Health Care Fiasco

PROFITPOINTS Health Care Fiasco The Health Care debate has been so illogical that even the sound bites are insidious. The proposal below would encourage an innovative market and insure everyone more inexpensively than socialized health care.

Jim Leis Oct 2009 Leis Network

PROFITPOINTS Health Care Fiasco Jim Leis Business Development and Value Creation Tel : E-mail: Web:

(347) 229-1345 [email protected] Leisnetwork.com

TABLE OF CONTENTS HEALTH CARE FIASCO .................................................................................................................................................... 1 THE CURRENT DEBATE: SOCIALIZED MEDICINE ...................................................................................................................... 1 PAYING FOR SOCIALIZED HEALTH CARE ................................................................................................................................ 2 INCONVENIENT TRUTHS OF US HEALTH CARE TODAY ............................................................................................................ 3 THE SHORT CASE FOR A FREE MARKET ANSWER .................................................................................................................... 4 SUGGESTIONS SOCIALISTS AND CAPITALISTS MIGHT AGREE ON ............................................................................................... 5 FREE MARKET SUGGESTIONS ................................................................................................................................................. 5 HEALTH INSURANCE MARKET ............................................................................................................................................... 7 ELEPHANTS IN THE ROOM ..................................................................................................................................................... 8 CONCLUSION ........................................................................................................................................................................ 8 BIBLIOGRAPHY ................................................................................................................................................................ 9 ABOUT THE AUTHOR ...................................................................................................................................................... 9

ProfitPoints HEALTH CARE FIASCO The current health care debate is a fiasco and intentionally misleading. The idea of nationalizing a 6th of society without pilots or test markets would be scorned in private enterprise as impractical, naïve and dangerously stupid. This article reviews socialized medicine, our current health care situation, and then proposes 16 steps to a free market health care industry. A free health care market chiefly involves ending government obstruction of a workable technologically advanced market, which has by any rational estimation doubled the cost of health care over the years. First, we need neither government panels, multi-year investigations, or huge consulting contracts in order to suggest the principle actions needed to produce a health care industry at 7-8% GDP that covers everyone and freely innovates. We just need to understand free markets, and how to nurture them. Let‟s begin the proposal by agreeing that everyone cares for the uninsured, especially the poor. Most citizens would agree with the President; you shouldn‟t have to go bankrupt because you get sick. Further, since so few people believe in markets anymore or even understand them, and in the interests of giving the proposal a slight chance of enactment, we shall make concessions to government intrusion which are technically not needed but will make people more comfortable. We do so beyond reason of practicality. We shall indicate government intrusion points where minimal damage to the market will occur. Markets are fragile not least because externalities are unknowable. It seems whenever government intrudes on markets, they do so with the utmost destruction in mind.

THE CURRENT DEBATE: SOCIALIZED MEDICINE We were told that health care reform meant to address the 46m people without insurance. But it wasn‟t 46m people. Only about 10m of the 46m are US citizens below 300% of the poverty line and ineligible for other programs. The rest are eligible for other programs, are capable but choose not to ensure, or illegal aliens. Such grievous misstatements would result in censure or firing in private enterprise. Strangely, no health care bill proposed by Democrats addresses the 46m goal. The main thrust of each version of the bill has been to nationalize the health care industry. That is the real goal. What is disingenuous about the debate is it wouldn‟t socialize medicine and provide a monopolized solution. It would only exacerbate the expensive quasi socialist / free market mess we are in now and chiefly responsible for its inordinate cost. If we want a socialized health care system, why don‟t we talk about it? What would socialized medicine look like? Let‟s look at the broader picture: the US spends 15%+ of GDP on health care while socialized programs in other countries spend about 10%. Socialized programs in most well run instances do a good job on maintenance (daily aches and pains) and arguably better than the current American

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ProfitPoints system. They also benefit from their monopolized delivery system. The aged in America must go through a warren of public and private agencies and policies to receive the combination of nursing, health, and treatment care they inevitably need. It is arguable that no one should have to face such unintuitive and often demeaning complexity while dealing with failing health at the end of life. And imagine the convenience of entering any clinic in the USA with nothing but a Social Security card to garner health care aid. Perhaps socialized medicine‟s largest benefit is that it is „free‟ and avoids moral hazard for treatment of the extremely sick and poor. It is one of the chief causes for moral prejudice of foreigners against the USA. Worse, most people attribute this hazard to a heartless capitalist system, which couldn‟t be further from the truth.

