Health Care Costs and Quality

by Stan Lass

Last revised 1-21-08.

Health Care Cost and Quality


In addition to effective economic competition, the government, and perhaps employers, could limit the provided health care coverage to the current level of health care in 2008. Over time, the cost of providing this level of health care should decline steadily as medical advances continue. When the cost has declined enough, the coverage could remain constant in dollar terms, but increase in effectiveness as medical advances continued.

How We Got Here

The conventional explanation for continually rising health care costs is that the providers keep raising prices. However, Congress keeps increasing the budget for Medicare and Medicaid each year, in effect putting more money on the table year after year. In order to take the money off the table, the health care industry responds by raising prices, devising more tests to charge for, etc.

A different explanation is that as more effective, and costly, treatments are found, the cost of health care increases.

This not only increased the cost of Medicare and Medicaid, it drove up medical costs for all consumers. Health care is about 16% of GDP currently, about $2.2 trillion.

Third party payers, e.g. insurance companies, do not provide an incentive to the consumer to limit doctor visits, etc.

Unnecessary operations increase the overall cost of health care.

An unscrupulous doctor can sometimes withhold proper care such that the patient gets some relief from symptoms, but does not recover. The resulting additional doctor visits provide added income to the doctor. Based on experience and anecdotal evidence, this seems to contribute to the overall cost of health care.

An incompetent or marginally competent doctor can survive fairly well within the current system. It usually takes serious malpractice on his part to expose him.

Reporting Cost and Care Quality of Health Care Providers

The information on enhanced insurance claim forms could be processed to yield cost of treatment for each diagnosis and a measure of the effectiveness of the treatment. The drugs prescribed could be included in the insurance claim form.

"data mining" is the term used to describe the extracting of useful information from data, e.g. the insurance claim forms.

Initially, consumers could make choices based mainly on the cost of treatment, including the cost of drugs. Over time, the effectiveness of the treatment can be assessed. Ideally, a patient visits a doctor, is treated, and recovers in time. But if the patient goes to a second doctor with essentially the same symptoms, and is cured successfully by the second doctor, then the first doctor most likely misdiagnosed the illness, or witheld proper treatment. The patient's insurance claim forms would leave a trail, providing evidence of what happened.

It'd be much like keeping statistics on baseball players. A good player will have good statistics.

The cost and quality data for each doctor and hospital would be made available on the Internet.

Doctors would have an incentive to keep their costs of treatment reasonable and to effectively treat the patient. From the data gathered from insurance forms, doctors would have information on each drug's cost effectiveness. This would help him in making informed choices in prescribing drugs.

When I see a doctor, I want him to be focused on doing what's best for me, not on how to maximize his revenue from me. If the doctor is focused on providing cost effective treatment, he will both do what's best for me and for himself. His prosperity would depend on providing cost effective treatment.

In time, the best advertisement for a drug would be that it has proven to be cost effective.

This rewards providers who provide good outcomes.

Misdiagnosis , a Possible Explanation for Some of it.

I've heard estimates of misdiagnosis of 15-20%.

This is some armchair speculation.

When a service station owner hears that a hurricane is coming, then doubles his prices. It's easy to conclude that he is price gouging, that he is cheating his customers.

Given some health care service, there is a reasonable price for it. However, if the price is raised enough, then at some point one is guilty of cheating one's customers.

Admittedly, it's not that simple, but there is a principle here. When one is aware that one is cheating one's customers, then one can lower prices, or lose awareness of the cheating, e.g. by thinking of how big your student loans are, having a mistress, alcohol, etc. Now, when one loses awareness, it's somewhat like dimming the lights on the problem. But one also loses awareness in general. The awareness, including intuition, needed to accurately diagnose some maladies is lessened as well, sometimes resulting in a misdiagnosis. (The book learning remains.)

End of armchair speculation.

The way out of the dilemma is a health care system that keeps the providers busy enough such that the prices charged can be reasonable.

Incentive to Shop Wisely For Health Care.

With government provided health care, there is not much incentive for an individual consumer to minimize his health care costs. Often this leads to rationing of health care, sometimes just by long delays in receiving health care.

Clearly the nation cannot afford unlimited health care and still meet it's other responsibilities. The first 10-20% of the health care dollars could provide perhaps 80-90% of health care. It would need to be worked out just what health care was covered.

The first 10-20% of health care could be covered by a government guaranteed loan program, i.e. if the consumer is unable to pay, the government pays and the consumer owes the government. It would provide access to health care for basic needs.

There would be a soft cap on the loans. The more that a consumer borrows without repaying, the more limited would be the health care services covered by the government guaranteed loan program. Loans, if needed, would be repaid at a reasonable rate, e.g. a maximum of 10% of one's annual income. The interest rate could be half of the prime rate.

Most young adults need relatively little health care. A Health Savings Account could be made mandatory. This would provide a cushion against the typically more expensive health care one needs in old age.

Even with just the basic health care and if you take care of yourself, you could expect a nearly normal life span, on average.

Some review of claims that are outside of the normal range could be made. This could discourage doctors from submitting claims outside the normal range.

