On Manufacturing More Costs: How to Keep Health Care Costs from Killing Us DEAD.

by Jefferson Pinto

July 2009, Issue 16: This column is not for everyone. Don't Ask your Doctor if it is right for you. Although side effects are rare, a small number of readers have experienced increased appetite, increased tolerance for forked-tongued politicians, and the desire to pay higher taxes for lower service levels. If you experience depression or feelings of helplessness that last more than four hours, seek verifiable facts immediately. [Editor's Note: The following Health Care Cost Analysis was written pre-Obamacare, signed into law in March of 2010]. Quick Link (This Article): http://bit.ly/2hPRtBh

But seriously folks, the health care reform debate is flaring up again. Current proposals and debates are hasty and half-baked – throwing out (or throwing up) solutions without first defining the problems and the causes. And so now is the time to ask the tough questions; What exactly are we fixing? What is the core problem? What are the associate symptoms, causes, and potential side effects? I can only hope the approach to the fix isn't as fragmented as our current health care system.

We are NOT suffering from a lack of technology, qualified health care professionals, labs, pharmaceuticals, hospital beds, or imaging machines. Plain and simple - the fundamental problem is high cost. The primary cause is an absence of downward pressure being exerted on costs. Runaway costs are driven by fear, greed, and ignorance.

Cost Accounting 101 Let's say two years ago you bought 100 gumballs for a dollar; they cost one penny each. Ahh, that's an easy one. The next year, you bought 125 gumballs for $2.50.

Question #1: What were the two causes the total cost increased? First you bought more gumballs (quantity variance), and secondly, the unit cost went up from one cent to two cents (price increase) per gumball.

Cost for each unit (gumball) is escalating: each MRI/CAT scan, each lab test each pill, each office visit, etc., procedure. The primary reason is a lack of competition and no “economic down force” pressure on prices.

"I'm not advocating socialized medicine for one second."

Secondly, the quantity (number of gumballs) scans, lab tests, prescriptions, office visits, surgeries are also increasing. The primary reason is due to an increase in the number of people receiving health care.

This sort of begs an ethical question. Who ought to be treated and how do we pay for those who can't pay for themselves?

Well folks, in the U.S., it is my personal belief, there ought to be a minimum standard of care (including emergency care) provided to every citizen irrespective of their ability to afford it. Hold your horses! I'm not advocating socialized medicine for one second. We are a nation of people, not money-grubbers, and if the richest country in the world can't "take care" of its sick people, then maybe we aren't really the "richest" country after all. Moreover, if the land of opportunity lacks the ability for 95 percent of Americans to pay their own way, there-in lies yet a bigger problem.

"The cruel economic reality is public policy does indeed put a price tag on a life."

Pretend, for a moment, that we all agree everyone ought to have transportation. What minimum standard ought we, the tax payers, foot the bill? A bus? A Hyundai? A Mercedes Benz? Does the new luxury car really provide more effective transportation? Nicer and more prestigious yes; more effective, no!

Currently, our health care system is operating at the Mercedes Benz standard. That's too high a standard than the taxpayers can afford. However, if you choose to upgrade your transportation with your own money, go for it.

The cruel economic reality is public policy does indeed put a price tag on a life. And clearly we could save countless lives by lowering the maximum speed limit to 25 miles per hour. You see, we do trade dollars and convenience for lives.

What if there were just 100 people in this country suffering from the same ailment? What if the cure would cost one trillion dollars each, should the rest of the citizens pay? NO! That would cost more than ten times the national debt. My point? There is a dollar limit to save/extend a life.

Current “Solutions” Won’t Work Because They Don’t Address The Problem

Forcing everyone to buy health insurance: The first flaw with this approach is it fails to reduce costs; it only spreads the costs around.

If I go on a road trip, take the ice chest out of the back seat and put it in the trunk did it reduce the overall weight of the vehicle? No, it simply redistributed the weight.

The proposed quick fix to make everyone pay only spreads the cost around. The second problem is the indigent can't pay which means those who can pay end up paying for those who can't pay in the form of higher health care premiums. Sort of like how it's done today. This is sort of nice for the government because it shifts the cost to the insurers and off the federal books.