PAYING FOR SOCIALIZED HEALTH CARE But the 15 vs. 10 percent comparison is misleading; socialized medicine‟s main goal is maintenance while the US system rewards innovation and heroic rescue; the US spends more than double on patient care in the last six months of life compared to any other country and our hospitals are better stocked, utilize cutting edge technology, and innovate comparatively freely. Virtually all innovation in health care is made by American firms or firms depending on the American market. Lack of innovation in socialized systems explains why foreigners flock to the US for serious malady. It‟s also why the US „brain drains‟ good doctors from other countries; doctors flee socialized countries where governments regulate their pay, geographic employment, and care procedures. Not even doctors like being told how much money they can make, where they must live, or how to do their jobs. Would you? Politicians in countries with socialized health care contain cost in two simple ways. First, they constrain health care supply. They do so by restricting human and capital investment, and rationing care of all serious treatment. It is not uncommon to wait years for a heart transplant if the patient lives that long. Second, they use monopoly power to negotiate country-wide discounts, forcing suppliers to compensate in profits in the USA. Even after stifling innovation and constraining supply, socialized medicine must fight political corruption and fiscal viability. No socialized program has proved it can control itself. They are all going bankrupt. The most powerful cabinet member in every socialist country is the Minister of Health. In the USA, we fear executive corruption. In socialized countries, corruption decays politics and therefore the whole monopolized system. Socialist countries pay for nationalized health care after they destroy the market with two tactics; raise taxes to the 50-70% range (including the „middle class‟), and deficit spending which in the long run denigrates the currency and bankrupts the country. All Western European socialist countries are currently on a collision course with fiscal ruin and are beginning to experiment with market policies to avoid it.

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ProfitPoints Some socialist governments have experimented with nationalizing whole industries (oil is a favorite) to pay for socialism, although profits still do not make up the shortfall. The US government already confiscates more money from oil, tobacco and alcohol than the profits of the firms that supply it. Taxing commodities is devastatingly regressive, but why nationalize it when you can tax it? There are two taxation choices that in the past have been culturally acceptable in the USA for socialized programs; tax supply with an identifiable payroll tax (sliding scale to burden higher incomes), or a version of sales tax on consumption (exempt vital items like food to reduce regressivity). But socialism and raising tax rates still tend to be frowned on in the USA. So socialists find it easier to add „sin‟ type taxes (e.g., soda, fast food, etc.) that a majority of the population finds acceptable. They also have the benefit of being difficult to identify by the population and therefore forgotten over time. That is why the government and media are now vilifying certain foods and fat. Note that arguments by socialists for freedom (i.e., abolishment) of religion are not used to protect fat people‟s right to eat what they wish, despite the overwhelming genetic evidence of body size. Usually a sense of sacrifice to the common good is used to give politicians their moral legitimacy and the populace its moral arrogance to trample individual freedom. Socialism demands the sacrifice of the individual and the hero for populations to swap freedom for everyone else. A little envy and disdain doesn‟t hurt either. So far we have had none of these debates on socialism vs. free markets. The Founders of the Constitution of the USA would be appalled at the level of discourse. But they are the discussions that any honest debate must have if socialized medicine is the goal in the USA. Let‟s at least be honest.

INCONVENIENT TRUTHS OF US HEALTH CARE TODAY It is currently popular to blame the cost of health care on a greedy, heartless free market that is out of control, and that must be contained for the welfare of us all. Only the blissfully naïve or willfully malicious socialist could make such a statement. For the US does not have a free market health care system by any definition; government pays for roughly half of all health care, and heavily regulates the rest at the expense of a free market. It is surely closer to a nationalized system than a free market. Medicaid, Social Security and Medicare programs are hurtling towards bankruptcy and in the private sector would be both illegal according to current law and ruinous according to actuarial jurisprudence. Further, government accounting systems can not pass private audits even while politicians deplore private standards and call for more oversight. The situation is ludicrous. It is popular to compare life expectancy by country as a measure of health care effectiveness. This comparison is insidious, not least because of our diverse population. And if we compare accident fatalities of New York taxi drivers with Idaho farmers, what conclusions can be made on car safety in the two states? The

