Healthcare Myths: I. The Cost Shift

This is part of a series of posts I’m writing, partially here and partially at Right-Thinking, busting Left wing myths about healthcare reform.

Before we start, a caveat. I am not a professional policy wonk nor a consumer advocate. Doubtless there are aspects of these issues about which I am, at best, ignorant. I’m coming from the point of view of someone from a family of medical workers who was in medical management for 13 years.

I also come at it as a libertarian who is fundamentally suspicious of grand government plans for running the Universe. I believe that markets will always trump central planning, although I believe we can and should help those who can’t help themselves.

Those are my biases and faults. But I still feel more qualified to talk about this subject than Michael Moore.

I was going to put up a post addressing the “our system stinks” myth. But an announcement today made this subject more urgent.

The Myth: Medicare does a better job than the private sector in controlling healthcare costs. Over the last 35 years, Medicare costs have grown 1-2% more slowly than private care costs.

Bad Policy Based On The Myth: Barack Obama wants to expand Medicare coverage to millions more Americans, including making it optional for anyone over 55 (which means, in the contest between private and “free” health insurance, it will be effectively mandatory). Obama is further proposing a “down payment” on health care reform financed by reducing provider fees that Medicare provides.

The Reality: It’s notable that no one who promulgates this myth can tell you precisely how Medicare controls costs. It’s not managed care and it’s not cost-benefit analysis. So what is it?

First off, the very idea that the government is better than the private sector at controlling costs should fail the smell test. In addition to the known and demonstrated inefficiency of government, there’s the demographic reality. Medicare covers the old and the disabled, who incur a huge fraction of medical care costs and are the most rapidly growing demographic in the nation. It would make little sense for those costs to be rising more slowly than the general population.

So how do I explain the above figures?

Imagine, if you will, that Obama gave a speech on the spiraling cost of education (federal spending doubled in the last Administration and the stimulus doubles it again). But, he claims, he has a solution. We will freeze teacher salaries … for the next 30 years.

You can imagine the uproar. And you can imagine the effect. All the good people would leave teaching and, eventually, your math teacher would be the guy who couldn’t get a job at 7/11.

But this precisely what Medicare has done. They have essentially frozen provider fees. The fee schedule has been frozen, slashed and reconfigured so dramatically that many procedures pay no more than they did a generation ago. In essence, every time a doctor or hospital treats a Medicare patient, they lose money.

Providers have only been able to make ends meet by (1) increasing volume; i.e. providing more healthcare than strictly necessary; (2) cost-shifting; i.e, charging non-Medicare patients more (which is why private insurance spending outpaces Medicare); (3) gaming the system.

The last is particularly noteworthy. By discharging patients before they are fully healed, then re-admitting them for later procedures, doctors and hospitals can make up the revenue loss. Obama’s proposal is supposed to crack down on this practice. But providers wouldn’t be engaging in the practice in the first place if they didn’t have to. Contrary to popular belief, health care providers are not, generally speaking, unethical.

Concrete example? Breast cancer. It is possible, in this country and this country alone, to biopsy a lump in a woman’s breast, have it evaluated the lab and, if necessary, do a mastectomy in one surgical setting. For years, Medicare refused to pay for the biopsy, arguing that since you removed the entire breast, they shouldn’t pay you for removing a small part of it. This encouraged doctors to do the biopsy, send the patient home and then later do the mastectomy, with concordant increased risk to the patient. I fought a battle against Medicare for years on this subject. They changed it after I left medical management.

If (and it’s a big if) Medicare closes off the system gaming, that will leave volume. But providers are near their limit and Congress restricts volume.

So that leaves us with cost-shifting. Doctors simply raise the fees on non-Medicare patients to keep their practices going. So if it costs $100 to do a procedure and Medicare only reimburse $75, you bill your non-Medicare patients $125.

This is Medicare as a pyramid scheme — even beyond the payroll tax pyramid. Providers raise medical fees on young people so the government can finance the care of old people.

But like all pyramid schemes, it collapses if you run out of suckers. And the current proposals dramatically increase the pressure on the sucker pool. Every patient going into the Medicare system increases the costs of those not in the system.

And of course, if, as many Democrats want, we shift the entire population to something like Medicare, there’s no one left to cost-shift to. All the options for making up Medicare fees are lost. Doctors will make dramatically less money and, pretty soon, your doctor will be, at best, a medical student hoping to get his education in the United States before practing somewhere — like wherever our politicans get their care — that pays a decent wage.

