Why Does Health Insurance Cost So Much?

This is the clearest explanation I've seen of why health insurance costs so much - a John Stossel report on 20/20, courtesy of the Independent Institute's blog. (Follow the link below)

Why Does Health Insurance Cost So Much?

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Lowering the cost of health care - another Detroit billboard

In the spring of 2009, as the health care "debate" was starting to brew, I saw the above billboard on Interstate 75 in Oakland County, Michigan. The county, encompassing Detroit's Northern suburbs where Dr. Rifai's practice is located, is the fourth wealthiest in the nation among counties with over one million residents.

According to a Discovery Health Article, in 2007 the average national prices for the procedures listed on the billboard were as follows:

..................2007 National Average...... 2009 Dr. Rifai ....Difference(%)

Breast Augmentation: .....$ 3,816 ...........$ 3,400.............. ( - 11%)
Tummy Tuck ...................$ 5,264 ...........$4,900............... ( - 7%)
Liposuction .......................$ 2,982 ...........$ 2,000.............. ( - 33%)

This may seem like an apples-and-oranges comparison but even those can provide some valuable information on what's not happening.

First, consider the fact that the comparison is for surgical procedures in 2007 vs 2009. Given the continuously rising cost of medical services, we should expect that the 2009 prices (Dr. Rifai's) be higher.

Second, the comparison is for the average prices in the US against the prices offered in the fourth wealthiest large county in the nation. Again, it would be a reasonable expectation that the prices offered in the rich market would be higher than the national average.

Finally, the the same Discovery Health article states, "costs in the big cities tend to be higher than in the rural areas" which gives us yet another reason to expect Dr. Rifai's prices, in a major metropolitan area, to be higher than the national average.

Contrary to all these reasonable expectations, they're not. Why? Could Dr. Rifai's practice be an exception? It's possible. Could it also be that, not covered by medical 'insurance' policies, most elective plastic surgery procedures are paid by consumers out-of-pocket? And since consumers pay directly the full cost of the procedure, they feel motivated t0 shop around, creating a truly comeptitive market for plastic surgery, where unfettered competition by providers brings prices down over time? Such a competitive market is not so unusual, folks. It happens with iPhones, and gaming consoles, and food, clothing, cars, airplane travel...

Competition is the only way to reliably and sustainably lower prices for products and services. In the current debate on health care there's absolutely no talk of creating competition among the providers of medical services (contrary to popular belief it is not your insurance company that provides your medical services). Until you can shop around comparing prices various doctors charge to fix your broken leg the same way you can shop around comparing prices for your liposuction we are not going to get the cost of health care down.

(I'd love to hear from any of you who have seen a price list for medical services... If you ever walked into a hospital or a doctors office and were offered a price list, please send me an email at atleastonewhy@gmail.com)

35 years behind the wave / Detroit billboard

Driving in Detroit recently I noticed a billboard touting Detroit Medical Center's (DMC) new initiative to use bar codes to scan and track 100% of the medications it administeres. The hospital system proudly runs a TV commercial with the same message. Interestingly, this article in today's New York Times explains that today marks the 35th anniversary of the first use of a bar code in a retail setting (a ten-pack of Juicy Fruit gum that cost 67 cents, scanned on the morning of June 26, 1974).

If you are not from around here you might think that, 35 years after the first use of bar codes, the DMC is the last hospital to catch up. Unfortunately, DMC is the first hospital in Michigan, and among the first the the US, to use bar codes to track medications...

So why has it been advantageous for 35 years for retailers to track Juicy Fruit gum using bar codes, but it has not been advantageous for hospitals to use the same inexpensive technology to track medications?

"Capitalism in crisis"

The phrase is the title of an opinion piece in yesterday's Wall Street Journal by federal circuit judge Richard A. Posner. One comes across the expression frequently these days, and I think it is worth examining the meaning of it a little closer. Why is "capitalism in crisis?"

What is meant by the statement? The word capitalism describes a system of economic organization, in which capital is owned and controlled by private individuals and organizations in an environment of economic competition. We also refer to this system as 'private enterprise,' or 'free enterprise' or 'free market.' It is distinct from a communist economic system, where government both owns and controls the capital of a country, or a fascist system, where capital is owned by private individuals but is largely controlled by the state, or a socialist system, where a portion of the capital may be owned by the government and a sizable portion of the capital is controlled by the state. In any case, the term capitalism describes a particular economic system.

Is this system of economic organization in crisis? To the extent that much private capital in America today (GM, AIG, many large US banks, etc.) is controlled by the federal government, one can justifiably say that the system of capitalism in the US is in crisis.