The third problem with everyone paying an "equal share" is still no downward pressure is exerted on prices, and costs will undoubtedly continue to escalate until the U.S. gets to be like other countries who have implemented this approach. (Like Sweden, with a 70 percent marginal tax rate). Criminy! That's gonna leave a mahk!

Lastly, we need to lower overall costs. Running everything through an insurance company seems to be adding an additional layer of profit to further enrich the insurance companies, one of the most powerful lobbies in the country. Is the motivation behind this one sort of making sense now?

Forcing all Employers to Provide Health Insurance

First, it (again still) puts no downward pressure on health care costs. (Does this sound vaguely familiar?) Second, it does nothing for those who are not employed or who are self-employed.

"If you can’t convince them, confuse them."

Third, if you subscribe to the "creates new jobs" philosophy, it will actually only increase the cost of labor. I can assure you there will be fewer jobs, lower service levels, and higher prices for other goods and services. Aye, there's the rub: the costs of health care will be borne by every product or service we consume in this country.

"Many citizens engage in behaviors that are directly destructive to their health such as poor diet, lack of exercise, smoking, drugging, drinking alcohol in excessive, etc. These behaviors drive medical costs like no other."

Finally, it will make all products made in the U.S. even less competitive than those manufactured elsewhere. Ever wonder why the manufacturing jobs keep going overseas ? Consider the labor cost difference between the U.S. and China. Then consider those foreign-made goods, that were put on a boat that sailed almost 4,000 miles and are still cheaper than making them on our soil. The primary cost drivers for U.S. manufactured goods are labor costs, U.S. government regulatory costs and other government-imposed restrictions (But that's another topic relating to inefficient and badly managed government for another article.)

Pool Large Numbers of People and Negotiate Lower Rates

This puts very little pressure on health care prices. It doesn't affect the operational efficiency or the treatment/prescribing decision-making process. What if you aren't in one of the larger pools of insured? In this scenario, it wouldn't pay to be a big fish in a small pond. This proposal solves no problem; its strategy, as an old business law instructor of mine said, if you can’t convince them, confuse them.

Causes: Players With Incentives and Resultant Conflicts of interest Players: Media Untruthfulness in Ads

Have you ever noticed that every commercial ends with how their product or service will solve your problem? Weight loss → Call Jenny. Headache? → pain reliever. Heart burn? → Antacid. I don't really expect to see commercials anytime soon that say, "Want to lose weight? Get counseling, exercise, make good food choices, and eat reasonable quantities. Have a headache? Drink Water. Go to a quiet place, lie down and relax. Heart burn? Stop eating the foods that cause you discomfort. Try something simple first. If the problem persists, see you health care provider.”

Player: Citizen/Patient Behavior

Many citizens engage in behaviors that are directly destructive to their health such as poor diet, lack of exercise, smoking, drugging, drinking alcohol in excessive, etc. These behaviors drive medical costs like no other. Providers can only do so much; the rest is up to the patient. By the way, many of these behaviors are caused by physiological dysfunctions and the patient would probably benefit immensely from psychotherapy. My father had an old joke: Q: How many psychologists does it take to change a light bulb? A: As many as seven, but the light bulb has to want to be changed.

"The earlier you detect a problem the less unpleasant the treatment, the less expensive and the greater the probability for a complete and successful cure."

Unfortunately, many citizens do not get regular check ups. The earlier you detect a problem the less unpleasant the treatment, the less expensive and the greater the probability for a complete and successful cure. The education about breast cancer in this country has saved countless lives, pain, suffering and (of course) money. Similar education about other diseases (like prostate or colon cancer) would reap similar benefits.

I've heard the argument, "I can’t afford regular checkups..." Depending upon where you get treated, an annual check up is probably a few hundred dollars. If you can't set aside less than a dollar a day to take care of your most prized possession (your health), why would you expect someone to care more for you than you do for yourself? I do believe some people really can't afford it; however, I think many can but won't. Lack of annual checkups or only seeking health care at the onset of symptoms also leads to avoidable and expensive trips to the emergency room (ER). High costs are also driven by early triage treatments and the fact that emergency rooms can't turn away people in need.

"How many patients don't follow the advice of a health care professional and wonder why their health doesn't improve or worse, continues to deteriorate?"

Iatrophobia (fear of doctors) is another barrier to cost limiting efforts. Many are afraid to seek medical treatment. This fear is almost always overcome by pain and then they end up in the ER.

