Saturday, July 5, 2008

Sabotaging health savings accounts

Herre is a copy from the AAPS website, worth repeating here:
start of quote
"Sabotaging health savings accounts
June 18th, 2008

Nothing probably shows the potential of health savings accounts (HSAs) better than their enemies’ attempts to wreck them. An attempt to load on costly administrative requirements passed the House of Representatives but not the Senate. President Bush had threatened to veto it. Expect it to come back.

H.R. 5719 would have required every HSA transaction to be reviewed and verified as a legitimate medical expense. Currently, such expenditures are subject to an IRS tax audit, and many are made with a debit card that is only useful at a facility providing medical supplies or services.

A Wall Street Journal editorial called it “Health Savings Sabotage,” with a key player being Rep. Pete Stark (D-CA), who views HSAs as a “weapon of mass destruction.” While Democrats, including Barack Obama and Hillary Clinton, decry the high cost of medical care, including insurance overhead, “Mr. Stark and his friends want to impose the same bureaucratic overhead even on spending that consumers do with their own money” (Wall St J 4/19/08).

Cheating is a nonproblem, the editorial stated: “In any case if people cheat on their HSAs, they are only cheating themselves.”

Lobbying for the provision was EvolutionBenefits, which makes software used for “substantiation” of expenses in employer-owned Flexible Spending Accounts. H.R. 5719 would have enabled EvolutionBenefits to charge twice as much for administering HSAs.

“This is a near perfect example of the corruption of Washington,” writes Greg Scandlen. “A powerful member of Congress using his authority to benefit a single company at the expense of millions of consumers and taxpayers” (Consumer Power Report #123, 4/23/08),

“The message is clear,” writes Dan Perrin of the HSA Coalition, “we (the Democrats) think you cannot make your own decisions, so we are going to force you to pay a company to review your decisions and then we will give you access to your own money but only after we decide whether you made the right choice in the first place.”

Since HSAs were created in December 2003, 3.2 million accounts have been opened, covering 4.5 million Americans, one-third of whom were previously uninsured and bought coverage on their own. Thirty-three percent of new users are small businesses that previously had not offered coverage to their employees.

Consulting firm Watson Wyatt found that average health-insurance costs in the last two years rose 3.6% for employers who offered high-deductible accounts, versus 7% for employers who did not (Wall St J 5/1/08).

According to the U.S. Government Accountability Office (GAO), the number of tax filers reporting an HSA tripled between 2004 and 2007 (GAO-08-474R).

“The take-up rate is the fastest of any benefits innovation of our lifetimes, states Greg Scandlen. “Faster than IRAs, 401(k)s, and far faster than HMOs. The only thing that rivals it may be the conversion of HMOs into PPOs in the mid to late 1990s.”

“Which is probably one of the main factors in pushing H.R. 5719,” writes Frank Timmins. “HSAs are a threat to the SP [single payer] crowd. They need to slowly poison this baby before it grows to maturity.”

end of quote

Friday, July 4, 2008

The Car Care Crisis: A Metaphor

I owe this very good illustration and metaphor to a colleague on Sermo - DoctorCottle. Here is the copy of a recent post of his on my favorite website, sermo.

In the ten years since most automobile insurance companies were either bought out by health insurance carriers or reorganized along the lines of the "third party payer" health insurance model, it has become increasingly obvious that a crisis in car care is looming in the country. In the last twelve months alone, the average monthly cost of car insurance has increased by almost 200%.

"The cost to fill up my tank is outrageous," says New Jersey motorist Alan Duke. "A tank full of gas now costs me a $15 co-pay. Who can afford this?" Duke is not alone in his criticism of an automobile insurance system that costs drivers more and more, yet seems to deliver less and less. "I haven't had the oil changed in my car for almost 500 miles," complains Janice Taylor as she waits in a seemingly endless line at service station in her home town of Sacramento, California. Just a few short years ago, Taylor used to get oil changes two to three times a month, but like an increasing number of Americans, she has experienced repeated frustration with obtaining even basic automotive service.

Motorists are not the only ones affected by the failure of our car care system. "This will get rejected," sighs Eric Rasely, the owner and operator of a service station in Dayton, Ohio as he fills out the paperwork for a prior authorization for a wiper blade change. "It'll get rejected and then the customer will jump all over me because he has to pay out of pocket. And besides, he just had the blades changed last month. They're fine." Rasely has had to hire extra personnel over the last several months just to help him fill out and submit prior authorizations, billing claims, and other paperwork that he says takes up more man-hours than actually servicing cars.

Few would dispute that America's car care system is broken, but there is little agreement on how to fix it. Caraid, the federal automobile service assistance program for low-income motorists implemented five years ago by the President and Congress, has been plagued by skyrocketing costs and poor reimbursement for car service providers, prompting many mechanics and gas station attendants to "opt out" of the system. This has given political ammunition to Democrats whose proposed nationalized car service initiative, based on Canada's universal car care system, was rejected several years ago. While opinion polls show that an increasing number of Americans are receptive to the idea of so-called "socialized car care," concerns about waiting lists for brake jobs and rationing of gasoline, tires, spark plugs, and transmission fluid under the Canadian system have curtailed widespread acceptance of a universal car care system.

One radical solution that a small but growing number of drivers have chosen is returning to the old model of carrying catastrophic car insurance that covers only unlikely but serious and very expensive contingencies such as theft and accidents, paying for routine expenditures out of pocket. "To me it makes sense," says Ryan Smith, an economics major at the University of Alabama, as he pays at the pump with his debit card at one of Birmingham's "cash only" service stations. "Comprehensive car insurance premiums would cost me a lot more than I spend for routine stuff like gas and oil changes. I bet you'll see more and more people doing this sort of thing in the future. It just makes economic sense. Heck, I bet it would even work for healthcare."

Monday, June 9, 2008

Singapore Health System - Responsibility Works

Healthcare reformers often look to Europe or to Canada for models of change. This might be due to the fact that it is geographically closer and more Americans are familiar with Europe from personal visits, or it may be due to ideological reasons. Most European nations have a more or less socialistic approach to health care systems. In "The American" of May / June 2008, Rowan Callick investigates the city-state of Singapore and finds it may have a prescription for America.

Singapore has eschewed the European government-payer-model of health care with a great deal of success. The reason for Singapore's successful health care system is not government spending, says Callick. Compared to the American system, Singapore keeps it citizens healthier for much less cost per person:

Singapore residents are considerably healthier than Americans, yet pay, per person, about one-fifth of what Americans pay for their healthcare.
In Singapore, the government funds only about one-fourth of total health care costs, while individuals and their employers pay for the rest.
According to the World Health Organization's (WHO) report on global health statistics:

The United States spends 15.4 percent of its GDP on healthcare, while Singapore spends just 3.7 percent.
Singapore's government spends only $381 per capita on health- or one-seventh of what the U.S. government spends.
Life expectancy at birth in the United States is 78 years; in Singapore, it is 82 years (I am including this with the limitation that life expectancy is not a good measure for the quality of a health care system, this is included since the single payer supporters always quote these figures)
The U.S. infant mortality rate is 6.4 deaths per 1,000 live births; in Singapore, is it just 2.3 deaths per 1,000 births.
Now, here is the decisive point:
Singapore's system requires individuals to take responsibility for their own health and for much of their own spending on medical care. The system works so well because it puts decisions in the hands of patients and doctors rather than of government bureaucrats and insurers, says Callick.
Source: Rowan Callick, "The Singapore Model," The American, May/June 2008.

Friday, June 6, 2008

HSAs - common misunderstandings

The HSAs (health savings accounts) are in my view the best answer that I know to the question: How do you increase people’s responsibility in health care spending in a fair way that balances compassion (giving the sick all they need) and responsibility (discouraging waste and overspending).
One of the main drivers of health care cost is the moral hazard, the fact that we are “shopping with someon else’s credit card” and therefore do not mind at all to spend generously and overspend. Unless you adress the moral hazard, you will never curb the spiraling health care costs. Obviously everybody wants to best, most complete, most modern etc…...This desire leads to cost overruns and it is often not necessary to reach the goal of diagnosis and or treatment.
People only get a bit more selective and cost conscious when they have to pay pat of the bill themselves. Then, and only then, they will ask the question: “Doctor, how can we manage my condition in a cost efficient way” and if their own money is at stake, they will keep an eye on the doctor’s spending.
The only other way is the top-down, one size fits all, anonymously handed down by committee cost reduction through rationing and through making resources simply unavailable - as it is done in single payer systems such as Canada and the UK - with al the disadvanatges that come with it.
The HSAs are a intelligent, balanced and fair way of adressing this problem, my favorite solution so far. I still have not found anything better. That is why HSA deserve publicity.

Here is a quote from John Goodman" excellent Healthcare blog, a comment left by Greg Scandlen, whose website "" I highly recommend. I could have called this "debunking myths about HSAs" but that expression is so overused...

begin quote:

"Greg Scandlen Says:

May 21st, 2008 at 3:52 pm

The week was not enhanced by the hearing on HSAs held by the Health Subcommittee of the House Ways & means Committee. Chairman Pete Stark (D-CA) has long been contemptuous of HSAs or anything slightly similar. He seems to think that the federal Medicare program is the Nirvana of health care financing - never mind that it has $34 trillion in unfunded liabilities and even then it pays only about half of the average senior’s health expenses.

The witnesses at the hearing included three long-standing opponents of HSAs — Linda Blumberg of the Urban Institute, Judy Waxman of the National Women’s Law Center, and Michael Chernew of the Harvard Medical School. What these folks had to say was boringly predictable and I’m not going to repeat it here. You can go to the Committee’s web site and download their testimony if you are feeling masochistic.

But we responded by submitting a statement that tried to rebut some of the distortions. Part of our statement said –

Most of what you have been told in the testimony to date is either mistaken, based on suppositions or surveys of uninformed people, or simply irrelevant to CDHC. For example –

• You were told that lower-income people cannot afford the out-of-pocket responsibility that comes with an HSA. You were not told how those same people could afford the higher premiums that are required to avoid that cost. In fact, money that is paid to an insurance company for first-dollar coverage is money that is lost forever. Lowering the premium and using that saving to pay directly for services gives the low-income consumer a chance to save money that would otherwise be lost.

