On Health-care Pt. 2.7: Reform is not inherently evil

Health-care reform has been a BigDeal(tm) lately, and I wanted to express some thoughts about it, the way it works and my general gripes about what is decidedly not real progress in my mind. In this series I will explore the benefits and failures of the current path of health-care reform in the United States. I will talk about insurance companies and risk pools; the difference between moral, political and economic decisions; and (in)efficiencies of scale in different levels of the industry.

On the April 17th, 2010 edition of The Economist, packed between an article about how we shouldn't eat our vegetables (seriously) and something about that slowly disintegrating Mediterranean economy, there was an article about dialysis. Most of the content matter was nothing new. Dialysis is expensive, sometimes up to $80,000 per person per year; many people die; the drugs and equipment are expensive. Basically, the same old "is it worth $x to keep this person alive?" question that is guaranteed to get everyone to scream over each other and not much else. But, while cruising through snooze-ville, I came across these little gems:

... running dialysis clinics and administering drugs, which account for 80% of the cost of dialysis. The two biggest operators of dialysis clinics are Fresenius and DaVita ...  Each of them runs almost a third of America’s dialysis clinics.

American dialysis clinics are paid on a “cost-plus” basis for the drugs they use ... American clinics used to favour an injected drug costing $4,100 a year over an identical oral one which was introduced to the market at a cost of $450 a year. After languishing unused, the oral drug now costs more than the injected one.

In case you didn't follow, here's how I understand this: Some pharma company came up with a drug that could be administered orally instead of intravenously and cost 11% of the original drug. Wow, that seems both convenient and economical! The maker couldn't sell this new, cheaper substitute because what clinics are paid is based on the cost of the drugs, therefore cheaper drugs meant less profits. In order to sell their new drug, the drug maker increased the price to a level above the injected substitute and the clinics, lured by higher profits, switched to it too. Clinics were able to do this because they could just bill it to the insurers. Patients didn't care because they were too worried about not dying, and because the insurer is paying anyways. This is big money! The government alone spends "$24 billion a year," and private insurers spend even more, although no exact figure was given. In any case, that's $48+ billion.

That, my (few) readers, is what we call "negative price elasticity of demand," resulting from the presence of a "perverse incentive."

Your friendly neighborhood tea-partier might be pointing to this as proof that the evil socialist health-care reform is going to bankrupt this once-great, once-capitalist nation, but he/she would be wrong:

The reforms will introduce a “bundled price”, whereby clinics receive a set rate for providing treatment. Analysts expect drug costs to fall by at least 10% soon after the change, as clinics use fewer or cheaper drugs.

Take that reactionaries!

On Health-care Pt. 2.6: Risk Pools and Fraud

Health-care reform has been a BigDeal(tm) lately, and I wanted to express some thoughts about it, the way it works and my general gripes about what is decidedly not real progress in my mind. In this series I will explore the benefits and failures of the current path of health-care reform in the United States. I will talk about insurance companies and risk pools; the difference between moral, political and economic decisions; and (in)efficiencies of scale in different levels of the industry.

So, I was taking a look at the Coalition Against Insurance Fraud website, and found a page full of stats (2) for reporters. Two things became instantly apparent: they don't know how to cite their so-called "stats" in any kind of usable manner and they are obviously run by the insurance companies themselves. Despite this, some of their claims are sort of interesting:

The U.S. spends more than $2 trillion on healthcare annually. At least 3 percent of that spending — or $68 billion — is lost to fraud each year. (National Health Care Anti-Fraud Association, 2008)

Medicare and private health insurers pay up to $16 billion a year for needless imaging tests ordered by doctors. (American College of Radiology, 2004)

Fraud accounts for 19 percent of the $600 billion to $800 billion in waste in the U.S. healthcare system annually. Fraud amounts to between $125 billion and $175 billion annually, including everything from bogus Medicare claims to kickbacks for worthless treatments and other services. (Thomson Reuters, 2009)

Medicare and Medicaid lose an estimated $60 billion or more annually to fraud, including $2.5 billion in South Florida. (Miami Herald, August 11, 2008)

First of all, let me say that I have little faith in these so-called statistics. I have little faith in anything that uses as its source The Miami Herald. Not because the Herald isn't a fine newspaper (it isn't) but because it's written by journalists not academic researchers. I'd like to see real research, not some little quotable that's mostly unfounded opinion. In the great words of Wikipedia, "[citation needed.]"

Second, the actual figures don't really matter to me. I'm here to talk about ideas. Let's look at four types of fraud:

• Person without coverage receives care which is billed as if the covered person had received it
• Person with coverage conspires with provider to participate in excess billing in exchange for cash or otherwise
• Doctor orders unnecessary procedures to increase billings when lacking clients
• Person receives medicine paid for by insurance which is improperly used or re-sold. (Where do you think dealers get pills?)

The first one stands out to me, because I see a solution for it. The fraud consists of someone not participating in the insured pool, but then using the coverage of the pool to receive treatment. It is the equivalent of sneaking in a concert. His / her costs are being paid for by the rest of the participants, raising their premiums. The higher the premiums go, the more incentive there is to cheat or forgo insurance in this system. You could detect and stop the fraudsters by investing in additional fraud and abuse detection units and then attempting to prosecute the fraudsters, which costs money. Another possible solution is to make participation in the pool compulsory, and severely limit the possibility of fraud. You still would be open to abuse from people not eligible for the mandated pool (e.g. illegal immigrants), but it would be much more difficult and there would be much less incentive for legal residents to attempt to cheat this system.

Final result? Compulsory participation reduces the amount of care the uninsured fraudulently receive that is paid for by the presently-insured. Depending on the levels of fraud in the system and the cost of compulsory participation, the costs of the presently-insured might even drop.