Strong opinions, weakly held

The “fee for service” problem, again

The latest article on health insurance everybody is pointing to is David Leonhardt’s column on prostate cancer. It is yet another explanation of how the “fee for service” model that dominates the health care industry creates economic incentives that guarantee health care expenditures that permanently spiral upward. Imagine if programmers were paid by the number of lines of code they produce. Yes, programmers would do more programming, but they almost certainly wouldn’t produce better applications.

The thing to remember as the nation debates health care is that doomsday approaches regardless of what’s done in terms of expanding the availability of health insurance. Our core problem is rising costs, and no matter what any politician says, this is a problem that we must address at some point. The core question that we face is how to remake the economics of the health care industry. Wish I had a solution.


  1. Wasn’t that the knock on IBM in the OS/2 era? Gates said they were tryingoro build the world’s heaviest airplane as their programmers were paid by the line.

  2. Health insurance is not health care.


    Cost of care (i.e. cost of doctors/hospitals/pharma/other providers) makes up 80 cents of a dollar of insurance premium.

    Doctors/hospitals/pharma/other providers/insurance all do not have transparent pricing nor communicate pricing in any way.


    Pricing from providers and insurers needs to be transparent and communicated in full.

    Consmers of health care need to act as consumers. See John Stossel’s blog http://tinyurl.com/m9tky

    Consumers should not assign insurance benefits to providers.

    Groups other than large multi-state employers, unions and Federal Government should be allowed to hold group insurance contracts.

    Individuals can join group of their choice: employer, union, bank customer, association, civic group, university group, other groups.

    All of the above will result in competitive insurance markets, competitive health care markets, lower costs for insurance, lower costs for health care, mobility of insured customers, waiver of pre-existing conditions, guaranteed acceptance of insured customers regardless of health status, elimination of job lock due to insurance, elimination of insurance company intervention with providers/denial of service.

    Market forces will drive competition and force costs to be lower. Information needs to be fully available. Consumers must be responsible purchasers.

  3. Rafe,

    I really do think that Rothbard was a genius. Here are some of the things he had to say about health care:


    As far as solutions go, no one really wants to hear it, but this is a real solution:


  4. The idea that customers must act more as “consumers” when it comes to health care does not fit in with any definition of human psychology that I have experienced.

    People make one really important health care choice — do I trust my doctor’s advice? If they don’t, they either ignore that advice and find another doctor, or they just ignore the advice and do nothing.

    Unless they have to pay out of pocket, people are not going to call around to hospitals and ask who’ll give them the best price on getting their appendix removed. And any system that demands that will see most people simply waiting til they get so sick that they can go to an emergency room where treatment cannot be refused, because they won’t be able to afford the price of paying for appendix removal.

  5. I love you, Duff, but that Rothbard article is perhaps the least persuasive thing I’ve ever read.

  6. Fascinating! I wonder why I’m so influenced by Rothbard. I was thinking he’s ridiculously logical. πŸ™‚ But…. you’re quite logical as well. Perhaps my thought that Rothbard’s logic is irrefutable needs some refinement! πŸ™‚

    Perhaps my personal biases are clouding my judgement in regards to the soundness of Rothbard’s arguments.

    It would be a fun lunchtime discussion someday. πŸ™‚

  7. I think Rothbard is very logical, but not very humane. The other problem with his argument is that he seems to regard alternative means of delivering health care as purely theoretical, and thus treats coming up with the possible outcomes as something we have to guess at. (As in the section on collectivism.) However, the truth is that there are many ways of supplying health care in use all over the world, so we don’t have to guess. We can look at the UK, Canada, Switzerland, Germany, Sweden, and others. We also have many health plans in the US. We have nationalized health care for veterans and public health insurance for old people already.

    So we can take a more pragmatic approach and see which approaches are getting the outcomes we wish for rather than just speculating.

  8. I dig the subtitle of your blog. I have many strong opinions weakly held. πŸ™‚

    I’d argue that getting government completely out of the health care equation would give the most people the most health care. This seems more humane to me than the alternatives.

    I was mulling a bit about how to measure humaneness. To me, one’s humanness can be measured by their individual voluntary kindness, generosity, level of charity, compassion, etc. Coerced charity is no longer charity.

    I find it difficult to say that a politician who advocates taking a bunch of stuff from one group of people and then giving that stuff to another group of people to be humane.

  9. My problem is that I don’t see any examples of countries or systems where no government involvement has worked in terms of delivering health insurance to everyone.

    I guess I feel like civilization is fundamentally about figuring out the optimum way of allocating our resources to maximize our quality of life. I suppose in a more just world we would choose the society in which we get to participate rather than it being an accident of birth for most people, but beyond that I’m OK with things like taxation.

    If you are unable to procure health care or obtain medical treatment for treatable conditions, it will likely prevent you from taking advantage of many of the other freedoms we are lucky enough to enjoy.

  10. I agree with you about “about figuring out the optimum way of allocating our resources to maximize our quality of life.” I guess that’s where our basic difference of opinion is. Some think that centralized coercion leads to the optimum allocation. Others think that voluntary, self-organizing, ‘anarchy’ does the trick.

