We have had a rather expensive seven year conversation about healthcare and its financing. From the get-go, it was clear that many people had misconceptions about this topic. Unfortunately, most of these misconceptions are still with us. This might make for an excellent partisan fight, but it is destructive of our attempts to find solutions. So let me debunk a few healthcare myths on topics where I believe the factual case is close to indisputable. In no particular order.
MYTH: We should cut out the middleman in healthcare, the insurance companies.
TRUTH: The reason we use a middleman in healthcare is because the prices can be quite high. My mother fell down and her 4 day stay in the hospital cost around $40,000. Her pacemaker replacement cost around $23,000. If you run a pure market system, many buyers won’t have enough money to participate in it. Would this help healthcare providers? Wouldn’t the total market be much smaller? The insurance mechanism is designed to pool money annually from many people and apply it to the subset who suffer losses in that year. I have written elsewhere about why this mechanism doesn’t necessarily work perfectly in the health area, but that doesn’t mean that we can just toss it away without a significant set of trade-offs. By the way, in the financial area, we call entities like insurance companies and banks “financial intermediaries,” not “middlemen,” which is somewhat perjorative because it sounds unnecessary.
MYTH: What matters most is whether we have a public option versus an insurance company.
TRUTH: What entity does the pass through of premiums to claimants is less important than the question of what mix of good and bad risks (i.e. healthy versus sick people) are in the insured pool of risks.
MYTH: Competition between insurers will always lower healthcare costs.
TRUTH: The market for health insurance and the market for healthcare delivery are not the same market. Prices (what a business charges for its goods and services) and costs (what it pays for the inputs needed to produce and deliver its goods and services) are not the same. Because an insurer is a financial intermediary as we discussed earlier, they are not just sellers, they are also buyers. An insurer is a proxy buyer of services from healthcare providers on behalf of their policyholders. Big buyers, like Wal-Mart, can exert downward pressure on prices charged by their suppliers. Same thing in a health insurance market. Size matters. The insurer is the demand side, so the calculation about the impact of competition between insurers isn’t as simple as some people think.
MYTH: All kinds of healthcare that we might come up with are equally important.
TRUTH: If we had unlimited funds, this view might be tolerated, but we just plain don’t. Elective care is different from necessary care. Investigational or experimental care is different from an established standard of care. Care to increase longevity is different from palliative care, and the need for either changes over time as an elderly person gets nearer to death. I might even argue that urgent or emergency hospital acute care is different from non-urgent care received in an independent physician’s office. And drugs, which are about 11 percent of total health expenditures? Not all of them are equally effective in all situations. For example, for a mild case of anxiety, drugs can help out a lot. But for someone with an extreme case of paranoia, drugs won’t solve the problem.
MYTH: Government incentives and metrics can foster effective cost control in healthcare.
TRUTH: There can be a role for government incentives and metrics, but most innovation is best done by the private sector for a variety of reasons. Such innovation will occur if someone can make money from it. It is difficult because cost control might mean less pay for healthcare providers and/or sometimes poor health outcomes, if not done properly. Note that there is a difference between making healthcare more efficient and less wasteful and arbitrarily cutting funding for necessary care. Also note that if cost control measures increase the administrative burden on healthcare providers, some people may choose a different line of work. That could result in higher costs and lower quality.
MYTH: We can control adverse selection through a penalty on those who fail to buy health insurance or a fee charged to those who buy it when they get sick.
TRUTH: Of course it depends partly on the size of these penalties and fees, but we should recognize that at some point the overall level of premiums gets so high that some people just plain can’t afford it, even if they want to buy the insurance. Subsidies can help, but if the government is paying healthy people almost all of their full freight of joining the risk pool, the question is whether we are still talking about traditional insurance? Why is that not an academic question? Because obviously I can solve the problem of the uninsured by forcing people to buy something and then paying for it for them, but it just seems rather idiotic to me even if I can’t put my finger on exactly why. (For those who don’t know, adverse selection is the consumer behavior phenomenon that consumers tend to buy what they need more than they buy what they don’t need. In this case, that means that some healthy people will inadvisedly run without health insurance if it costs too much).