Of course, what Judge Posner and everyone else mean when they say that capitalism is in crisis is, in fact, that the economy is in crisis. This is something quite different. The rhetorical confusion has a rather unfortunate consequence: instead of focusing on fixing the economy, the gut-level reaction is to change the system. This is extremely unfortunate, since capitalism is the only economic system that has a consistent long-term record of increasing people's standard of living.

Moore and Me

Today (4/1/2009) Michael Moore (the same one of "Roger and Me" and "Fahrenheit 9/11" fame) posted a letter on his website addressing the Obama's administration involvement with the US auto industry. The letter starts by suggesting that it is very inappropriate for the President of the United States to interfere directly in the business of a private corporation. It's April 1st, after all, and the punchline comes soon enough:

" 'What are we going to do about this Obama?' Not much, fellows. He has the massive will of the American people behind him -- and he has been granted permission by us to do what he sees fit."

President Obama may have the massive will of the American people behind him, except, apparently, the will of the workers at the GM Powertrain plant in Ypsilanti, MI. A relative, who drives an eighteen-wheeler, was in the plant yesterday to pick up a load. He said that the workers were so angry, frustrated, even distracted by the decision of the President (of the US, not of GM) that they loaded his truck with the wrong parts at first.

Furthermore, and Mr. Moore should know this since he has a picture of the US Constitution on his website, right above the title of his letter, the President of the United States has not been "granted permission by us to do what he sees fit." He was only elected by us to "... faithfully execute the Office of President of the United States, and ... to the best of [his] Ability, preserve, protect and defend the Constitution of the United States" (the Oath of office). Article II of the US Constitution spells out what the president can do, such as appointing ambassadors, cabinet members, even Supreme Court Justices, but nowhere does it say appointing CEOs or firing them.

Michael Moore's point later in the letter is that after all these years when GM presidents (starting with Roger Smith) laid off thousands of hard working auto workers, someone finally gave a pink slip to the president of General Motors:

"Not one of them ever thought that one day they would witness the CEO receive the same treatment. Of course Chairman Wagoner will not have to sign up for food stamps or be evicted from his home or tell his kids they'll be going to the community college, not the university. Instead, he will get a $23 million golden parachute. But the slip in his hands is still pink, just like the hundreds of thousands that others received -- except his was issued by us, via the Obama-man. Here's the door, buster. See ya. Don't wanna be ya."

Don't wanna be ya? Mr. Moore seems to miss his own point: the laid off GM workers struggled precisely because they lost their source of income. Most laid off workers would rather be Rick Wagoner with his $23 million golden parachute.

This doesn't seem to be the first time Michael Moore misses his own point. In Roger and Me (watch the movie - it's great!) he spends half the time outlining the struggles GM is facing as it attempts to adapt to global competition (which, if it had done successfully, would not have caused GM to be facing bankruptcy today) and the other half on the failures of the Flint city government to bring about economic development. It seems lost on him that while he is asking government to solve economic problems he is exposing precisely government's inability to solve economic problems.

But the points above are merely philosophical. As a practical matter, take a look at these Time magazine articles on two cars made by government-run factories: Trabant and Yugo. Though they weren't particularly environmentally friendly, they got excellent gas mileage, and with today's advanced catlytic converter technology and the right government mandates, we could make them as clean as Prius.

Lights out - now we need the light bulbs on

It was sad to see the beautiful Chrysler headquarters building outside Detroit seemingly deserted when I passed by it last Saturday evening. While office buildings normally leave many of their lights on 24/7, the only lights visible that night in the glass and steel Chrysler tower were the faint emergency exit lights. I figured it must be some cost saving measure (it is), but the momentary thought that the building might actually be vacant was jolting.

Chrysler is an American institution. Founded in 1925 by Walter P. Chrysler, the company introduced numerous innovations, many of which became industry standards. Walter Chrysler was a manufacturing and engineering genius who cut his teeth in the locomotive building business before switching to automobile manufacturing. The company is one of the "Big 3" American automobile manufacturers that survived competition and consolidation in the industry that saw literally hundreds of companies go out of business since the 1920s. None of this, of course, mandates that Chrysler must survive the current economic turmoil. On the other hand, the possible demise of this venerable American corporation is neither necessary, nor necessarily helpful.

It would be really sad, I think, if Chrysler ceases to exist. Not just for sentimental reasons, either. But the current artificial life support, the government loans with their strings attached, may not be the solution to bringing Chrysler from the brink of extinction. It seems to me that now is the time to open the floodgate for all kinds of creative ideas, as many as possible, from anywhere across America and around the world. I teach my students that modern corporations must be learning organizations in order to survive the global competitive environment. Now is the time for Chrysler to become a learning organization- to plug into as many people and other organizations as possible, to plug into any source of ideas that might flame the creative sparks, which might lead to new, innovative, creative solutions for its current predicament.

