Perverse Incentives

Medicare officials admit that fraud is pervasive, but refuse to take the hard steps to address it.

To defend Medicare for a moment: it makes no economic sense to spend $10 in order to eliminate $5 worth of fraud. However, that math changes when everyone gets the idea that they can scam the system for small amounts of money with impunity, which is why insurance companies have fraud prevention systems.

A company in a free market will do its best to balance overzealous fraud prevention with preventing large losses due to fraud. A patient does not get any benefit from fraudulent payments nor for fraud prevention; both are essentially overhead. A company that strikes a good balance will either make a larger profit or will be able to pass along some of the cost savings to its customers (or both).

The problem comes in the superficial analysis of the efficiency of a company.  If a company spends, say, $30 per customer to prevent $100 worth of fraud, and then charges $300 per month in premiums instead of $400 in premiums, it will look worse than a company that charges $370 per month for premiums and spends little to nothing on fraud prevention.  In a superficial analysis, the former company spends 10% of premiums on “overhead” that does not “provide medical care,” which is substantially more than the second company spends.  (Perversely, the higher premiums make the company’s percentage of overhead spending look even better: the larger denominator results in a smaller percentage.)

“Hey, Bridget, that would never happen in the real world. The insurance company would get creamed, because no one would spend an extra $70/month for the same product.”

Not in the free market, they wouldn’t, but I’ve just given you a simplified version of Medicare spending and the reason that Medicare famously “spends so little” on overhead.

Musings on the VA Scandal

The Veteran’s Administration debacle is such a scandal because it involves breaking a promise to those who risked their lives, health, bodily integrity, and sanity for the country, and it also underscores the many problems that come with government-run businesses. One such problem is that the government cannot act as an umpire when it is also a player in the game: while it can regulate other businesses in the marketplace and bring prosecutions or civil charges as needed, it is fundamentally incapable of policing itself.  Rather than have the government as a neutral third party to ensure that people and companies do not commit rampant fraud, we have a government that is structurally accountable to no one, and victims of its malfeasance lack any redress. While the IRS and Benghazi scandals are dismissed as ginned-up ideological issues, it is hard to do the same for the V.A. when the underlying issues (i.e. total lack of accountability for a government agency or actors) are involved.

Just as the government holds corporations accountable, so do markets. An inefficient corporation that does not provide quality goods or services will find that its customers go elsewhere. While it may struggle to pinpoint the source of the problem (e.g. bad customer service, faulty reporting by employees, or a poor product), it will either find and redress the problem or go out of business.

While I agree with Megan McArdle that the scandal is bigger than any one President, I disagree with her that such an idea exempts Obama from criticism.  In 2008, Obama was more than happy to play the Wonderball game: the one holding the ball when the timer runs out (in 2008, it was on the housing and stock markets) is the loser. If that was his standard in 2008, it should be the standard to which he is held in 2014.

In a larger sense, Obama has done things that promote the evils of the V.A. scandal: on a structural level, he has presided over a massive growth in the federal government, and his signature accomplishment is to bring the V.A. system to all Americans. It’s not that his actions are neutral on this and momentum carried the malfeasance through his term; his entire Presidency has been aimed at making these scandals happen to all of us.  Without government or market oversight, this is our future under ObamaCare – a future that we warned the nation about, but for which we were viciously derided by the current occupant of the White House.

The prescriptions for avoiding such scandals in government agencies are simple: reduce the size of government, eliminate sovereign immunity, outsource as much as possible to the private sector and let competition clear things up, and ensure that at least some reporting is done by the people, not the bureaucrats.

 

Our current health care system does not resemble any sort of free market

This, however, is free market health care.  Oklahoma doctors are putting their prices up online and starting bidding wars for patients.  Patients have gone to their own hospitals with a plane ticket to Oklahoma in hand, then asked the hospital to match the all-inclusive price of surgery.

Dr. Keith Smith’s medical group also does not accept Medicaid or Medicare, because the regulations would prohibit them from posting their prices online and charging what they charge.  Yes, my friends, as I’ve long said, you can’t give discount health care and be a Medicare/Medicaid provider.  (This is also why plastic surgery and cosmetic dentistry are so transparent with their prices, and have the better quality/lower price trend that is seen in computers, iPods, and pretty much anything in the free market.)

As a final point, Dr. Smith says this:

“What we’ve discovered is health care really doesn’t cost that much,” said Smith. “What people are being charged for is another matter altogether.”

I’ve heard that primary care doctors spend $47 per patient filling out insurance forms; the insurance company spends approximately the same amount of money.  Your premiums will pay for, in roughly equal numbers: your doctor’s visit; your doctor’s costs to fill out insurance paperwork; and your insurance company to process the payment.  If you want to pay for medical care plus administrative overhead, be my guest, but please don’t force the entire nation into that system.

The Two Generation Rule: Medicare and Geriatricians

There is a two generation rule for understanding the full effects of cultural changes: one generation to institute the change, another generation to grow up and react to that change.

