Monday, January 31, 2011

Do we spend too much or does it cost too much?

We can’t even ask the right questions.

Maybe it’s the writer in me, but it drives me nutty when smart, educated, informed people say we have to cut health care cost, when that’s not what they mean. What I believe they mean, taken from the context in which this phrase is usually used, is that we spend too much on health care (and I believe that assertion is hard to defend).

The evidence of what I say? Listen to the discussion. “We spent $2.5 trillion on health care, 16 percent of our GDP. We have to cut the cost of health care.” So, do we spend too much or does it cost too much? Furthermore, is health care spending a good thing or a bad thing?

Cost. Every purchase we make reflects built in cost. Cost includes labor, materials, administration, marketing, and various other overhead expenses. The cost of a pacemaker, for instance, includes research, development, marketing, the buildings in which all this is done, taxes, snow plowing (lately, all across the country), administration and a whole lot more. You get the idea.

Price. Every purchase carries a price. Price is different from cost. Price usually reflects cost plus some degree of margin. If the total cost of making a pacemaker is $15,000, and the manufacturer wants a 10 percent return on investment (before taxes), the price will be $16,670.

Spending. When all purchases are combined we can arrive at a spending level. Spending includes cost and price, plus use or the quantity of purchases made. My insurance buys me a pacemaker. Nine others in my town also receive pacemakers (thanks to their health insurance or government health plan). Our health care payers just spent $167,000 on the pacemakers (plus at least that much for the doctors, surgeons, scanners, MRIs, X-rays, blood test, hospital room, surgical center, etc.).

Every facet of the health care industry reflects cost and selling price. Spending reflects purchase quantity.

The definitional difference is critical to our health care redesign debate. Because spending, quite frankly, is directly related to rationing. Someone is going to ration health care because someone has determined that we spend too much in the aggregate, or we spend too much on a certain type of procedure.

The best way to control cost, on the other hand, is through competition. When Smart Choice of Milwaukee figured out how to do all MRI’s for $600, it should have resulted in other MRI providers finding a way to reduce their cost if they want to stay in business. Unfortunately, the third party payer system seems to prefer to pay a higher price and real cost competition falls aside.

Yet, at $600 each, we cannot say whether health care spending would fall just because the price is less – because Smart Choice found a way to reduce cost. Spending could very well double as more people turn to less expensive MRIs in place of less effective but cheaper X-rays. Such is the nature of health care spending.

Ask your health care guru, Congressman, or state legislator this question: Do you intend to reduce health care spending? Or do you intend to reduce the cost of health care?

There is something Congress and legislators can do to reduce cost, and they ought to do it quickly. The cost of business regulation in the United States during 2009, according to The Wall Street Journal, was $1.75 trillion dollars or 14 percent of GDP. What if a miracle occurred, and elected officials decided to reduce the imposed cost of doing business that result from over-regulation? These regulatory costs are included in every increment of health care cost.

If the government-imposed regulatory cost were reduced, the price of health care services would fall, thanks to competition. This is a winning strategy, but it does not address the other question: How much do we and should we spend on health care?

Stay tuned.

Tuesday, January 25, 2011

Congress actually is doing something constitutional

Republicans in the U.S. house want to cut federal spending back to the 2008 level. That’s a good start.

Consider the irony of this, however. The cuts they are proposing now, in 2011, are not for 2012’s budget. They for the current budget.

The Constitution is quite clear about what Congress is supposed to do – somewhat less clear, thanks to the Supreme Court and some very aggressive politicians, about what it cannot and should not do. One of the very clear tasks is this: appropriate money.

All bills that spend money must originate in the House, so says the Constitution. The Senate cannot create bills to appropriate money, although they certainly can, and so, amend them – billions in earmarks each year. The President cannot write a bill to spend money – all he can do is find creative ways to spend what Congress allows.

The point is that it is a primary responsibility of Congress to figure out appropriate, constitutional ways to spend money. That is why Congress passes a federal budget every year except, well, last year.

Instead of passing  budget, which is their constitutional obligation, Congress bailed out big business, wrote a federal takeover of health care, grabbed more power over banks, started the process of dictating rules and regulations, and a plethora of other constitionally questionable actions. Is it any wonder that voters threw out the old rascals and elected new ones?

The new House, however, actually seems to want to listen to and obey the Constitution. They had the gall to actually read it aloud on the House floor – can you imagine? Now, the House actually wants to write a budget, and properly appropriate money. Will wonders ever cease?

Imagine the incredible freedom we could all enjoy if Congress and the President focused on what is constitutional, instead of the continuous increase in federal power over us. Imagine. Well, like our founding fathers imagined.

Given a chance to do it right, maybe the GOP will usher in a new day in a America, a shining city on a hill. But let’s be clear about this: it will only happen if We the People continue to lead and insist on it.

Tuesday, January 18, 2011

Accountable Care Organizations: Accountable how, to whom, and how does that work again?