MYTH: Single payer is free.
TRUTH: Milton Friedman said famously that “there is no free lunch.” With a single payer system, you might not pay insurance premiums, but instead you will pay taxes. And even if the incidence of the taxes doesn’t fall on you at first, it will be passed through the economic system to you in the form of higher prices for the goods and services that you buy. That doesn’t mean that you will pay exactly the same amount, but it does mean that you cannot expect to pay zero.
MYTH: Only single payer systems ration care.
TRUTH: When my father looked into hip replacement surgery, the waiting period from the scheduling to the surgery was over 9 months. Long waiting periods are the hallmark of single payer systems and the way care is rationed de facto, but they are not confined to such systems. In addition, geographic proximity to care can make a difference in whether you get it or not.
MYTH: We can solve our problems by selling insurance across State lines.
TRUTH: I’m sure that the CEO of New York Life Insurance Company will fall off his chair with joy when he finds out that he will be allowed to sell product outside of New York State. That’s just a little joke. Do we really believe that our fellow American businesspeople in an industry that goes back to the mid-18th century are so utterly moronic that they never thought to do this before? I don’t want to go into all the details of the regulatory scheme because a simple factoid will suffice. State Farm has about 82 million policyholders and their domiciliary state of Illinois has a population of about 12.9 million people. So query: can their sales really be confined to Illinois?
MYTH: If the federal government does a single block grant to Medicaid, it will reduce costs.
TRUTH: When you are dealing with hospitals, you are dealing with high fixed costs such as salaries for labor and the cost of the physical plant and equipment. If you try to reduce Medicaid spending too much, the system will try to shift those costs to the commercial healthcare premiums paid mostly by businesses, but also some individuals. If their premiums go up, they aren’t going to be happy. (For those who don’t know, a fixed cost is one that does not vary depending on the number of units sold, while a variable cost is one that does).
MYTH: The main problem with the Veteran’s Administration is incompetent executive branch managers.
TRUTH: When you have a government owned and run healthcare delivery system (as opposed merely to one that provides financing), there is a capacity limitation on the number of beds in the hospital and the number of doctors and nurses employed. If you have a big war and there are a lot of injuries, then utilization will rise. It takes a long time to add hospital capacity and it is quite expensive. Therefore, proper funding and advance long term planning matter. The question is: what happens if you expand your delivery system to meet the needs of a big war and then later you have extended peace? These brick and mortar hospitals and the supply of providers who staff them don’t expand and contract at a moment’s notice like a balloon that you can blow air into and then let air out of.
MYTH: The main problem with Medicare is incompetent executive branch managers who can’t control spending.
TRUTH: The aging of the baby boomers into the Medicare population accounts for most of the fiscal problem with the program, along with the increasing obesity and medical technology innovation that drives costs independently of whether the payer is government or private sector.
MYTH: Transparency of prices will reduce healthcare costs.
TRUTH: This will help a lot if consumers have real skin in the game, but if most or all of the costs are paid by a third party payer or eaten by the provider, then the opposite effect could occur. Why? Because we are trained to believe that high price signals high quality, even when this is done only to trick us. The quality of some services can be difficult to determine and even if you can determine it, that information may not spread out into the entire market of consumers. And stop and think: isn’t surgery usually a one-time event? In that case, doesn’t learning comes too late?
MYTH: Doctors always know how to diagnose and treat what’s wrong with you.
TRUTH: The more unusual your condition, the less true this is. In fact, many people would be surprised to learn how few conditions have fully developed and agreed upon best practices for treatment. Medical science is always evolving and sometimes we are the guinea pigs. Trial and error is an inescapable part of human endeavor. Please note that most insurance does not cover investigational or experimental treatment. And also observe that what I am talking about means that cost effectiveness analysis and cost control measures in the health area aren’t as easy to work out as it might initially seem.
