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How to build a world-class medical care system


Decrypting someone else’s hospital bill is no fun, but most people who work in finance and accounting, especially in smaller businesses, end up doing it — however reluctantly.

Sean is a long-time friend and broke through my reluctance when he told me how happy he was with his medical insurance. He had recently been to a hospital for something they call a “procedure” and could hardly believe the bill he received for that. I had no trouble with the idea that a hospital bill was unbelievable but being happy with it was a pretty rare reaction. To paraphrase a familiar movie line, “he had me at ‘happy.”

“You’ve got to see this,” he said. And sure enough, he had brought it with him.

It was immediately clear why he was so happy. The bill for the procedure was $3,695; the amount he had to pay was $16.06. There was some undecipherable language that possibly could explain the difference between the two numbers, but my friend didn’t care about that. “I just can’t stop smiling every time I look at it,” he said.

We would all like to be as happy as Sean, and we can be — if we are prepared to ignore the economic reality of health care costs: shifting around who pays does not change the total cost. In his case, the fact that the procedure cost him only $16 doesn’t mean that the remaining portion, $3,678,94 just disappears. It’s just going to show up on someone else’s bill. That someone could be the hospital, the medical insurance policy holders (including my friend), the taxpayers, or a mix of all three.

An example of that economic reality emerged recently when the Trump administration announced that it was temporarily suspending $10.4 billion in “risk adjustment” payments to medical insurance companies participating in the high-risk pool set up by Obamacare. Most people had forgotten or never knew about that part of the Affordable Care Act (ACA).

The high-risk pool moves funds from the insurance companies covering relatively healthy people to the companies covering those with more health problems. In practice, this often means moving some of the insurance premiums paid by young people to the companies that insure a greater proportion of those who need more medical care. That group includes older Americans as well as “high risk” individuals who have serious chronic illnesses.

Risk pooling is a necessary dimension of the insurance business model. It is not a new concept and not limited to the health care sector. Years ago, for example, when automobile drivers with bad records were turfed out by their insurance companies they could get insurance through what was called an “assigned risk” policy. This was a pooling of risk that differed from the Obamacare version in two key respects. First, it was done at the policy issuance level rather than shifting funds around. Second, the driver paid the higher premium.

Obamacare was justifiably criticized for two good reasons. The first was that it did not address the cost of medical care, it simply shifted the cost. The second was that its “three-card Monte” funding structure tended to obscure its total cost.

If you view the ACA as a prelude to a government single-payer health care system, the high-risk pooling system doesn’t much matter. What would still matter, though, is the lack of an accounting system that identifies total real costs, because that is what taxpayers are going to pay.

The ACA was developed under the assumption that the government had to control the financial structure for the system to work. The current administration believes that the free market system has to be the controlling force for the system to work. In truth, both assumptions tend to break down in practice for lack of a workable design model.

In the early days of computers and of game theory, competitions between humans and machines always came out the same way. The computers always won in simple games like tic-tac-toe, but humans always beat the computers in more complex games like chess.

Chess was too complex a game, or system, to allow the develop a comprehensive model and winning strategy. Our medical care system is very much like chess only with even more variables, decision points and surprises. If we define a winning strategy as resulting in a low-cost, high-quality medical care, the path to that strategy remains unclear.

A good choice for that winning system would be one built on the strengths of the free markets and the focus of regulatory force; letting the free market build the engine, with a regulatory rudder to keep the ship on course. It’s only a dream in this politicized world, but where would modern medicine be without dreams?

James McCusker is a Bothell economist, educator and consultant.

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