America wants to everyone to be cost conscious when using medical care services.  Quick, which one of these two alternatives would best motivate the people you know?

Money, Money, Money...

or

Civic Duty?

Part 3 of this series observed that we could make the U.S. healthcare system cheaper, fairer and more efficient overnight by simply allowing our healthcare providers to charge whatever they want on an hourly basis…just like every other professional on the planet.

I realize that this is a radical idea.  God forbid, it’s not what we do now.  Of course, what we’re doing now is stupid, arbitrary, economically inefficient, medically wrong and is wasting hundreds of billions of dollars every year, but it’s an established tradition.  To change it would be to change an idiotic and ill-considered decision made by Congress twenty years ago.

Perhaps John Stuart Mill said it best:

“The despotism of custom is everywhere the standing hindrance to human advancement.”

Except this particular despotism is getting a little help from our elected and regulatory Leaders.

But we’re not quite finished with our discussion of the market-based “pay doctors for their time” approach.  How could it save us more money than just the $26 billion per year in billing expenses that we discussed last time, and how do we sure that patient have “skin in the game”?

The saving money part is easy if you think about two things: how the existing RBRVS system distorts payment incentives, and all of the administrative cost incurred by insurers and everyone else as a result of having to enforce RBRVS.

Because procedures generally pay providers so much more than anything else they can do, they tend to be over-used.  There is nothing surprising or nefarious about this; it’s rational human economic behavior.  You’re in business.  You have two equally good solutions for your customer.  One is a procedure and one isn’t.  The procedure pays you far more.  Which one are your going to recommend to your client?  (If you said “not the procedure, but the other one”, you might want to reconsider that career in business and apply for a job in government.  You too, are living in a dream world.)

This economic bias towards procedures has adverse economic consequences.  Procedures typically cost far more than the amount we pay those doctors.  There are facility costs to consider.  Then you can add on equipment usage, the cost of medical devices, supplies and ancillary staff.  Lastly, add in the cost of bandages, post-op medications and potential complications, as well as all of those follow-up visits.  Or course alternatives to procedures have expenses of their own but, on average, there is an excellent chance that all of those excess procedures are costing us a large fortune.

Let’s call up some numbers.  Americans spent nearly $122 billion on surgical procedures in 2003. but this is back when total U.S. healthcare spending was only $1.7 billion.  An equivalent rate of spending on surgical procedures today would be $180 billion per year.  If the procedural bias of the RBRVS system accounts for just 10% of that spending, that’s $180 billion over the next ten years  that might have been better spent elsewhere – an amount that dwarfs the CBO’s latest estimates of deficit reductions due to the Democrat’s new healthcare reform law.

The potential administrative savings of dumping RBRVS are legion.  Not only are doctors shelling out tens of billion per year to comply with the system, everyone else involved has to shell out equal or greater amounts of money to enforce it.  For every biller trying to get paid on an RBRVS claim, there is going to be a review process to ensure that the complex, arcane and ever-changing rules are followed.  It’s no accident that administrative expenses (and the number of administrators themselves) are the fastest growing component of healthcare.  (More on this in a future post…)

Charging by the hour helps clarify and simplify the supply situation, but what about demand?  We said previously that one important part of this whole payment scheme is that patients have “skin in the game”.  If one doctor charges $300/hour and other charges only $200/hour, other things equal how do we get then to prefer the cheaper one?

There’s only one possible answer: every patient has to share in the financial consequences whenever a healthcare decision is made.  Ironically the biggest challenge we have in this regard is with America’s poor, and with those receiving the very best health insurance coverage.

Many Americans currently pay little or nothing out-of-pocket for the healthcare they receive.  Those in low income brackets use emergency rooms as their primary care clinics free of charge, or participate in Medicaid programs with little or no co-payment requirement.  People with comprehensive insurance coverage provided by their employers also pay little or nothing on their own.  Their coverage is, if anything, too good.  The marginal cost of care seen by these two groups of individuals is zero.  Unlike everyone else in America, they have no skin in the game.

So we have to give them some.  How?  The best way is to take the “Oprah” approach.  “Look under your seat.  Everyone gets a Healthcare Savings Account (HSA)!  You get an HSA, and you get an HSA and you get an HSA!”

And you’re going to get one whether you want it or not.

Here’s how it works:

• Step #1 – Every health insurance policy in America comes with an HSA, whether it’s private insurance, Medicare, Medicaid or TRICARE.  If a family’s income falls below a given threshold, the account is largely funded for them.  If they family has insurance, the HSA is funded by a designated portion of their health insurance premiums.  But everybody’s got to have one, and everyone has to contribute something relative to their means.