MYTH: The reason we have poor health outcomes in the U.S. relative to some other countries is because our healthcare delivery system is bad.
TRUTH: Health is affected by more than merely the healthcare delivery system. It is also affected by public health efforts, pollution and lifestyle choices including our eating and substance abuse habits. There is also a correlation between health status and levels of income and education. In other words, if you are overweight, sedentary and you smoke every day, don’t get mad at your doctor when she asks you whether your estate planning affairs are in order.
MYTH and TRUTH: Back in 2009, I heard a small businessman on television say “I don’t want to pay for some kid’s broken arm.” Of course, he already did that even before ACA. In 2016, I heard a notable ACA critic on television say “we don’t want to pay for sick people.” Of course, that’s the whole point of health insurance. We’re not going to get very far if people don’t understand the basics of what is going on. Sure, it isn’t fun to pay health insurance premium, but one day when the shoe is on the other foot and you have a life-threatening illness and the insurer says, “sorry, not covered,” I hope you will remember back to the day when you wanted to buy on the cheap. You get what you pay for, folks, and dying ain’t all what it’s cracked up to be. As Hamlet speaks it: “Who would fardels bear, to grunt and sweat under a weary life, but that the dread of something after death, the undiscovered country, from whose bourn no traveler returns, puzzles the will, and rather makes us bear the ills we have than fly to others that we know not of?”
The author formerly worked for the State of Hawaii as an insurance regulator, but his views as expressed here do not necessarily reflect the views of his former employer. He has a B.A. from Columbia University, a J.D. from UCLA, an M.B.A. from the University of Hawaii at Manoa, and a CPCU. He has published a number of books on a variety of topics.
“Natural selection in the Darwinian sense doesn’t exist very much anymore with respect to human beings. **** “Today, the idea of survival of the fittest doesn’t necessarily mean survival of the strongest.” From page 112 of “Business A-Z: the Definitive Guide for Busy Executives,” by Lloyd Lim (Tate Publishing 2017).
Debunking Healthcare Myths
We have had a rather expensive seven year conversation about healthcare and its financing. From the get-go, it was clear that many people had misconceptions about this topic. Unfortunately, most of these misconceptions are still with us. This might make for an excellent partisan fight, but it is destructive of our attempts to find solutions. So let me debunk a few healthcare myths on topics where I believe the factual case is close to indisputable. In no particular order.
MYTH: We should cut out the middleman in healthcare, the insurance companies.
TRUTH: The reason we use a middleman in healthcare is because the prices can be quite high. My mother fell down and her 4 day stay in the hospital cost around $40,000. Her pacemaker replacement cost around $23,000. If you run a pure market system, many buyers won’t have enough money to participate in it. Would this help healthcare providers? Wouldn’t the total market be much smaller? The insurance mechanism is designed to pool money annually from many people and apply it to the subset who suffer losses in that year. I have written elsewhere about why this mechanism doesn’t necessarily work perfectly in the health area, but that doesn’t mean that we can just toss it away without a significant set of trade-offs. By the way, in the financial area, we call entities like insurance companies and banks “financial intermediaries,” not “middlemen,” which is somewhat perjorative because it sounds unnecessary.
MYTH: What matters most is whether we have a public option versus an insurance company.
TRUTH: What entity does the pass through of premiums to claimants is less important than the question of what mix of good and bad risks (i.e. healthy versus sick people) are in the insured pool of risks.
MYTH: Competition between insurers will always lower healthcare costs.
TRUTH: The market for health insurance and the market for healthcare delivery are not the same market. Prices (what a business charges for its goods and services) and costs (what it pays for the inputs needed to produce and deliver its goods and services) are not the same. Because an insurer is a financial intermediary as we discussed earlier, they are not just sellers, they are also buyers. An insurer is a proxy buyer of services from healthcare providers on behalf of their policyholders. Big buyers, like Wal-Mart, can exert downward pressure on prices charged by their suppliers. Same thing in a health insurance market. Size matters. The insurer is the demand side, so the calculation about the impact of competition between insurers isn’t as simple as some people think.