• You were told that the tax break associated with HSAs is unprecedented and a boon to the “wealthy.” In fact, the tax treatment of HSAs is precisely the same tax treatment afforded to employer-sponsored health insurance. Premiums are untaxed and benefits are untaxed. It is true that the “wealthy” get a larger tax benefits than the unwealthy, but that is the case for employer-sponsored comprehensive coverage as well as for HSAs. Further, the opportunity to save, say, $2,000 a year that would otherwise go to an insurance company is of far greater benefit to the low-income worker who earns $20,000 a year than to the wealthy executive who makes $200,000, regardless of the tax treatment.

• You were told that “the sick” do not benefit from HSAs because of the higher out-of-pocket responsibility. In fact, both the healthy and the sick have less out-of-pocket exposure with an HSA, a point that was well documented in a recent Health Affairs article. In fact, HSAs limit a patient’s out-of-pocket exposure, something that is not true for the Medicare program, for instance.

• You were told that most health care spending takes place above the deductible associated with an HSA, so they will not have “a significant effect on overall spending.” This is probably true, but irrelevant. HSAs are having a profound effect on lower-cost routine spending and that is significant by itself. Other strategies are needed for high-cost services with or without an HSA.

• You were told that many people with a high-deductible health plan do not open up an HSA. That, too, is true but irrelevant. The HSA itself is attractive for those people who are able to get a tax benefit from passing their direct payments through the account. Other people, especially those who pay no income taxes, may find it more suitable to simply pay cash at the time of services or to keep their funds in some other, non-HSA, account. Further, there is likely to be a lag time between the point of enrollment and opening up that account. This is not a problem.

• You were told that some people who have to pay directly for care or for prescription drugs may fail to do so to save the money. That also may sometimes be true. But there is never any guarantee that people will always fill their prescriptions and take their medications regardless of the financing scheme. In fact, we know that many health conditions are caused or aggravated by patient behavior under all health insurance systems. But, to the extent that people with CDHC are more knowledgeable and more invested in their own care, their compliance will be better than it is for other benefit programs. And that is precisely what we are seeing in the market."

end quote

Wednesday, May 28, 2008

What Physicians Have In Common and Can Agree On

A few weeks ago this post on received over 300 votes with an outstanding 95% of "yes" answers.

I see these few points as a declaration of independence of physicians and physicians should read and remember this from time to time.

"What we physicians all have in common"

1. We want to serve our patients, not insurance companies nor the government

2. We want to practice medicine independently according to our knowledge and judgment, and not be told what to do by insurance companies nor by the government

3. We want to make a living on our own, we do not want to be given what insurance companies and government deem "appropriate" for us

We want to be an independent, noble and free profession!

Because WE have the knowledge, the expertise and the skills, and the insurance companies and the government do NOT! "

Monday, May 26, 2008

Time to Nationalize the Educational System

The following statistics are from the National Institute for Literacy:

In the International Adult Literacy Survey (IALS) assessment, 1994-98:

The average composite literacy score of native-born adults in the U.S. was 284 (Level 3); the U.S. ranked 10th out of 17 high-income countries;
The average composite literacy score of foreign-born adults in the U.S. was 210 (Level 1); the U.S. ranked 16th out of 17 countries.

In the International Adult Literacy Survey (IALS) assessment, 1994-98:

The mean prose literacy scores of U.S. adults with primary or no education, ranked 14th out of 18 high-income countries;
The mean prose literacy scores of U.S. adults with some high school, but no diploma or GED, ranked 19th out of 19 high-income countries;
The mean prose literacy scores of U.S. adults with a high school diploma or GED (but no college), ranked 18th (tie) out of 19 countries;
The mean prose literacy scores of U.S. adults with 1-3 years of college, ranked 15th out of 19 countries; and
The mean prose literacy scores of U.S. adults with a bachelor's degree or higher, ranked 5th.

end of quote

These statistics show very clearly that we have a literacy crisis on our hands. I believe that literacy is a basic human right! The educational system needs to nationalized! Since we are underperforming the other industrialzied nations, the government needs to take over our education system - immediately!

But, uuuhooooh, wait, wait, the educational system is already nationalized! The government is already running it! So, how come we are not doing that well compared to other industrialized nations? How is this failure possible? I thought that "government run" is a recipe for complete and utter success!

Now, do you still think we ought to nationalize health care? Should we, really?

Sunday, May 25, 2008

Stupid Arguments in the Health Care Reform Debate

This particularly stupid argument about health care reform was repeated by Senator Clinton:
"Markets in Medicine do not work, you cannot shop for a physician when you are having a heart attack...."
Of course not, dear Senator, you are so right. But then, we knew that already.
Nobody expects such a thing. You shop when you are healthy. You compare family physicians in your neighborhood and maybe a little bit beyond. You use the internet with the new tools that bring together basic info about physicians such as training, board certification, specialty, practice profile that includes ages, most common diagnoses, and of course prices for the most common services.
Mind you, these websites do not exist yet in this comprehensive form, but they will come. In addition, you might have journals and magazine such as consumer reports in the future as well.

You shop before something happens, when you are looking for a family physician and then you rely on this family physician for your choice of hospitals and specialists.
Why do anti-free-market advocates pretend that this is not possible?

Let's consider this:
Can you shop for a lawyer while the robber is holding you at gun point?
NO! Uhoh, time to socialize lawyers! Senator Clinton as a lawyer should be intimately acquainted with shopping for lawyers in a free market.
Very strangley indeed - laywers seem to be completely exempt from any talk about "nationalized law care" because "we cannot shop for lawyers when a robber holds us at gunpoint".

Another argument from the single minded is that supposedly there is "not enough information about physicians". Since there is not enough information, we cannot shop and consequently we outgh to nationalize health care. Hello?

Well, there is even less information about lawyers, so, hurry up, let's nationalize lawyers too!
Make an experiment: Next time you see a politician (most of them are lawyers) during a speech, ask him or her to support a bill to nationalize the legal system, so that everybody, truly eerybody has "acccess to law" and so that there is no more "law only for the rich". Now watch how well that goes over! Take the arguments why a nationalized legal system is complete nonsense in the eye of the politician, and, voila! Apply that to medicine.

Medicine is very comparable with law, in the sense that the average person does not understand too much of it's intricacies and details and therefore most people tend to leave it to professionals to guide them. What works fro law, works for medicine.

So, fans of socialized medicine, go on, socialize law - everybody deserves "rights". Is "lawcare" not a constitutional right? Should not the government make sure you and everybody else have equal access to rights, to lawyers etc? What a great field to start, so let's nationalize the legal system! All lawyers paid by the goverment, by fixed rates that are determined by some far away university commission, adn maybe they should be paid "by the case". And, just to make things equal to medicine, they should be forbidden to charge anything more that what the government pays them - ever. And, please institute pay for performance, now that you are at it....

Friday, May 23, 2008

Massachusetts - How Not To Reform Health Care

Here is an article of the Wall Street Journal that is worth quoting:

start quote
The New Big Dig
May 21, 2008; Page A18

Mitt Romney's presidential run is history, but it looks as if the taxpayers of Massachusetts will be paying for it for years to come. The former Governor had hoped to ride his grand state "universal" health-care reform of 2006 to the White House, but his state's residents are now having to live with what he and the state's Democratic Legislature passed. As the Boston press likes to say, it's "the new Big Dig."

The showpiece of RomneyCare was its individual mandate, a requirement that all Massachusetts residents obtain health insurance by July of last year or else pay penalties. The idea was that getting everyone into the insurance system would eliminate the "free-rider" problem of those who refuse to buy insurance but then go to emergency rooms when they're sick; thus costs would fall. "Will it work? I'm optimistic, but time will tell," Mr. Romney wrote in these pages in 2006.

Well, the returns are rolling in, and the critics look prescient. First, the plan isn't "universal" at all: About 350,000 more people are now insured in Massachusetts since the reform passed. Federal estimates put the prior number of uninsured at more than 657,000, so there was a reduction. But it was not secured through the market reforms that Governor Romney promised. Instead, Massachusetts also created a new state entitlement that is already trembling on the verge of bankruptcy inside of a year.

Some two-thirds of the growth in coverage owes to a low- or no-cost public insurance option. Called Commonwealth Care, it uses a sliding income scale to subsidize coverage for everyone under 300% of the federal poverty level, or about $63,000 for a family of four. Commonwealth Care also accounts for 60% of statewide growth in individual insurance over the last year, and the trend is expected to accelerate, perhaps double.

One lesson here is that while pledging "universal" coverage is easy, the harder problem is paying for it. This year's appropriation for Commonwealth Care was $472 million, but officials have asked for an add-on that will bring it to $625 million. For 2009, Governor Deval Patrick requested $869 million but has already conceded that even that huge figure is too low. Over the coming decade, the expected overruns float in as much as $4 billion over budget. It's too early to tell how much is new coverage or if state programs are displacing private insurance.

The "new Big Dig" moniker refers to the legendary cost overruns when Boston rebuilt its traffic system. Now state legislators are pushing new schemes to offset RomneyCare's runaway expenses, including reductions in state payments to doctors and hospitals, enlarged business penalties, an increase in the state tobacco tax, and more restrictions on drug companies and insurers.

Mr. Romney's fundamental mistake was focusing on making health insurance "universal" without first reforming the private insurance market. The "connector" that was supposed to link individuals to private insurance options has barely been used, as lower-income workers flood to the public option. Meanwhile, low-cost private insurers continue to avoid the state because it imposes multiple and costly mandates on all policies.

Hailed at first as a new national model, the Massachusetts nonmiracle ought to be a warning to Washington. Barack Obama and Hillary Clinton are both proposing versions of RomneyCare on a national scale, with similar promises that covering everyone under a government plan will reduce costs. Mr. Obama at least argues that more people would be covered were insurance more affordable. But his solution is Massachusetts on steroids – make insurance less expensive for policyholders by transferring the extra costs onto the government. Mrs. Clinton likes that but also wants the individual mandate, despite the mediocre results so far.