Regardless of how the money got into the HSA, it’s the family’s money.  If they change insurers, the funds go with them.  If they die, their heirs get it.  It earns a market rate of interest, and the interest is theirs.  HSA funds can be used for medical expenses until retirement, at which point any surplus can be added to retirement savings.  But a portion of that money should also available for random consumption.  Perhaps a portion of the year-end surplus or the annual interest on the account can even be withdrawn and spent on anything at all.  Diamonds.  Boats.  Televisions.  (Anything but cigarettes…)

The objective is to create a system where spending that HSA money on healthcare means that the patient can’t spend a portion of that same money on something else that they might really want, whether that’s a new car, iPhone, jewelry, a comfortable retirement or a college education.  We want it to hurt a little to spend that HSA money.  For a large percentage of the population that’s not going to happen if all they can use it for is boring stuff like medical care or a retirement that might happen 40 years hence.  The promise of near-term gratification is far more important.  (If anyone is offended by that observation: I didn’t make these people,  I just observe how they behave.  A large fraction of Americans want to spend their money on anything but medical services.  Anyone who tells you differently needs to spend some time in a clinic or an ER.  Seriously.)

• Step #2 – All healthcare decisions come with price transparency.  (As you’ll remember, this was a big reason for switching away from RBRVS.  It’s easy to explain and understand pricing a doctor’s services by the hour.  That’s not the case with the existing system.)

This means that prices are known, published, and a part of every decision that patients and providers have to make together.  Conversations about medications, procedures and tests revolve around risks, benefits and the cost to the patient.  A substantial portion of those costs are going to come from the patient’s HSA.  And that’s going to hurt at a little no matter who you are. Other things equal, you’ll look for that lower price.

Market-based competition, price transparency and consumers of healthcare services having skin in the game is a powerful combination.  They’re the only things that are likely to get us anywhere near a system that balances quality with quantity, and supply and demand.  We can do this.  It’s not magic, it’s just simple economics and recognition of human behavior.

If America’s politicians won’t lead us in this direction, then they need to do their own civic duty and get out of the way.  After all, you’re the ones who created this mess.

What’s the best way to pay our healthcare professionals?
The same way these folks are paid: by the hour.

In our last post on this topic we discussed how an appropriately designed American healthcare system should serve, and listed five critical attributes that a system so conceived and so dedicated must have.  Thusly armed, we are now in a position to weigh alternatives for paying healthcare providers.  The best strategy would be the payment method that:

1. Adheres to the attributes we’ve identified;
2. Produces the most efficient use of scarce healthcare resources; and
3. Can be implemented in the simplest, least expensive and most readily understandable way.

The existing RBRVS clearly fails us on all fronts.  It’s far from market-based.  In practice, the government and private insurers fix prices.  If those prices don’t cover actual production costs, that’s too bad; providers are forbidden from billing patients any balance that might be due.  If the prices set are too high, that’s too bad as well; taxpayers and insurance rate payers get stuck with the bill.  The distribution of income among physicians is essentially determined by an AMA-created board weighted towards specialists, and whose decision-making processes are shrouded in secrecy.  The system is to complex to understand, and hopelessly expensive to administer.  Clinical decision-making is inherently biased toward whatever procedures happen to pay better than others at the time.  Doctors with superior experience, skills or abilities are paid exactly the same as those with lesser talents.  Because prices are fixed, healthcare goods and services end up being rationed covertly, and often arbitrarily.   Patients with Medicare and other government insurance may not be able to find any providers who can afford to provide specific services, or even serve them at all.  Administrative expenses account for about one-third of each dollar spent, and administrators themselves – who provide no actual healthcare services – are proliferating like rabbits.

In short, the whole thing might as well have been designed by someone trying to undermine rationality and efficiency in the American healthcare system.

So how should we pay our doctors?  It’s simple: pay them by the hour, like every other professional on Earth.

What a radical idea.

Why does this make so much sense, that no think tank academic, regulator, lobbyist or Congressional analyst would not dream of suggesting it?  Let us count the ways.

Way #1 – It’s economic common sense. Doctors are a valuable resource: people with special knowledge and skills that can be used for a wide variety of purposes.  If you use that resource for one thing, it’s unavailable for any other alternative use.  This is what economists call “opportunity cost”.  If you want to use a doctor’s time for something trivial or useless, say for filling out regulatory paperwork, that resource costs should cost just as much (and in economic reality does cost just as much), as if you had the same doctor repairing a bleeding artery in someone’s brain.

