Capitalism in Health Care – Do you still believe?

01 Oct Capitalism in Health Care – Do you still believe?

Capitalism (kăp’ĭ-tl-ĭz’əm)

1. An economic system based on a free market, open competition, profit motive and private ownership of the means of production.
2. Descriptive of a system that encourages private investment and business, compared to a government-controlled economy where investment money is obtained from private sources (shareholders).

I, along with everyone else, has been walking around hollow-eyed given the speed of the recent financial meltdown. 100 year old firms disappearing in a weekend, markets roiling with every bit of news, experts clamoring about the greatest calamity ever in the recorded history of finance, and politicians actually working weekends to attempt to rescue the largest and most important financial system in the world.

This is serious business.

I have also been amazed at the Governments response to nationalize “key” companies – AIG, Fanny/Freddie, and probably a few others before it is all through. Several people have made the connection between the nationalization of financial companies with the potential nationalization of the health care systems. Actually the wealth-health connection is probably stronger than you think. Just as the current financial mess is related to the “toxic” subprime debt on the books of the eviscerated companies, hospitals are also being laden with “toxic” debt from consumers who are also leaving them holding the bag on their bad debt.

Will the bad debt get big enough that health systems begin to fail? Can you imagine Kaiser Permanent, Sutter Health, Geisinger, or the Cleveland Clinic going down financially because of consumers bad debt? Can you imagine what would happen if these organizations cash flow problems began to shut down hospitals, affect care, and the ensuing outrage that would follow. Given recent events, would the government come in and “take over” these hospitals by infusing capital into them, folding them into the medicare system, or some other hybrid financing mechanism. Clearly, I understand the issue with sub-prime was the subsequent “securitization” of the risk which was how the “toxicity” was bought and sold. However, it does give one pause to consider the possibilities in light of previously unthinkable actions we have witnessed the last month.

Further still, it gives me pause to reconsider the capitalistic system running aground in a world wherein we are trying to outsource our brand of “economic progress”. Its a tough sell, particularly with a very angry international environment not only for the perception of imperialism, but also how our system of capitalisms is dragging the entire world economy into a vortex we created. Ouch. Might need to adjust those international travel plans.

In considering these issues and the sustainability of our capitalistic system, I read through a recent Newsweek article by George F. Will which helped to restore my confidence in the invisible hand despite the very visible recent carnage:

Capitalism, Ruth reminds him, is a profit and loss system. Corfam—Du Pont’s fake leather that made awful shoes in the 1960s—and the Edsel quickly vanished. But, Ruth notes, “the post office and ethanol subsidies and agricultural price supports and mediocre public schools live forever.” They are insulated from market forces; they are created, in defiance of those forces, by government, which can disregard prices, which means disregarding the rational allocation of resources. To disrupt markets is to tamper with the unseen source of the harmony that is all around us.

The spontaneous emergence of social cooperation—the emergence of a system vastly more complex, responsive and efficient than any government could organize—is not universally acknowledged or appreciated. It discomforts a certain political sensibility, the one that exaggerates the importance of government and the competence of the political class.

Government is important in establishing the legal framework for markets to function. The most competent political class allows markets to work wonders that government cannot replicate. Hayek, a 1974 Nobel laureate in economics, said, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” People, and especially political people, are rarely grateful to be taught their limits. That is why economics is called the dismal science.

6 Comments
  • Vijay Goel, M.D.
    Posted at 21:26h, 01 October Reply

    We’ve already nationalized healthcare, starting with the bedrock of Medicare/Medicaid, and the litany of regulations that have served to limit degrees of freedom (e.g., tax laws, ERISA, EMTALA, insurance mandates, etc).

    The biggest issue seen in the financial system is that sunlight kills disease…and all of the creativity of the last decade went into putting things off balance sheets, tying them up into illiquid contracts, etc. Regulators should focus on keeping the sunlight shining.

    In health, there’s so little focus on sunshine that our clearing mechanisms have become highly disfunctional. It hasn’t gotten as bad as Canada, where its illegal to pay for desired alternatives, but we’re seeing one-size-fits-none here, as you can’t manage dynamic systems top-down, which we’re trying to do.

    My lesson from the crisis is how do we tie incentives to real everyday risks and benefits so that individuals making decisions are properly incented to do the right thing for their customer over the next 5-10 years instead of the right thing for themselves right now.

  • Scott Shreeve, MD
    Posted at 22:22h, 01 October Reply

    VJ,

    You are right . . . We already have this quasi public-private system, and the quasi sense of whether or not health care is a right or should be left to the devices of the market.

    I agree with your sunshine analogy . . . it not only is a powerful disinfectant but also can serve as a stimulator of growth as well (carbon processing via photosynthesis). I believe we all agree with the value of transparency in health care and we all need to keep focusing on letting the light in.

    Finally, the alignment of incentives you describe really is critical. The concept of “nudging” people to do the right behavior is powerful, but also tricky, with excessive planning (top down as you mention) resulting in less than optimal situation versus letting an appropriately regulated market do its thing.

    Would be interested in understanding what incentives specifically you want to help align?

