The Sick and the Well

By Christian Probasco, 11-02-08

	Caption: Regina Herzlinger

McCain and Obama offer stark choices for improving our broken healthcare system.  McCain suggests a small tax credit that might begin to bring some healthcare costs down and Obama wants a systematic political overhaul, which will ultimately result in some rationing. Both plans are especially unpalatable in the West, where most people would prefer to pay fair market prices for individual medical services.  But the political system that should be abetting the market in delivering fair prices has been manipulated by special interests to the point where most health care is out of reach of most individuals.

“All the money in the U.S. health care system--equal to $2 trillion, which is as big as the GDP of China—comes from us,” says Regina Herzlinger, the Nancy R. McPherson Professor of Business Administration Chair of the Harvard Business School and author of “Who Killed Health Care” (NY: McGraw-Hill, 2007), “either in taxes, national debt payments or salaries foregone so employers can supply us with health insurance. But we have ZERO knowledge or control about how it is spent.  As a result, the rich –big insurers and hospitals—get richer and we have to beg for our money to be used properly.”

“A $2 trillion industry makes a living for a lot of people,” agrees Doctor John Dale Dunn, emergency physician, member of the Science and Policy Advisory Board of the American Council on Science and Health.and policy advisor to the conservative Heartland Institute, “The really rich in the health care field have found a niche or have exerted control which keeps them in the money.  Medicine is often the biggest industry in small towns, except for government related industries.  The only industry that controls more first round expenditures, in fact, is the federal government.”

As to how health care got to be so expensive in the first place, Dunn says, “the fields where prices and inflation are higher are usually where government has put its finger on the scale. Food, energy, higher education and healthcare are four examples where government funding or regulations have distorted the markets and prevented the economy from producing an affordable, satisfactory product.

“The government creates mandates, subsidies, regulations, price controls—everything proven to be bad for the market.  Then, when prices go out of control, it’s suggested that the government take over the entire sector. The electorate is assuaged but the end result is mediocrity and rationing, playing favorites and more distortions in priorities.”

Mike Tanner, Director of Health and Welfare Studies at the libertarian Cato Institute, sees another culprit, albeit one the federal government helped create with poor tax laws.

“The costs of healthcare,” says Tanner, “are hidden from most consumers. We have a third and even fourth party payment system, which means that healthcare is not being paid for by the consumer.  Consumers generally pay 15 percent of their actual healthcare costs directly.

“I don’t think national healthcare is going to do anything to bring down the costs of care. It will actually stimulate demand. Systems which don’t have consumer cost-sharing especially—like Canada or Britain—have a high degree of direct rationing or rationing by queue.”

Herzlinger might agree with McCain’s approach, as a first step to controlling costs.

“Let’s control expenditures,” says Herzlinger, “The only reason I let my employer take $15,000 of what would otherwise be my salary and use it to buy my health insurance is that they can do it with pre-tax money.  If they paid me the $15,000, I would be taxed on it. We have to fix the tax laws so we can use our own pre-tax funds to buy individual health insurance.”

Says Dunn, “We should put the power of the purse back in the hands of consumers.  No more employer-based and controlled insurance programs.
We could actually afford the things that people get bent out of shape about, such as emergency department care and care for the impoverished, with pocket change from the health care budget.”

According to Dunn, “Government employees are making a good living with current welfare programs and socialists consider healthcare an iconic issue for government growth. Politicians believe they can ‘fine-tune’ healthcare to respond to the latest issue.  They suffer from the fatal conceit that they can figure out how to make things work for everybody.”

“You and I and hundreds of millions of ordinary people like us made cars and computers better and cheaper by rewarding good suppliers and penalizing bad ones,” says Herzlinger, “We can do the same for the health care system, if we personally control the money.”

“Doctors are becoming more specialized,” says Tanner, “The old ‘Marcus Welby’ generalists are disappearing. Normally the gap they leave would be filled by the next rung down, which is non-physician professionals (nurse practitioners, physicians assistants), but they’re prevented from moving into those positions by licensing laws.”

Huge amounts of regulation present a barrier to entry for smaller businesses wishing to compete in the medical field.  Regulation cuts into profits, which lowers the amount of investment money available for new drugs, devices and procedures, and delays cutting-edge treatment to those most in need. 

“It costs about $110 million on average to bring a drug to market,” says Tanner, “The problem is that the patent starts running out when the drug reaches phase III trials, which are effectiveness trials, not risk trials, and which can take eight to 12 years.”

As a first step to more affordable drugs available in a shorter time span, the FDA “may want to eliminate phase III trials.”

In terms of reform, the main obstacles for either major political party are the entrenched special interests holding their purse strings, which are quite satisfied with the status quo. In the case of medicine, we’re talking thousands of lobbyists for groups like the American College of Physicians-American Society of Internal Medicine, the American Academy of Family Physicians, the American College of Obstetricians and Gynecologists and the American Medical Association (AMA).

Says Dunn, “The AMA is a terrible organization.  They are a relic of the guild system approach, run and lead by medical politicians, academics and ambitious elites.  They are socialists who push for more centralized, government control.  They have a very serious net negative effect on the economics of healthcare.”

Tanner agrees, “The AMA only represents the interests of doctors.  Their goal is always to provide more payment for doctors and decrease competition in the medical field, which translates into more insurance and higher barriers of entry into the profession.”