The real problem in health care is the way the tax code and third-party payment system distort incentives. That's where John McCain has been focusing his reform efforts – because that really does have the potential to reduce costs while covering more of the uninsured – and Republicans ought to follow his lead.

In this respect paradoxically, we can be thankful that Massachusetts ignored the cost problems that doomed other recent liberal health insurance overhauls in California, Pennsylvania, Wisconsin and Illinois. The Bay State is showing everyone how not to reform health care.

end quote

Thursday, May 22, 2008

Well, I guess it’s up to me to ask the uncouth yet obvious question: If U.S. health care is inferior to the systems of Canada and Europe, why wasn’t a rich and famous man like Senator Kennedy immediately sent to one of those places so that he could get the best care available?

As Whitecoat noted the other day, Kennedy was indeed transferred from Cape Cod Hospital, where he was initially admitted, and airlifted to … Massachusetts General Hospital. Why not Europe? Perhaps the answer lies in this international comparison of cancer survival rates for males:

UK cancer survival rate lowest in Europe
By Nicole Martin
Last Updated: 1:56AM BST 24/08/2007
Cancer survival rates in Britain are among the lowest in Europe, according to the most comprehensive analysis of the issue yet produced.

European cancer survival rates
England is on a par with Poland despite the NHS spending three times more on health care.

Survival rates are based on the number of patients who are alive five years after diagnosis and researchers found that, for women, England was the fifth worst in a league of 22 countries. Scotland came bottom. Cancer experts blamed late diagnosis and long waiting lists.

In total, 52.7pc of women survived for five years after being diagnosed between 2000 and 2002. Only Ireland, Northern Ireland, Scotland, the Czech Republic and Poland did worse. Just 44.8pc of men survived, putting England in the bottom seven countries.

The team, writing in The Lancet Oncology, found that Britain's survival rates for the most common cancers - colorectal, lung, breast and prostate - were substantially behind those in Western Europe. In England, the proportion of women with breast cancer who were alive five years after diagnosis was 77.8pc. Scotland (77.3pc) and Ireland (76.2pc) had a lower rate.

Rates for lung cancer in England were poor, with only 8.4pc of patients surviving - half the rate for Iceland (16.8pc). Only Scotland (8.2pc) and Malta (4.6pc) did worse.

Fewer women in England lived for five years after being diagnosed with cervical cancer (58.6pc) despite a national screening programme. This compared to 70.6pc in Iceland. Dr Franco Berrino, who led the study at the National Cancer Institute in Milan, said cancer care was improving in countries that recorded low survival figures. He added: "If all countries attained the mean survival (57pc) of Norway, Sweden and Finland, about 12pc fewer deaths would occur in the five years after diagnosis."

His co-researcher, Prof Ian Kunkler from the Western General Hospital in Edinburgh, said waiting lists for radiotherapy were partly to blame.

This table is from The Telegraph, which reported the results of a study first published in The Lancet. Despite the mountains of BS piled up by single-payer advocates (including Kennedy himself), it clearly showed that the U.S. health care system outperforms the “superior” systems of Europe.

A couple of weeks ago, John McCain was lambasted for having the audacity to say that U.S. health care was still the best in the world. It would appear that the Kennedy family agrees.

¶ Posted 21 May 2008 † Catron

The Cause of Spiraling Health Care Costs

A colleague of mine received my email with the “Open Letter” and my comment that I think that the third party payer system is the true root problem of the spiraling cost of health care.

He answered:

“I feel that not only is it the greed of third party payers stifling
our health care choices, the health paradigm itself is failing. The
paradigm allows for patients to abuse their bodies and then hope for a
pill/surgery/procedure to get them up and running again. This taxes
the system and rewards those who can care less about their health. It
does nothing to empower people to live healthier lives.

I completely believe in a system that allows for healthier people to
pay fewer premiums. Less utilization = lower premiums. Stop eating
your cheeseburgers and diet cokes and maybe you'll save $$, let alone
live extra years.

When a patient of mine was allowed to degrade under physical therapy
for 8 straight years under Medicare, and then regain neurological function
under my care in 2.5 months, we have a problem. Not only that,
Medicare then wants to cut him off.

Bullshit, bullshit, bullshit. How about rewarding excellence in
care and in patient behavior? Doesn't happen”

My answer:

The third party payer system does not equal “greed of the third party payers”, not at all, not at all. The third parties will always behave the same way, coming up with anything to save money. It does not matter if the third party payer is a for profit company or a government institution. The behavior will be exactly the same. roof: I have seen all the exact same shenanigans that HMOs do to us here in the US exercised by the government run "sickness fund" in Germany. No difference at all, none, zero. I cannot stress that enough.

The problem is that the people involved in making the decisions to spend the money, parties one and two have no interest whatsoever in saving money. Patients want the best, most expensive, most modern, coolest treatment of the planet and yesterday and will all the creature comforts please. Physicians want to be nice to the patients and want to earn money. The more physicians do, the more they earn....
The problem is that we are "shopping with someone else's credit card" and therefore ready to waste.

As you correctly point out, people do not care about prevention - hey, why should they, if something happens, "it's all covered" anyway, so why worry. Unless it starts to become costly to neglect your body and your health, people will not go for prevention. Anybody who says otherwise is a dreamer and lives in idealistic lalaland....

That is where the solution is:
People have to pay for their health care. Period. Problem solved. There was a large study done by the Ayn Rand foundation in the 70's: one group with an insurance that covers everything- with 5% out of pocket and one group with 50-50% out of pocket and one group where the insurance covers only 5%, and 95% are out of pocket.
What happened: the care for the 95% out of pocket was the least expensive - but they reduced health care consumption indifferently, they reduced consumption of truly needed as well as superfluous tests and treatments.

Every socialist will cry out when hearing this reasoning: "see, people are going to get breast cancer, they are going to neglect their health to save a few dollars, this is immoral, blablabla. Cry, cry...insert tear jerker anecdote here....

My reasoning: at some point in life people have to learn what is important and what is not. You might as well start now, and the earlier the better. In time, people will realize what they really need and what they don't need. Today are not the seventies and with the Internet providing information, it is easy to tell the difference between necessary and superfluous tests.

And: only when a patient asks the physician: "What is the most cost effective way of dealing with this?" and then insist on the right solution, only then will the "unstoppable increase" in health care costs abate...
Your Obgynthoughts

Wednesday, May 21, 2008

Sermo, the Open Letter and the root of all health care problems

We physicians need to talk to each other more, we need to use the Internet as a the new and exceedingly useful platform to communicate with each other. With the development of the "Open Letter", has proven that it can be be just that, a platform to stay in touch, and to exchange ideas. And it allows us physicians to talk to each other across speciality lines and across any geographical boundaries, something that is sorely needed.

We physicians need to unite. We are medicine. All the others are outsiders without our knowledge, our expertise and our skils. It is completely unacceptable that health care planning and reform is happening around tables without phsyicians. We have to stop accepting what business people and politicians cook up for health care and then expect us to swallow. We are medicine, we are it. "They" are the mere monkeys on our backs. Without us, they are nothing.

While I agree with most others in terms of the criticism of what is wrong today in health care, I am not in favor of any kind of single payer third party payer system or any other kind of overbearing, strangulating government control. Instituting a socialistic single payer system would competely and sadly miss the root problem in health care: the fact that "we are shopping with someone else's credit card".

That is the true root problem of health care systems in Europe and in the US.

I have the advantage that I grew up in Germany and Spain and now live here in the US. I have trained and practiced in Germany and in the US. I have worked in Europe and I have seen the exact, but absolutely exact same problems and developements in Germany that we see here in the US. Amazing , isn't it? The exact same problems, Now let that sink in. "Socialistic" or "capitalistic" structure of the health care system does not matter. The third party payer system is the problem.
As long as a third party pays the bills, we will encourage waste, as long as a third party pays the bills, we will overspend, as long as a third party pays the bills, costs will continue to rise "unstoppable", as long as a third party pays the bills, it will go downhill.

Stop salivating about universal health care and about the Canadian or Bristish system, stop denying the problems each of them has. Work on replacing the third party payer system with a direct patient - physician relationship. Nothing else, no outside intrusion. Then health care will be free of third party interests, free of abuse by commerce and government and the patient and physician will be in charge again, as it should always have been and as it will be again in a few years

Tuesday, May 20, 2008


Another quote from the Center for Policy Analysis reporting that US Americans have same or better access to drugs at the same cost as Canadians. If you think about it, Walmart with their $4 prescription program is excellent, it shows capitalism in action. Very successful, very cheap.

Here is the quote:

"When it comes to prescription drug policies, governments in the United States tend to be more oriented towards competitive markets while the governments in Canada tend to be more interventionist. There is a common misperception Canadian prescription drug policies tend to produce lower overall costs for consumers than American prescription drug policies. However, a recently published Fraser Institute report shows that the average personal cost burden of prescription drug spending is roughly equivalent in both countries.

For example:

In 2006, the per capita spending on prescription drugs was 1.5 percent of per capita GDP for Canadians and 1.6 percent for Americans.
In the same year, Canadians spent 2.5 percent of their personal disposable income on prescription drugs, while American spent only 2.2 percent.
Also, the number of prescriptions dispensed per capita in both countries was approximately the same, 13 prescriptions per person in Canada compared to 12.3 per person in the United States.
The fact that the personal cost burden of prescription drug spending is roughly the same for Canadians and Americans is partially explained by differences in the prices of patented and generic drugs:

Patented brand name drugs in Canada are on average about 51 percent less expensive than in the United States.
Generic drugs in Canada are about 115 percent more expensive on average than the same generic drugs in the United.
Although Canadians and Americans share approximately the same cost burden for prescription drug spending, Americans are better off because research suggests that U.S. consumers have better access to new innovative drugs than Canadians do. Canadians who rely on public drug programs suffer longer delays to access many new medicines than Americans, and are in many cases not able to access the same number of life-saving and life-improving drugs that are more commonly available to Americans, according to Fraser.

Source: Brian J. Skinner and Mark Rovere, "Same Spending, Different Access," Fraser Forum, March 2008.

For text:

For more on Health Issues:
end of quote


A bit of fresh air for the fans of single payer health care systems:, a quote from the national center for Policy Analysis:

Start quote...
"Excessive waits for health care services endured by Canadian patients have imposed huge costs on the nation's citizens according to a study from the Centre for Spatial Economics.