MYTH: All kinds of healthcare that we might come up with are equally important.
TRUTH: If we had unlimited funds, this view might be tolerated, but we just plain don’t. Elective care is different from necessary care. Investigational or experimental care is different from an established standard of care. Care to increase longevity is different from palliative care, and the need for either changes over time as an elderly person gets nearer to death. I might even argue that urgent or emergency hospital acute care is different from non-urgent care received in an independent physician’s office. And drugs, which are about 11 percent of total health expenditures? Not all of them are equally effective in all situations. For example, for a mild case of anxiety, drugs can help out a lot. But for someone with an extreme case of paranoia, drugs won’t solve the problem.
MYTH: Government incentives and metrics can foster effective cost control in healthcare.
TRUTH: There can be a role for government incentives and metrics, but most innovation is best done by the private sector for a variety of reasons. Such innovation will occur if someone can make money from it. It is difficult because cost control might mean less pay for healthcare providers and/or sometimes poor health outcomes, if not done properly. Note that there is a difference between making healthcare more efficient and less wasteful and arbitrarily cutting funding for necessary care. Also note that if cost control measures increase the administrative burden on healthcare providers, some people may choose a different line of work. That could result in higher costs and lower quality.
MYTH: We can control adverse selection through a penalty on those who fail to buy health insurance or a fee charged to those who buy it when they get sick.
TRUTH: Of course it depends partly on the size of these penalties and fees, but we should recognize that at some point the overall level of premiums gets so high that some people just plain can’t afford it, even if they want to buy the insurance. Subsidies can help, but if the government is paying healthy people almost all of their full freight of joining the risk pool, the question is whether we are still talking about traditional insurance? Why is that not an academic question? Because obviously I can solve the problem of the uninsured by forcing people to buy something and then paying for it for them, but it just seems rather idiotic to me even if I can’t put my finger on exactly why. (For those who don’t know, adverse selection is the consumer behavior phenomenon that consumers tend to buy what they need more than they buy what they don’t need. In this case, that means that some healthy people will inadvisedly run without health insurance if it costs too much).
MYTH: Single payer is free.
TRUTH: Milton Friedman said famously that “there is no free lunch.” With a single payer system, you might not pay insurance premiums, but instead you will pay taxes. And even if the incidence of the taxes doesn’t fall on you at first, it will be passed through the economic system to you in the form of higher prices for the goods and services that you buy. That doesn’t mean that you will pay exactly the same amount, but it does mean that you cannot expect to pay zero.
MYTH: Only single payer systems ration care.
TRUTH: When my father looked into hip replacement surgery, the waiting period from the scheduling to the surgery was over 9 months. Long waiting periods are the hallmark of single payer systems and the way care is rationed de facto, but they are not confined to such systems. In addition, geographic proximity to care can make a difference in whether you get it or not.
MYTH: We can solve our problems by selling insurance across State lines.
TRUTH: I’m sure that the CEO of New York Life Insurance Company will fall off his chair with joy when he finds out that he will be allowed to sell product outside of New York State. That’s just a little joke. Do we really believe that our fellow American businesspeople in an industry that goes back to the mid-18th century are so utterly moronic that they never thought to do this before? I don’t want to go into all the details of the regulatory scheme because a simple factoid will suffice. State Farm has about 82 million policyholders and their domiciliary state of Illinois has a population of about 12.9 million people. So query: can their sales really be confined to Illinois?
MYTH: If the federal government does a single block grant to Medicaid, it will reduce costs.
TRUTH: When you are dealing with hospitals, you are dealing with high fixed costs such as salaries for labor and the cost of the physical plant and equipment. If you try to reduce Medicaid spending too much, the system will try to shift those costs to the commercial healthcare premiums paid mostly by businesses, but also some individuals. If their premiums go up, they aren’t going to be happy. (For those who don’t know, a fixed cost is one that does not vary depending on the number of units sold, while a variable cost is one that does).
