Market Solutions to Health Care Costs

Some of us have been hopeful for a long time (since March 2010 when it was enacted) for the repeal of Obamacare. We don’t even like the idea of “repeal and replace,” because any replacement should not be a different government program; it should be free market solutions. All government needs to do is get the heck out of the way.

But, for those who fall into the pit built by the big government control types, and fear what would happen if you take away the boondoggle that has been foisted upon you, please remember: people had health care before the inaccurately named Affordable Care Act.

As Ted Cruz put it in 2013, in an interview with Mark Levin,

Imagine three years ago, when this was being debated, if President Obama said, “I’ve got a great plan. I’m going to take away the healthcare of 5 million Americans in order to cover 100,000. And while I’m at it, I’m going to jeopardize the healthcare of 100 million Americans who have employer-provided plans…. And while I’m at it, I’m going to cost millions of jobs and force millions of people into part-time work, working 29 hours a week.” Is that a good deal for America? People would have laughed at it. If he’d simply been honest, he would have been laughed out of the room…. Because the only way to sell this law was to mislead the American people.

At this point, we also ought to be honest about what the ACA has really cost us. I’ll leave the data to others for now. But here’s a summary from Casey Mulligan, a University of Chicago economics professor, from a couple of years ago:

In summary, the ACA has three major taxes in it. Two are taxes on full-time employment and the other is a tax on income. They may be implicit, they may be hidden, politicians may not call them taxes, but that’s what they are. Their economic impact on workers varies widely, affecting low-skill workers the most. They create all kinds of productivity problems and will have visible and permanent effects on the economy. I have estimated that employment will be three percent less over the long term because of the ACA, and that national income—or GDP, if you like to think of it that way—will be two percent less. If you look at the productivity costs alone—forgetting the fact that there will be a number of people not working anymore—they come to $6,000 per person who gets health insurance because of the law. And I’m not beginning to count the payments needed for health care providers.

In conclusion, I can make you this promise: If you like your weak economy, you can keep your weak economy.

Doing anything but completely repealing Obamacare is to burden people who ought to have the burden relieved.

There are free market options—options people would be more likely to turn to as government stops forcing a bloated, ugly, expensive, coercive plan on them.

To remind us of one of the free market alternatives, libertarian Tom Woods linked to a previous podcast discussing concierge care, or direct primary care. The guest was Dr. Josh Umbehr. I wrote about his practice in 2013, after an interview he did with Mark Levin.

image from Atlas MD blog

Just to remind us that free market options work, and are already possible, I’d like to share some of the interview with Tom Woods. 

Dr. Umbehr is a primary care physician in Kansas. At the time of the interview, his direct primary care practice was five years old. As he described it, the bulk of what most people need is family medicine. At his practice they pay a flat rate per month based on age, like a gym membership.

I looked up his practice, and it’s $10 per child, $50 per adult age 20-44, $75 a month for age 45-64, and $100 for age 65+. He says,

For that membership you get unlimited home visits, work visits, office visits, technology visits. Not limited by what insurance will pay for. No copay at our office visits. Any procedure we can do in the office is included free of charge, because that is what the membership is covering—just like any equipment at the gym is included in the base membership price. So, stitches, biopsies, joint injections, ultrasounds, bone scans, lung scans, urine testing, strep throat testing, minor surgical procedures—all included for free.

He's talking about a lot of savings, because of wholesale medications, labs, imaging, and pathology, that physicians have access to. Here’s an example:

We ordered some blood work. We have our negotiated cash discounts of usually 95%. And a patient’s blood work was accidentally billed through the insurance rate, because of a computer mistake at the lab, and the price that they were quoted was $1028. We ran that back through our system; it cost $39—a 97% savings by just cutting out the middleman.

