Supersized Healthcare by Nicholas van der Meer January 2010
Let’s hope that South Africa’s newly appointed health minister, Dr Aaron Motsoaledi, has been paying close attention to the healthcare debate currently raging on in the United States. South Africa can do well to learn some cheap lessons from the world’s largest economy on how to best provide healthcare equitably and efficiently.
The healthcare debate is a sensitive and important one for many reasons. A government that cannot provide sufficient healthcare to its population, be it through public or private channels, risks social backlash, as the provision of healthcare is one of the most important and basic services in a society. A healthy population is also a productive one and the costs to companies in the form of lost productivity cannot be overlooked. Also, overspending on healthcare is detrimental to the taxpayer because government’s share of costs is invariably passed on through increased taxes.
Mr Obama has barely had time to catch his breath since taking office in January 2009. Having managed to navigate his way through the financial and economic storm (thus far at least), attention has now shifted to the next great challenge – healthcare. The president has two problems with respect to healthcare. First, he has the uninsured – 49 million Americans who have no health insurance. Second, he has the issue of healthcare costs rising faster than anywhere else in the developed world, meaning government spending on healthcare is becoming more burdensome to both taxpayers and the president’s budget as each fiscal year passes.
Based on his proposals earlier this year, Mr Obama made the error of attempting to kill both birds with one stone. His initial proposal was to completely overhaul the healthcare system by moving away from a system of decentralized, private healthcare to a single payer, public system. However, in recent public statements, it seems he has heeded the advice that throwing the baby out with the bathwater would not be wise, and some changes to the existing system could be more effective and less costly than a complete overhaul.
The first concern of the 49 million uninsured is originally what spurred the president’s proposal that government become the provider of healthcare in the US. His first statements would suggest that he thinks that if private providers cannot insure every citizen, then the government can, and will, step in and do it. Mr Obama proposed that government would become a competitor in the health insurance market, and greater competition would spur better and cheaper coverage for all Americans. This sounds great in theory, but in practice we know that often when government becomes a competitor in free market economics, the lines between competition and price fixing become blurred at best. Mr Obama’s plan was built on one fundamental assumption – that government can do a better job of insuring the uninsured than the private sector. Whether this is true or not is open for debate, although debate will probably be fruitless. This is evidenced in the UK, where the jury is still out on the effectiveness of their single payer system, the National Health Service (NHS).
An alternative for Mr Obama would be to mandate health insurance. Mandated insurance would make it compulsory for everyone in the US to be covered by a private health insurer, while the government would subsidise those who cannot afford it. Previously opposed to the mandate model, Mr Obama has relaxed his initial tough stance by saying that mandated health insurance, such as that used in The Netherlands and Switzerland, is a possibility.
Either way the government will be paying for those that cannot afford to pay for healthcare – the latter scenario is just less drastic and less disruptive to the economy.
Although the 49 million uninsured is an emotionally rousing matter, soaring costs is a more complex problem. The cost of healthcare and the rate at which it is climbing is unprecedented anywhere in the developed world. On average, the US spends $7300 per person per year on healthcare, more than double the OECD average of $3000. The US currently spends 16% of GDP on healthcare, compared to the OECD average of 8.9%. The shocking truth though, is that despite the higher costs, the extra spending does not always translate into better health. For example, in 2007 America’s infant mortality rate was 6.7 per 1000 births, while the OECD average was 4.0.
Drug manufacturers have been blamed in the media for the high costs because they are accused of charging too much for their drugs, making super profits and by implication, denying medical attention to the sick who also suffer from poverty. But pills account for only 10% of spending on healthcare in the US.
So why is healthcare so much more costly in the US?
The simple answer is the ‘supersize’ phenomenon. As different as the two organizations are, walking into a hospital or a McDonalds may not be entirely dissimilar. Order a burger meal at a McDonalds and you’ll have the option, for something like a dollar more, to double the size of your coke and fries. Why not? It’s only a dollar more and who would want to finish their meal before their hunger was satisfied or their thirst was quenched. Healthcare in the US works in a similar way – for a nominal additional fee, you can supersize your treatment.
Having had personal experience with this phenomenon, I would like to recount a story to illustrate it. After breaking the 5th toe on my right foot during a Saturday soccer game, I was taken to a hospital in the Southeastern US. The break was a clean one and, although I am not a doctor myself, I assumed a ‘tug and shake’ would set it back in place and splinting it to the 4th toe would keep it there. The consulting doctor examined me and said that I should come back on Monday to see the orthopedic surgeon for x-rays and an assessment, where after they would consider an operation. Then I would be sold an orthopedic shoe that would keep the toe from bending. The total cost would run into thousands of dollars. After much deliberation, arguing and guarantees that I would not sue him, the doctor yielded and performed the’ tug and shake’ on my toe, it popped back into place and I strapped it up with some adhesive tape. The total cost was less than $300 – I saved thousands of dollars on a procedure that was not absolutely necessary.
