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» The Ornery American Forum » General Comments » Healthcare Fundamentals, part I

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Author Topic: Healthcare Fundamentals, part I
The Drake
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As noted on an earlier thread, the goal of a business enterprise is to make a profit for the owners (public or private). Hospitals, doctors, and insurance companies are no exception (even non-profits try to make margins to launch new initiatives and endowments). The one fact that supporters of private insurance won't admit to, is that this guarantees that a number of individuals and families will not be able to afford healthcare - by way of their employers or otherwise.

How can I make this claim, you may wonder? A business sets its prices so that supply and demand intersect at the most profitable point. The key metric is marginal profit. If it costs you more to lower your price than you gain by expanding market share - then you won't lower price.

Ignoring insurance for the moment - if a checkup costs $100 and a doctor sees 10 patients per week, they are making $1000 in revenue. Lets say they could add 1 patient by lowering the cost to $90. But 11 x 90 = $990 in revenue AND your marginal cost is higher, which only makes it worse.

Obviously, there are complications. But the fundamental fact is this:

I. A fully private solution will ensure that some people cannot afford even the most basic services.

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Pyrtolin
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My personal specualtion is that the best solution would be to require that all health care providers be non-profits, completely removing the need to work for the benefit of shareholders at the expense of customers. There would still be some overhead, but no pull toward an abitrarily large one.

That's not likely at all, so the next best is having a competative public plan that creates market pressure toward tighter profit margins.

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The Drake
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Non-profits help, but not entirely. A non-profit still makes choices about how to set prices. Non-profit hospitals are not significantly cheaper than for-profit hospitals, AFAIK, but I'm open to data suggesting otherwise.

I'll save my comments on public plan and market pressure for another installment in the series.

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The Drake
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In the general case of "more market pressure" - note that when new entrants arrive in a market, they drive costs down - culminating in commodity level pricing. Zero profit, however, does not equal universal affordability.

Further, there is no real way to attract new entrants to the market, except for charitable impulses, so this can lead to general stagnation. Even non-profits need marginal income to spend on expansion and other capital improvements (like a new MRI machine).

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Pyrtolin
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Once you have options that are affordable to most people you should be able to see a much more clear line as to where outright support is needed to enable those that can't afford it to have access.

Income based subsidies or outright vouchers can be provided to those below certain economic benchmarks or with exceptional needs.

Fixing the system for the top level will help make support for those below the line more managable, but it definitely needs to be worked on from both ends. Top level reform is essential, but it's not meant to be a replacement in any way for low level support, just a way to make sure there isn't a wide gap in the middle that effectively penalizes people who can't quite get to the next rung.

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IrishTD
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This is not intended to be snarky, though it comes across that way.

quote:
A fully private solution will ensure that some people cannot afford even the most basic services.
This is true even for the fundamental basics of food, clothing, and shelter. Why should it be any different for health care?

***

Obviously, we have developed government and non-profit structures (and to a certain extent, even for-profit ventures) to try and alleviate this basic fact. Clearly then, there are potential solutions (as Pyrtolin pointed out -- second comment on this thread) for health care, just as there are for things like food, clothing, and shelter.

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The Drake
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True, Irish. I'm presenting it in this way, because I think it might help us all to look at the axioms and laws that underlie healthcare and how it functions. Naturally, there can be additional forces applied to the equation. Gravity tends to make everything nearby fall to the center of the earth, but that doesn't mean it cannot be defied.

There have been a variety of systems, some better and some worse, to provide basic living of poorest citizens. The first thing, however, is that under government assistance for food, clothing, and shelter, one must be unemployed.

A) Price controls: e.g. rent control, electricity and other utilities

Tend to limit supply, as prices cannot be raised unless government allows it. New construction of rental units or power plants tend to dry up. Obviously, some chilling ramifications for healthcare.

B) Subsidies: e.g. milk, corn

Does make staple foods more readily available at low prices. Can result in oversupply, which the government sometimes buys so it can destroy the crop! Even worse, if supply is inelastic (hard to build new hospitals, train new doctors), then subsidies only result in higher prices - not more access.