Take a look at the two pictures included in this article.

The first one is a picture of our health care system – many disconnected or sort of connected pieces that work in a relatively chaotic manner to deliver care. This system is very hard to manage and by nature, is beset by some level of inefficiency. It is also, however, extremely dynamic and able to quickly add new technology, practice concepts, treatments, medicines, and evermore refined medical delivery.

The second picture is how the Affordable Care Act wishes our health care system could look – an organized, coherent, manageable monolith. This is kind of system that can more easily be managed from the top down, like the Army, a football team, or a single payer health care system. (Actually, the analogy falls apart with single payer; it’s just a way of saying that is what single payer adherents believe to be true.)

The Affordable Care Act of 2010 (ACA), the new federal health care law, in trying to create this coordinated, efficient, top-down health system model, points toward three large organizational structures to accomplish its goal: The Health Benefit Insurance Exchanges (one in each state), consolidation of health insurance companies (the eventual result), and Accountable Care Organizations (ACOs). Here I want to briefly address the ACOs, and will leave the others to another time.

Dr. Richard Reece, who has been writing about health care reform efforts for nearly 50 years, calls ACOs, “Another attempt to herd doctors into large organizations.” Other of my MD-friends call them “HMOs on steroids.” Or, “super-sized HMOs.”

The simple definition of an Accountable Care Organization is this: a broad system of doctors in a wide variety of practice types, along with hospitals, clinics, and other health care service providers. ACOs will deliver services under contract with the Centers for Medicare and Medicaid Services (CMS). ACOs will also contract with private insurance companies. CMS believes by bundling care into these super-sized HMOs, it will be able to accomplish several purposes, the most important of which is to reduce the cost of health care.

The “Accountable” part of the ACO is designed to use manufacturing quality control concepts to evaluate the performance of a doctor or hospital. If the doctor follows the prescribed guidelines (i.e., is accountable), the doctor will be rewarded with a bonus. If the doctor fails to follow the guidelines (never mind the uncooperative patient that refuses to obey the medical cookbook), the doctor receives no bonus – and might be paying to keep his or her job.

It’s essential to understand that the ACO on its own is not designed to reduce the use of health care, nor will it reduce overall spending. Its purpose is to reduce the unit cost of care.

Using the ACO to reduce the cost of care is something like thinking that if we could eliminate small bakeries and have all pastries made and distributed from one source that our donuts would cost less. We will probably buy as many donuts or even more, but each one would save us a nickel.

I believe that the purpose of the ACO is to make it more possible for the federal government to manage the health care of everyone who receives care from an ACO. And who might that be? Well eventually, you, me, and everyone.

What’s a doctor to do?

Right now, doctors all across the country are trying to decide what to do about these ACOs. Do they sell their practices and go to work for the hospital or mega-medical system that sits at the center of the ACO? Do they try to continue in private practice, or in small, independent group practice? A cash only practice might work, unless you are a cardiac surgeon.

More regularly now, the march is toward selling a private clinic or practice to join the ACO, as if it is a matter of fate. Many doctors believe it is a way to escape from the underpayments he or she receives whenever a Medicare or Medicaid patient enters their clinic.

(For the non-doctors reading this column, understand that more than 75 percent of doctors report that Medicare’s payments for their services barely meet the hard cost of providing the service, or in fact, the doctor loses money every time he or she sees a Medicare patient. But even at that, Medicaid is far worse. Doctors report receiving as little as 28 cents on the dollar for each Medicaid patient. Therefore, many doctors are refusing to see anymore Medicare and Medicaid patients.)

When the doctor contracts with the new ACO, he or she may have walked into a trap, and it might be one from which extracting oneself is nearly impossible. Here is why: Hospitals cannot turn away Medicare or Medicaid patients. When the doctor joins the ACO in concert with a hospital (and an ACO cannot exist without a hospital), the doctor has by default agreed to accept Medicare and Medicaid payments for service. So what was inadequate before is just as inadequate in the ACO, except the doctor has no recourse, other than to quit the ACO.

The others that join ACOs – nurse practitioners, physician assistants, perhaps pharmacies, medical device resellers, etc. – to flee the Medicare and Medicaid reimbursement system will find themselves at the financial mercy of the ACO. The ACO, in turn, will be subject to the reimbursements it can win from the remaining, huge, private health insurance companies and the granddaddy of them all, CMS.

This is all driven, in my humble, yet studied opinion, by the belief that large organizations are more manageable and efficient than are small organizations. More so, that solving the health care “crisis” means that the federal government must be in charge. Here is the greatest worry about all this. The federal government wants Accountable Care Organizations so government planners can hold someone accountable. But, who holds the government planners accountable?

