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Sunday, May 15, 2011

The Health Care Endgame

Spending on health care has consistently grown at about 2% greater than the overall economy over the past 40 years. There may be little there is consensus about in the health care realm, but one thing which garners consensus is that the growth rate which exceeds the growth of the overall economy is simply not sustainable. This issue has been recognized for almost as long as Medicare and Medicaid has been in place, but no effective solution has been put into place. Why?

Obviously the problem s complex, but there is a convergence of factors, none of which are unique to the health care realm, which are conspiring to sink our ship. The first is optimism. We humans are hard wired to be optimists. Optimist live longer and are motivated to act. When people become depressed, early on their illness they often have better reality testing that when they are "normal". That is at least one reason they get depressed, because they see their prospects as they really are.

The downside to optimism is it tends to blind us to reality. We are convinced that we will do fine in our retirement and therefore there is no reason to start saving now. We will extend ourselves to buy that house based upon the assumption that our financial circumstances will improve and anyway, housing prices will rise forever. We will cut that deal with our employees making promises for pensions and benefits which can only be supported if the stock market grows at 10% annually, forever.

In the same sense, the actuarial data on Medicare, Medicaid, and private health insurance all says one thing. We cannot do this forever. We have been hearing this for over 30 years, prompting most locked into the present business model to eek just a few more years of banner earnings. When Kodak faced the prospect of digital photography in the late 1980's, they knew their core business would ultimately be decimated. However, a move to the digital world and leaving the film business model meant moving to a lower margin product. Why would a company develop a new product which would have a lower margin than their pre-existing core business? Never if the optimist in you sways you you to believe that film will last...somehow.

The second factor is what I call the "health care is different" mentality. In many respect this mentality feeds into the optimistic delusional mentality. If health care is different, then the predictions of the actuaries will not hold because of the special relationship the public has with health care and their providers. No matter how one views the unique (or not so unique) missions of the health care industry, one aspect of them is they run on money. People who provide all types of services vital for the deliver of health care, from those who provide point of service care to those who provide support services which are absolutely indispensable, all require financial compensation. The companies that provide the IV tubing, drugs, software, hardware, heating, cooling, HR management, billing, all require payment. While the health care services may be viewed as different from other services (and I would take issue with this assumption, but that is for another piece) , their financial drivers still have the potential to bankrupt us like any investment which is poorly conceived.

One of the products of the health care is different mentality is the idea that investment within the health care realm is different from investments elsewhere. We all make decisions with our personal resources which reflect trade offs. With the exception of very few in the super rich category, we all elect at times to deploy our resources and buy a good or service which is less expensive and lower quality than some other good or service. We elect to be somewhat under served because we conclude that a lower quality product serves our needs well enough.

Within health care, we routinely deliver products which over serve the public. The insured portion of the public, which is the segment that the health care industry cares most about, cares little if they are over served. While they might ultimately pay for being over served, they generally are not called upon to pay for specific services immediately. That their premium rises is not linked in their mind to the CAT scan they had for chronic headaches, the brand name doxycycline prices at $750/month their dematologist prescribed, or the $35K defibrillator implanted when the a less expensive model would suffice. No investment in a human life can be viewed as excessive, particularly when it is someone else's money. 

There is vague understanding at what can best be described at a 20,000 foot level that we will soon enter a realm where things will be different. We are implored to ultimately embrace the concept of shared sacrifices. However, no one wants to be first. The lesson of the previous generation of medicine is that those who were the first to be conscious of costs were the first to be impaled. Adjustments to payments were rarely targeted to those at the extremes. Payments were adjusted with a blunt instrument, downward for everyone, including those who resisted the temptation to gorge on the health carer payment gluttony. They ended being screwed when their practices which operated on modest margins became financially unworkable. Those most focused on the financial aspects of medicine found themselves on the panels which rigged the prices. Those of us who have been around to see how this has played out know that only noble fools get into the front of the line of shared sacrifices. The gamers will end up eating such folks alive and the gamers will always outnumber the noble fools.

Finally, the health care economics problem has been moved solidly into the political realm where workable solutions are political suicide. Successful politicians are ones that can get re-elected. Their first priority is to understand politics and use that understanding in order to leverage resources at their disposal into garnering votes when needed. Truth and a long time line are extraneous. To move any problem, which is difficult to understand and solutions are almost impossible to implement, into a political realm is crazy. It essentially guarantees the problem will be addressed with short term political goals in mind. Evidence for this relating to health care is everywhere. To discuss touching the entitlements of Medicare and Medicaid is almost universally viewed as political suicide.

President Obama's most recent attempt to use a bipartisan commission to take the political heat basically failed. The recommended approaches were immediately recognized as being incompatible with political goals and they are. Both groups are actually completely correct in that the only way to fix the problems with the budget is to fundamentally alter health care entitlements and any attempt to do so is incompatible with political survival.  The lesson to be learned is that it is foolish to attempt to fix problems which have no political solutions within the political realm. It is not a Republican or Democrat problem, it is a fundamental problem with the political process. Those involved simply don't have the tools to fix this problem.

There will be a point where the problem will be taken out of their hands. It some respects, this is playing out at the state level where states and localities are being forced to make hard choices. As painful as this might be, it may also have the effect of tempering some of the unrealistic optimism and spurring the development of alternative models which can deliver health care via models which are more cost effective. When people are having to make hard choices, they can spot where their resources are being wasted by being over served. How this will affect Medicare and Medicaid is unclear. I simply cannot envision how the transition will take place, but it will because those who are floating our debt will refuse to lend money. They will recognize that unless we can figure out how to stop this runaway train, investment in our activities is a bad idea.

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