C) Payment to consumer, or on behalf of consumer

e.g. Electronic Benefits Card (food stamps), Section 8 housing

Fraud is a big issue. Also, requires providing only basic staples and safe housing. The healthcare equivalent would be to cover immunizations and other low cost - high value healthcare products, but to leave things like organ transplants off the government plan.

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Pyrtolin
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quote:
Originally posted by The Drake:
There have been a variety of systems, some better and some worse, to provide basic living of poorest citizens. The first thing, however, is that under government assistance for food, clothing, and shelter, one must be unemployed.

That's a poor qualification, because it creates a gap that people must hurdle for employment to actually be worth while. A phased plan where the recipient's resonsibility for costs increases in proportion to income makes much more sense (and more roughly maps to many of the systems in place today)

quote:
C) Payment to consumer, or on behalf of consumer

e.g. Electronic Benefits Card (food stamps), Section 8 housing

Fraud is a big issue. Also, requires providing only basic staples and safe housing. The healthcare equivalent would be to cover immunizations and other low cost - high value healthcare products, but to leave things like organ transplants off the government plan.

You're conflating two bits here. Imagine instead- the government offers a comparable baseline plan with something resembling currently recognizable terms- medically necessary procedures are covered, elective ones not, and the like. Then it offers an income and household size based direct payment up to the price of that plan plus it covers any relevant copays or deductibles to everyone below a certain income threshold.

You can even apply that payment to the cost of private plans or the employee contribution portion of an employer's health plan. As your income increases, the benefit gradually decreases. After that you begin to be responsible for an increasing percentage of the actual copay/deductible costs until you hit a point (perhaps 2-3x poverty level) where you are now fully responsible for all costs.

This way there are no barriers to upward movement, and no one is priced out of the system.

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The Drake
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True, I dated myself by not recognizing newer programs like EITC, that cover the "working poor". I stand corrected on the relevance of employment status.

But medically necessary includes the full range of all procedures that don't fall into elective categories. Medicare is the type of system most pointed to by the government as a model for government provided healthcare. You're basically talking about putting all regular people on an insurance plan - like the one for federal employees - except that there's no income to deduct their premiums from.

The type of system that you are talking about is interesting. But no one has proposed it, certainly not from this administration. Since I hadn't intended to limit the discussion to Obama's plans, that's certainly okay.

Under your proposed system, you are basically talking about buying insurance for most of the currently uncovered individuals. That's 46 million of them. At a cost of $1 trillion /yr.

Essentially, this proposal is like section (C) above. It gives one more reason for people to not marry (borderline fraud). Or work under the table. If you read about Section 8 housing, you'll have a good idea what that form of government intervention looks like.

Key features of section 8: Long waiting lines due to scarcity (landlords/developers opting not to provide S8 housing), price caps in the form of "Fair Market Rent", government pressures on both the tenant and the landlord to meet certain standards and obligations.

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LetterRip
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The Drake,

quote:

Ignoring insurance for the moment - if a checkup costs $100 and a doctor sees 10 patients per week, they are making $1000 in revenue. Lets say they could add 1 patient by lowering the cost to $90. But 11 x 90 = $990 in revenue AND your marginal cost is higher, which only makes it worse.

This ignores market segmentation.

I only lower cost for those who can't pay the 100$.

quote:

Further, there is no real way to attract new entrants to the market, except for charitable impulses, so this can lead to general stagnation. Even non-profits need marginal income to spend on expansion and other capital improvements (like a new MRI machine).

We have a huge artificial scarcity in doctors. Which was lobbied by the AMA. Medical schools are paid to limit the number of students they train, and the medical schools increase the price of training.

This results in both huge medical school bills, (so doctors have to charge a lot to pay it back), and essentially no competition.

If we had triple the number of doctors, we'd have much cheaper doctors and surgeons.

MRI and other expensive procedures aren't needed nearly as much as they are used (most other countries use them far less often but have similar results).

LetterRip

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hobsen
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Yes, the United States is importing doctors from other nations when this country could just as well be training its own citizens for those jobs.
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The Drake
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Good points, LR.