I once overheard someone complaining, "I took the time to get a check up, paid, and the doctor told me there’s nothing wrong with me. What a waste of time and money." I didn't quite see it the same way...

"Some patients are downright bullies. After watching the commercials, these patients tell/insist/demand their practitioner prescribe a particular medication."

How many patients don't follow the advice of a health care professional and wonder why their health doesn't improve or worse, continues to deteriorate? Even mainstream AMA doctors are beginning to prescribe vitamins more frequently. Oh well, you can lead a horse to the treatment plan but you can't make him sign the consent form.

Physicians aren't the only ones who contribute to over-prescribing medications. Some patients are downright bullies. After watching the commercials, these patients tell/insist/demand their practitioner prescribe a particular medication. This is called presenting the solution before defining the problem. Maybe they too are taking lessons from our politicians, "I know I've got a bacterial infection go ahead and prescribe me the (wrong) antibiotics so we can nip it in the bud." Properly diagnosing an ailment isn't always a "one tripper" (single office visit). Sometimes you need to wait a few days, if the symptoms get worse you may need to go back to your practitioner. One trippers can result in over-prescribing or prescribing the wrong medication. Sometimes patients need to have patience with their practitioner.

"...many of the labs and imaging facilities are owned by the very practitioners that are prescribing and directing the patients to go there. Can you say conflict of interest?"

Patients who are not forthright and honest with practitioners also hinder the ability to diagnose and treat them. Some patients feel embarrassed or guilty. Maybe health care providers ought to put a chapel in their offices so their patients could address their fear (pray) and guilt (confession) before their visit. After all, there are already chapels in airports and hospitals. Similarly some supermarkets have banks: that sort makes sense; get money before you go shopping.

"After conflicts of interest are removed, practitioners are in the best position to recommend diagnostic procedures and treatment for their patient, not the bean counters or insurance companies. Most practitioners really went into their respective field to heal people, not for the money."

Player: Health Care Practitioners

By definition health care practitioners include physicians, nurse practitioners, nurses, therapists, chiropractors etc. Practitioners have financial incentives to do more "stuff" (require more diagnostics, prescribe more medications, and perform more procedures). Further, many of the labs and imaging facilities are owned by the very practitioners that are prescribing and directing the patients to go there. Can you say conflict of interest? I knew you could. CPAs aren't allowed to own a single share of the stock of the company they are auditing.

Another reason practitioners over prescribe and perform more diagnosis than necessary is to avoid frivolous law suits. (Special thanks to our tort attorneys).

Here's the bottom line: Practitioners are trained in medicine and the associated risks. After conflicts of interest are removed, practitioners are in the best position to recommend diagnostic procedures and treatment for their patient, not the bean counters or insurance companies. Most practitioners really went into their respective field to heal people, not for the money.

"...the practitioner must maintain a very specialized and expensive administrative staff to interface with insurance companies..."

Player: Insurance Companies

Insurance companies, like politicians where bureaucracy knows no bounds, are the best stall artists on the planet when it comes to paying. Consequently, practitioners must fund the additional working capital (cash flow) which translates into more non-medical costs (interest).

If that weren't enough, the practitioner must maintain a very specialized and expensive administrative staff to interface with insurance companies (verify coverage, bill, follow up on payments, follow up on payments, follow up on payments...)

"...it is against the code of professional ethics to audit on contingency."

Practitioners are also subject to audit by the insurance companies. In concept, audits aren't a bad idea. Where it goes sour, is when the insurance company hires auditors on contingency (The more 'waste’' they find the more they get ). Hello folks, again, can you say conflict of interest? As a retired CPA and public auditor, I'll point out that it is against the code of professional ethics to audit on contingency.

Player: Trial Attorneys

Strict liability standards have morphed into hot coffee liability in this country, and there appears to be no disincentives to discourage filing frivolous lawsuits. Liability insurance premiums have been increasing proportionally to health care costs, and the patient is the cash cow (coincidence? I think not...). It's not just the cost of the final judgment against health care professionals, it's also the legal cost to defend such lawsuits.

Additionally, some areas of medical specialty are so rife with lawsuits that fewer medical students are choosing that field. Case and point, Obstetrics: A study released in 2004 by the American College of Obstetricians and Gynecologists (ACOG ) disclosed:

• 1 in 7 have stopped delivering babies because of the fear of being sued.