He describes how they save enough money just on medications to cover the cost of the membership:

We can dispense medications in Kansas, just like a pharmacist. Forty-four states allow physicians to function like this. And so, I can order the medications wholesale from the same places the pharmacies do. But I can get 1000 blood pressure pills for $8.34. Even after my 10% markup, they’re under a penny a pill. Walmart would literally have to give them away to out-compete us. And if they did, great, we still win. It’s not a value that is a revenue generator for us; we’re adding to the value of the membership.

He makes the comparison to Costco membership, or to Walmart or Amazon, who focus on value for the customer.

These savings have been available for at least a couple of decades. It just takes a doctor to look at a new business model and be willing to try it. He said that in medical school they actually taught that dealing with business was beneath them, something they shouldn’t dirty themselves with. But, if they take an oath to “do no harm,” that ought to include no financial harm. If he can save a patient money while providing better health care, that’s giving more and better life. That’s what doctors should be doing.

Some doctors say it’s hard to get patients just to pay a $20 copay; how would they get their patients to pay $50? Dr. Umbehr lays it out like this:

Netflix to Blockbuster. Netflix figured out how to give me 10,000 videos for $7,  when Blockbuster could only give me 1 for $7. So, if we apply that same innovation to health care, it only stands to reason that we can drastically reduce the cost curve.

The Silicon Valley formula is, you have to be 10x better before the barrier to change is overcome. We’re 20x better.

What about the system as a whole? Is this just helping the few individuals who use it but don’t need much beyond basics? He says no, it helps everyone. For example,

The total cost, if you go back to the last year I have data for—I think it was 2011—the cost for all prescription medications in the US was $263 billion. The cost for all cancer care [prescriptions] was $157 billion. So, if we could, with our wholesale changes, and we can get cancer medicines cheaper. Not all of it. Not everything’s cheap. Some of it is just expensive. But if you get that lower…

We had an example where we had a breast cancer chemotherapy pill that was $600 for every two weeks at the pharmacy and $6 or $7 with us—a literal 99% savings. We gave it to her for free just so that we could say now we provided chemotherapy.

So, if we took, let’s just be minimal and say we only save $157 billion out of that $263 billion of prescription for all the things that are expensive—then we pay for all cancer care.

Besides savings through insurance, administrative costs are also much lower:

The average physician would have 7 employees per doctor to run a practice. We have half of a full-time equivalent per physician—because of less regulation, less red tape, less bureaucracy. That would drive down the cost of care.

More savings examples, for the health care system overall:

One of my favorite examples is Imitrex, a migraine medicine, that at the pharmacy, for the name brand, as I pull it up now $565 cash price, anywhere from $447 to $486 with a coupon; the generic is $260 cash price, as well as $101 that I get for $5—my patient gets for $5, because I don’t need to make revenue off the medication.

I’m trying to make them healthier; I’m trying to save them money; I’m trying to show the value of my membership. So, every month they refill that medicine I’m saving them at least $100. Their membership’s $50; their medicine’s $5. I’m giving them $45 of their life back. That’s life—that’s time, that’s energy.

So, when someone says, well this only works well for the rich or the healthy, that’s ridiculous. This works out best for the sick and the poor. Just like any market, I’m reaching the people most likely to benefit from a food service, or a phone service, or a car service. So, people who want to save money on their medicines and are sick enough to need medicines benefit the most from this system.

So, the government is paying $101 for that medicine, instead of the $5 that it should be.

Dr. Umbehr’s practice, in Kansas, is Atlas MD. They also have a blog, and offer free help to other physicians wanting to try this business model.

I looked online for something nearby. Searching “direct primary care” I didn’t get anything closer than Austin. But “concierge care Houston” came up with at least one possibility not too far away with four physicians.

I’m also interested in health savings accounts. In fact, Dr. Umbehr recommends using health savings accounts and a catastrophic high deductible insurance policy in addition to his practice for full coverage at the lowest cost.

If we want everyone to be provided good quality health care at affordable costs, we need to do exactly opposite of the Affordable Care Act: repeal government interference, and replace it with the free market.