  • Ian Furst
    Posted at 01:27h, 02 October Reply

    I’m going to call bullshit on this one Vijay. It’s not illegal to pay for services in Canada. The federal government will not send transfer payments should the provinicial governent does not enforce public insured services. Physicians’ are still subject to the free market but most opt for public insurance patients. It’s really health insurance that has been nationalized in Canada. It was insurance that played a major role in the credit crunch in the US. I don’t know, but I doubt that the Cleveland Clinic is leveraged 30:1 so the risk of failure is lower save a complete economic melt down.

    So I think the bigger question is will the US nationalize medical insurance? What would be the implication of that?

  • Vijay Goel, M.D.
    Posted at 18:21h, 02 October Reply

    Scott,
    There are a number of points in the health system where, like mortgage originators, fees are maximized up front and value is not a focus. Today, I’d say the biggest issues are:
    1) Inability to price higher for better service, inducing race to the bottom provider network dynamics
    2) Subscription models (ie insurance, gym membership) driving utilization reduction instead of healthy engagement– what do the currently well get out of their $15K/family?
    3) Retrospective payment and collection: inability to have clear prospective pricing allowing for shopping behavior–due to the claims model for all transactions
    4) Lake Wobegon: Socialistic view that all docs are above average at everything…Transparency allowing for comparison shopping based on spikes and lower performance would allow for better matches between patient, condition, procedure, and selected physician.

    Ian,
    I’ll call bullshit right back. Although they technically may not enforce their own laws, it’s illegal for facilities to charge for covered core medical services (ref below), similar to how balance billing laws for insurance subscribers and Medicare here in the states prevent pricing power for differentiated services. The artificial creation of a commodity marketplace allows for a race to mediocrity. Only through differentiation and the ability to gain competitive advantage do we see real progress at anything– that progress moves slowly today and has a high noise to signal ratio.

    From the NYTimes: “Accepting money from patients for operations they would otherwise receive free of charge in a public hospital is technically prohibited in this country, even in cases where patients would wait months or even years in discomfort before receiving treatment.”

  • Katrina
    Posted at 21:56h, 07 October Reply

    This post caught my as I am catching up on my reading after the SHOUTAmerica health care conference (www.shoutamerica.com) here in Nashville.

    Do you believe that Capitalism can actually work in healthcare?? I would argue that capitalism is simply not going to get us out of this mess. Lets start with economics 101. The basic principle of supply and demand doesn’t work in the healthcare industry (could this be due to insurance?). What other industry experiences higher prices as demand increases? I would argue that low supply is not the issue unless we tie it to quality. So, if we cannot apply basic free-market principles then we cannot leave healthcare to its own devices.

    Please explain to me how Capitalism will solve out current healthcare problems…

    Next, I would mention that healthcare needs a little more than sunshine. Yes, TRANSPARENCY, please – something I advocate everyday through my work at change:healthcare, but transparency alone is not going to solve our problems. Incentives can certainly help on the individual level, but lets take a closer look. The government has been providing tax-incentives for Americans to save for years… we have seen little results on that front. So what kind of incentives are we speaking of here? What incentives have proven affective in changing behavior? We have to conjure a better idea than providing a tax-credit for the purchase of individual health insurance (McCain).

    I have yet to craft my own solution, but incentives and transparency are not going to be enough. First and foremost, key players in healthcare have to partially drive/want change. Unfortunately, too many “key players” are making lots of money off our currently broken system.

    Maybe we are looking at community rating and the movement of Medicaid into the private sector. I believe that increasing competition in the private sector for coverage could go a long way in reducing costs. Part of the problem is that large insurance companies’ have the ability to exclude those from coverage who need it most, or just price them out of purchase. I believe that health care would be much better off left to the devices of the private sector, unfortunately that sector has proven very inefficient in regulating itself.

    With the addition of a few ground rules, I think we need to leave healthcare in the private sector. As I mentioned earlier, I even think we need to move one of our large gov. programs into the private sector (with the gov still supporting those that need coverage up a certain percent of the poverty line). But there is simply too little regulation. Transparency, accountability, and competition are much needed, and I have faith that they will improve the current state of healthcare. However, I am beginning to feel like those three things just are not going to be enough.

  • Robin
    Posted at 04:02h, 13 October Reply

    @Vijay

    I actually believe Ian is correct. This article might help provide a more balanced understanding of what is covered in the Canada Health Act:
    http://www.hc-sc.gc.ca/hcs-sss/medi-assur/cha-lcs/overview-apercu-eng.php

    While Canadian healthcare is not perfect, it does continue to perform at a level which is meeting the needs of a large majority of the population (who are all insured). For example, this study looked at broad satisfaction with Healthcare in the US. and Canada (http://www.statcan.ca/english/freepub/82M0022XIE/2003001/tables/table7.htm) and found almost identical satisfaction levels. Furthermore, Canada outperforms the U.S. when it comes “macro” measures such as % health expenditures per GDP (9.9 vs. 15.3) and life expectancy (80.34 vs. 78.06).

    All this to say that I think your vilification of a system you obviously do not understand (other than one NYTimes article) is not warranted. It is different and has been setup with different priorities in mind (ie. health care for all). I would argue that much of the rhetoric about our system comes from those who would financially benefit from opening up our system to the free-market.

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