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ProfitPoints question and answer is farcical as is the comparison to life expectancy. No statistically valid research has proven that fat people or smokers cost the health system more money than „healthy‟ folks (they tend to die sooner). And only in an Orwellian world would governments zone cities so that one must drive to get a quart of milk, create more pollution, and then blame them for getting fat and driving too much. All statistically valid research proves preventative medicine currently costs more money than treating the sick. It saves nothing. Here again private industry is much more adept at answering these questions as opposed to a government forum of uninformed sound bites and moral imperatives. Technology arguments also ring hollow in their attempt to explain America‟s high health care cost. Recent studies agree. Technology arguments certainly don‟t pass the smell test in a free market, although if it is a cost driver in the health care twilight zone we‟re living in, a free market would fix it.

THE SHORT CASE FOR A FREE MARKET ANSWER It is rational to suggest that either a socialized or free market approach to health care would be better than the hybrid of the worst of both worlds we have today. Socialized health in other countries has after all contained cost and is going bankrupt more slowly than the system Americans have. But it is also instructive in this era of irrationality regarding markets to remember that cost contained socialized health care has been attempted in many varieties in many countries for decades. They are all failing, bereft of ideas and funds. It‟s not like the grand experiment hasn‟t been attempted. It is beyond reason to suggest that since our regulated, subsidized system doesn‟t work, more subsidy and regulation is the answer. Conversely, in the last two decades prices have fallen in virtually every industry due to process and product technological advances. It‟s the primary reason we continue to live more luxuriously than generations past. Even commodities have not appreciated in price despite the ravages of government induced inflation. Only in industries heavily regulated by government have costs spiraled out of control; banking, welfare, drugs (both legal and illegal), education, and health care are all great examples. By now their cost threatens our very viability as a nation. Even more telling, results from these industries are anemic or non-existent despite massive taxpayer investment. In many cases we have a larger mess now than we had 50 years ago. To repeat a famous phrase, it must at least be seriously considered that government is not the answer but the problem. Contrary to popular opinion, a comparison of relatively free markets to heavily regulated industries, it is not the failure of free markets that has produced this mess, but the lack of them. And before western nations collapse in a mountain of socialist debt and the ensuing societal upheaval that entails, we suggest a simple answer; consider allowing markets to work. One last gentle caveat; markets work not because they are selfish and greedy. They

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ProfitPoints work because they rely on individuals‟ self-interested responsibility and sense of empathy, both of which are heavily encouraged in free markets. To mistake greed for self-interest is a willful disgrace. For no one will knowingly deal twice with a liar, a cheat or a greedy bull. Free markets heavily reward honesty and hard work, not duplicity and selfishness. Industries rife with duplicity have a way of going away, if the government allows them to do so. And for the record, all laws that excuse individual and executive fiduciary duty undermine the foundational tenets of the markets they serve.

SUGGESTIONS SOCIALISTS AND CAPITALISTS MIGHT AGREE ON A free market approach that preserves innovation might begin with bipartisan suggestions which both socialists and free marketers could agree on: 1. All foreign governments with socialized medicine have instituted drastic tort reform. American socialists are disingenuous and possibly immoral to exclude it from the health care debate. Research suggests tort cost is many times higher than current public estimates. The law long ago evolved from a transactional agent into a transactional barrier. Markets welcome leveling and correcting agents, but like any organisms which rely on emergent behavior, they can not survive parasites. 2. To prevent bankruptcy and provide everyone with basic care, health insurance agencies are mandated to provide catastrophic health plans against major illness and surgery exceeding say, $10,000 for a start. Profit and non-profit organizations such as Blue Cross have proven their ability to remain solvent while providing this service. If the government insists on intruding into the market on behalf of the vast welfare state, they could arrange payments to the plan of each means tested citizen‟s choice. If the people can not rely on the market to provide care against catastrophic injury, it can at least prevent the government from socializing or controlling it.