Predictions

It’s the time of year for making predictions. I don’t happen to be good at that sort of thing. I don’t know who will be running for president. I don’t know what edict the president is going to make next, claiming such executive orders are within his constitutional authority. I don’t know how various judges are going to vote on redefining marriage.

So I’m going to do something easier: an if/then exercise. We know, based on principle, that anything the government takes on, for whatever “good intentions,” will cause harm—and most likely will create the exact opposite of the stated goal. I can safely predict that, if an idea is actually a good one but is outside the proper role of government, then government will make things worse rather than better. If an idea is worth doing, then the free market is much more likely to bring about the desired ends.

So here’s the list.

 

Families would benefit from giving dads (in addition to moms) parental leave upon the birth of a new baby.

Government Way: Makes a law requiring all employers to provide paid parental leave for at least one month for any dad whose wife/partner has just given birth.

Result: Businesses hesitate to hire married men whose wives are in child-bearing years. Businesses remove other benefits from employees, in order to pay for this new requirement without going in the red. Businesses will hesitate to promote or increase pay for any man who is likely to (or has taken) paid family leave. Businesses will reflect failure to reach goals during time off in performance reviews.

Many European countries do offer lengthy paid parental leave to fathers and mothers. It looks so civilized. But several things play out in those countries: high unemployment, lack of advancement for employees, and shockingly low birth rates.

Free Market Way: Businesses who want to attract and maintain the best employees consider whether offering parental leave would help. They will consider what works best for the employer and the employee. They may come up with a variety of alternatives, which might include varying lengths of parental leave, or combining work at home with work at the office during new baby times.

Result: The employer can actually offer caring for the individual employee, instead of simply being coerced to follow a one-size-fits-all government plan. The employer feels supported by the employer and is more likely to respond with hard effort to meet the employer’s goals. The employer and employee agree on the importance of family, and families are likely to be stronger—and larger. 

Employees Should Be Paid a Living Wage

Government Way: Makes a law requiring businesses to pay at least a minimum wage—for example, $10 an hour—for every employee, regardless of the value the worker brings to the business.

Result: Businesses will only hire employees who can and do contribute the minimum wage cost (which is actually high for the employer, with taxes, benefits such as health care, and management costs). Anyone who has too little experience or ability will remain unemployed. Young people who do not need a living wage, but need some income and experience, will lack previously available opportunities. Young, inexperienced, and part-time workers will be most hurt. Businesses will be less likely to risk starting businesses in areas where low-experience workers are plentiful—so unemployment will be particularly high in places where the most vulnerable live. The costs to produce goods are higher, so the cost to purchase is higher, nullifying the higher minimum wage being earned by the lowest skilled employees. So, if they have income, it doesn’t go as far.

Free Market Way: Businesses make individual agreements with individual workers, based on the work the employer wants done and the worker’s abilities. No employer is forced to pay more than the work is worth. No employee is forced to do work for less than he agrees to be paid.

Result: Businesses attract the best workers by willingly paying them what they’re worth. Less experienced workers start out working at a lower wage, but as they gain experience, their pay increases. Employers are willing to take a chance on less experienced workers, because the cost of employment is lower. Unemployment decreases—possibly down to near zero, which is prevented by current minimum wage laws. Inexperienced workers have a starting place from which they can move up. There is more flexibility for employers and employees. Costs to produce goods are more in line with what the market will bear, without artificially high costs, so money earned goes further. 

Everyone Ought to Receive Affordable Health Care

Government Way: Implements a complex and unworkable scheme to force all people to buy health insurance prescribed by government, regardless of what individuals want and need and can afford. Many unwanted details are hidden within the law—i.e., higher taxes on home sales, health clinics in schools that work against parental desires or permission, pressure to force states to set up exchanges to enable the boondoggle. It is insisted this is not a tax when being forced through Congress; it is held up as a tax, in order to pretend it is constitutional, when brought before the Supreme Court.

