Talk to Me Like I'm 4: Why Our Health Care System Failed Us and How We Can Fix It

If you could meet a genie in a bottle, free it and receive three wishes about the American health care system as your reward, what would those wishes be?

For most experts, they would be high quality, low costs and universal access: The best medical care possible with the least amount of money to the largest number of people. That, indeed, would be lovely.

Alas, genies from bottles have so far refused to help us reach all those important goals at the same time. Instead, we are stuck with all-too-human plans for fixing the ailing U.S. health care delivery system.

Those plans can be summarized as mostly pro-market or mostly pro-government: Either encourage more competition in the health care markets or supervise and regulate those markets more stringently. It helps to think of such plans as falling somewhere along a straight line where one end-point denotes perfectly unregulated ("free") markets with an almost Wild West flavor, and the other end-point denotes a system of government-owned-and-controlled ("socialized") health care provision. Where should the U.S. system place itself on such a line?

The Obama administration has a chance to make its own recommendations on that placement, although recent rumors hint at nothing much happening during 2009. Obama's campaign Web site tells us, though, that his administration has both pro-market and pro-government plans for fixing the health care system.

Given the new fashion for bipartisanship in politics, and Obama's willingness to compromise with his political opponents, I fear that the conservatives will manage to nibble away at these plans until only the market-based, competition-driven bits remain. This would be a grave mistake, because increasing competition alone will not help us out of our present dilemma of escalating costs and growing numbers of people with no health care coverage.

The reason for that lies in the very nature of health care competition. It is a very different-looking animal from the competition that proponents of "free markets" have in mind when they extol the benefits of markets: variety, innovation, high quality and low prices.

Indeed, competition in health care markets may result in higher prices and unnecessary duplication of expensive facilities. It may also consist of refusing customers who have high health care needs.

On Tomatoes and Stomach Pains

To see where the "free marketeers" go wrong in their pro-competition arguments, let us imagine the kind of market that indeed functions very well: A small farmers market, meeting every Saturday near a large city, a place where growers bring their produce for consumers to buy. It is easy at such a market to compare prices and quality, the consumers know what they plan to buy for that night's dinner, and testing the products can be arranged if desired by simple taste tests.

To check prices, all a buyer needs to do is walk around. Prices of, say, tomatoes will quickly be equalized in such a market to the lowest level at which the growers still make enough money to attend the market and the quality of tomatoes will mostly be quite good.

Now compare a visit to buy tomatoes to a medical visit, one that is caused by some unidentified stomach pain. Few of us will shop providers before deciding to use the services of one -- services that begin with an identification of the symptoms and then continue with recommendations for further action. It is as if we asked a tomato grower to tell us if we really need to eat tomatoes and how many of them to buy, often from the same grower, while all the time not truly knowing if that grower's tomatoes are any good or what we need to buy.

The potential conflict of interest this can create is obvious when translated into tomato terms. It is also the reason for the strict training and regulation of health care providers, for malpractice suits and for the self-regulation carried out by professional medical organizations. But even more importantly, it is the reason for expecting that health care providers operate in the best interest of their patients, as the patients' agents.

This, however, is a problem for your average market model, because sellers who work both as sellers and as the buyers' advisors and agents muddy up the clear rules that the two sides of the markets traditionally have.

The above parable is about lack of information: Health care consumers have a lot less of the necessary information than tomato consumers, and some of that missing information is purchased together with the recommended products.

But if some patients have trouble with such fundamental information as their own need for particular treatments, how can they judge quality information in the markets accurately? And if quality is misinterpreted by enough consumers, what do the quoted prices for various services mean? Can such a market result in lower costs and higher quality?

On Free Ice Cream, Bad Apples and Cherry-Picking

Sure, you might mutter. After all, insurance companies and employers who pay for health care have an interest in such outcomes and more time and information than your average consumer to study the medical statistics and to find the best deals for their money.

Now, where did these intermediaries come from? The market for tomatoes has no tomato insurance, no third-party funding and no employer assistance, because we don't suddenly wake up one morning to find we need tomatoes that day to stay alive, and because buying tomatoes is not especially expensive.

Some health care needs, however, are both sudden, hard to predict and disastrous if not attended to. Many of those are also very expensive. Hence, the need for medical insurance, a system where we hope to convert a large uncertain future loss of money into a smaller regular payment to the insurer so that we don't have to try to save huge amounts of money to cover possible future medical expenses. We can sleep better with insurance, too.

Insurers, if for-profit firms, can earn a profit out of this in a manner familiar to us from car insurance. Sounds very nice, doesn't it? But the presence of medical insurance introduces a few new problems for the traditional view of competition as a Good Thing -- moral hazard and combating adverse selection.

These odd terms are what I call free ice cream and cherry-picking. Moral hazard (or free ice cream) is a term the insurance literature uses to describe the fact that the very act of being insured can change people's behavior. As an example, if I insure an old warehouse against fire, I might then have an incentive to burn the place down when my business is doing poorly.