    I enjoyed the discussion!

  11. From what I have read, most of you, like most Americans, have no idea how your health care is “managed”. Most of the insured do not seem to understand either. So here it is! We the insured who work in the health care industry have heard from the uninsured. Now the media and bloggers and the web, along with the uninsured need to hear from the insured–especially those of us who work in utilization review. YES! we are fortunate to have health care insurance but there is a critical question that deserves focus and attention: why has here been no media time given to the way our health care dollars are administered? News media have printed articles and spoken ever so wisely about Republican and Democratic reaction to the Obama administration and spending with regard to health care reform—but no one seems to discuss just what it is that is being reformed. None of you have talked about what it is that is planned to change!

    Thanks to managed health care and utilization review, we the insured are currently spending about 20% of the cost of our monthly insurance premiums on activity other than health care and its delivery. I”ll say it again…most Americans do not understand what governs the delivery and benefits of their health care –the hidden costs that are driving the premiums up, costing workers benefits because employers cannot cost share health benefits any longer. Information is available to the public about the hidden costs of health care premiums if you know where to look and what the answers mean—but most Americans do NOT understand managed health care and utilization review. According to Google, there are 1300+ HMO plans, 900+ Utilization Management/Review agents and 800+ managed care organizations (MCO) currently active in the USA. Every insurance carrier, 3rd party administrator, MCO and HMO hires professional nurses (RN) and physicians (MD, DO, PhD), like me, who have decades of health care delivery experience with (and as) medical providers; many of us have experience working for health insurance payors. My jobs have shown quite clearly that those who are fortunate enough to have health insurance are not paying for medical care–we are paying the wages and salaries of the HMO, MCO, PPO gatekeepers, reviewers, the nurse answering the 800 number found on our insurance card when contacting our health plan to arrange to have care “certified or pre-certified as medically necessary” .

    The “medical necessity” of our treatment is determined by the use of guidelines and criteria developed by physicians and health lawyers and sold to insurance companies and vendors who accept the out-sourced utilzation review activities too burdensome for the insurance company to manage due to volume.

    To those who thought bureaucrats were making health care decisions–you are wrong. Physicians and other health care delivery specialists are making the determination of what level health care you receive by developing, promulgatingusing, selling and licensing commercial criteria and guidelines. The criteria and guidelines used to render decisions about “medical necessity or appropriateness” are the basis of managed health care, facility contracting and govern how, where and when health care dollars are spent. Health insurance plans have a strong financial incentive to try to shift as much of the costs of each insurance claim on to individuals, providers, and other health insurance providers. It therefore makes sense for them to devote substantial resources to the task of trying to avoid paying claims that are brought to them. One example of this effect is how insurance companies have nurses and physicians go over claims to try to deny them whenever possible. A national government-run insurance plan would have no such incentive, since there would be no one to try to shift the burden to.
 I have seen millions of dollars that should have been spent on acute level hospital care just washed washed away from providers by utilization review agents contracted by insurance companies, using commerical criteria to “deny” payment of a claim. I appreciate someone taking the time to read this and understand that our health care delivery has been severely damaged by managed health care as an industry; the rules of the health insurance industry are complex and are not benefitting the policy holders or the patients.Β Every health insurance claim is reviewed by at least an RN or an MD for medical necessity of treatment provision before payment is authorized. If the Obama administration would do the math and add the number of MCOs or payors utilization review agents, the medical management staff of the payor entity and the acute care facilities and understand there are hundreds of health care professionals highly engaged and highly paid to process clinical information for each consumer, it would become clear where our health care premium dollars are going.

    By the way HMOs, for all the negative media coverage they get, are not the bad guys. Every employer based health plan is selected from those the employer has to choose from in the managed care market place. Most employers try to do the smart thing and select the best quality plan for the least amount of money out of pocket for themselves and their employees. The benefit structure is developed by insurance companies and managed care experts to sell to employer groups as their special “products” –and become newsworthy only when the payor does not want to pay. Employers wanted oversight of the dollars spent on heath care and they bought into utilization review as a cost saving measure —but the cost they sought to save has simply brought new players to the health care market place, and the practice of utilization review and managing our health care has run many employers out of the business of cost sharing health benefits with employees.

    So what about “health care reform”? Who will administer the new and reformed health care? What will it look like to recipients? What sets of criteria and medical management guidelines will be used to approve or deny the health care we are paying premiums to receive? How will we know what percentage of our premium is going toward the payment of physicians and hospitals as opposed to the pockets of the utilization review agents, MCOs and the HMO administrative staff? Will those organizations just go away? Who will continue to profit in the food chain that the money eating monster managed health care has become? This is BIG business. An intire INDUSTRY is being funded by our insurance premiums. Stop fumbling with philosophy and educate yourselves concerning what is happening with your health insurance dollars. The ADMINISTRATORS of the fee for service plans must be ONE SOURCE or the competition for enrollees will continue to rise, creating more managed care companies and more utilization review agents who are rationing health care based on contractual arrangements with your insurance companies. Wake up!

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