Other major findings:

The study of medical wait times in all 10 of Canada's provinces found excessive delays for four key procedures--total joint replacement surgery, cataract surgery, coronary artery bypass graft surgery, and magnetic resonance imaging (MRI) scans--cost the nation an estimated $14.8 billion in 2007.
This in turn lowered federal and provincial government revenues by a total of $4.4 billion, the report noted.
However, it is individuals who bear these costs. When the government controls all of health care, it looks for ways to save money, and the easiest way to save is to deny care or ration care through long waits, says Charles M. Arlinghaus, president of the Josiah Bartlett Center for Public Policy.

Rationing care by using waiting lists puts a heavy strain on an economy by incurring high costs through reduced worker productivity, says Devon Herrick, a senior fellow at the National Center for Policy Analysis. Canadian Medicare uses rationing by waiting because the cost of lost productivity is borne by the individual and employer, whereas the cost of actually providing needed care falls on the public system.

For example:

Excessive waiting for total joint replacement surgery was the most expensive byproduct of Canada's health care rationing, at nearly $26,400 per patient.
That was followed closely by MRIs ($20,000), coronary artery bypass graft surgery ($19,400), and cataract surgery ($2,900).
Herrick disagrees with the study's policy prescription, saying private care options would be more effective than increased government investment in the system.

"Canadians should be allowed to pay for care privately if they so choose. It is unconscionable to forbid patients from paying for care the public system cannot provide them in a timely manner," he says.

Source: Sanjit Bagchi, "Long Waits for Health Care Are Costing Canadians Billions of Dollars," Health Care News, June 1, 2008.

For text:

For study:

For more on Health Issues:
" end of quote

Monday, May 12, 2008

Open Letter from the American Physicians

Sign the Open Letter from America's Physicians

The time has come for physicians to come together and lead a new wave of healthcare reform. The current healthcare system is strained and unsustainable. Our patients' well-being and the dignity of our profession are at stake. The physician community has found a powerful voice on Sermo and we can use this platform to speak with consensus and act in unity.

On Sermo, the physician community has been able to start formulating strategies to refocus our misdirected healthcare system for optimal patient care. The first product of this effort is the launch of an open letter to the American public, outlining the challenges we face in delivering appropriate care. This letter also gives us the opportunity to declare our full commitment to our patients. What began with the idea of drafting a single letter has now grown into a movement that is unifying and giving voice to thousands of physicians.

The "Open Letter from America's Physicians" is the culmination of months of polling, discussions, and draft revisions on Sermo, involving the active participation of over a thousand physicians. We must now drive our colleagues to sign the letter to show the strength and scope of our unity to policy makers and the public. Sermo has pledged support to distribute the signed letter broadly via the Internet, national newspapers, and downloadable materials that we can share with our patients. These strategies will give us national visibility and generate significant media attention for our efforts.

We have finally been given a real opportunity to speak and act as one. There is power in our unity. We can build on this experience and create a viable mechanism for establishing a new paradigm that acknowledges the value of physician autonomy and patient-centered health care delivery, free from the intrusion of special interests and political motives.


An Open Letter from America's Physicians

Dear Fellow Americans,

For decades the United States has led the world in healthcare. We have enjoyed the finest hospitals, medical schools, research, technology, and resources. Unfortunately, our healthcare system has lost focus to the point where patient well-being is placed after politics, profits, and special interests. Healthcare costs are on the rise and patients have lost their freedom of choice. These trends are hurting our economy and compromising the doctor-patient relationship. As a result, it has become difficult for physicians to deliver the best possible care.

Our heavily fragmented healthcare system has made it very difficult for you, the American public, to get the care you need. As your physicians, we want to partner with you to address the critical defects of the system as outlined below:

You are paying a lot for healthcare and not receiving enough in return. Your insurance premiums continue to increase while your healthcare options are dwindling. Gatekeepers, insurance networks, and restrictive regulations limit your choice of doctors and your access to care.
You have been made dependent on complicated and expensive health insurance plans. Employers are forced to take money out of your paycheck to purchase health coverage. If you lose your job, you are left with no safety net and the money you have paid for health coverage vanishes.
The time you spend with your physician has become remarkably brief due to regulatory hurdles requiring doctors to spend more time on documentation than with you.
We believe the following factors have made our current healthcare system unsustainable:

The insurance industry's undue authority and oppressive control over healthcare processes
Excessive and misguided government regulation
The practice of defensive medicine in response to a harmful and costly legal environment

We, the physicians of the United States, will no longer remain silent. We will not tolerate a healthcare system where those without medical expertise or genuine interest in our patients' health have absolute control. This letter is merely a summary of the most important problems in our current system. We believe that by partnering with the public we can start to demand real change and formulate practical solutions.

We invite you, our patients, friends, neighbors, and employers to unite with us at this important time in the history of healthcare in the United States. Together, we can guarantee our nation a healthier tomorrow.

Please talk to your doctor about this letter and visit for more information.


The Undersigned U.S. Physicians


What can you do?

SIGN the letter here through your vote and add your voice to this nationwide call to patients.

SEND emails to colleagues and encourage them to sign. Better yet, forward this posting through "Send to Colleague".

SHARE the attached flyer with colleagues. Place it in mailboxes or post it in locations that will be seen by other physicians.

Monday, April 28, 2008

The New American Solution

Here is another quote from the Feb 7 2008 NEJM article of Robert Kuttner, a journalist and member of a political advocacy group, with the misleading name "Market based failure, a second opinion on US health care costs"

"Defenders of commercialized health care contend that economic incentives work. And indeed they do — but often in perverse ways. The privately regulated medical market is signaling pressured physicians to behave more like entrepreneurs, inspiring some to defect to "boutique medicine," in which well-to-do patients pay a premium, physicians maintain good incomes, and both get leisurely consultation time. It's a convenient solution, but only for the very affluent and their doctors, and it increases overall medical outlays."

And indeed economical incentives work. Who would have thought so? Money is the most direct connection to everybody's mind and heart. The author recognizing the effectiveness, but immediatley moves away to the supposed drawbacks ..."it works in perverse ways". It mihgt be counterproductive intially, when people do not go to doctors to save money, but sooner or later they will recognize that it is better to have a mammogram, rather than having to treat breast cancer at some point in time. Poeple have to learn that prevention is good, we cannot force them. We cannot regulate, administrate intelligence and cost efficient behaviour. It is simply impossible. People will have to learn.
We do not force everybody to start saving at age 15, and invest the interest back into the savings account. Right? Even though regular saving or investing with adding back the interest is one of the most powerful instruments to accumulate wealth, we do not force everybody to do it.
Why is health care so different? Why do we have to try to administrate our way to perfection in health care? Why do we not trust anybody with their own decisions?
We are on our own when we buy cars and take care of our cars. If we neglect them, they will rust, they will fall apart earlier and we will have to replace them earlier. People know this and take care of their cars. Why is health care different?

Apparently personal responsibility is undesired in health care, too many of us want to "have it all covered" and pay a high price for it, a price that, as it turns out, gets higher and higher every year.
The only solution to cost control in health care is to have consumers pay directly, cash. Only then will physicians be asked "Doctor, what is the most cost effective way to deal with this problem?"
Until we decide to go this route, health care costs will continue to climb and climb and climb, seemingly "unstoppable".
Well, not unstoppable at all. Health care costs are going up in exactly the same way in ALL countries in Europe and most countires around the world, yes exactly the same way as here in the US....
and why? Because the all use the "third party payer" system, that isolates the consumer from any kind of knowledge and responsibility of health care cost.
It is not the weird "market" here in the US, that is not even a real market, that dribves cost up, because cost goes up in single payer systems such as Canada and in three tier systems such as Germany. These systems are not the solution. They all struggle with cost increases. Why look to Europe when they have the same percentage of cost increases and the same range of dissatisfaction with their health care systems.
Are we not the greatest nation? Why would we look to the other ones for examples? Should we not lead instead of following?
We should lead by being the first country to institute cash care! Direct medicine. Responsibility and Affordability.
Capitalism is not the cause of the problems that plague our health care system, it is the CURE
More to follow

Kuttner is wrong. WE do not have a health care market and therefore it has not failed

Sometimes you find a particularly flawed article. In early February I read an article in the New England Journal of Medicine by a journalist and member of a political advocacy organization. The article is called

Market-Based Failure — A Second Opinion on U.S. Health Care Costs

And it was written by Robert Kuttner

You can read it here .

A few comments:

Market Based Failure" is a misnomer. It is the “health management concept” in its present form that has failed. This failure should be attributed to the government that has set up the system in the first place. I would call this more accurately a "government based failure". It is surprising that someone who has been writing about the health care system and about politics for many years lacks the most basic knowledge about economics and about health care. We do not have a "health care market". It does not exist. Any 18 year old can see that. We have a very (!) limited market for "health insurances". Just that. Not for health care services, which is exactly the problem with our system. To postulate that we have a "health care market" is either plain stupid or cynical. For Mr.Kuttner's sake I assume he is being cynical and just tries to make a pro-government-monopoly point. A bit cheap though...

Here is what the past governments have set up: patients and physicians are blinded to the costs of all transactions. This alone shows that our health care system is not a "market". You cannot shop without knowing prices.

A powerful oligopoly of insurances dominates and overpowers individual physicians, which are not permitted to unite, unionize or even communicate in any way concerning pricing. Physicians can either participate at the conditions of the HMOs and Medicare or drop out of the system altogether. It is a “bad contract-no negotiation-take it or die” situation for physicians. Physicians are rewarded only for volume, not for quality, service or efficient use of resources. The healthcare consumer, the patient, not only has no idea at all what happens with his money, has also has no influence whatsoever on how his money is spent. This discourages cost efficient behavior to say it mildly. And neither physician nor patient is really held responsible for any cost, another major factor in increasing costs.

So, this is what the government has set up. Mr.Kutter believes that this government produced system has failed. With a rather incomprehensible logic he now wants to turn the whole system over to those people who have failed - the government. Go figure.