Medicare is not the model we want to build a healthcare system on. I can outline numerous problems but this is the biggest and the most relevant. The proposals to expand Medicare — and shrink payments to providers — are merely going to hasten the toppling of the pyramid.

And we’re all in the shadow of this one.


One of the stupidest ideas to emerge in the public mind is the idea of gun buybacks. NYC is happily announcing the collection of 919 guns at a price of $200 per gun.

To put this in perspective:

There are some 250 million guns in this country, according to most estimates.

According to the Department of Justice, about half a million gun crimes are committed each year. Assuming no gun is used twice, that means about one in 500 guns will be used to commit a crime. NYC’s buyback has therefore prevented, perhaps, two crimes at a cost of $159,000. If, instead, they had hired a couple of cops, they might have prevented more than two crimes.

The CDC estimates about 90,000 people are injured or killed by guns. So NYC’s buyback would prevent deaths at a rate of half a million dollars per life. If half a million dollars were used to train and hire emergency room physicians, they could prevent a lot more than one injury or death.

Of course, only about a third of those casualties are fatal. And half of those are suicides. So NYC’s buyback may have prevent 1/20th of a murder at a cost of $3 million per life. You can see where this is going.

Now I’ll grant you that my simplistic analysis uses national averages and guns are more dangerous in cities. But you’ll have to grant me that gun buybacks produce an incentive to steal guns and a method to dump guns used in the commission of crimes.

No matter how you slice it, gun buybacks are a waste of time and money. But they do make officials feel better about themselves. That’s the point, I guess.

Fisking the NSOTU

I didn’t watch it last night. This was partially because my daughter decided that last night’s dinner would look better, in semi-digested form, on the bedroom floor. But the other reason I skipped it was because my tolerance for Presidential addresses to Congress is at a low ebb.

These speeches are boring the crap out of me, no matter how skilled or unskilled the speaker may be. There are too many “killer” lines; too much standing and applauding. I tried flipping over a few times last night and every single time, Congress was applauding. Seriously, we could shorten these speeches to 90 seconds if Congress sat on their hands.

I don’t have time for a full fisking or a coherent response. But I thought I’d put up a few random thoughts as I read through the thing.

Continue reading Fisking the NSOTU

Facbook Baaad

Oh, come on:

Social networking websites are causing alarming changes in the brains of young users, an eminent scientist has warned.

Sites such as Facebook, Twitter and Bebo are said to shorten attention spans, encourage instant gratification and make young people more self-centred.

The claims from neuroscientist Susan Greenfield will make disturbing reading for the millions whose social lives depend on logging on to their favourite websites each day.

Is there any evidence supporting this conjecture? Nope. What is it with people? Do we have to freak out over every technology that comes down the pipe?

Monday Linkorama

  • The economist reports that half the people in the world are middle-class. That’s a class that didn’t really exist until the wonderful engine of capitalism was set loose:

    An essential characteristic is the possession of a reasonable amount of discretionary income. Middle-class people do not live from hand to mouth, job to job, season to season, as the poor do. Diana Farrell, who is now a member of America’s National Economic Council but until recently worked for McKinsey, a consultancy that has spent a lot of time studying the middle classes, reckons they begin at roughly the point where people have a third of their income left for discretionary spending after providing for basic food and shelter. This allows them not just to buy things like fridges or cars but to improve their health care or plan for their children’s education.

    In the last depression, most of the world was dirt poor. The west was on its own. But it may just be that the rising tides in Indian, China and South America keep us afloat.

    I hope.

  • More reality on the state budget woes. I would quibble that during a recession, states can let the fiscal reins slip a bit. However, such slippage would have been a lot easier if the states hadn’t been wracking up massive spending and debts while we were in an economic boom.
  • The only really bad idea in Obama’s housing plan is the “cramdown” provision. But that one is a doozy.
  • Rust

    I put this post up at Right-Thinking, but thought I’d mirror it here.

    WaPo has a great article about the epidemic sweeping Africa:

    A virulent new version of a deadly fungus is ravaging wheat in Kenya’s most fertile fields and spreading beyond Africa to threaten one of the world’s principal food crops, according to the United Nations’ Food and Agriculture Organization.

    Stem rust, a killer that farmers thought they had defeated 50 years ago, surfaced here in 1999, jumped the Red Sea to Yemen in 2006 and turned up in Iran last year. Crop scientists say they are powerless to stop its spread and increasingly frustrated in their efforts to find resistant plants.

