America, Love It or Heal It

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Efficiency in the health care market: A short treatise on a perplexing paradox

On any given day, you can hear talking heads on a dozen sides of the health care reform debate arguing about which version of health care delivery is the most efficient. Many lay claim to this holy grail of financing, they cannot all be right, so who is doing the truth-telling and who is doing the lying?

“Efficiency”, like many jargon-able phrases, has different meanings to different people who use the word. In classical 101-level economics, efficiency is a market phenomenon that happens when you allow an unfettered entry of buyers and sellers to a common exchange. Demand and supply sort themselves out to some sort of equilibrium, and a movement of goods occurs at a point where the maximum possible number of buyers and sellers are happy with the outcome – a mechanism essentially mediated by price. This is a dynamic process, with price rising as a good becomes more popular and sellers can demand more compensation (concert tickets on the day of a sold-out show, plywood and flashlights on the day a hurricane rolls through town), and price dropping as surpluses flood the market or goods lose the cache to drive high price (disco shoes circa 1980, manual labor in the era of mechanization). Though this kind of efficiency by no means makes everyone happy, it is one way to reach maximal contentment with minimal interference and to drive supply in accordance with demand. (This model harbors a wealth of flaws when applied to health care, but set those aside for a moment.)

“Efficiency” in the health care world has taken on a life of its own, and in looking at the cross-purpose uses of this word, we can start to understand why so many sides of the debate lay claim to this distinction – and while none of them are exactly lying, how we can use a better understanding to pick which of these sorts of “efficiencies” actually align with reasonable health care systems.

On one hand, one could reasonably use the term “efficiency” to describe how much of a system’s health care dollars go into actually health care, versus how much goes into overhead, upkeep, and general bureaucratic usage. To give you a sense of the norms, Britain’s National Health Service runs a usual overhead rate of about 5%. Medicare – America’s near-universal program for insuring retirees, run by the much-maligned US government – comes in at a spectacularly low 3% overhead rate. In both of these notably “socialist” programs, 95% or more of the cash flow runs straight to actual health care.

Private for-profit insurers in the United States routine run an 80-20 split: 80% to actual health costs, 20% to overhead and other costs. By any measure, for-profit US insurers are an entire digit less “efficient” than the universal insurers in any other developed country. Shocking, no?

Well, maybe not. Because it depends on your actual goal when you define the term “efficiency.” In the very succinct words of TR Reid in his eminently entertaining jaunt through comparative health care economics, The Healing of America:

It’s revealing that, in the lingo of the US health insurance industry, the money paid to doctors, hospitals, and pharmacies for treatment of insured patients is referred to as “medical loss.” That is, when health insurance actually pays for somebody’s health care, the industry considers it a loss. (Health insurance executives explain that “loss ratio” is a technical term borrowed from the fire and casualty insurance business.) Insurance executives, securities analysts, and the business media carefully watch each company’s medical loss ratio to make sure that the actual medical payments don’t eat too deeply into administrative costs and profits. If a health insurance company consistently spent much more than 80 percent of its money on actual health care, its stock would plummet and its CEO would be axed.”

If your goal is health care, 3% overhead is a remarkable feat of efficiency. If you goal is profit – as it is for the bulk of American coverage providers – efficiency is measured not in low overhead, but in low outlay toward “losses” – losses that, for Medicare or the NHS, add up to a whomping 95-97% of their budget. This view of efficiency (maximizing profit, minimizing unnecessary losses) would ring true for a car manufacturer, a legal services office, a retail clothing outlet – why would it be any different for a commercial insurer? Read from this angle, the American private health insurer is a star of efficiency, wringing a spectacular profit out of an industry in a manner achieved in no other developed-world nation. And incidentally, along the way, creating the most expensive health care system with some of the most notably mediocre outcomes in the developed world.