MYTH: The main problem with the Veteran’s Administration is incompetent executive branch managers.
TRUTH: When you have a government owned and run healthcare delivery system (as opposed merely to one that provides financing), there is a capacity limitation on the number of beds in the hospital and the number of doctors and nurses employed. If you have a big war and there are a lot of injuries, then utilization will rise. It takes a long time to add hospital capacity and it is quite expensive. Therefore, proper funding and advance long term planning matter. The question is: what happens if you expand your delivery system to meet the needs of a big war and then later you have extended peace? These brick and mortar hospitals and the supply of providers who staff them don’t expand and contract at a moment’s notice like a balloon that you can blow air into and then let air out of.
MYTH: The main problem with Medicare is incompetent executive branch managers who can’t control spending.
TRUTH: The aging of the baby boomers into the Medicare population accounts for most of the fiscal problem with the program, along with the increasing obesity and medical technology innovation that drives costs independently of whether the payer is government or private sector.
MYTH: Transparency of prices will reduce healthcare costs.
TRUTH: This will help a lot if consumers have real skin in the game, but if most or all of the costs are paid by a third party payer or eaten by the provider, then the opposite effect could occur. Why? Because we are trained to believe that high price signals high quality, even when this is done only to trick us. The quality of some services can be difficult to determine and even if you can determine it, that information may not spread out into the entire market of consumers. And stop and think: isn’t surgery usually a one-time event? In that case, doesn’t learning comes too late?
MYTH: Doctors always know how to diagnose and treat what’s wrong with you.
TRUTH: The more unusual your condition, the less true this is. In fact, many people would be surprised to learn how few conditions have fully developed and agreed upon best practices for treatment. Medical science is always evolving and sometimes we are the guinea pigs. Trial and error is an inescapable part of human endeavor. Please note that most insurance does not cover investigational or experimental treatment. And also observe that what I am talking about means that cost effectiveness analysis and cost control measures in the health area aren’t as easy to work out as it might initially seem.
MYTH: The reason we have poor health outcomes in the U.S. relative to some other countries is because our healthcare delivery system is bad.
TRUTH: Health is affected by more than merely the healthcare delivery system. It is also affected by public health efforts, pollution and lifestyle choices including our eating and substance abuse habits. There is also a correlation between health status and levels of income and education. In other words, if you are overweight, sedentary and you smoke every day, don’t get mad at your doctor when she asks you whether your estate planning affairs are in order.
MYTH and TRUTH: Back in 2009, I heard a small businessman on television say “I don’t want to pay for some kid’s broken arm.” Of course, he already did that even before ACA. In 2016, I heard a notable ACA critic on television say “we don’t want to pay for sick people.” Of course, that’s the whole point of health insurance. We’re not going to get very far if people don’t understand the basics of what is going on. Sure, it isn’t fun to pay health insurance premium, but one day when the shoe is on the other foot and you have a life-threatening illness and the insurer says, “sorry, not covered,” I hope you will remember back to the day when you wanted to buy on the cheap. You get what you pay for, folks, and dying ain’t all what it’s cracked up to be. As Hamlet speaks it: “Who would fardels bear, to grunt and sweat under a weary life, but that the dread of something after death, the undiscovered country, from whose bourn no traveler returns, puzzles the will, and rather makes us bear the ills we have than fly to others that we know not of?”
The author formerly worked for the State of Hawaii as an insurance regulator, but his views as expressed here do not necessarily reflect the views of his former employer. He has a B.A. from Columbia University, a J.D. from UCLA, an M.B.A. from the University of Hawaii at Manoa, and a CPCU. He has published a number of books on a variety of topics.
“Natural selection in the Darwinian sense doesn’t exist very much anymore with respect to human beings. **** “Today, the idea of survival of the fittest doesn’t necessarily mean survival of the strongest.” From page 112 of “Business A-Z: the Definitive Guide for Busy Executives,” by Lloyd Lim (Tate Publishing 2017).
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