The destruction of markets in healthcare

Editor's Note: Welcome to Medical Economics' blog section which features contributions from members of the medical community. These blogs are an opportunity for bloggers to engage with readers about a topic that is top of mind, whether it is practice management, experiences with patients, the industry, medicine in general, or healthcare reform. The series continues with this blog by Ken Fisher, MD, who is an internist/nephrologist in Kalamazoo, Michigan, a teacher, author ("Understanding Healthcare: A Historical Perspective") and co-founder of Michigan Chapter Free Market Medicine Association. The views expressed in these blogs are those of their respective contributors and do not represent the views of Medical Economics or UBM Medica.

Ken Fisher, MDMany hold the belief that markets do not work in healthcare.  Recently, former President Bill Clinton-calling for more patient-directed care using markets-said, “that didn’t work out very well for us, did it? We wound up with the most expensive system in the world and we insured the smallest percentage of people.”  He was referring to the American experience of the past 50 years, with many uninsured and excessive costs. 

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With this kind of reasoning,healthcare is unique and true markets do not work, therefore, to these political leaders, we need a government-dominated, price-controlled and heavily bureaucratic system that pays less attention to personalized care. But is it true that markets in the United States do not work for healthcare, or is it the result of unintended consequences of decades of ill-conceived federal policies?

Could it be that our federal government started the destruction of healthcare market discipline in 1965 with the passage of Medicare/Medicaid?  When written, this law was open-ended (no limit on expenditures) and it did not involve the recipient in knowing or being concerned with cost.  Monies put into the Medicare fund during working years are now grossly inadequate, paying approximately one-third of each person’s expenditures.  The law immediately created a huge increase in demand with no effort to increase supply. 

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As one might expect, within the first year, costs greatly exceeded expectations and continue to threaten federal and state solvency to the present day.  Instead of addressing these structural flaws, Congress has, in a series of further market destroying steps and with the approval of several presidents over the years, created a price-controlled, bureaucratically administered payment system for Medicare that uses formulas that have NO market determination.  Yet with each attempt to control costs, they continue to soar.  Congress does not seem able to address fundamental flaws but rather deals with this issue by adding more ineffectual bureaucracy.

Next: How can Congress extricate the nation out of this healthcare crisis?

Because of Medicare’s sheer size, insurance companies follow suit with similar artificial physician reimbursements, though hospital systems are able to negotiate significantly higher insurance payments to compensate for inadequate Medicare and Medicaid compensation.  The bigger the system, the greater leverage the hospitals have in these negotiations.  This is called “cost shifting” and those uninsured are also billed these inflated rates.

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The insurance companies then pass on those increased costs along with other fees to employers, which, since World War II, have provided health insurance pre-tax to employees.  This has two effects: One, it removes the employee concern for dollars spent and two, as expenses increase, the employers’ ability to increase wages decreases. Medicaid is even more complicated with federal funding to the states paying about half the cost, varying with the size of the state’s economy.  Thus funding for Medicaid with its increasing population has exploded for both the federal and state governments causing pain for both, with states determining its own reimbursement rates.  

Over the years, the federal government has made many changes to the Medicare/Medicaid amendments and to the 1935 Social Security law in a desperate attempt to control costs, yet repeatedly they have been unsuccessful.

They are:

1)   The Diagnostic Related Group (DRGs) payment system, passed in 1983.  This is a price-fixed system that causes many hospitals to lose money, especially when treating not only Medicaid patients but also Medicare patients. This then causes wild pricing for self-pay and insured patients

2)   CPT codes for doctors

3)   Sustainable Growth Rate (SGR) adjustment

4)   The HITECH Act

5)   The Patient Protection and Affordable Care Act

6)    Medicare Access and Chip Reauthorization Act

Despite this ill-conceived litany of Congressional actions, the irony is that there are several instances that markets are working fabulously in medicine. Many general surgery centers have opened that have all-inclusive cash prices and provide excellent care at a fraction of hospital “charge master” prices. Many physicians are converting to direct primary care, with monthly fees that cover care and offer grossly discounted testing prices. These practices are market-driven, providing personalized care at far less cost.

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How can Congress extricate the nation out of this healthcare crisis? Let individuals decide what is best for them. This means a voluntary option for ALL Americans, including Medicare/Medicaid recipients having deposits into their own expanded health savings accounts that can fund usual care, a direct care contract and a high deductible health plan sold across state lines. 

This, with price transparency, then puts individuals in charge of their own spending.  Use the discipline of market forces in healthcare as in the rest of our economy.   Centralized bureaucratic healthcare has led to cronyism, huge costs, and waste, but most importantly, poor care for many.