FREE MARKET SUGGESTIONS A free market must be created if capitalism is to drive down cost while increasing effectiveness of the health care system. We need no charters, investigations, surveys or government panels to tell us the ingredients of a market; we need the simple laws of supply and demand with comprehensive market information. Following are the general regulatory changes to create an efficient market: 3. To nurture the market‟s supply side, we need more doctors and nurses and hospitals. Either private firms will solve that issue with immigration after the market becomes more attractive to investment, or the Medical association which constrains supply can solve it. It makes no difference. We suspect tort reform alone will encourage both human and monetary investment. 4. To further nurture supply, legislation must be reviewed to determine if it is stifling productivity, specialized labor and technological advancements (e.g., Internet diagnoses and prescriptions). We suspect regulation is more than doubling the price of staff diagnosis and treatment costs with no return on quality. Hospitals remain horribly inefficient. Markets will solve that if

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permitted, including remote diagnosis, process engineering and stratification of labor. Little or no regulation is needed to monitor or enforce these changes, as market information acts more effectively than peer pressure in a school yard. Ask any producer who sold a defective product; once. To nurture the demand side of the market, we must have direct consumers, but employer plans discourage shopping. Also, a significant portion of the uninsured is between jobs. We can kill both birds with one stone. To nurture the consumer and preserve revenue neutrality, transfer legislation of tax deductions to citizens from employer plans and compel employers to raise all employee pay to equal their co-payments. Now the consumer is back in charge, and the employer is out, and the demand for variety and stratification in health care will explode. Markets can not work without information. To ensure they get off on the right foot, we mandate that care givers must release success rates and prices by diagnosis and procedure so consumers know where to shop. We realize free markets would solve this issue over time without legislation. But we are in a rush to create the market, and health care has not seen a free market in over a generation, so we shall give it a push. We predict savings of hundreds of billions per year in this legislation alone since we fully expect treatment prices regardless of quality to vary by over 100% within even a small geography. This pricing variance is prevalent where markets are not efficient and so we fully expect it in health care. Markets will fix these aberrations almost overnight without costly regulation and control and oversight. All tax laws regarding charitable contributions must be rewritten. Currently they favor government over charity donations, which tend to be local and community oriented, which is where capitalism and free markets reside. Local charities are natural foundational components of free markets and society which most importantly relieve public pressure for government monopoly and the subsequent destruction of markets. They are also sources of innovation especially in stodgy industries like health care because they tend to attract people with engaged minds and hearts (i.e., motivated to create), and are not bound by group think to just throw money at a problem. Tax laws should not dissuade charity. The highest cost to product innovation is passing government FDA regulation. Studies show federal bureaucracy is the worst of all monopolies; statist, resistant to innovation and advancement, inefficient, removed from its customer and political for its own sake. Citizens and private enterprise urge commission of consultants and statisticians to re-engineer efficiency and effectiveness of the FDA. Better yet, contract it out to specialized private firms who will compete for excellence. Government does a terrible job of continuous improvement; it is all they can do to implement new policy, much less review the effectiveness of existent legislation. If governments insist on interfering with free markets they would be better served to either approve or disapprove of bills written entirely by industry specialists and then contract the work to markets for administration. Get the legalese and the lawyers out of the markets. They don‟t understand them.

Jim Leis

ProfitPoints HEALTH INSURANCE MARKET An insurance market is useful for all large ticket purchases. Following are changes to government legislation that prevents a market in health insurance: 9. To nurture the health care insurance market, repeal government regulation and allow health insurance companies to cross state lines. No industry innovates (both in process and product engineering) or prices well without competition. It‟s like asking a dog to evolve without allowing gene and cellular mutation. How can anyone believe in evolution and not competition? They are the same thing. 10. Insurance markets must have access to consumer information. Technology has significant ability to lower cost in billions of dollars in this regard as it has in the car insurance and credit card industries. 11. Access to supplier information as provided by suggestion 6 above is necessary for insurance companies to also be an effective consumer. 12. Government regulation has seriously handicapped the insurance industry by its regulation regarding customer segmentation. This is a mistake and ultimately dissuades the market. Worst, it becomes a variable in dissuading insurance altogether, and therefore opens the door for pre-existing condition arguments. The information arguments made earlier and the market created below will take care of all these concerns. But the insurance industry must be permitted to stratify risk. That is the definition of insurance. 13. We fully expect that the sweet spot for private insurance programs will have relatively high deductibles (Remember payments are tax deductible now). All socialized medicine programs either have a deductible or are considering it to dissuade care givers and consumers from unnecessary consumption (e.g., it is distressing to think doctors are prescribing sleeping pills when a walk before bed would be effective). Look to Canada as one of the last hold-outs to implement a deductible as their health care system implodes. Deductibles are synergistic with encouraging practical low cost choice and a prerequisite to quantifying insurance. This is the essence of an aligned market as opposed to instituting non-discerned subsidy spurred by marketing and fear. In an industry where premiums are often $15-20,000 a year with $20 deductibles, we suspect the deductible will quickly rise to the thousands of dollars and save the industry and consumers billions in transaction costs alone, as well as unneeded doctor visits. 14. It may also be necessary to create a high risk pool as profiled by the car industry for consumers who prove unable to find affordable insurance or who avoid it altogether until they are sick. Governments and charities may subsidize means tested individuals (as opposed to organizations) to preserve and minimize subsidy to the market. Charities may also proliferate to provide care for the uninsured. Government provided individual subsidy should be accomplished in a manner to encourage competition and minimize volume and coercion effects. State intervention would be exponentially more desirable than federal since it allows for further innovation and federal government is by nature a highly bureaucratic monopoly.