Result: While this is ineptly named the Affordable Care Act, it is more expensive for almost all Americans, essentially just as many remain uninsured as previously, and many who previously had health insurance and doctors they liked are deprived of those options. Health insurance is mistaken for care, and both health insurance and health care are made less affordable.

Free Market Way: It is recognized that separation from free market has led to higher prices. So free market alternatives begin to appear: health care savings accounts, health care cooperatives, lower prices for direct cash payments, major medical-only insurance, insurance across state lines and portable when changing employers. Low interest payment plans might be allowed, depending on credit histories and other factors. Hospitals coordinate with charities to help those with overwhelming costs.

Result: Individual needs are met with individual options. Competition and connection between patient and payment increase attention to cost, keeping costs naturally lower, and—as happens in free markets—innovation leads to greater services at lower costs

The list could go on. If you want a clean environment, keep government out of it, or you’ll get a dirtier environment. If you want a colorblind society, stop letting government favor certain races. If you want a good education for every child, get government out of the business of controlling education from afar.

There are specific roles for government, always related to protecting life, liberty, and property. Government has been so inept in so many things, we may not trust them even with the essentials, but there is a proper role for government. However, anything beyond that proper role and government will create negative consequences, regardless of possibly positive intentions.

So I predict greater freedom, prosperity, and civilization wherever government is limited to its proper role. I predict movement toward tyranny, poverty, and savagery whenever government steps in to “fix” some perceived problem. Every time.

Alternatives

There’s a lot of talk (justifiably so) these days about how bad Obamacare is. Which brings up a couple of questions:

·        If we get rid of it, doesn’t that put us back in the same mess we were in before Obamacare was put out there as a solution?

·        Instead of just being negative about the mess that is Obamacare, why not offer some positive alternatives?

The best starting point is often principle. The economic principle behind the problem of high health care costs is—something has interfered with the natural market price. Get rid of the interference, and prices reach an equilibrium point with demand.

We went through some of this in the November 6th post, showing the history of government interference leading to separation of who gets services from who pays for services. I remember a student paper I edited back in college on socialized medicine. My purpose as a writing tutor was to help the student make his/her point clearly. But this one I had to say just wasn’t convincing. And it was with a fellow tutor, so I was allowed to be tougher than on a regular student. His point was that medicine isn’t like other free market services, because you never know when you’re going to need the service—so the solution is for government to step in. I argued that, while I might not know all the solutions, the pricing problem would be better solved by getting closer to the market rather than further away.

I did have to think, though, about whether medical care was different in some way from all other goods and services. It can be unexpected and unplanned for.

But so can car care. Even with an aging car, there are some things you can predict. You can, for relatively low cost, do some basic maintenance that will help the car’s longevity: change the oil, check the fluids, clean whatever needs cleaning, replace whatever needs replacing. You can budget in for those things. As the car reaches a certain age, you start expecting bigger things to need repair or replacement—like transmissions. If you own an aging car, a good rule of thumb is to expect to pay in repair close to what you’d be paying in payments on a new car—and then if you get lucky enough not to have that many problems, you’ve got savings in your budget.

Most of us do typically get insurance for accidents—to help pay for our own repairs, if necessary, and, even more important, to pay for repairs of anyone we cause damage to. We can try to avoid accidents with all kinds of safe driving, but, still, accidents happen. So insurance coverage for those car versions of catastrophic illnesses is probably worth putting in the household budget.

We don’t buy insurance to cover basic car maintenance, because the basic principle is to insure against the unpredictable, not against the expected. You can, of course, buy maintenance plans, if that helps even out your budget—but you can be certain the seller of those extended warranty plans is doing it as a money maker, not as a service-out-of-the-kindness-of-their-hearts.

