Health care prescription #4

This is counter-intuitive. Let’s tax health care benefits just like we tax wages (and reduce other taxes to compensate).  Back to basics – the more we tax something the less of it we get; the more we subsidize something the more of it we get.

The more we subsidize health care (by making health insurance tax-free compensation) the less employees have an incentive to fight for lower prices and to shop around.  Also, to the extent companies can give a dollar of tax-free benefits it is the equivalent of giving $1.50 of taxable wages (for someone in the 35% marginal tax bracket).  So when one runs a company and is trying to get the most after-tax benefits to the employees for the dollar spent one uses health care benefits rather than higher wages.

But company-run health care programs are not very efficient either.  They are clearly more efficient than government-run programs but not nearly as efficient and effective as a program predicated on an individual spending his own money.

Out of my prescriptions offered to date this is the least likely to be understood and endorsed by our pointy-headed politicians but this prescription would still be effective as one partial solution to getting our health care system back on track.

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Another example of excellence in socialized medicine!

Last week Kane Gorny, died of dehydration while in a leading British teaching hospital – his nurses evidently forgot about him.  So much for excellence in nationalized health care.

And of course in most countries you will have a tough time suing the government for its negligence.  This is referred to as “sovereign immunity” and goes back to the days when one could not sue the King of England when he did you wrong.

But there are times that you can sue the government in the US, however it is a tougher road to travel than litigating against a big corporation or hospital.  The government gets stubborn and will spend $20,000 to keep from paying you $10,000.  Bureaucrat’s reputations are on the line and they will spend bucketfuls of your money to protect their personal reputation.

Much of the debate about health care in America has been about medical malpractice reform.  That is an important subject and we need reasonable limits on what the payouts should be.  But even if the surgeon amputates your left leg when you needed the right leg amputated, his medical malpractice insurance company will fight to reduce what you should receive in damages. You will have to hire an attorney for the fight and plenty of medical experts (quite expensive) and even if you win your attorneys and experts will receive a big chunk of the judgment. 

Interestingly, if a 25 year old financial analyst (earning $200,000 per year and with a family of four) loses his one remaining good leg the “damages” will be substantially more than a 60 year old retired man that also loses his good leg.  Because the jury is typically instructed to calculate the number of years remaining of expected salary times the expected earnings per year.

But in America patients that have been damaged by lousy (not just slightly poor) medical care have the chance to receive compensation.  If as a society we simply stated “tough luck”, that would reduce costs, and probably lead to sloppier care.  I doubt if many Americans want to see the patient that loses his good leg not get compensated but there is a cost to it that is greater here than in nationalized systems.

Much of our controversy has related to “punitive damages”.  These are additional awards by the jury from the defendant to the injured patient which are intended to reform or deter the defendant and others from engaging in this type of sloppy medical care.  These punitive damages are in addition to the actual damages and are intended to “send a message” to the defendant.

But if the medical mistakes were  unclear or just bad luck most juries are reluctant to punish the doctors that they generally trust.  Except we still hear stories where a jury awards $100 million punitive damage award to a family of a deceased patient.  These awards typically get reduced by the appeals court and in many states the legislatures have set maximum punitive damages as a percentage of the actual damages.

You won’t see the family of this Brit receiving any punitive damages and they may not even receive any actual damages or payments from the government at all.  The British system saves two ways – lower medical malpractice payments and they can cut corners at will.  Not a great way to lower costs.

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How should it work if your government goes bust?

If I invest in a corporation or an LLC all I risk losing is my principal.  I can’t invest $100 but lose a million.

But how should it work if your government goes bust?  Iceland is facing this question today and Greece and California must deal with this question soon.

Many of the government liabilities are based on decisions made while I was a citizen.  So during my lifetime I was a citizen of California for about 36 years.   So should I be on the hook for 36 years worth of their unpaid debt?  I sure hope not.  Maybe we should only count my adult years as a California citizen; this reduces my exposure to only about 20 years – but it reduces everyone else’s exposure as well.  So I might not be better off with this interpretation.

Liability in corporations in limited to what one invests but perhaps we need a system in government that results in its citizens being more accountable.

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Health care system prescriptions #2 & #3

Our first prescription solved the wholesale drug pricing problem.

But here is the second big problem and it also involves pricing.  The last thing I want is the government to set prices;  that would be a disaster.  But we have a major health-care pricing problem today.  Everybody from doctors to hospitals to MRI centers to pharmacies charge different prices to different customers.  That is OK until it is taken to the extreme.  Plus these service providers make it very hard for one to know what their price is (the last thing you will generally see for a pharmacy is what they charge for Xanax and the last thing you will see on a hospital’s website is what their daily charge per hospital room).  And try calling them up to get their price.