I believe we do not have a market in healthcare and I think we should finally have one. A market where costs are transparent, where everybody knows where the money is going, how it is spent.

The reason why every system around the world fails to contain cost is:

The consumer has no feedback about his spending. The consumer does not have skin in the game. The consumer is spending “other people’s money”

Americans (and Europeans equally) demand the best health care other people’s money can buy. As long as the “third party payer” system is intact, the spiraling health care costs will not be contained.

The author certainly is aware of the complete absence of true market characteristics in US health care. This makes his “second opinion” invalid. But let’s try something different:

"News are vital, and inconsistent quality and lack of informative value warrants a reform. All TV and radio stations, print media and Internet outlets will be merged into the government run "Federal News Department" (FND). The FND will the exclusive employer for all journalists and pay salaries mirroring the postal service. This will free journalists to focus on their work. Since they do not have "expectations of earnings", they will be just fine.

The FND issues comprehensive guidelines: All news have to follow templates, the number of words and paragraphs have to be consistent with formulas proven efficient in conveying information. Only words from federal vocabulary lists are permissible. We do not know how to measure performance, but we will cut salaries if "performance measures" are not met. I am sure, Mr. Kuttner, that you enthusiastically support my reform proposal!”

To dump health care into the lap of the government is the helplessly-throw-your-arms-in-the-air-and-give-up-version of reform, some people would call it the EEYORE version of reform.

Think before you support something stupid!

Why Health Care is expensive

This is an excellent article that I found, and to my surprise it was published on the website of the CATO Institute. I completely agree with the conclusions of this analysis, which was published in 1994. Some things do not change......It is about time that more people take this analysis to heart, otherwise nothing will change for the better. The bottom line is: everybody spends generously when someone else is paying. This is one of the biggest reasons why the cost increase in health care seems unstoppable - besides the other reasons such as aging population and technical progress.
Very, very, very important, neither capitalistic HMO bureaucracy nor socialistic single payer as in Canada or in the UK are the answer. Both these systems are battling the same problem (and loosing). Both are failing. It is time to use the system that has made America great, the system that works so well for 5/6 of our economy, the system that made so many come to America: the free market! Capitalism is not the cause of our health care problems, it is the cure!

Begin quote:

Why Health Care Costs Too Much

by Stan Liebowitz

Stan Liebowitz is a professor of managerial economics in the Management School of the University of Texas at Dallas.

Health care costs have increased dramatically over the last few decades and are now thought to be excessively high. That has caused the current political reevaluation of our health care system, including its funding and performance.

This study is an analysis of the causes of the increase in health care costs. The major culprit in the seemingly endless rise in health care costs is found to be the removal of the patient as a major participant in the financial and medical choices that are currently being made by others in the name of the patient.

The increasing share of medical bills paid by third-party payers (insurance companies and governments) and the disastrous consequences are documented. Patients overuse medical resources since those resources appear to be free or almost free. Producers of medical equipment create new and more expensive devices, even if they are of only marginal benefit, since third-party payers create a guaranteed market. Attempts to rein in those costs have led to a blizzard of paperwork but proven ineffective in controlling costs.

The cure for the present problems is straightforward: the patient must once again be made the central actor in the medical marketplace. Patients need to be given the same motivations to economize on medical care that they have to economize in other markets. Tax laws need to be rewritten. The use of medical savings accounts needs to be promoted. High-deductible health insurance should be encouraged.

Returning the patient, and normal market principles, to center stage is all that is necessary to bring the costs of health care under control.


One would practically have to be a modern Rip van Winkle not to be aware of the fact that the percentage of the gross national product devoted to health care has been rising for several decades. That fact figures prominently in the claim that health care is devouring too many of America's resources and that, therefore, the health system needs to be overhauled. The infamous growth of medical care relative to GNP is shown in Figure 1.

Fig 1
Source: Health Care Financing Administration

The focus on the share of GNP devoted to health care is somewhat unusual. For example, there does not seem to be any concern over the share of our wealth that is devoted to shoes, or automobiles, or housing. Moreover, there are many products, such as recreational activities, whose share of GNP rises as our wealth increases, yet there is no concomitant clamor to reduce our expenditure on them, as there is on health care.(1) The increasing share of GNP devoted to health care, by itself, is not evidence that the health care market is in need of repair.

More telling are attributes of the health care delivery system that make it inefficient, foremost among which is the

reliance on third parties (insurance companies and the government) to pay most medical costs. In 1990 third parties paid 77 cents of each dollar of medical expense. Because patients pay an average of only 23 cents on each dollar of medical expense, there is only a weak linkage between any consumer's use of medical resources and the payments made by that consumer. When the direct linkage between use of medical facilities and payment is broken, medical consumers lose their incentive to economize on their use of medical resources.

Another factor that usually portends inefficiency in any market is a high degree of government intervention in it, as the extensive literature examining government organizations has demonstrated.

Analysis indicates that our high medical costs are the result of various government policies that have removed patients as purchasers in the medical marketplace. While that state of affairs may be no more than the unlucky result of misguided policies, it is detrimental to the health of medical markets and, if improperly diagnosed, may eventually prove deadly to the literal health of many Americans.

Unfortunately, the proper diagnosis of our medical problems has been obscured by the demonizing of certain components of the medical industry. For example, the Clinton administration has at various times blamed the pharmaceutical industry, medical specialists, and health insurance companies for causing high prices and excessive medical expenditure. Such charges miss the underlying reasons for the current poor health of the medical delivery system, and diminish our ability to repair it. The failure to understand the causes of increased medical costs is apparent also in the Clinton proposal to revamp our health care system, which unabashedly increases our reliance on government and third-party payments.

Several competing proposals, however, have been suggested. Among them are some that adopt, at least in part, the medical savings accounts and tax-law changes proposed by John Goodman and Gerald Musgrave in Patient Power.(2) Central to the Patient Power approach is the weakening of third-party payment mechanisms and the reestablishment of the patient as both the consumer and the purchaser of medical services. By putting consumers back in control of their money, we can restore the vitality of the medical sector.

The Varieties of Excessive Costs

The excessive costs of our current medical system can be classified into three major categories:

• The first, and by far the largest excess cost, is due to the current overuse of medical resources by patients. Overuse is the rational response of consumers who do not have to pay the entire cost of the medical services they use. The causes of those excess costs are Medicaid, Medicare, and tax laws that provide incentives for individuals to have their employers purchase their medical care in the form of private health insurance.

• The second category of excess cost consists of administrative and paperwork costs that are unnecessary for the provision of health care, but that have come into existence because of the current patchwork of third-party payers and their attempts to control their increasing costs by closely monitoring the behavior of doctors and patients. Even worse is the fact that those cost-containment activities do not seem to have contained costs very well.

• The third excess cost is associated with the fear of malpractice suits. Administering medically unnecessary tests and procedures helps to insulate doctors and hospitals from the potential wrath of patients or their families when inevitable accidents occur in medical treatment or when treatments just do not work.

In some sense each of those costs has been brought about by the retreat from a market-based system of medical delivery. The first two of them could have been avoided if patients had been given incentives to make their own choices about medical care. The third cost could have been controlled if the courts had allowed patients and medical providers to use market contracts to detail liability in case of unforeseen accidents.

The Cost from Overusing Medical Resources

Largely ignored in much of the current debate over health care is the excessive use of medical resources by ordinary Americans. No politicians are giving speeches blaming the average citizens of the country for overusing medical care. There are no fireside chats with the president asking citizens to stop seeing doctors so often, asking parents to have their children "tough it out" and not see the doctor for every little scratch, asking the elderly to give up that extra year or two of life. Politicians are not so foolish.

But turning a blind eye to the consumption of medical resources by patients is a mistake. If the country is overusing medical resources, patients must bear responsibility for much of that overuse. We cannot cut our medical expenditures without reducing our consumption of medical resources. Fortunately, we know why patients overuse medical resources, and we know how to solve the problem. Unfortunately, the political will to enact correctives to the problem is not as easily come by, and the current administration in Washington seems to prefer to make empty promises to reduce costs while at the same time increasing medical services.

The concept of "excessive" medical use has a very precise meaning in economic analysis. When the marginal value of the resources used in a medical treatment is greater than the marginal value provided to the patient by the medical treatment, then the medical treatment is classified as "excessive." Note that the economic concept does not require that the medical treatment be without value altogether.

That definition needs to be contrasted with that of the medical community, which typically defines "excessive" treatment as a treatment that is not medically beneficial, as in the claim that cesarean sections are performed in many cases where they serve no positive medical purpose. The medical definition of "excessive" is similar to that of "fraudulent." Patients purportedly accept unneeded treat ment because they are misled by doctors. Yet the economic concept of "excessive" does not require any deceit or fraud at all. It merely requires that patients receive treatment that the patients themselves value at less than the cost of the treatment.

The economic concept of excess use of medical resources is illustrated in Figure 2, which is a version of a simple diagram that can be found in virtually any introductory economics textbook. In Figure 2 medical care is simplified into a single unidimensional concept for the purposes of illustration, but the ideas contained in the diagram are perfectly general and can apply to any particular medical procedure. The downward sloping line represents the value to patients of increasing amounts of medical care. Not all patients have the same value for a given procedure: some patients are not likely to live a useful or productive life, even with treatment; others expect to be able to live many productive years afterwards; still others prefer to preserve resources for their children and forgo treatment. Various persons, therefore, will have different values for identical medical procedures, since the impact of the procedure on their lives will be different. Their differing values for the medical service are arrayed in order, measured by dollars, from highest to lowest, in Figure 2. In the jargon of economics, it is a demand curve.

Fig 2

The upward sloping line represents the value of resources that are used when providing medical services. Doctors, nurses, hospitals, and the other resources currently used in providing medical care could be productively put to use in other activities. Thus, the provision of medical services is a cost to society, in the sense that resources that are used to provide medical care cannot then be used for something else. The measure of the value of lost resources is known as the opportunity cost of producing medical services.

In Figure 2, the cost of providing additional units of medical service is shown by the upward sloping line, which is usually called a supply curve. It is shown to slope upward because it is often (but not necessarily) thought that the resources used first in this market are best suited for medical uses relative to other uses, and those used last are poorly suited to medical uses.