By looking through these opposing lenses, we can start to see how both the universal-coverage proponents and the free-marketeers both claim the mantle of efficiency. The question then simply becomes which kind of efficiency we want: the kind in which the cash flow through the health coverage system is maximized for health, or the kind in which the monetary investment in the health insurance industry is maximized for profit? This is a question of both desired outcomes and moral fiber of a nation. It is a question that is currently being answered for us in a variety of ways, but which behooves us to step up to the plate and take a brave stab at answer for ourselves.

Now let me put a third spin on the definition of “efficiency” – or in this case, inefficiency. Outside of the hallowed halls of academic economics and the somewhat shadier halls of the for-profit health insurance business, there are the busy and chaotic halls of your local hospital and clinic. On ground zero of the coverage debate – where physician meets patient – a different version of inefficiency arises, one that has little interest in actuarial tables and national policy and theoretic curves of supply versus demand. This is a nebulous, harder-to-define inefficiency, along the lines of how a famous person once described pornography: “I know it when I see it.” It goes like this:

On an average day, I see a certain number of patients, treat their complaints, send them on their way. And then I take a deep breath and dive into the hours of paperwork generated every day by the intentional hoops, denials, and obfuscations created by a system fractured into competing for-profit insurers. These hours are spent completing prior authorizations, appealing denials, cooking up secondary codes when insurers don’t want to cover diabetic blood tests under the code for “diabetes.” Hunting down lists of approved drugs only to receive a fax back declaring the medication chosen was actually not on the approved list, then filing a prior authorization, and then receiving a fax back declaring that oops, it actually was on the list to begin with. Memorizing arcane grids of which labs work with which insurance agencies, and remembering to choose the purple tube or the green tube before performing basic tests (and calling patients back for repeat testing if by chance I pick the wrong one, or they change insurance carriers in the interim). Fielding calls from panicked patients that a test that should have been covered was not. Fielding calls from angry patients that three weeks into a request, we still have no answer on a prior authorization. Fielding mystified looks from patients who legitimately ask, “Will this be covered by my insurance?” when the answer from me is that I have no way of answering – not only because I cannot memorize some thousands of constantly-changing benefits packages, but because if I hazard a guess, I know I will be held to it. This sort of inefficiency may not be well-theorized by the economists and financiers, but it perhaps the one that most affects your satisfaction with your health care. It is driven – both intentionally and not – by the multiplicity of insurers and the drive to deny services and maintain that 80% maximum outlay toward “medical loss,” as the insurers call it (or “health care” as the rest of us call it).

This is the soul-grinding inefficiency that makes so many primary care doctors want to flee the business altogether. It is also a rankly understated part of the reason why health care is so expensive in the US: not only are private insurers routinely skimming 20% of the health care dollars that pass through their hands, almost no model I have ever seen accounts for direct patient care time lost to the demands that insurers place on doctors. I could see several more patients per day at the same salary were it not for the trail of paperwork each leaves behind - sometimes several-fold the actual face time spent with a patient. This is time that increases insurance company profits at the expense of decreases physician income per hour - essentially, unreimbursed time providers spend working on behalf of the profit interests of insurance companies. And with delays, uncovered costs, and a thousand other annoyances small and large, this contributes mightily to the soul-grinding inefficiency that makes so many patients so dissatisfied with their primary care experience.

Single-payer (or at least more tightly regulated) systems remove a large part of this latter inefficiency by offering more uniform benefits packages that physicians might reasonably be expected to master, by forcing ancillary services like labs and imaging centers to utilize less fractured logistic practices, and ultimately by making the goal of health care to take care of people rather than to deny services. And therein allowing physicians to do what they do best – practicing medicine – instead of do what we usually do worst: push paper.

Note: Much of the background information for this discussion is derived from TR Reid’s most impressive The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care – which tackles the usual dry topic of comparative health economics in a most enjoyable format. This should be required reading for any non-expert interested in the problem of health care reform, and I highly recommend it for anyone interested in understanding the different formats of single payer/universal coverage around the world and at home.Efficiency in the health care market: A short treatise on a perplexing paradox