If someone desires coverage beyond the preceding, private insurance plans could provide the coverage. By law, the private insurance plans would have a minimum deductible of say $2000.

This plan should induce a consumer to use health care providers judiciously and to take care of himself. Giving consumers the incentive to shop wisely for health care would likely reduce the total dollars spent on health care. Even so, the loan defaults would be significant, but likely far less costly to the taxpayer than a fully funded government health care program.

The unfortunate among us would still be able to get basic health care as part of the guaranteed loan program. There would be special cases where special treatment was appropriate.

Employers could provide health care insurance beyond the basic government loan guaranteed health care coverage. Alternatively, most people would climb the economic ladder a ways, and could buy supplemental private insurance.

To make this politically acceptable, there could be a transition, e.g. using the 2008 level of health care as the benchmark. The costs of providing that level of care should decline steadily. Then when the cost, inflation adjusted, is say 20% of current costs, the government involvement in health care could be stabilized at that level. For example, current government expenditures for health care are around $800 billion, which could be reduced to arount $160 billion, inflation adjusted (into the future). Employers could consider this model as well.

Speculation on How Health Care Would Evolve.

Now, given that a consumer has both the incentive to keep his health care costs down and easy access to cost and quality data, the consumer can shop wisely. The essential elements of competition will have been restored and then, competition should drive down prices.

Initially, health care providers would compete mainly on price. Then, as data on the quality of health care begins to emerge, compete on price and quality. The health care providers' future business would be affected by his track record on price and quality of health care. Note that with price and quality information available on the Internet, there would be less need for insurance companies to negotiate prices. Accordingly, with less cost of negotiation, insurance could cost less.

If a doctor ordered unnecessary tests and/or performed unnecessary operations, it would be reflected in his cost rating. This would lessen his attractiveness to health care consumers. Accordingly, it would be in his best interest not to order unnecessary tests and/or perform unnecessary operations.

The mistakes of incompetent and marginally competent doctors would be reflected in the quality ratings. People would tend to avoid them, or only use them for minor health problems. As a result, malpractice insurance should cost less.

In any competition there are winners and losers. The losers in the competition would be forced to lower prices in order to continue getting business. The winners get more business and may raise prices to limit the amount of business. However, if they use the added business to gain economy of scale, they could realistically lower their prices, get even more business and be even more profitable. This process should drive prices down to where profits are adequate, but not exorbitant.

Regarding the economy of scale, health care providers would tend to specialize, getting much of their business in one particular area of health care. With consumers having easy access to cost and quality data on health care providers, a good health care provider could realistically draw on a significantly larger geographical area.

Consider a service that costs $1000 to provide, but the customer is charged $4000 on average. Then say a provider, with a record of good quality, drops his price to $2000. In today's environment, the provider is unlikely to get much more business, but would instead suffer a big loss in income. But with consumers having both the incentive to minimize costs and get good quality care, the provider would get a huge increase in business. Accordingly, I'd expect a race to become the dominant provider in an area of health care in a geographical area.

In time I would expect a consumer to check on the net for which health care provider is good at treating his current ailment, and then go there. Of course, some will be loyal to their current doctor, and go to him. Even then, a consumer could check on the net to see how well his current doctor compares to the average.

Ideally, the best doctors should work on the most difficult cases. This approach would help bring that about in that the best doctors would be identifiable by their quality of care, and the sickest patients can go to them for care.

In the 1800's, the U.S. was largely a rural population. Then it made sense to have doctors trained to handle most health care needs. Today, the U.S. is largely urban, with a much higher population density. Now it makes more sense for doctors to specialize.

Summary and Comments.

Given informed competition in the health care industry, good cost effective health care providers will get rewarded with more business. In turn, the providers can use economies of scale to trim costs while maintaining good profitability. Health care would become less of a cottage industry.

I'd say that today's quality of health care could be provided for about 8% of GDP instead of today's 16% of GDP, saving the economy about $1.1 trillion, about $11000 per household. The savings would come mainly from technology innovation, economies of scale and reducing costs. With informed competition, most of the profiteering and incompetence would be wrung out of the health care industry.

Consumers pay for their own health care costs, including when the employer provides it as a fringe benefit, and they also pay for the health care costs in goods, services and government.

Some doctors provide health care in third world countries. Perhaps there are things to be learned in how it is provided, e.g. not encumbered by regulations and various requirements.

The high and rising cost of medical care is a stress on the population, leading to more stress related diseases. For example, some people overeat to relieve stress, which can lead to type 2 diabetes and/or heart disease.

The numbers used in the foregoing would need to be fine tuned and the total cost estimated.

Again, to be effective, any solution must provide the essential elements for effective competition.


A story apparently inspired by a proposed Democrat health care plan during the Truman administration:

A man is not feeling well. He goes to the new Democrat national health care facility, walks in. He sees two doors, labeled "Adult" and "Child". He goes through the "Adult" door. He sees two doors, labeled "Male" and "Female". He goes through the "Male" door. He sees two doors, labeled "Democrat" and "Republican". He goes through the "Republican" door, and finds himself out on the street.

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