    Nobel Peace laureate Norman Borlaug, the world’s leading authority on the disease, said that once established, stem rust can explode to crisis proportions within a year under certain weather conditions.

    “This is a dangerous problem because a good share of the world’s area sown to wheat is susceptible to it,” Borlaug said. “It has immense destructive potential.”

    Coming on the heels of grain scarcity and food riots last year, the budding epidemic exposes the fragility of the food supply in poor countries. It is also a reminder of how vulnerable the ever-growing global population is to the pathogens that inevitably surface somewhere on the planet.

    This was an epidemic that Borlaug helped control by breeding resistant strains of wheat. But now? Borlaug is 94 years old and has saved billions already. And he’s still going.

    Because there hasn’t been a major epidemic in 50 years, only a few living scientists have seen the destructive power of stem rust.

    But Borlaug needed no history lesson. He recruited scientists from wheat-producing countries and raised funds to underwrite their work. Foundations in the United States and Japan pitched in, as did the governments of Canada, India and the United States, Singh said. Last year, the Bill and Melinda Gates Foundation gave $26.8 million to a project led by Cornell University scientists.

    A key first step was to comb the world’s wheat for resistant plants that could provide genetic ammunition to hold off the rust.

    They found it. And it’s taking a long time to put it into play. Why? Because they aren’t able to use genetic engineering to spread the gene. Assholes like Friends of Earth and Greenpeace have terrified African countries into refusing genetically-engineered crops. Their irrational superstition — and their predating upon ignorance to advance a political agenda — is going to destroy millions of tons of crops and prolong starvation.

    Obama’s been talking about taking the politics out of science. If he’s serious, this would be a good place to start — by calling on the nations to allow transgenic crops that can resist the rust fungus. As a man of Kenyan decent, he is in a unique position to gain the trust of African nations that have been lied to by the environmentalists. Will he do it? That simple act could save thousands or millions of lives.

    Living Wages

    Megan Mcardle has a great discussion on the living wage nonsense:

    n the popular mind, every blue collar worker in 1950 was pulling down a hefty wage at GM, but union membership peaked at about a third of workers, and most of those jobs were at companies that didn’t have the profits, or the freedom from competition, to support those kinds of wages. A lot more blue collar workers were people like the mechanics and pump operators at my grandfather’s gas station, who raised families on . . . the kind of money you could generate working at a gas station.

    Read the whole thing.

    Blowing My Own Horn

    Because no one else will. Me, in October:

    I’m going to make a prediction right now. We’ve endured a .com bubble and a housing bubble. Bubbles are, unfortunately, inevitable in a free market.

    I predict that the next big bubble is going to be alternative energy. Billions of dollars are going to be sunk into untenable technologies. Millions of jobs will be wasted on useless endeavors. There’s nothing wrong with this — so long as it’s the private sector and not the government — creating the bubble. But when governments doing it, we will get a catastrophe on par with the housing crash we’re experiencing now.

    Now, the American Spectator has discovered the bleeding obvious:

    You can see in all this the essence of how government meddling promotes economic meltdowns. What happened with the subprime debacle? The federal government became obsessed with the idea that home ownership was good for everyone. It subsidized mortgages among people who couldn’t afford them, assuming some of the risk itself and forcing banks to take on the rest. Pretty soon the whole thing comes crashing down, carrying the rest of the economy along with it.

    What’s happening with alternate energy is the same thing. Governments have assumed that windmills, solar collectors, and biofuels are the wave of the future. Therefore the only logical course is to hasten that future by subsidizing it and forcing utilities to adopt it ahead of schedule. What’s lost in this is that windmills are producing almost no useful electricity and will become a huge drag on the economy — just as biofuels have done nothing to reduce our dependence on foreign oil and have just led to hundreds of millions in wasted investments.

    But it’s a stimulus! Oh, and then there’s this:

    Yesterday, President Barack Obama signed the $787 billion economic stimulus bill after touring the solar panel installation on the roof of the Denver Museum of Nature and Science.

    But as nice as those panels look, just how practical are they? Well, the Denver Business Journal looked into the project last summer and found that the 465 panel 100-kilowatt installation cost $720,000 and will produce about 130,000 kilowatt-hours of electricity annually. According to the Journal, electricity from the solar array will replace between 2 and 12 per cent of the museum’s electricity demand. In fact, an internal museum report says the solar panels will supply only 1 to 2 percent of the museum’s electricity needs.

    It will take 110 years to pay for itself.

    110 years.

    Green jobs, my aching ass.