First, let’s consider the different prices.  An uninsured but credit-worthy (in other words one who is paying for her own care) patient might pay as much as five or six times as much for a night in the hospital as the hospital bills the US Government for a Medicare patient.  But in a hurricane where a gas station charges one customer five times what they charge another customer, the gas station is convicted of felony price gouging.   But the US Government condones this price gouging when it suits their pursuit of  a single-payer health care system.

So consistent with prescription #1, I would allow health care providers to set their own prices.  But I would set a price range they could charge one group of customers versus another group at 100% - 120%.  If you are going to charge the US Government Medicare patients $100 for a procedure you can’t charge me as an uninsured patient $500.  In fact you can charge me no more than $120.  So you can’t rip me off to subsidize Uncle Sam’s patients.  If you want the US government business price your services accordingly – if you don’t then price them a little higher.

Prescription #3 is transparency.   I propose that health care providers must post on the internet what their price ranges are for their services.  Doctor’s visit $50 - $60.  MRI $400- $480.  One night in the hospital $400 - $480.  You get the idea.  But don’t gouge me with a $500 service that you give to the other guy for $60.

Transparency would allow me to shop around for a fair price while considering other factors like proximity, convenience, office hours, experience in this procedure and overall client reviews (a later prescription).

The insurance companies will not endorse these “prescriptions” because it diminishes their role and their power.   Today I must get health care insurance simply because without it I get gouged on each and every service that I require.  I am fine with paying 20% more than the “big guys” but don’t charge me five times as much.

We need to budge the health care system towards one where patients manage far more of their treatments versus their costs.  We want patients to ask their doctor “Wouldn’t an x-ray work just as well as an MRI?”  We have a system where the customer could care less about price (because they are not paying the bill) and hence they only demand the best service that money (other people’s money) will buy.  And by the way give it to me NOW.

You might sense that I believe in a system where patients play a much bigger role in their treatment and consider not only convenience and effectiveness but also cost.     Today cost is not a consideration for most patients.

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Health care system prescription #1

You may have guessed that I detest the notion of a single-payer health care system in America and I hate the idea of adding an additional 31 million Americans to a paid-for-by-the-government system.

But our system is broken.  We need a series of pragmatic changes that will move us towards a market-based and less expensive health care system.

Here is prescription #1.

The drug companies around the world spend billions to develop and test new drugs which can do marvelous things for one’s health when you need them.  Let’s say Big Drug Company A develops “XXextra”, a cure for stupidity, at a cost of $3 billion.  This includes early conceptualization, lab work and extensive testing along the way.  This does not include the billions that it has already invested in drugs that were never good enough to come to market and were scrapped.

But when Big Drug Company A has a winner and it is approved by the regulatory agencies around the world it must decide on how to price its product – a fundamental marketing decision.  Its marginal cost to produce the pill is only $3 per pill – in other words if they simply wrote off the research and development expenditures and didn’t care about paying off any company debt nor making any money for its shareholders it could produce the pill for $3 each and break even.  But why would any company ever volunteer for a business like that?

So as a business the drug company tries to maximize the positive cash flow from its new discovery.  Big Drug Company A starts with health care providers, pharmacies and insurance companies in the US and sell the product for $40 - $50 per pill because the pill has such health benefits and it gets prescribed in mass across the country.

But when Big Drug Company A heads to Canada, England and Germany to sell the same XXextra pill they run across a far more powerful buyer (because of their sheer size and the fact they are a single buyer for their entire country).  The Germans know that Big Drug Company A is doing well in the US and the national buyers  also know that the marginal cost to produce each pill is only $3.  So the buyers each insist on a price of $10 per pill which the drug company eventually accepts.  So the Canucks and the Brits and the Germans get the same benefits for their citizens without paying their fair share.

If the drug company plays hardball with the single-payer health care systems around the world they lose the margin (difference between the $10 revenue and $3 marginal cost) per pill that they would have received.  As a result the drug company either makes less money or loses money; eventually it  loses its capacity to develop the next blockbuster drug.

The answer?  The US government simply sets a price range percentage in which any drug can be sold in the US.  Some deviation is allowed but it would no longer be acceptable to charge Americans five times what they charge Canadians.  So the range might be from 100% - 120%.  In other words the wholesale price of the drug for one customer can not be more than 120% of that for another customer.

 So after plenty of analysis Big Drug Company A decides that the wholesale price of XXextra will be $20 - $24 per pill.  The actual price is still up to the drug company but it can no longer subsidize the rest of the world on the backs of Americans.    Maybe now the Americans are paying $24 per pill and the Canadians are paying $20 per pill but America is not subsidizing everyone else’s health care system around the world.

This idea doesn't require a huge government bureaucracy so the probably left won't like it.   But it is simple and combined with several other pragmatic solutions it would help us get our costs down.

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It takes time to wreck a great economy!