We are now seeing this play out in geriatric medicine, i.e. the medical needs specific to the elderly.  (Hat tip: Glenn Reynolds.)   In the next fifteen years, we will need three times as many geriatric specialists as we currently have.  Even though there are more elderly people, and those people are living longer, there are fewer doctors specialising in this type of medicine. (Note: this is your first clue that the free market is not involved here.)

In 1965, Congress instituted Medicare, which provides health insurance for all Americans who are above age 65 (and some others).  Medicare reimbursements are notoriously low – approximately 35% less than what private health insurance pays – and are only dropping, not rising. (Folks, that’s a 29% drop in reimbursements that Congress wanted to put through.)  The shortage of geriatric physicians makes perfect sense, in the non-free-market of government-run health care: payments are lower than in the private sector, those payments are made on the whim of Congress, not by insurance companies who have some interest in keeping their clients, and the amount of paperwork is higher than for private health insurers.  All this adds up to a two-generation result: two generations after the passage of Medicare, we can’t find enough doctors to treat old people.

In 1936, the Soviet Union declared that access to health care was a universal human right.  Now, “[l]ack of access to quality health care is perhaps one of the most all-encompassing human rights issues facing [Russia] today,” despite having more physicians per capita than almost any other country in the world. Life expectancy in Russia is about age 65.

To anyone who thinks that state-run health care means fewer abortions (due to access to birth control) or more live births, due to lack of financial pressures, I will point out that Russia has one of the highest abortion rates in the world.  From that link, “According to one study, 14 percent of the women in Russia with sixteen or more years of school had undergone eight to ten abortions.”  Likewise, physicians in Russia are paid more poorly than their counterparts in the medical bureaucracy (hey, who would have expected that from a government-run programme?), and are in fact paid more poorly than most other professionals in the country.  Doctors go through intensive schooling, then are retrained in other, more lucrative, professions.

Ergo,  Russia has a high number of physicians, but precious few who are willing to work for the government.  We are seeing that now with Medicare, and that is our future, circa 2050 or so, under ObamaCare. As Russian-born Ayn Rand said, there are only three ways of making a man work: a whip, a gun, or a dollar.  As I will say, you can have a right to someone else’s labour, but you can’t force them to work in a free country.

A Smorgasbord of Health Care News

Okay, I’ve been busy and neglecting things at The Fog of Law.  Here’s what I’ve been reading but haven’t had time to blog about:

From The Pioneer Institute: A New Agenda for Cost Control in Massachusetts by Amy Lischko, Ph.D.

The Galen Institute: States rebel against ObamaCare.

STD rates are soaring in New York City.

The Sebelius cover-up: how ObamaCare exchanges need scrutiny. (Hat tip.)

A small, insect-eating dinosaur has been named after Obama.  Discuss.

What happens when you fund ‘health care reform’ that pays for 16,000 new IRS agents and zero new physicians or nurses

Orlando Health is preparing for its largest layoff in history; it will eliminate 400 employees in order to save money to comply with ObamaCare.  (Hat tip: Sunshine State Sarah.) Medicaid reimbursements are down 20%, or $15 million.  Medicare, which pays for seniors, will be cut in 2014 – to the tune of $100 billion a year nationwide.  Given that Florida has more than your average number of people age 65 or older, it stands to reason that Florida hospitals will be hit particularly hard by the cuts, which will effect reimbursement rates.

This doesn’t stop people who live in a dream world from not understanding these “unexpected” effects:

Laura Goodhue, executive director of the health-advocacy organization Florida Chain, also questioned whether the layoffs were necessary.

“I’m not sure why they’re having layoffs now. And I’m not sure what they’re referring to in regards to reduced payments,” she said.

“As a result of the Affordable Care Act, more Floridians are going to have health coverage, not fewer, so there will be more paying Floridians in the system,” Goodhue said.

If the government mandated that a grocery store were to give out 10% more food despite stagnant or falling revenues, the stores would cut staff, too.   There’s nothing magical about medical care that makes the laws of economics inapplicable.  You simply cannot pay for ‘free’ medical care for an additional twenty million people, cut Medicare by $100 billion per year, destroy cost-saving measures like FSAs, develop mandatory issuance of insurance (even to those who are already sick), and not have massive price increases and/or layoffs in the medical industry.

Again, ObamaCare pays for sixteen thousand new IRS agents but not a single extra physician or nurse.  It sets up a system wherein almost all medical transactions will be run through an insurance company, thus increasing the cost of care by increasing the transaction costs. This will lead to layoffs and decreased quality of care.

 

Note to Joe Kennedy, III

If you’re going to run a campaign for Congress, and your sole qualifications, outside of your family name, are being a 31-year-old, red-headed attorney (NTTAWWT), then at least get your facts straight.

Let’s queue up the popcorn and the laugh track as we examine Mr. Kennedy’s ‘white paper’ on health care reform:

The ACA extends health insurance coverage to more than 32 million Americans, saves Medicare $716 billion, and extends the solvency of the program eight years, until 2024, all without cutting benefits.