It is a simple matter to determine the optimal quantity of medical services in a diagram such as Figure 2, and students in introductory economics classes have been doing so for decades. The quantity of medical services Q* is the optimal amount of medical service.

That can be understood by examining the implications of other quantities of medical service. For quantities of medical service greater than Q*, a unit of additional medical service is of lower value to patients than is the cost of providing it. In other words, patients would prefer cash equal to the value of the resources used to provide the medical services to receiving the medical services. Thus, it impoverishes patients and society to produce medical services when the recipient of the service would prefer those resources to be used for a different purpose. Similarly, for quantities less than Q*, patients value an additional unit of medical service more than they value the resources used to provide that unit of medical service. Producing the extra unit of medical service would enhance the well-being of patients and society. Thus, if the extra unit is not produced, society is deprived of a potential gain. Therefore, the quantity Q* is the efficient output. At Q*, the net value (value to consumers minus resources used up) of medical services is maximized.

Unfortunately, the current medical system does not induce patients to choose the efficient quantity Q*. Because patients largely have their medical bills paid by third parties, it is rational for them to consume medical services even when the value of those medical services is less than the value of the resources used to provide them.

Third-party payments are of two forms. First, most patients have private health insurance, usually provided by their employers.(3) A typical feature of such insurance is that when insured patients go to doctors, or hospitals, they pay only a small part of the actual cost of the visit, known as a copayment. Second, most patients without private health insurance are covered by government health insurance, either Medicare or Medicaid. Those patients also pay only a portion of the actual costs of the medical resources they use. As a result, there are very few persons who actually pay their entire health care bills out-of-pocket.

Figure 2 can be used to illustrate the situation in which patients pay zero out-of-pocket expense for medical procedures. Although zero out-of-pocket expense is something of an exaggeration (such expenditure is actually 23 percent), that assumption makes the issue easier to understand. In that case, patients have no reason to refuse any medical procedure, no matter how little the value of the procedure might be to the patient.(4) The quantity of medical services that patients will request will be Q1. The extent of the unnecessary medical services is given by the difference between Q1 and Q*. Those excess medical procedures have some value (given by area D), but their value is too low to justify the expense of the procedure.

The unshaded rectangle in Figure 2 represents the expenditures that society would make for medical care if it were provided in a fully functioning marketplace. It is merely the product of the price P* and the quantity Q*. The shaded region represents the excessively high expenditures that occur when third parties pay for all medical care. It is equal to the product of the excess quantity, Q1, and the higher price of medical care, P1, minus the product of P* and Q*.

Some of the excess expenditure goes to sellers of medical services, indicated by areas B and C. The extra revenue going to providers may explain why they have been willing participants in the movement away from consumer payment for medical care.(5) Some of the excess expenditure produces value to consumers, given by area D. But some of the excess expenditure is pure waste, known to economists as deadweight loss, and given by the triangular portion of the shaded area indicated as A.

The excess consumption at a point such as Q1 will likely take the form of excess quality since, in some sense, quality and quantity are interchangeable. Too many hospitals might contain expensive state-of-the-art equipment; too many patients might occupy singleor double-occupancy rooms rather than wards. Overall, the quality of care will be too high, even though there clearly is some value in the additional care. We have chosen a Cadillac of health care systems when a Chevrolet is more in line with our willingness to pay. It is understandable that some commentators are reluctant to characterize the problem of excess quality as a "crisis." Of course, it is not really the quality of health care that is in crisis; it is the financing. Making monthly payments on a Cadillac can seem like a crisis to someone making Chevrolet wages. Too much of an economic good can be as harmful as too little.

The Impact of Third-Party Payment on Medical Spending

Measuring excessive use of a product is a difficult and usually imprecise task. The best that can be hoped for is a crude estimate, and even that will require some rather broad generalizations, such as lumping many disparate medical resources into a single whole.

The analysis consists first of measuring the relationship between third-party payments and changes in the use of medical resources. Then the current use of medical resources is compared to the resources that would have been used if patients had paid for their own health care (Q* in Figure 2). The difference measures the excessive use of medical resources.

Third-party payment mechanisms are now very common, although before World War II individuals generally purchased medical services just like any other economic commodity and paid for them just like any other economic commodity--out of their own pockets. But during the war many companies began to offer medical benefits as a way to avoid price controls and to take advantage of the tax code. As shown in Figure 3, there was an explosion of private health care coverage shortly after World War II.(6)

Fig 3
Source: Based on data from Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

In addition, 1965 was the year in which the government introduced Medicare and Medicaid, which pay for much of the medical care of the elderly and the poor. The combination of the increased use of private health insurance and in creased government payments in the last few decades has reduced the out-of-pocket expenses of consumers dramatically. Figure 4 shows the fall in out-of-pocket expenses since 1960.(7)

After 1960 the fall in out-of-pocket expense was mainly due to increases in government expenditure. Although not shown, there was a significant decrease in out-of-pocket expenses due to increases in private health insurance in the 1940s and 1950s. The overriding conclusion to be drawn from Figure 4 is clear, however. The role of third-party payment has increased significantly in the last few decades.

Some of the most compelling evidence that third-party payments alter the use of medical resources comes from a study performed under the auspices of the RAND Corporation in the late 1970s.(8) That study assigned families to four health insurance plans with differing coinsurance provisions and deductibles. Coinsurance is the percentage of medical bills paid out-of-pocket by the patient. The deductible measures the maximum total dollar amount that a family will pay out-of-pocket before the plan will drop the coinsurance requirement and pick up the entire medical bill. Some families had zero coinsurance, meaning that the plan paid all of their medical bills, while other families had to pay up to 95 percent of the cost of their medical bills, until their bills reached a total deductible level of $1,000 in 1973 dollars, which is the equivalent of approximately $2,850 in today's dollars.(9)

Fig 4
Source: Based on data form Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

The RAND researchers observed how the different coinsurance rates influenced the use of medical resources by 2,500 families for three to five years. They found very pronounced changes in the use of medical resources, depending on the extent of third-party payments. In particular, families with no coinsurance (complete third-party payments) used 53 percent more hospital services (measured in dollars) and 63 percent more visits to doctors, drugs, and the like than did the group that paid 95 percent coinsurance. Overall, the total use of medical resources was 58 percent greater for the group with no coinsurance. Thus, there is clear indication that the use of medical resources by patients varies dramatically with the existence of third-party payment mechanisms.

Figure 5 shows the relative medical expenditures for each of four groups in the experiment. As the share that patients pay drops below 50 percent, the use of medical resources increases dramatically. It is interesting that this experiment did not find increased use of medical resources as the out-of-pocket share dropped from 95 percent to 50 percent. That may mean that consumers do not begin to overuse medical resources seriously until they pay less than half the cost, or it may just be a statistical anomaly, as the authors of the RAND study point out.

Fig 5
Source: Data from RAND health insurance experiment, cited in Joseph Newhouse et al., "Some Interim Results from a Controlled Trial of Cost Sharing in Health Insurance," New England Journal of Medicine, December 17, 1981.

The decrease in use of medical resources by families with high copayments might have been thought to decrease their health. One of the criticisms that has been made of high-deductible, high-copayment medical plans is that they discourage inexpensive preventative medicine, causing higher medical payments down the road. But the RAND study found no significant difference in health outcomes. In addition, a study by Robert Brook and others, reported in the New England Journal of Medicine, concluded that free medical care did not appear to improve the health of the participants.(10) Thus, it appears that the excessive costs associated with excessive use of medical resources do not materially improve the health of those receiving that care, a result that should not be surprising. Most persons are likely to be willing to pay for inexpensive medical services that provide enhanced future health. Moreover, the prevention of disease is most often associated with activities that individuals engage in for their own reasons, and that are not strongly related to visits to doctors (e.g., they stop smoking or they exercise).

It should also be noted that the RAND study was conducted in such a way as to underestimate the impact of third-party payments on total medical expenditures, because the impact of third-party payments in the experiment could not appreciably influence the price of medical resources, since the number of participants in the study was too small a percentage of the market to have influenced market prices. However, if the measured increase in use of medical resources found by the RAND researchers were duplicated throughout the country by millions of patients, as more and more of them switched to third-party payments, the price of medical resources could be expected to rise, and the increase in expenses could be expected to be larger than that found in the RAND experiment.

The RAND experiment is not the only estimate of the response of consumers to medical payments. A large number of other studies conclude that medical consumers do respond to price changes, and the degree of response found is often similar to that reported in the RAND study. There is virtual unanimity in the belief that higher levels of third-party payment will increase the use of medical facilities by patients.(11)

In the RAND study patients responded within a few years to changes in third-party payments. Yet it is likely that, for society as a whole, the complete reaction to changes in third-party payments might take a longer time to work through the system. Once third parties pay for a large share of total costs, technologies that might not have been cost effective when the patient was paying the full cost will be demanded by patients.

A simple analogy can be used to illustrate the impact of third-party payment on the growth rate of medical expenses. If the government told citizens that it would pay 80 percent of the cost of each automobile purchased, most citizens would march right out to their local dealerships and order very expensive cars. Automobile manufacturers, sensing profits in the air, would begin to offer far more standard equipment and would begin to offer more new types of equipment than they had previously. What was formerly a luxury car would become commonplace, and new, more luxurious automobiles would be produced. The newest technologies would be used (rather like those used in jet fighters), since the cost to the consumer would be only a fraction of the actual cost. Thus, the growth in automobile expenditures caused by the third-party payments could go on for many years.