Friday, January 14, 2011

The Second Rule of Politics: The Single Most Important Vote

Former Speaker of the House Nancy Pelosi, D-Ca., gave her “farewell” speech a few days ago. Then she handed Rep. John Boehner, R-Ohio, a huge new gavel. Pelosi’s symbolic gesture of handing over the reins of power is an incredibly important civics lesson.
You see, Pelosi never gave Boehner the gavel. Boehner earned the gavel by convincing the new GOP House Caucus to vote for him as Speaker. That singular vote is the most important vote the GOP members will take during the 112th Congress (barring replacement of Boehner at some later date).

By electing Boehner, the voters that elected the GOP House majority created an entirely new governing structure. The Speaker, you see, is responsible to decide which committees will be created or allowed to continue, who will serve as chairs of those committees, and which members will serve on them. Sure, it is true that seniority plays a significant rule in choosing chairs and committee members, but the real power rests in the Speaker’s office.

Nancy Pelosi demonstrated the Speaker’s power by breaking enough Democrat arms to pass the Affordable Care Act of 2010. Using her power, she convinced dozens of Democrats to throw away their political careers and vote against their constituents. Don’t lose the lesson here: The House Speaker is more powerful than the constituents that send members to Congress.

How John Boehner uses his power as Speaker will be seen. I expect it to be more benevolent than Pelosi’s, but when the Speaker needs votes, he will get them.

The single most important vote, then, is the vote for Speaker of the House. In the U.S. Senate, it is for the Majority Leader. This will become more evident as the 112th Congress gets about doing its business. The contrast between Sen. Harry Reid, D-Nev., the Senate Majority Leader, and Speaker Boehner will become evident quite quickly. Reid will be the obstructionist, running interference for President Obama. Reid has the power, albeit not to the same extent as Boehner, to stop good things from happening.

The Second Rule of Politics is, the single most important vote a member of the House or Senate takes is for their senior leader. And the second part of that formula is the party that holds the majority elects the leader.

Cong. Colin Peterson, D-MN, is viewed by many as a Blue Dog Democrat, willing to buck Speaker Pelosi and vote more like a Republican whenever principle demands it. Two things are wrong with this formulation: First, Peterson voted for Pelosi as Speaker. His own convictions, with this vote, took second place. Second, Peterson voted with Pelosi 92 percent of the time, and why not? She was his leader.

Next time you find yourself thinking or saying, “Well, all those other Congressmen are liberal but my Member is more like me,” remember this: The single most important vote your member will take is for the Speaker of the House, or the Senate Majority Leader. This is precisely why you must vote for the opponent of even the most benign, conservative Democratic Congressman or U.S. Senator. Vote wrong, and you lose it all.

Be sure to go to and download the "Myths and Misconceptions" piece.

Thursday, January 13, 2011

The First Rule of Politics - Proving to be True

(This posting is also available as a video from on off-site server.)

State Senator Linda Berglin, D-Mpls., slowly made her way to her chair in the Minnesota State Capitol hearing room. She came 20 minutes late. As she reached her chair, she slowly panned her eyes across the gallery, trying to make sure everyone noticed her. She sat down slowly, and somewhat dramatically picked up her folder of hearing materials. No one cared.

Since 1972, Sen. Berglin served in the Minnesota House or Senate majority. For the last 18 years, she dominated the making of health care policy in the state. In other words, she orchestrated Minnesota’s march to the left. But after the 2010 elections sent her to the minority, things have changed for her, and for Minnesotans.

As I traveled last summer and fall talking about health care reform, I taught four political laws, the first of which is, “It is far better to talk with a legislator that believes as you do than one who is deaf to your ideas.” I used Sen. Berglin as my example, all across the country. Sen. Berglin, you see, is deaf to people who understand that a market-based approach to health care reform is far superior than a Statist approach. No matter how many facts we presented, no matter how many zany ideas we shot down, no matter how fiscally irresponsible was the constant expansion of government-run health care, she remained immune to what we had to say, acting as if she were deaf.

So, we changed the majority party and elected new committee chairs.

This past week, leaders from the Minnesota Association of Health Underwriters gave a Health Insurance 101 presentation to the House and Senate committees on health care policy. These are the committees that will write and rewrite Minnesota’s health insurance laws.

For the first time at least since 1992, these elected officials heard the story of risk pooling, underwriting, what agents do, how insurance works, and that there are better, market-based ways to deliver health insurance. It felt as though a cool breeze had entered the stuffy hearing room. I cannot over-emphasize how different this message was – 180 degrees – from what the legislature has been hearing for 18 years.

All of this is a result of electing a new majority, with leaders that are willing to listen to, analyze, and use ideas offered by people like us. The new majority has fulfilled the first law of politics.

Do not let this lesson be lost on you. If you have not elected a market-friendly legislature yet, make sure you do it in 2012. And if you have, as we have done in Minnesota, make sure you return that majority to power again. Start now, because I can assure you, the “deaf ones” are already plotting to grab back their power.

You might enjoy reading the “Myths and Misconceptions” piece I wrote for the legislators. Grab it here and download it. Spread it around to everyone. It’s really good stuff.