Actually, it leaves thirty million Americans uninsured, and was sold on insuring 40 to 50 million Americans, so it only insures 10 to 20 million Americans.  Not 32 million.

Second, as we all know by now, ObamaCare does not “save” Medicare any money.  Rather, it cuts Medicare by $716 billion, and for every new dollar in benefits, it cuts twelve dollars in benefits.

Let’s continue the hilarity.

Medicare

[….]

The first goal should be ensuring that the ACA remains in place. The ACA guarantees Medicare’s solvency and extends the life of the Medicare Trust Fund until 2024.

Medicare cuts are not being reinvested in Medicare; they are paying for ObamaCare. That’s not “guaranteeing solvency”; that’s raiding.  Had Kennedy spent an iota of time in the private sector, he would know that you can’t double-count your savings.

Moving right along:

The government can do more to disseminate information about which treatments work – including helping everyone consider the costs and side effects of unnecessary treatments – so that every health care dollar is put to good use.

If you want a 31-year-old who has never taken a science class since high school telling you what treatments you can get, vote for Joe.  If you think that your doctor knows better than Joe Kennedy III what you need for your own, personal medical condition, don’t vote for these chuckleheads.

Raiding Medicare will kill forty thousand seniors per year

Last week, I pointed out that reductions in Medicare payments – already significantly lower than those given by private insurance companies – will result in fewer doctors who accept Medicare.  The “positive right” to medical care cannot be obtained without a physician willing to provide it, and that won’t happen at the prices offered through ObamaCare.

This week, Betsy McCaughy, Ph.D., crunched the numbers and reveals that ObamaCare will kill forty thousand senior citizens annually.

For those familiar with the NHS, this is not a surprise (and indicates that McCaughy may be low-balling the numbers; the population of America is roughly five times that of Great Britain). My morbid self would also like to point out that a country can bump off tens of thousands of old folks every year without doing much damage to its life expectancy – that’s just basic math.

Since hospitals do not already have enough of a disincentive to take Medicare patients…

…the brilliant federal government decided to impose penalties on the ones who take the sickest and oldest patients*.

Under an ObamaCare regulation, hospitals with high readmission rates (patients who are readmitted within thirty days of being released) will be docked on their already too-low Medicare reimbursements. In theory, this is meant to encourage hospitals to provide high-quality care and to reduce costly readmissions, which result in $17.5 billion in spending every year.

It is questionable whether this will actually save any money, and may simply result in more medical spending.  Rather than release a patient who is ready to go home, a hospital may keep that person in its care – at the cost of thousands of dollars a day to the government.  Likewise, one of the largest drivers of costs in American medicine is defensive medicine, in which doctors do things that are not strictly necessary or even helpful, but intended to stave off the threat of litigation.  This regulation will only increase that incentive.

Those who are serious about ensuring that doctors give high-quality medical care to Medicare patients their first time through the hospital should look to altering the very high denial of claims rate: Medicare is twice as likely as a private insurer to deny recommended medical treatment.

This is absurd in light of ObamaCare’s implementation of an Independent Payment Advisory Board, which will issue recommendations on how to reduce Medicare spending.  The $17.5 billion spent on readmission pales in comparison to the cost of Medicare ($7.7 trillion in ten years, according to the CBO).  The logical result of this is to squeeze doctors from both sides: to refuse treatments that could prevent readmission, then reduce reimbursement when the inevitable readmissions result.

 

*Ab obligatory “balancing the budget via death panels” joke is in order: after all, if hospitals have less of an incentive to treat the old and the sick, we’ll all save money, right?  I jest.  Morbid humour and all.

A physician’s opinion of ObamaCare

Dr. Marc Siegal explains some of the problems with a more strict regulatory environment here:

Will the best and the brightest continue to choose medicine as a career? Medical school admissions are down by 6% at a time when the Association of American Medical Colleges predicts a shortage of 160,000 by 2025. And the effective shortage of doctors who will work with Obamacare is far greater. Doctors who are already in practice will drop out of insurances, move to hospitals to work for a salary, or accept cash only. This trend will create a two-tiered system of health care and could be a knife in the back of Obamacare, which relies on physician participation with insurances and its expanded patient load to survive.

Dr. Siegal places blame fairly on both insurance companies and on the government reimbursement scheme.  He also explains that Medicaid pays only 56% of what private insurance does, and that Medicare pays 81%.

Query: where are physicians to make cuts?  Do we expect them to cut the salaries and benefits of their receptionists, billing staff, and nurses by 19% to 44%?  (Is that really a socially desirable outcome?) Will their landlords give them a 19% cut in rent?

Right now, we have a medical system wherein most of the middle class has access to outstanding medical care with very little wait.  Anyone who has (as but one example) Harvard Vanguard health insurance can go into MGH and get treated by the same physicians that Adele the British pop singer was treated by — but she’s one of the few Brits wealthy enough to get that quality of care.

The problem with the PPACA is that the care currently available to the middle class will be restricted to the very wealthy.  That fits no rational definition of “social justice” (or any kind of justice, unless you’re really into Darwinism).