A similar story can be told about the health care industry. Although the RAND experiment indicated that consumers responded quickly to third-party payments, the longer run consequences might continue for decades. It is possible to examine that hypothesis by comparing the growth in expenditures over several decades for various medical products that have considerable variation in the degree of third-party payment. As most persons who have experienced the choices available with different health insurance policies can testify, medical services related to dental and vision care (eyeglasses) and drugs or medical appliances tend to have much higher out-of-pocket expenses than hospital stays or visits to doctors. Figure 6 indicates that major differences exist in the share of out-of-pocket expenses borne by the patient for various categories of care.(12) In 1990 third parties paid virtually all hospital bills (95 percent), making hospitalization essentially a free good for most Americans, and only 20 percent of physicians' bills were paid by patients. On the other hand, 53 percent of dental bills, 74 percent of drug expenses, and 68 percent of eyeglasses bills were paid by patients.(13)

If third-party payments influence the growth of medical expenditures, then the increased use of medical resources in the past few decades should differ for the various types of medical services. That prediction is generally borne out, as shown in Figure 7, which shows the growth in each of the medical sectors, relative to their 1965 amounts, after controlling for the effects of inflation. Thus, the total costs of hospitalization increased more than 350 percent from 1965 to 1990, even after controlling for general inflation. During the same period, physician payments went up almost 250 percent, yet costs for dentists, drugs and appliances, and vision care went up only 150 to 200 percent. At the same time, real GNP went up by 94 percent.(14) It should be no surprise, then, that medical costs are gobbling up larger and larger shares of GNP.(15)

Fig 6
Source: Based on data from Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

Fig 7
Source: Based on data from Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

It is particularly ironic that drug manufacturers have been singled out by the Clinton administration as being responsible for the spiraling costs of health care in light of the fact that the growth in drug expenditures is far less than the growth in overall medical costs, particularly hospitalization. The relationship between growth in expenditure and out-of-pocket payment is more clearly seen in Figure 8. For five categories of medical care, the share of costs paid by patients is related to the growth in real expenditure over a 25-year period. The relationship is as expected: medical categories with low levels of third-party payments (high out-of-pocket expense) had the smallest increase in total expenditures. Although there are only five data points--and the small number of observations requires that we be cautious in trying to generalize the results--it is still noteworthy that the results indicate a powerful relationship between the level of coinsurance and the growth of medical expenditures.

Fig 8

The three medical categories having a relatively small third-party payments--dental services, drug products, and vision products--also show growth rates that are not a great deal higher than the overall growth of GNP (194 percent). The two categories with the greatest level of third-party payments experienced the greatest growth. The rank correlation between the growth of medical costs and the share of the medical bill paid out-of-pocket is perfect.

The line drawn through the points is a linear regression line.(16) It is almost a perfect fit through the points, and its interpretation is straightforward: the larger the share of medical expense paid by the patient, the smaller the growth in expenditure on that medical product.(17) Extrapolating the line to a point where patients pay completely for medical services would lead to the conclusion that medical services would grow at a rate only slightly greater than the overall growth in GNP.(18) Table 1 gives the expected share of GNP devoted to medical care in 1990 for various levels of third-party payments, based on the results shown in Figure 8.

Table 1
Medical Care's 1990 Share of GNP for Different
Third-Party Payments (1965 base)
If Patients Had Paid (%) Percentage of GNP in 1990 Would Have Been
100 6.8
75 8.7
50 10.6
25 12.6
0 14.5

Thus, the evidence indicates that if the effect of third-party payment had been eliminated, the growth in medical expense would have been much smaller than it actually has been. The reality is that medical expenditures have risen from 4.4 percent of GNP in 1950 to 12.2 percent in 1990 to over 14 percent today. That increase has occurred under a regime of increasing third-party payments. Yet without third-party payments, the growth rate of medical care would have been much smaller, and the "crisis" in health care would not have been a crisis at all.

But even the figures in Table 1 estimating the importance of medical care under regimes of low third-party payments will, to some extent, overestimate the importance of medical care as a percentage of GNP. That is because the base year, 1965, was already severely tainted by the influence of third-party payments, and thus the level of medical spending was already significantly higher than it would have been had third-party payments not been as high as they were.

Finally, it is disconcerting to note that two of the three categories that have experienced the smallest increase in total expenditure--dental and vision products--are going to be brought under the umbrella of third-party payments in the proposed Clinton health plan, a policy that will ensure that our current problems will get worse. Instead of trying to duplicate the relatively good performance of dentistry, eye care, and drugs in the relatively profligate categories of hospitalization and physician payments, the Clinton administration appears determined to impose the egregious performance of hospitalization and physician expenses on the few areas not currently suffering from an explosion in costs.

Evaluating Excessive Output

The historical evidence just examined indicates that with no third-party payments, the medical bill for the nation would be less than 7 percent of GNP instead of the current level of 14 percent. Stated another way, current spending is approximately double the level it would have been if third-party payments had not existed. However, since insurance for calamitous medical bills is valuable, so is some level of third-party payment. Assuming that the alternative to the current system will still leave thirdparty payments in the vicinity of 25 percent implies, based on Table 1, that the share of GNP devoted to medical care would be in the range of 8 to 9 percent. In dollar terms, that translates into a conclusion that for 1992, under a system with third-party payments in the vicinity of 25 percent, medical spending would have been approximately $300 billion less than the actual payments.(19) That is not to say that the excessive $300 billion provides no value, but that it provides less value than cost and would not have been spent if patients had been making the financial decisions.(20)

Although that estimate of excessive expenditure may seem like a fairly enormous sum, it is actually quite conservative. Other analyses in the literature provide a much larger estimate of the increased use of medical resources. Martin Feldstein estimates that for hospital care, the largest single component of health care, the increase in expense that would be caused by a change from complete out of-pocket expenses to complete third-party payments might be as high as 250 percent.(21)

Even the RAND study, which provided an underestimate of the impact of third-party payment, concluded that virtually complete third-party payments would increase medical costs by at least 60 percent relative to what they would have been with much lower third-party payments, a result not far from that found in the historical data.

Excessive Costs of Monitoring

Much of the public debate over health care centers on the amount of paperwork that is required. Hospitals and doctors fill out a plethora of forms for health insurance companies and for the government. But in fact the paperwork (administrative) costs of the current system are not the largest unnecessary costs in our medical system.

It is possible to gauge total administrative costs by focusing on the administrative costs of health insurance, the component of administrative costs that appears to be most precisely measured. Comparing those costs to the other costs of the health care system (Figure 9) makes it clear that the measured administrative costs of running health insurance companies are not a large proportion of the total. Indeed, in 1990 they came to 5.81 percent of the total cost of our health care system.(22)

However, health insurance administrative costs are only a part of the true administrative costs of the current system. After all, hospitals and physicians have enormous amounts of paperwork, much of which they send to the health insurance companies. Yet only the costs to the insurance companies are included in Figure 9. Still, the administrative costs of running health insurance companies should mirror the costs that hospitals and physicians incur, since the forms go back and forth between those parties. If so, then the growth of one category of administrative costs will reflect the growth in other categories of administrative costs.

As a first approximation, administrative costs could be expected to grow at about the same rate as other medical costs, since some administration is necessary. If administrative costs are excessively high, and if the excess has not been in the health system from the beginning, then we should find that administrative costs have increased by more than other medical costs. Figure 10 compares the growth of total medical costs with the growth in the cost of administering private health insurance since 1965.

Fig 9
Source: Based on data from Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

Fig 10
Source: Based on data from Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

Figure 10 indicates that administrative costs increased slightly less than overall medical costs from 1965 to 1975, but that since 1975 they have grown very rapidly.(23) Thus, there is some evidence to indicate that administrative costs might be too high. It is important to understand just why those costs might have started to grow so rapidly after 1975.

The most likely explanation seems to be the emergence of Professional Standards Review Organizations (PSROs) in 1972 and Professional Review Organizations (PROs) 10 years later. Those organizations are privately contracted agents of the government that review the decisions made by doctors and other health professionals, purportedly to save taxpayers money on Medicare and Medicaid cases by eliminating unnecessary or wasteful expenditures. Since private health insurance companies act as fiscal intermediaries for the government's Medicare program, the reviews are bound to affect their costs as well. The flip side is Utilization Review (UR), a system very similar to PROs, in that private health insurance companies hire third parties to review the behavior of doctors. All three systems give doctors incen tives to document all aspects of care, since otherwise they might not be compensated by the third-party payer.

If the entire difference in the growth of administrative costs and other medical costs since 1965 were taken to be excess administrative costs, then 50 percent of current administrative costs would be excessive. And it is inter esting that there is no evidence that the extra administrative costs have lowered overall medical costs, so that the supposition that the new administrative costs do not provide any value seems plausible. Of course, the true test of whether the additional administrative costs are worthwhile requires comparing actual medical costs with what the costs would have been without the additional administrative costs, a test that I do not attempt here, nor am I aware of any such calculation by others. Since administrative costs for health insurance were somewhat less than $50 billion in 1990, and doctors and hospitals must duplicate those costs, we can conservatively assume that total administrative costs are at least $100 billion. Then, if the costs were 50 percent too high, the excessive administrative costs would be $33 billion.

There are many estimates of the excess costs of administering health care, as might be expected given the difficulty in measuring them.(24) It has been claimed that current administrative costs are twice as high as they should be, and that as much as 10 percent of medical expenditure is excess administrative costs. Still, even those estimates indicate that excessive administrative costs are small ($83 billion in 1992) compared to the excessive use of medical resources due to third-party payments.

The current Clinton heath plan claims that there will be large savings in administrative costs and that those savings will help to cover the cost of health insurance for some 37 million Americans who are thought not to have health insurance at any moment.(25) But those cost savings are predicated on there being fewer forms to be filled out, since there will be fewer insurers. But if the additional administrative costs are due to wasteful utilization reviews by third-party payers, there would be no reason to expect administrative costs to fall, given that the Clinton plan expands the role of third-party payers. The Clinton plan also adds entire new layers of government bureaucracy, which, if history is any guide, seems most unlikely to reduce overall administrative waste.

How Patient Power Lowers Health Care Costs

The Patient Power plan avoids excessive costs--both those associated with excessive use of medical care and those associated with excessive administrative burdens. It reduces medical expenditures by giving patients an incentive to use medical care efficiently, rather than overusing it. To that end, tax laws would be altered. The tax break extended for the purchase of health coverage would be allowed only for basic, no-frills catastrophic insurance policies. No longer would patients be faced with a choice of having their employer pay for small medical bills with before-tax dollars or paying out-of-pocket costs with aftertax dollars. Thus, there would be no reason for them to prefer to have insurance pay for most medical bills, and insurance policies would no longer carry small copayments. As we have seen, that is the most crucial element in stopping the soaring increase in health care costs without clumsy, government-imposed price controls.