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ProfitPoints ELEPHANTS IN THE ROOM Finally, there are two more elephants in the room that must be addressed: 15. Everyone must agree that the most egregious and regressive government policy against the poor and middle class is inflation. Since the government controls inflation via the Fed, we urge fiscal restraint against the precipice of bankruptcy the government now faces. 16. Regardless of one‟s views on immigration, illegal aliens present a significant threat to the welfare state and its economy. Securing the border becomes a huge priority for fiscal solvency and logically a prerequisite for immigration and clemency reform. We must stop the leak before dealing with water in the boat. Notice that in a free market system even illegal aliens are eligible to purchase insurance and avoid the moral hazard of government subsidy.

CONCLUSION Any of the above policies would reduce the cost and increase the effectiveness of health care by billions of dollars per year. If we institute all the above changes, my first guess (using 10% socialized medicine as a bar) would be that health care in USA would be 7-8% of GDP within 10 years with everyone covered in the highest quality, most innovative system in the world. Objections to the rough estimate compared only with monopoly will be reminded that no government estimate has ever approached 50% of its budget. That can hardly be called a good record. The above estimate is made as a general extrapolation from the thousands of research papers made comparing free markets to monopolies of any form. Since the government has controlled health care so long, and its deleterious effects on cost even more pervasive than suspected, market gains could actually be greater. We need free, transparent markets to innovate, and health care prices will decrease while quality rises. Other than fiscal viability, the other compelling reason for instituting a free market in health care is that biotechnology will inevitably have an increasingly profound effect on health care and the way we live. Our only chance to implement and keep up with these changes is in a free market economy which proves adaptable and resilient. Statist bureaucracies and regulation has no way of doing so. Next, we must attack Medicare, Medicaid and the Military with an understanding of how markets can help them. They threaten to bankrupt our country. But their effectiveness is irrelevant to the current debate except to the extent that they contribute to the debt and therefore make all of us, especially the poor, poorer. The other project vying for our priority might be to allow the empathy of markets to solve the issue of the poor and end domestic and foreign welfare forever. Markets are particularly adept at increasing per capita earnings, if only they are understood. Free marketers would derive incredible joy at the sight of millions of self-actualized citizens as opposed to the contemptuous, self-perpetuating cycle of victimology with which they are treated today.

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ProfitPoints BIBLIOGRAPHY Alemayehu, Berhanu, and Kenneth E. Warner. “The Lifetime Distribution of Health Care Costs.” Health Services Research 39, no. 3 (6, 2004): 627-642. http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1361028/. Brookings Institution. “Bending the Curve: Effective Steps to Address Long-Term Health Care Spending Growth.” http://www.brookings.edu/reports/2009/0901_btc.aspx. “CDC - National Center for Health Statistics.” http://www.cdc.gov/nchs/. Orszag, Peter R. “Opinion: Health Costs Are the Real Deficit Threat.” wsj.com, May 15, 2009, sec. Commentary (U.S.). http://online.wsj.com/article/SB124234365947221489.html. Risch, Senator James E. “Breakdown of the Uninsured - Health Care Reform.” http://risch.senate.gov/public/?p=BreakdownoftheUninsured. US Census Bureau Systems Support Division, and Laura K Yax. “Current Population Survey (CPS).” http://www.census.gov/cps/.

ABOUT THE AUTHOR Jim Leis resides in Virginia. For the last 20 years he has held consulting, technical, and executive positions in systems design and management, strategy, and business development. Mr. Leis received an MBA from Kenan Flagler Business School at UNC Chapel Hill.

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