Is health care different? Most medical services are basic maintenance and repair. The costs would have been responsive to market pricing, if the payer had stayed in touch with the cost. Some people have pointed out how responsive veterinary medical care still is—because the pet owner, not a distant insurer, is directly paying the cost.

Would it be a good idea to also budget for unforeseen catastrophe? Yes, that is what insurance actually is.

The point is, medical care is still like other things we address through the marketplace. It just looks impossibly expensive—it is. Because the connection between the service receiver and the payer has been broken. Any solution has to move in the direction of the market, so that prices can realign.

Are there any such solutions?

Yes. Yes, actually, some of these have been on the table since long before Obamacare. The standard list includes: allow insurers to offer policies across state lines, increase use of health savings accounts, encourage low-cost clinic care for the uninsured rather than emergency rooms.

The list was repeated by Senator Ted Cruz on Tuesday’s Mark Levin radio show. Cruz suggests we repeal the entire Obamacare bill and start over. And what then? I transcribed a few paragraphs:

[At 5-minute mark]: We ought to enact real healthcare reform, that allows people to purchase health insurance across state lines…. Economics 101: if you want to expand access, cost is the biggest barrier, and ideally we should see a marketplace where cost goes down and people have a lot more choices…. We ought to empower patients so that insurance is personal, it’s portable, it’s affordable. Like your car insurance, it goes with you from job to job and you own it. And you can buy it across state lines. That would do far more to improve healthcare than anything in Obamacare.

[At 7-minute mark]:  If we would simply allow people to purchase health insurance across state lines, what we would see is a 50-state marketplace—real competition—so that, for example, young healthy people, many of whom don’t have health insurance now; if they had the access to low-cost catastrophic policies, they may well choose to buy it. But if a 22-year-old single man has to buy a comprehensive plan that covers everything, including a hip replacement, which he’s not going to need for 50 years, he’s not going to buy the insurance, because no one wants to spend the money that Obamacare is trying to get people, to use to subsidize other folks. It’s a totally misguided policy.

[At 14-minute mark]:  Imagine three years ago, when this was being debated, if President Obama said, “I’ve got a great plan. I’m going to take away the healthcare of 5 million Americans in order to cover 100,000. And while I’m at it, I’m going to jeopardize the healthcare of 100 million Americans who have employer-provided plans…. And while I’m at it, I’m going to cost millions of jobs and force millions of people into part-time work, working 29 hours a week.” Is that a good deal for America? People would have laughed at it. If he’d simply been honest, he would have been laughed out of the room…. [When he said you could keep your plan] He “misspoke”? He said it 28 times, unambiguously. Because the only way to sell this law was to mislead the American people.

There are a few out-of-the-box ideas as well—as you’d expect from a real free market. I’ve heard a couple of interesting interviews recently on radio, with doctors who suggest a new model for basic medical care. A few days ago I wrote down a name to look it up later. I found an article about the model presented by Dr. Josh Umbehr. He has a practice in Kansas, along with two other doctors and one nurse.

Dr. Qamar of MedLion Direct Primary Care
on Fox Business News

He calls it a concierge model. It’s also called direct primary care practice. Families pay a set fee, something like $50 per month per person, and get access to their primary care doctor as needed—by phone, in office, whatever is needed. Like having your doctor on retainer.

Prescriptions can be filled at very low wholesale rates. Many tests can be done at minimal costs as well. Off the bat, there’s an overhead savings of 40% just by avoiding insurance paperwork. This type of service covers the basic maintenance issues that you need to budget for, not hedge your bets against with insurance. They encourage people to additionally get a low-cost catastrophic policy, or self-insure with a health savings account if they can.

When I was searching for more information about this idea, I came across an interview on Fox Business News on November 13, with Dr. Samir Qamar, of MedLion Clinics. His plan seems similar to Dr. Umbehr’s. It’s a model that can be picked up by primary care doctors across the country—to save money for themselves and their patients.

When there are pricing problems, there are always market solutions. Even when the product is medical care.