A number of factors work together to contribute to the high inflation, and they take place on the side of the care provider (doctor) and the receiver (patient).
Fear is a factor that affects the provider and receiver alike. Patients are afraid of illnesses of which they are not aware. Doctors are afraid that they will be sued if they fail to correctly diagnose a patient. This fear results in many procedures taking place that are not absolutely necessary – sometimes the chance of having a certain illness may be 1000 to 1, but a costly test will be performed, just to be sure.
Patients are also not aware of what these procedures cost, and many would prefer not to know as long as they perceive it to be enhancing to their health. On average, a patient in America will pay only 15% of their medical bill – the 85% balance is sent directly to the insurance company. Therefore, if a doctor suggests a procedure that will cost a patient only $150, it seems a small price to pay to guarantee a clean bill of health. Unfortunately the consumer making the purchase decision fails to take into account the $850 that is billed directly to the health insurance company. This contributes to escalating costs.
Most alarmingly, the structure of medical reimbursements means doctors in America are remunerated not on the quality of the healthcare they provide, but rather on the quantity. The more procedures doctors recommend or perform, the more money they make. The result is the provision of many goods and services that are not absolutely necessary to patients and doctors get paid more for that. Statistics show that doctors in America have more units of sophisticated medical equipment, and use their equipment more often than the average in the OECD. Doctor’s incentives need to be realigned with the most important outcome – providing the best quality healthcare in the most efficient way
Economist Arnold Kling has addressed these issues in his book, ‘A Crisis of Abundance: Rethinking how we pay for healthcare’. He proposes that, amongst others, consumers should be given the means, the opportunity and the incentive to make wiser, more cost effective decisions about what procedures and treatments are accepted. Kling says that if consumers were paying closer to 50% of their medical bill out of their own pocket, instead of 15%, they would have more incentive to turn down unnecessary procedures. He states as well that in a country that demands supersized, all-you-can-eat healthcare, insurers and regulators should place limits on the provision of unnecessary procedures.
Doubters of Kling’s theory argue that if there is a pullback in spending, it will discourage innovation, one of the overwhelming strengths of the US system. But it would seem not all innovation is making a marked difference to the health of the nation and some innovation is only propped up by a defective reimbursement structure. This may suggest that resources are not being allocated to the most efficient use, an outcome that should be the backbone of the private healthcare model.
Adversaries of nationalized healthcare need to open their doors to a certain level of government intervention. Supporters of nationalized healthcare need to recognize that a complete overhaul would cost trillions of unnecessary dollars and bring with it a plethora of new problems (just ask the British). Mr Obama would do well to rather focus on adjusting and oiling the private healthcare wheel instead of reinventing it.
Supersized administration 2009-10-06 23:43:19 To follow on the point that Rays has raised currently South Africans can be sure that they are getting what they pay for without having to go through the audit process. Private hospital care is available at less than 50% of the price paid for public care in developed economies and with the exception of a few specialties South Africans are paying almost nothing for the care provided by their doctors. Under the circumstances the suggested audit process would just add to the cost.
Presently adminstrative burden exceeds the cost of professional care in the private sector and far outweighs that of primary care. This may be why the proposed NHIS is looking to a single payer government administered scheme. Whatever system develops, it is inevitable that in this globalised world the cost of professional care doctors and nurses etc will go up and the most obvious area in which to curb expense is in administration. - Neil
Nic for president 2009-09-10 07:55:07 Well done on a great article.I think we should get you to start consulting to Mr Motsoaledi - Johann van der Merwe
I am 2009-09-04 00:19:37 When do we start a Health Cure Sector that is base on getting patients cured as opposed to ongoing care? Lets measure the health of our nation on health and not disease status? - Gilbert Dennis
I am not a doctor 2009-09-02 12:51:27 From Barry Schwartzs talk the paradox of choicernrnThe same explosion of choice is true. Health care -- it is no longer the case in the United States that you go to the doctor and the doctor tells you what to do. Instead you go to the doctor and the doctor tells you well we could do A or we could do B. A has these benefits and these risks. B has these benefits and these risks. What do you want to do? And you say Doc what should I do? And the doc says A has these benefits and risks and B has these benefits and risks. What do you want to do? And you say If you were me Doc what would you do? And the doc says But Im not you. And the result is -- we call it patient autonomy which makes it sound like a good thing. But what it really is is a shifting of the burden and the responsibility for decision-making from somebody who knows something -- namely the doctor -- to somebody who knows nothing and is almost certainly sick and thus not in the best shape to be making decisions -- namely the patient.rn - Benjamin