I frequently rag on California.  But I love the state, was born there and have a second home in Northern California.  And despite the odds,  I really hope that it gets its act turned around.  My criticisms of the state are similar to my thoughts on many other states from New York to Illinois (not to mention our federal government), but I know California better than the others and it represents our biggest state economy.  Historically California was built by entrepreneurs from the Gold rush to the Transcontinental Railroad to Hollywood to Silicon Valley.  California’s founders had to get off their rear end and move here to begin with and that self-selected a certain kind of risk-taker.

 

So the Golden State got off to an adventurous and successful start.  But since the early 1980’s a series of policies, laws and regulations have undermined its economic foundation.  These terrible decisions rarely had an immediate impact but the results have been cumulative and are manifesting themselves today in huge amounts of debt and an unemployment rate exceeding 12%.  It takes time to mess up such a good thing.

 

As California increased its graduated state income tax for the more affluent over the years, those hit hardest didn’t move out immediately.  But over time many did move out and those in other states considering a move crossed California off their list of possibilities.  Those that moved out of California rarely came back.  Nationally over 43% of Americans pay zero or negative income tax (for example those that receive the earned income tax credit).  I don’t have the figure for California but it has got to be even higher since the percentage of welfare recipients in the Golden State is more than three times the national average.

 

In an effort to encourage energy conservation, the California Public Utility Commission established an inverted rate structure.  In other words, the more one uses the higher one’s per-unit cost for electricity and natural gas.  So a big user can pay four times as much for his last kwh of electricity as a small user pays for his last unit of electricity.  Granted this may encourage the wealthy to invest in energy conservation but brings the marginal electricity rate to one of the highest in the world.  And since it reduces the price for the poor, it discourages conservation by this group.  The highest cost of electricity in a California home is about four-five times the highest rate in Nevada. One doesn’t pack up and leave the state after one power bill, but the impact of these bad government decisions are collective and add pressure. 

 

Public employee unions have come to dominate government services in California.  These state workers receive substantially higher wages, and far better health insurance programs and retirement programs than those in the private sector.  For example where most private sector employees receive six paid holidays per year most California state workers receive12 (down recently from 14).  But most importantly these union contracts reduce flexibility and make it difficult to respond to a reduction in tax revenues and to adjust the compensation of these workers when needed.  Governor Schwarzenegger’s recent attempt to furlough state workers for one day every other week has just been reversed in court.  So now these days off will likely end up as bonus vacation days.  Nobody left the state after another state job was unionized because the results were not immediately felt during the good times.  But this kind of nonsense eventually led to a far bigger budget deficit and a few more U-Haul trucks leaving the state with furniture than entering the state.

 

The regulations just kept getting more complex and more intrusive in California.  For example, to lend money to more than one person per year (say $10 to your brother and $20 to your sister), one needs a license under the California Finance Lenders law.  The private lender says “Why bother in California - I’ll go and lend in Nevada”.  My non-profit made two small interest-free loans to veterans in California and the state sent us a letter ordering us to cease and desist because we did not have a state license. 

 

But more importantly, this means that fewer loans are available to business (the real job creators) except through banks and government.  This kind of dim-witted regulation does not drive out business immediately (especially when banks are actively lending).  But when the banks are tightening like they are today and that private finance option is removed, a few more businesses exit the state.

 

For years California has enacted a minimum wage that is higher than the Federal Government.  Today it is $8.00 in California while the national minimum is $7.25.  Doesn’t sound like much, but if these other laws and regulations have sufficiently irritated the business manager, this may be the “tipping point” that means a few more jobs are sent to Texas.

 

The negative impacts of these actions take years to become visible and frequently decades to destroy a vibrant economy – like slow moving termites eating away at a wooden building.  As citizens (especially wealthy, entrepreneurs and business owners) start to personally experience the bad legislation and regulation, they gradually start to leave the state.  The ones that leave are on average more affluent than those that stay.  So the state has quietly lost the tax and business base that the legislators assumed would sit passively and “just take it”.  On average the welfare recipients stay because California has such an attractive bundle of benefits for them.

 

It is hard for the public and the media to understand the “cause and effect” between bad regulations and laws and their impact because there is such a lag and it is so hard to point to any one factor.  From environmental restrictions, coastal building restrictions, business license bureaucracy, high tax rates, excess regulation, and high electricity rates, it all takes time to be felt.  One piece of bad regulation does not destroy an economy but bad law after bad law will eventually do the trick.  It has taken persistence and consistency by the California left to decimate what was once such an energetic economy. And unfortunately it will take even more persistence to undo the damage.   But before California makes the tough decisions in needs to turn things around I guarantee (and I do not guarantee much) that it will seek a federal bailout.

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Time to sell the US Postal Service

It is time to split up the US Postal Service and sell it to private industry.  Then remove all subsidies and competition restrictions that only allow UPS and FedEx to deliver “urgent” letters to homes across America.

The USPS is already up to $10 billion in US Government subsidized debt and the market has changed radically.  We need radical surgery not the typical government tinkering and while we are at it let’s remove yet another public-employee union with pay and benefits double what their neighbors are being paid.

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