The Patient Power plan would allow patients to selfinsure (meaning that patients themselves pay for the treatment of their illnesses) for many potential medical bills through medical savings accounts that would go hand in hand with the tax changes. It typically costs an employer more than $4,800 to provide health insurance for a worker, her spouse, and two children. Under the Patient Power plan, employers would purchase only catastrophic policies for workers, and workers would deposit the savings in premiums in medical savings accounts. The medical savings accounts could be used to pay for small, routine medical bills not covered by catastrophic health insurance. If the account was not used to pay for medical bills, the owner could roll it over into an IRA to be used for other purposes after retirement. Patients would have an incentive not to use their medical savings accounts except for medical care that they deemed worth the money, since they would benefit directly from economizing on medical care. In addition, selfinsurance eliminates the paperwork involved with having third parties pay medical bills. It also eliminates the costs of having third parties monitor the transactions between patient and doctor, thereby greatly reducing administration costs generated by PSROs, PROs, and URs.

Second, Patient Power would reduce state regulations that currently mandate many benefits that must be provided by each health insurance policy sold in a state irrespective of patients' wants or needs. Such regulations drive up the price of health insurance and make the purchase of a policy less attractive for persons who are not interested in the extra benefits mandated by the state. If consumers are allowed to purchase insurance that is tailored to their specific needs without having to comply with state mandates, they will be happier and will save money.

Finally, Patient Power would reform tort law to allow patients and doctors to contract in advance to rationally insure against accidents or errors.


The moral of this story is crystal clear: third-party payment mechanisms have raised the total consumption of medical resources to unprecedented levels. The excessive use of medical resources due to third-party payments was estimated to be over $300 billion and the excessive administrative costs to be in the vicinity of $33 billion.

To lower the currently very large medical expenditures in the United States, the third-party payment system must be reined in. Putting the patient back in control of the medical purchasing decision is the most effective way to control third-party mechanisms, while still providing a safety net for Americans.

The worst policy that we could follow would be to increase third-party payments and reduce copayments. Yet that is exactly what is proposed by the Clinton administra tion. The evidence makes it abundantly clear that the current increase in medical bills will only be exacerbated by the Clinton plan and that rising costs will quickly run into the spending caps contained in the Clinton plan. That plan would be greatly improved if it were to impose high copayments on patients instead of low copayments, and if it were to keep predictable and relatively inexpensive medical costs, such as dentistry and eye care, out of the thirdparty payment system. But even if those changes were made, the Clinton plan would still create a large government bureaucracy controlling and limiting consumer choices, and it still would contain the dreadful idea of spending caps as a means of reducing medical costs.

The Patient Power plan is much more likely to reduce health care costs.


(1) Recreational expenditures, relative to disposable in come, increased from 5.0 percent in 1958 to 7.1 percent in 1988, according to statistics reported in Harold Vogel, Entertainment Industry Economics (Cambridge: Cambridge University Press, 1990), p. 348.

(2) John C. Goodman and Gerald L. Musgrave, Patient Power: Solving America's Health Care Crisis (Washington: Cato Institute, 1992).

(3) Ibid. That appears to be an outgrowth of two factors. First, during World War II price controls were in place at a time when employers were looking to increase the pay of workers. Providing additional fringe benefits allowed employers to circumvent price controls, and fringe benefits thus became a common part of an employee's compensation. Second, tax laws allow employers to deduct medical insurance premiums, whereas individuals have no such right (unless their medical bills are large enough for them to declare them as itemized deductions, which is certainly not the usual case). Obviously, those factors provide a strong incentive for most employees to purchase their medical insurance through their employers.

(4) Note that the inconvenience of the medical procedure, lost wages, pain, and so on, are taken into account in the patient's valuation of the medical procedure. Thus, a patient will request any procedure for which all "psychic" costs are less than the benefits, ignoring the monetary costs of the procedure itself.

(5) Although the leadership of the American Medical Associa tion originally opposed Medicare in 1965, they were against it for philosophical reasons and actually predicted that it would increase revenues going to doctors. Their opposition ended when most doctors realized the bonanza that it provid ed. See Edward Annis, Code Blue (Washington: Regnery Gate way, 1993).

(6) Health Insurance Association of America, 1991 Source Book of Health Insurance Data (Washington: HIAA, 1992), Table 2.2.

(7) Ibid., Table 4.4.

(8) Joseph Newhouse et al., "Some Interim Results from a Controlled Trial of Cost Sharing in Health Insurance," New England Journal of Medicine, December 17, 1981.

(9) Using the GDP deflator found in Robert J. Gordon, Macro economics (New York: Harper-Collins, 1993), appendix A.

(10) Robert Brook et al., "Does Free Care Improve Adults' Health? Results from a Randomized Clinical Trial," New England Journal of Medicine, December 8, 1983.

(11) Alan Sorkin reports on 20 estimates of price elasticity for various medical services. Price elasticity measures the responsiveness of consumption to changes in price. The majority are between 0.2 and 1, which is consistent with the RAND experiment. Sorkin, Health Economics (New York: Lex ington Books, 1992), p. 31.

(12) Health Insurance Association of America, Table 4.1.

(13) A large portion of expenditures on drugs is for overthe-counter products, which most medical plans do not cover.

(14) Ibid., Tables 2.2, 4.1, and 4.4; and Gordon, appendix A.

(15) There were three other categories of expenditure that were not included: nursing home expenditures, other health services, and other professional services. Since the con tents of categories with the term "other" is unclear, and might change dramatically over time, I followed the common practice of removing them. Nursing home expenditures in creased dramatically over the period, but that is probably more attributable to the decline in the extended family and the increase in life span than it is to any increase in medical use. Nursing homes, after all, generally do not respond to specific health problems so much as to old age and general inability to look after oneself. (Younger family members used to look after elderly relatives.) In addition, regulation of nursing homes during the period raised their costs significantly, according to Goodman and Musgrave, p. 107. Had those categories been included, the statistical confidence in the relationship between out-ofpocket costs and growth in expenditure would have weakened considerably, although the direction of the relationship would have been the same.

(16) Obviously, the change in expenditures on those catego ries of medical care are likely to depend on many variables other than just the change in copayments. Some of those factors are changes in age cohorts, changes in medical technology (which itself is likely to be affected by the copayment rate), and changes in diet and exercise. Never theless, these results are consistent with those of prior studies, are statistically significant, and are not related in a clear way to potential left-out factors.

(17) Regressing on the share of out-of-pocket expenses (OOPE) gave the equation: Growth in Expenditures (GIE) = -255 _ OOPE + 478. The t-statistic on OOPE is 12.34 and the rsquared (adjusted) is .97. Those coefficients imply that if out-of-pocket expenses had been 100 percent, medical expen diture would have grown in 1990 to only 223 percent (478 255) of its 1965 value. The GNP in 1990 was 194 percent of its 1965 value, so medical care would have remained almost constant as a percentage of GNP.

(18) This estimate implies a higher growth in medical expen diture than some others suggest. For example, Sorkin re ports that most estimates of income elasticity of medical care are in the range of .5 to .7, meaning that medical expenses would be expected to grow only 60 percent as fast as income, holding everything else constant.

(19) In 1992 spending on medical care was approximately $830 billion. Assuming that our best alternative is to have third-party payments in the vicinity of 25 percent, we would expect current spending to be approximately 60 percent too high. Thus, for 1992, under a system with smaller thirdparty payments, medical spending would have been only $520 billion, and, therefore, slightly over $300 billion in health care spending was excessive.

(20) Measuring the actual deadweight losses associated with excessive expenditures is an imprecise task. Martin Feld stein calculated the possible deadweight losses from the overuse of hospitalization. On the basis of the 1969 outof-pocket expense of 33 percent, he estimated that the dead weight loss ran from a low of 23 percent of total hospital revenues to a high of 67 percent of total revenues. Felds tein, Hospital Costs and Health Insurance (Cambridge, Mass.: Harvard University Press, 1981), chap. 6. With current outof-pocket expenses for hospitalization running at only 5 percent, we would expect even larger deadweight losses than he found. Feldstein reports (p. 99) that Mark Pauly mea sured welfare loss at $450 million for 1963, which is 15 percent of 1963 total health expenditures, as reported in Health Insurance Association of America, Table 4.4.

(21) Feldstein, p. 66. He reports estimates that the elas ticity of hospital days with respect to price is between .5 and .7. Assuming that .6 is the appropriate number, and assuming that it is an arc elasticity, decreasing payment from the market price to zero would increase usage by 250 percent.

(22) Health Insurance Association of America, Table 4.1.

(23) It should be noted that using data on personal consump tion expenditure, which exclude Medicaid and some other government spending (public health, research, construction) and which go back to 1950, there is no evidence that admin istrative costs grew more rapidly than other medical expens es from 1950 to 1965.

(24) Some of the higher estimates come from Steffie Wool handler and David Himmelstein, "Administrative Costs of U.S. Health Care," New England Journal of Medicine, May 2, 1991; they claim that about 20 percent of medical spending is administrative in nature. They also claim that health care administration costs in Canada were only about 10 percent of health care spending, and conclude, therefore, that about half of the U.S. administrative expense was wasteful. They also note that there was a very significant increase in wasteful administrative costs between 1983 and 1987, for which they blame the increased use of cost-containment mechanisms. There are good reasons to be suspicious of those results, as reported in a critique of the study by the Health Insurance Association of America in the May 30, 1991, issue of Medical Benefits.

(25) Although approximately 37 million Americans may not have health insurance on any given day, only about 7 million fail to have health insurance for an entire year. Most uninsured individuals are only temporarily uninsured.

Published by the Cato Institute, Policy Analysis is a regular series evaluating government policies and offering proposals for reform. Nothing in Policy Analysis should be construed as necessarily reflecting the views of the Cato Institute or as an attempt to aid or hinder the passage of any bill before Congress. Contact the Cato Institute for reprint permission. Printed copies of Policy Analysis are $6.00 each ($3.00 in bulk). To order, or for a complete listing of available studies, write to: Policy Analysis, Cato Institute, 1000 Massachusetts Avenue NW, Washington, D.C. 20001. (202)842-0200 FAX (202)842-3490 E-mail

© 1994 The Cato Institute

End of quote