assurance of financial risk coverage in case of unpredictable future sickness. The fund remains solvent by recruiting a large number of consumers with varying health profiles, so a large number of healthy people subsidize the unfortunate 20 percent unhealthy, who use 80 percent of health services.

The US health system - which is expensive and not equitable - has faltered in the mechanics of purchase of health services. McCain wants to rectify it by injecting market competition at two points of purchase: one, to empower individuals to buy less expensive health insurance and second, to encourage them to negotiate the price of services with providers.

This plan is similar to what Cogan, Hubbard and Kessler have expressed in their well-written book, ‘Healthy, Wealthy, and Wise’. They recommend five steps, which I quote below:

1. Health care tax reform
   • Tax deducibility of health care expenses
   • Expanded health savings account
   • Tax credits for low income people
2. Insurance reform
   • Interstate portability
   • Subsidized private insurance for the chronically ill
3. Improve health information
   • Report cards on providers
   • Guidelines for best practices
4. Control anticompetitive behavior by providers and insurance
5. Reform malpractice

McCain intends to drop the tax deductibility of health insurance expenditure of employers and instead give a tax credit of $ 2500 to individuals and $ 5000 to families who will buy their own insurance. The plan will also allow insurance companies to sell products across state lines to encourage competition and offer a ‘no-frills’ insurance to low risk individuals.

As inexpensive insurance does not translate to affordable health care, McCain will popularize individual health saving account (HSA), which frees the consumer of the illusion (moral hazard) that care is free because a third party is picking up the tab. Instead, HSA empowers her to shop for value for money and works as a tool for demand side cost control against ‘moral hazard’.

John McCain, the republican presidential hopeful, believes that a free market will provide the healing touch to the ailing health care system. He has a reform plan: cut off the regulatory hands and let the invisible hand work its magic. Will it succeed? The answer is a two-letter word: no.

McCain’s plan may induce employers to drop health benefits for the employees and encourage individuals to shop for their own insurance across state lines. This will fragment the original risk pool. It is likely that young brawny frolickers on Miami Beach will get cheaper health insurance from some distant company; they will abandon their pool loaded with retirees in Tampa, who now will have to pay higher premiums to cover the higher risk. While the young may find affordable insurance, the total health care cost to the system will stay the same.

McCain has faith in the ability of an individual – armed with free choice - to wade through the maze of health information. The HSA will encourage consumer directed health care, which allows patients to decide which health services to buy. But explosion of medical knowledge leaves a vulnerable consumer – in this case a patient- with an insurmountable disadvantage of knowledge asymmetry with his clinician. Add to that numerous insurance plans (Seattle has 747!), which compound the asymmetry with incomprehensible complex multiple insurance products with caveats and uncovered services, which are more difficult to decipher than Egyptian hieroglyphics. Assuming the unlikely scenario that patients will be able to overcome this asymmetry, the HSA plan still will have distribution distortions; healthy adults and children will spend less leaving the sick with higher expenses.

The world experience of last century tells us that health care is impervious to the free market justice and the system needs both supply and demand side controls. Innovations like co-payment, capitation, pay for performance, evidence based medicine and tax subsidies generate distortions, enough to undo any benefits they accrue. Attempts to correct these distortions require substantial administrative organization and expenditure and have been difficult to implement.

Health care in the US is approaching “The tragedy of the commons” described by Hardin in ‘Science’ in 1968: a group of herdsman can increase their number of cattle as long a common pasture has enough carrying capacity, but as the pasture reaches its feeding limit the herdsman can do irreparable harm by over-consumption. The current health care system comes with built in cost escalation mechanism: expedience guides its operation. Over consumption of the medical commons provides illusionary protection for the patient and profits for the provider.

In an article in the New England Journal Of Medicine in 1973, the author Hiatt asked: “Protecting the medical commons: who is responsible?” He exhorted “It is imperative that physicians and other health providers work closely with professionals from many fields, and with consumers, to ensure the availability and dissemination of information that will permit decisions that are in the best interests of society.” The clinician alone cannot do it, as she works both as an independent businessman and patient advocate simultaneously; she is always treading the boundary between ethics and profits; between imperfect medical science and legal threats. The medical commons will become barren unless all stake holders in the system stop overgrazing.

The solution seems obvious: repair the current pluralistic system with stronger cost cutting measures and provide universal coverage and subsidies for the poor. But considering the hurdles to overhaul of the current system, single payer system may be the only option. Almost all developed nations are moving towards a single payer system, which saves considerable money on administrative costs. While estimates on administrative costs vary in various studies, most developed countries with a single payer spend approximately 10 percent on administration, while the US spends over 25 percent. This saving alone could meet the needs of the uninsured.

No panacea exists when aspirations for health care far exceed the need. And when the constrained resources do not even satisfy the unmet need, it may be the time to concede that the poor, old and the sick need a helping hand and not an invisible one; or they will be at the mercy of a hand that is sure to stay invisible when they need it the most.