Think about it.  If you want to rent a machine that is valuable enough to command a market price of $300 per hour, how much should you have to pay if you use that machine to plug British Petroleum’s oil leak in the Gulf of Mexico?  The answer is $300 per hour.  What should it cost if you use the same machine as an office decoration?  Again, the answer is $300 per hour.  If you want to misuse or neglect a valuable resource, that’s your business.  But misusing it doesn’t make it any less valuable.  It’s pretty obvious that that same principle applies to medical resources as well.

Way #2 – It’s simple and easy to administer; drastically reducing administrative overhead associated with billing and collections. All that one needs to know when creating an hourly bill is the pre-determined hourly rate and amount of the time used.  Both of these are easily tracked and verified.

Medical billing currently consumes an average of 7.5% of a healthcare provider’s gross income.  Think about that.  Most doctors have an overhead rate of 50%.  That means that billing under the current RBRVS system consumes a full 15% of a healthcare provider’s net income, just for the privilege of following the billing laws our government has created.

Any doctor will tell you that they would gladly charge less if they could only escape the nightmare of RBRVS billing.  For the sake of illustration, let’s say that charging by the hour reduces professional billing expenses to 1.5% of gross physician income.  Under these circumstances, any economically rational doctor would be happy to reduce his gross charges by a full 5%.  Heck, insurers and consumers would pay 5% less overnight, and the doctor would still take home 2% more net income.

Let’s put a number on that.  Physician and clinical services make up about 21% of total healthcare spending in the U.S.  In 2010, we’ll spend about $2.5 trillion on healthcare.  Allowing doctors to reduce their gross charges by just 5% would have saved us $26 billion, and would save an additional $26.3 billion or more each and every year thereafter.  That’s $263 billion over ten years, or about twice the $143 billion that the CBO claims that the recent healthcare reform law will reduce the federal deficit from 2010 to 2019.  (Of course that was before last week, when the CBO discovered that discretionary spending in the law will cost more than $115 billion in additional unbudgeted expenses between now and 2019.)

With all the resources of the most powerful and advanced nation on Earth, President Obama and the United States Congress couldn’t work something this simple, obvious and cost-effective into a 2,409 page healthcare reform bill?

Way #3 – Hourly billing is transparent, direct and perfectly suited to a market-based system of resource allocation. It allows all of the relevant economic, professional and social factors to be taken into account.

“I charge $100 per hour.  I estimate that the procedure will take one-half hour.  Is having this done worth $50 to you?”

“I charge $100 per hour, but have done very few of these procedures.  The doctor next door charges $200 per hour, but has done lots of them.   Which of us would you prefer to use?”

“I charge $100 per hour, but I am brusque and impersonal.  The doctor next door charges $200 per hour, and is sweet, smiling and personable.  Which of us would you prefer to use?”

Just try taking any of those factors into account with RBRVS.  (You can’t.)

Way #4 – Hourly compensation does not bias clinical decision-making.

This is big.  Let’s say that you have a medical problem that can be treated either surgically or medically.  Your doctor is paid exactly the same amount per hour whether she is operating on you, or adjusting your medications.  Which treatment is she going to recommend?

Frankly it’s a trick question.  What she’s most likely to do in this situation is explain the advantages and disadvantages of all of the available courses of action, and help you decided based upon your our personal budget, preferences and the best available medical evidence.  Why not?  That’s what she’s now being paid to do.

The medical, social and financial implications of this single, simple fact are enormous.  For the first time in thirty years, patients don’t have to wonder if a course of action is being recommended to them because it’s more lucrative for their clinician.  Their doctor can afford to take the time to explain all of the available options, risks, benefits and alternatives as an expert counselor, because that’s what they’re now being paid to do.

For the first time in thirty years providing preventive medicine services would be financially equivalent to fixing the problem after it’s occurred.

For the first time in thirty years doctors won’t have to feel guilty about talking to their patients, and have to tell them to come back because the CPT code doesn’t pay enough for the amount of time required for the visit.

And, astonishingly enough, for the first time it will be the patient who is asking about how to limit the amount of time and medical resources used for diagnosis and treatment rather than providers or insurers.  Because for the first time it will be possible and appropriate to give them the answers.  Which leads us to…

Way #5 – Hourly compensation can dramatically and directly reduce the total cost of care for everyone involved. This is perhaps the most interesting and compelling reason to switch to paying doctors for their time rather than for “units of output”.

We’ve already seen that hourly billing can instantly save over $26 billion per year in administrative costs alone, without removing a single medical good or service from the marketplace.  But what if we could change the mix of medical goods and services from one oriented to maximizing procedure revenue, to one that maximizes the efficient use of medical resources?  The answer is cost savings on a truly massive scale.  This is exactly what will happen if we combine price transparency with asking patients to pay their own money – at least in part – for the medical goods and services they receive.

How and why this works will be the subject of our next post in this series.