There is a contribution to scarcity due to AMA, for sure. This is one of the trends that has states commissioning Physician's Assistants programs and other ways for basic care to be dispensed by less expensive professionals. It remains to be seen whether that cost cutting mesure - or others - can be implemented. As marginal cost goes down, supply goes up. Or, as hobsen indicates, we can bring in lots of H1B visa holders. Our national dialogue should probably include lots of these ways to reduce scarcity.

Market segmentation doesn't help, I think. You segment based on willingness (including ability) to pay. It never lowers the cheapest price, it raises the price for people who would pay more.

For a non-profit, it could be done. But I think that's just another way to pay for a subsidy for people who can't afford market rates - just like in Pyrtolin's example of scaling government health contributions according to income.

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G2
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quote:
Originally posted by The Drake:
I. A fully private solution will ensure that some people cannot afford even the most basic services.

A fully private solution does not do that. We do not have a fully private solution and have not had one for a long time.

quote:
Originally posted by The Drake:
A business sets its prices so that supply and demand intersect at the most profitable point. The key metric is marginal profit. If it costs you more to lower your price than you gain by expanding market share - then you won't lower price.

This is a very static view of how the market works and would only be true if every medical provider agrees to this, known as "price fixing". That, of course, is illegal.

quote:
Originally posted by The Drake:
Ignoring insurance for the moment - if a checkup costs $100 and a doctor sees 10 patients per week, they are making $1000 in revenue. Lets say they could add 1 patient by lowering the cost to $90. But 11 x 90 = $990 in revenue AND your marginal cost is higher, which only makes it worse.

A business also has to compete. If another doctor provides equivalent care for $90, then he will pull patients away from the higher priced provider. Following your example, the cheaper doctor would only have to grab 2 patients a week to force the higher priced one to re-evaluate the pricing model. In the end, the higher priced provider will have to find ways to maximize efficiencies and cut costs forcing all the others to do so as well.

Of course, this is occurs in a private solution. A public solution has no profit drivers and no reason to cut costs or provide higher quality service. They'll get the tax dollars to run on no matter what. In a mixed solution, like we have now, the prices are subsidized by public funds so medical providers can inflate the price to what people will pay plus the public funds that are provided.

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Pyrtolin
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quote:
Originally posted by G2:
Following your example, the cheaper doctor would only have to grab 2 patients a week to force the higher priced one to re-evaluate the pricing model. In the end, the higher priced provider will have to find ways to maximize efficiencies and cut costs forcing all the others to do so as well.



That is only true if the market is saturated with doctors, and there is a shortage of people who need care. The $90/wk doctor will instead find more customers than he can manage, and the rest will overflow to the $100/wk doctor such that he has no incentive to cut costs, and can point out to the other doctor that he's miscalculated his price curve.

Then they notice that the doc down the street is charging $150 and still has a full bill of patients, so they bump their prices up and, sure enough, since there are plenty of people, and none of them can afford not to pay for service, their offices stay full.

Until and unless the patients can always walk away from an unreasonable price and take a more reasonable one, they're forced to pay whatever price is offered to them, because opting to die instead of being treated is not a viable option.

quote:
Of course, this is occurs in a private solution. A public solution has no profit drivers and no reason to cut costs or provide higher quality service.

That runs on the assumption that the public option is not required to fully fund itself, which is not what's being proposed. The public option on the table is required to be self sufficient; to be actuarially sound. The only difference between it and the private companies will be that it has no shareholders at the reins demanding that it cut costs and increase fees to maximize profits at at the expense of overall quality and breadth of service.

By removing that element, but still operating on a competitive basis, it will actively set a market benchmark for the other companies to compete against. If they can't offer higher quality or better prices, then there will be a choice for all potential customers to walk away, which is what creates the market pressure toward a fair balance point.

(I mean, by your argument, public television and radio should have an unlimited budget and no one should be willing to pay for cable. That's pretty distinctly not what's happening there either. While there is a foundation that gets government support, the bulk of their income comes from their audience and people still pay very well for cable or satellite services)

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