In health insurance, moral hazard usually refers to the fact that an insured patient doesn't have to worry about the actual costs of the treatment but only its out-of-pocket price. (Imagine how you might act in a farmers market if your purchases there were covered by insurance!) It's like free ice cream, if you happen to have the kind of insurance where you pay nothing for a particular service.

But the ice cream is not really free. If all insured individuals consume more than they would without insurance, the price of insurance (or its premium) will ultimately rise. The higher that price goes, the fewer people can afford insurance.

Free-market acolytes often worry about this. Their usual recommendation is to make consumers more sensitive to the real prices of medical care by increasing that out-of-pocket price. But this brings us back to a world with less real insurance at the time of need, more worry about the future and the whole question about our ability to judge prices and quality in health care. Well, that is the world in which we already live; one with only partial insurance.

Not only do most of us have to pay a sizable out-of-pocket cost (in deductibles and co-insurance rates), but we may also find that the claims we thought would be covered are not. To go further in that direction is not much different from making insurance unavailable via too-high premiums.

Of course, that, too, is the world many of us inhabit: No insurance at all, or none through firms that operate in the market place. Government programs such as Medicare (for the elderly), Medicaid (for certain groups of the poor) and VA health care program (for the veterans) take care of the insurance needs of many but still leave between 40 million and 50 million Americans uninsured. That is not exactly universal coverage.

So much for the ice cream metaphor. In hindsight, it's not the best possible one because it conveys something frivolous. Perhaps I should have called my metaphor "free cod liver oil?"

In any case, there's ultimately no free health care, of course, just as there's ultimately no free ice cream (or cod liver oil), and any health care system must grapple with the problems of how to keep costs down while maintaining access and a reasonable quality of care.

Private health insurance markets have an extra problem with guaranteeing access to health care. That is how to avoid the "barrel" of the insured consisting mostly of "bad apples," those who are going to use a lot of health care and thus cost a lot to the insurer.

Suppose a health insurance policy is offered to all applicants at the same price, something reflecting the average health care expenses of a community, plus a little extra for the firm's expenses and profit. Such a policy would look great to individuals who have very high health care needs but pretty bad to individuals who expect not to spend very much on health care.

As a consequence, the policy would probably attract more high-users than low-users, and its price in the following year would have to go up to reflect the higher claims experience. This would make the policy even less attractive for the low-users, more of them would drop out, and the policy would continue to rise in price. Notice how fewer and fewer individuals end up covered here and how the price of insurance keeps on rising?

This scenario is an extreme case of something called adverse selection in the insurance literature. It is yet another example of lack of information in the medical marketplace, but this time, it is the sellers who lack the information needed to determine which applicants might be high-users and which low-users.

In reality, that information is not wholly lacking. For example, young people are less likely to be high-users than older people, and anyone with a chronic illness is apt to be a high-user. The insurers can also comb through the applicants in individual health insurance markets in order to find other indicators that might label them as possible high-users. And, of course, they may have the right to offer policies to different individuals at different prices, or to exclude certain services from coverage altogether.

But those tools in their kit boxes tend to leave the ones with the highest health care needs without coverage. An example of this is the pre-existing condition exclusion clause in many individual health insurance contracts.

It's a mess, isn't it? Remember that the government Medicare program already insures the elderly, the group with the highest health care expenses. One might argue that most of the proverbial "bad apples" have already been removed from the "barrels" of the private insurance industry, and that should make them able to figure out affordable policies for most everyone else.

One might also argue that we could all one day turn into "bad apples" and that the very purpose of insurance is to protect us from the financial consequences of that day. Yet denial of coverage is not uncommon in private health insurance, and neither is finding one's insurance terminated after claims start rising. All this means that having insurance might not mean being covered against large health care expenses.

The strategies the health insurers use to combat adverse selection are called cherry-picking or cream skimming. These strategies consist of trying to attract mostly low-users (the young and the healthy being the cherriest of cherries), while discouraging high-users from signing up, of excluding pre-existing conditions from coverage and of not covering certain services (such as maternity care) at all.

When the price of insurance is allowed to vary among applicants (as is the case of most individual health insurance), women are quoted higher prices than men because women, as a group, consume more health care until age 50 or so. Indeed, even the common (and in some ways laudable) practice of employer-based group health insurance helps to skim the cream or to pick the cherries, because it focuses on people well enough to go to work every day.

On Patchwork Quilts

The U.S. health care system is very much like an old patchwork quilt, one which has grown over time with new patches sewn onto the parts that wore out. But the quilt is fraying more rapidly, and more holes may appear quite suddenly.

Those who are lucky have access to good health care and employer-covered group insurance at a still-affordable price. Those who are unlucky and lose their jobs may also lose their health insurance. Those who are medically indigent or who work for firms not offering insurance are left to try to find an affordable individual policy, which is not easy, these days. Or they may rely on various government programs, assuming that they qualify, or on nothing but their own savings.