Supersized problem 2009-09-01 16:34:40 I think we already have a supersized problem here Where else in the economy does the supplier bill direct with no check on the user that the all the details of a bill were in fact provided. Medical aids created the problem by accepting the direct billing. Local companies use GRVs. to ensure they got what they are paying for. - Rays
Supersized Health Care 2009-09-01 15:40:21 If there is away of achieving eqity in some arena of South African Life this would be good. Health and Education are the two obvious areas. The most significant achievement in health care in South Africa over the post apartheid era has been the growth of Netcare which provides excellent care at a fraction of the cost of public care in Europe or Canada but this care remains inaccessible to 80 of South Africans. If there is a way for South Africa to provide universal care without thowing the baby out with the bathwater as the author suggests the this would be a good time to move forward on that even if it means selling transnet and Eskom - Neil
Prices and prescriptions set in stone 2009-09-01 11:27:06 I have to agree with Jezza a very well written article that makes several good points. Even in SA there seems to be a no-negotiating over price attitude when it comes to medical services which can be very dangerous in the long term - Mark
Great Summary of a Complex Issue 2009-08-31 22:54:37 But it would seem not all innovation is making a marked difference to the health of the nation and some innovation is only propped up by a defective reimbursement structure. Nicely put This may be one of the most important points in the entire debate. - Jezza
Let’s hope that South Africa’s newly appointed health minister, Dr Aaron Motsoaledi, has been paying close attention to the healthcare debate currently raging on in the United States. South Africa can do well to learn some cheap lessons from the world’s largest economy on how to best provide healthcare equitably and efficiently.
2009-10-06 23:43:19
To follow on the point that Rays has raised currently South Africans can be sure that they are getting what they pay for without having to go through the audit process. Private hospital care is available at less than 50% of the price paid for public care in developed economies and with the exception of a few specialties South Africans are paying almost nothing for the care provided by their doctors. Under the circumstances the suggested audit process would just add to the cost. Presently adminstrative burden exceeds the cost of professional care in the private sector and far outweighs that of primary care. This may be why the proposed NHIS is looking to a single payer government administered scheme. Whatever system develops, it is inevitable that in this globalised world the cost of professional care doctors and nurses etc will go up and the most obvious area in which to curb expense is in administration. - Neil
Nic for president
2009-09-10 07:55:07
Well done on a great article.I think we should get you to start consulting to Mr Motsoaledi - Johann van der Merwe
I am
2009-09-04 00:19:37
When do we start a Health Cure Sector that is base on getting patients cured as opposed to ongoing care? Lets measure the health of our nation on health and not disease status? - Gilbert Dennis
I am not a doctor
2009-09-02 12:51:27
From Barry Schwartzs talk the paradox of choicernrnThe same explosion of choice is true. Health care -- it is no longer the case in the United States that you go to the doctor and the doctor tells you what to do. Instead you go to the doctor and the doctor tells you well we could do A or we could do B. A has these benefits and these risks. B has these benefits and these risks. What do you want to do? And you say Doc what should I do? And the doc says A has these benefits and risks and B has these benefits and risks. What do you want to do? And you say If you were me Doc what would you do? And the doc says But Im not you. And the result is -- we call it patient autonomy which makes it sound like a good thing. But what it really is is a shifting of the burden and the responsibility for decision-making from somebody who knows something -- namely the doctor -- to somebody who knows nothing and is almost certainly sick and thus not in the best shape to be making decisions -- namely the patient.rn - Benjamin
Supersized problem
2009-09-01 16:34:40
I think we already have a supersized problem here Where else in the economy does the supplier bill direct with no check on the user that the all the details of a bill were in fact provided. Medical aids created the problem by accepting the direct billing. Local companies use GRVs. to ensure they got what they are paying for. - Rays
Supersized Health Care
2009-09-01 15:40:21
If there is away of achieving eqity in some arena of South African Life this would be good. Health and Education are the two obvious areas. The most significant achievement in health care in South Africa over the post apartheid era has been the growth of Netcare which provides excellent care at a fraction of the cost of public care in Europe or Canada but this care remains inaccessible to 80 of South Africans. If there is a way for South Africa to provide universal care without thowing the baby out with the bathwater as the author suggests the this would be a good time to move forward on that even if it means selling transnet and Eskom - Neil
Prices and prescriptions set in stone
2009-09-01 11:27:06
I have to agree with Jezza a very well written article that makes several good points. Even in SA there seems to be a no-negotiating over price attitude when it comes to medical services which can be very dangerous in the long term - Mark
Great Summary of a Complex Issue
2009-08-31 22:54:37
But it would seem not all innovation is making a marked difference to the health of the nation and some innovation is only propped up by a defective reimbursement structure. Nicely put This may be one of the most important points in the entire debate. - Jezza