There are thousands of business and engineering school students who crave for an opportunity to put their minds to work on really challenging real-life cases, there are tens of thousands of workers (and former workers), with their ears (and noses, and eyes) close to the ground who have perspectives and experiences that the corporate executives lack, there are civic organizations and others, thousands, if not hundreds of thousands, who may be interested in solving a challenging problem like bringing Chrysler back from life support. Thomas Friedman would call this "open source innovation." It's possible, it's doable, it's a bit crazy, but it's the way the knowledge economy (fyi: that's today's economy) works. The real question is, can Chrysler plug into, and manage, such an open source innovation model, or will it just wait to hear for whom the bell tolls? Alas, the answer is out there: Its own blog rules state:

1-In the spirit of honest, free-flowing conversation...
...
11-The blog is not intended as a forum for outside suggestions, including but not limited to those which pertain to vehicle design, product attributes, marketing or advertising, and no such material will be posted.

Yes, I know, the Chrysler blog is just one out of many possible ways to plug into the open source innovation 'thing' in this flat world of ours, still... The company saves a few thousand dollars by turning the lights off at night, but what it really needs is to find a way to turn lots of light bulbs on if it should have any hope of survival. In the spirit of honest conversation, I'd like to help you out, Chrysler, really, but my entire lifetime tax dollars just went to the guy sitting over there, in the dark corner of the AIG executive cafeteria. Sorry, all I've left is advice.

This all began back in the Renaissance

A couple of months ago I was flying to Switzerland to co-teach a class on innovation to students from five continents. Coming from the United States, I would inevitably be asked about my take on the financial crisis. Formulating my analysis, I noticed the irony that while I would be commenting on the proposed government bailouts and economic stimulus packages, I would be doing so a few miles downhill from Hotel du Parc , Mt. Pelerin, site of the first gathering of the Mont Pelerin Society sixty years earlier. This group, mostly economists, had argued that government intervention in the economy leads to government monopoly, and worse. (related post)

Above the Atlantic, I was also catching up on my WSJ reading, perusing KLM’s in-flight magazine, HollandHerald, during my breaks from the Journal. I found two interesting articles.

The first one, When It Comes to Cash , A Thai Village Says ‘Baht, Humbug!’ in the WSJ (Jan 7, 2009), told the story of a village in Thailand, which decided to print its own money after the 1998 Asian financial crisis. Unable to rely on the value of the government-issued baht, the villagers started printing their own local currency, and have been using it successfully for a decade, side-by-side and in competition with the baht. The result has been local economic growth and development largely unaffected by the vicissitudes of the broader Thai economy that relies exclusively on the monopoly currency.

Therefore, if competition is better than monopoly (anti-trust legislation is almost universal) and government monopoly is worse (especially so, according to the Mont Pelerin Society), why do we have a government monopoly on money, and could that monopoly have contributed to the current financial crisis?

The second article, Douglas Rushkoff’s Futurenomics in the HollandHerald (Jan 2009), gave perhaps the easiest to understand answer to these questions. I strongly believe in the need for clear communication, thus, impressed by the clear explanation, I quote a few of the most relevant passages below, throwing in one example from US history for a good measure:

“This all began back in the Renaissance, when a waning monarchy was looking for ways to preserve its power in the face of a rising merchant class. The merchants were becoming richer than the royals. So the monarchs came up with an idea: chartered monopolies. By granting one of these new companies exclusive province over a particular industry or region, monarchs earned their undying loyalty—as well as a generous portion of shares in the enterprise. They began to write laws that favoured their chartered companies,…

Such a law was the Tea Act of 1773, which granted the East India Company, originally chartered by Elizabeth I in 1600, exclusive right to import duty-free tea into the American colonies. This mandated cost advantage gave it a virtual monopoly. Bostonians, in protest of such special privilege, boarded the company’s ships in the harbor and dumped the tea overboard. Interestingly, it may have been Benjamin Franklin who proposed that the British Government relieve the East India Company of paying duties on its tea as a way to prop up its finances. Nowadays we call that bailout.

“…such as preventing inhabitants of colonies from creating any value for themselves; they had to ship raw resources back to the mother country, where they were processed into clothes or other finished goods. This model of business-by-extraction carried over to finance as well. European towns had used local currencies for centuries. Farmers would bring their wheat to a grain store, who would in turn give them receipts for the amount of grain kept for them. These receipts served as local currency. The system was so efficient, and people were living so well, that people of this era were taller than at any time until the last few decades. By making local currency illegal, a monarch could force people to use his own more expensive ‘coin of the realm’ instead. So, rather than being earned into existence, this money was borrowed into existence.

“Over the next 400 years, the business of money slowly grew bigger than business itself. A central bank creates money and charges interest to the next bank down the line, and so on, until it gets to the business that needs to do something useful. The problem is, more value is being extracted on each level than business can produce. There are simply too many institutions—too many lenders—to be paid.