Most of the currently uninsured do not offer great money-making opportunities for the private markets, however much competition we might wish to inject there (ironically enough, usually through regulation), but must be covered and treated through government programs, charity or not at all. And when the utterly uninsured finally seek help for a medical problem, it is often late in the disease process and at a hospital emergency room, one of the most expensive patches in our quilt and an inappropriate one as a setting for primary care.

The difficulty in fixing an old patchwork quilt is that the very attempt of introducing another patch will strain the nearby old fabric, thus creating further rips and tears. This is what I see happening with the pro-competition plans. They will not work alone, because competition in health care is seldom about bringing the prices down or trying to cover everyone, for reasons I have discussed here.

Neither is it necessarily contributing to high-quality care: The United States, with its large private health care sector and high expenditure levels, fares poorly in international comparisons of those bluntest of (inverse) quality measures: life expectancy and mortality rates.

In 2008, the U.S life expectancy at birth was 78.1 years, while the corresponding figures in Canada and the U.K. were 81.2 and 78.9 years respectively. Infant mortality rates (measured as deaths per 1,000 live births in a calendar year, and usually regarded as valid measures of care quality) show a similar pattern that year: The U.S. rate was 6.3, the Canadian, 5.1 and the British, 4.9.

And what did we pay to get those not-so-impressive results? A lot. In 2005, the latest year for which cost data is available on all three countries, the U.S. spent 15.3 percent of its gross domestic product (GDP) on health care, while the health care systems of Canada and the U.K. managed to get by with 9.8 percent and 8.3 percent of their GDPs.

To put these numbers into an even starker perspective, note that the Canadian and British systems covered everyone, but the U.S. system spent a lot more while leaving around 16 percent of Americans uninsured.

What all that money has bought many Americans is access to high-tech care and the results of latest medical research. These are valuable things and worth keeping. But it's important to remember that high-tech care isn't always equal to high-quality care.

Medical firms may compete in apparent quality by offering the latest medical advances, but when other firms do likewise, the facilities may be duplicated and no one firm may end up with enough patients to keep the practitioners' skills in their application up-to-date. Yet someone will have to pay for all those facilities.

On Patches and Purse Strings

Now imagine this large patchwork health care quilt on the bed called the United States. Some of us lie under it comfortably, because the quilt above us is whole and warm. Others lie under a rip or a tear, turning and twisting while trying to avoid it. Yet others are not even under the quilt.

This is what the Obama administration faces. It is the new Keeper of the Quilt and needs to decide what to mend and how. This requires managing the three goals of universal access, low costs and high quality, a juggling act, because increasing access or quality tends to also increase the costs of care.

The first weeks of the new administration have already achieved an increase in access: The recent expansion of the State Children's Health Insurance Program -- the government health insurance program for low-income children -- guarantees health care access to as many as an additional 4.1 million children, and the new stimulus package proposes government subsidies designed to help the uninsured find affordable health insurance.

Based on his campaign Web site, Obama is planning several further measures that would add patches to the quilt to increase access: a play-or-pay requirement for medium-sized and large firms to either offer health insurance to their workers or to pay a fee toward such coverage by other means, a requirement for insurers to give affordable coverage to individuals with pre-existing conditions and a proposal to offer a program comparable to the Federal Employee Benefits Program to individuals who can't otherwise access care under the current system.

The last two must be offered together, because if private firms could still employ the pre-existing condition exclusion clause, the federal program would end up with mostly high-users (remember the "bad apples"?). This, alone, would make it look like a much more expensive program than the private alternatives.

Patches. These are all extra patches to the same old quilt, and good ones to get us closer to universal access. But they offer few new ideas about the costs and quality of care. The campaign Web site addresses those in the form of more emphasis on prevention and a greater focus on the use of technology and computers in medical decision-making. Though both of these are desirable changes, they are unlikely to lower health care costs by any large amount. For that, something more is needed: real cost control.

That will not come from measures that try to increase competition in the private health care markets, not even from opening a federal insurance system such as the Federal Employee Benefit Program to all comers. The Canadian and British systems are not cheaper to run because the government can out-compete private firms; they are cheaper because they are run under one vast budgetary system. This is the one-purse model of health care financing, and it works to contain costs in ways that health care competition will not.

Now, the Obama administration as the Keeper of the Quilt may not want a single-payer system. Those of us who are quite comfortable under our good corners of the quilt might fear that such drastic remaking of the quilt would leave us less well covered. And perhaps the United States sleeps better under the current system of rationing care by consumers' ability to pay for it than under alternative systems of rationing, such as treatment protocols, triage and the use of waiting times for non-emergency care. Perhaps.

But one day, soon, the American patchwork quilt of health care will become unaffordable if we all we do is sew patches upon patches for greater access without any tightening of the societal purse strings. The time is now ripe to sew a new quilt.

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