• In 2004, only 65 percent of the OB/ Gyn residency slots were filled by U.S. medical school seniors, compared with 86 percent a decade earlier.

• The survey also found that 49.5 percent of all claims against OB/Gyns are dropped by plaintiffs' attorneys, dismissed or settled without payment – and that OB/Gyns win eight out of every 10 cases that go to court.

Players: Pharmaceutical & Medical device makers

Think back. Think way back. Think 1980s way back. Think windfall profits tax. Pharmaceutical & medical device makers are to medical costs what petroleum companies were to gasoline prices.

The idea, 'windfall' was based on the prohibition of taking any wood from the king's forest, unless you were to come across a tree laying on its side that was blown over by the wind hence the word, windfall.

"...Amgen posted average growth of 13 percent per year, of the past four years. That's 52 percent profit increase over four years!!!"

We've heard all the banter about how much money they pour into research and development. Anecdotally this sounds good, but why have their take-home corporate profits sky rocketed parallel to overall health care costs? For example, our friends at Amgen posted average growth of 13 percent per year, of the past four years. That's 52 percent profit increase over four years!!!

Also, intellectual property protection (patent protection) is essential to foster research, but 17 years is a bit long in this economy.

Solutions:

• Remove practitioners' conflicts of interest. If you are a practitioner you may not directly or indirectly own independent labs, diagnostic facilities, or pharmaceutics. (Mutual funds ownership are probably OK).

• Remove insurance co. auditors' conflict of interest by eliminating contingency fees.

• Increase flat rates to primary practitioners, increase patient deductibles and lower premiums proportionally. When patients are paying with their own money, they tend to look at the costs more carefully. Moreover, a higher deductible means less involvement and administration from the insurance company. This will take some doing to fine tune the optimal balance.

• Require practitioners to provide a written estimate. Auto mechanics are required to provide a written estimate prior to performing a service. Why not practitioners ?

• Require practitioners to put treatment plans in writing and give a copy to the patient. This sort of removes the excuse of said patient not knowing what he/she the patient was suppose to do, see a psychotherapist or do perform daily exercise.

• Educate citizens about preventative medicine. And how to "listen" to their bodies. Have you ever seen the Show "I didn't know I was pregnant?" I don't get it ? Then I've never been pregnant and oh yeah I'm a man. On the opposite end of the spectrum, don't run to the doctor at the first sign of a sniffle, just because you want that "professional" drama and attention... Wait until you have X symptoms for Y days before consulting over the phone with your primary practitioner.

• Educate practitioners about cross functional coordination (medical, psychological, chiropractic, etc.) and patient misconduct (bullying the doctor/shopping for meds antibiotics, etc.).

• Impose a penalty on patients for making poor health choices and failing to follow reasonable prescribed treatment plans. Oversized people have to buy two airplane seats, why not link personal costs based on factors within your direct control. (Did you follow your treatment plan? Did you see your psychotherapist ?)

• Enforce existing false/misleading advertising laws. How many more weight loss pills or bowel cleansers do we really need? (Most of these prey on the desperate and ignorant).

"Streamline and expedite the FDA approval process for new medicines or devices."

• Reevaluate the existing intellectual property laws to determine if the period of protection is appropriate. Streamline and expedite the FDA approval process for new medicines or devices.

• Remove tort attorney's contingency fees. Bill by the hour like any other self-respecting professional. Build a safety valve in the litigation process to better determine actual injury and the party of proximate cause before too many defense costs are incurred. Evaluate whether a monetary cap for pain and suffering judgments is appropriate.

"Build a safety valve in the litigation process to better determine actual injury and the party of proximate cause before too many defense costs are incurred."

All of the above really address the incentives (or disincentives) that drive the behavior that have led the current state of the health care "system". None of the above addresses the operational efficiency of diagnosing and treating patients. (That's sort of up to the practitioners and not really within the domain of public policy.)

Jefferson Pinto is a retired CPA, holds an MBA from one of the finer accredited universities in this country, and is the VP of corporate operations for his day job. This email address is being protected from spambots. You need JavaScript enabled to view it.© 2009,OjaiandVenturaVIEW.com

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SOURCE: VIEW Issue 16, Feb. 2009
LINK: Classic VIEW Website