Friday, March 26, 2010

Travel to Galapagos I : Quito, Equador

Monty and I have just returned from a trip to Equador and Galapagos Islands. We first went to Quito for a short visit, flew on to the Islands and boarded a small ship that cruised around the Archipelago, and then returned to the port city of Guayaquil. I plan to report on my reactions to this very exciting trip in ths series of four postings.

I did not know what to expect from Quito. I knew it was the capital but little else. As it turned out, Quito is a very interesting city with one of the best preserved old towns in the world and a rich history.

The city itself is a metaphor for a paradox. It has many beautiful buildings constructed in the European style and yet it is bordered by the slums we come to expect in less developed countries. It is a major international city plopped in the middle of the Andes Mountains over 9,000 feet above sea level. The contrast of a modern city surrounded by the rugged mountain is landscape is overwhelming. It is located on the slopes of an active volcano and within about a mile of the equator.

How could this immense, sophisticated city emerge in the remotest of possible locales rather than on the Pacific coast? I can only speculate that Quito was located where it is for military reasons. The Spanish must have found a need to establish a presence in the mountains in order to sustain the conquest of the indigenous people who for their own reasons lived in the heart of the Andes.

Under any circumstances it is not surprising that Quito a was the first city to be designated by UNESCO as a world heritage site.

The people of Equador also piqued my curiosity. Our guide said that eighty per cent of the inhabitants are of Indian stock. Unlike Mexico and many Central American countries, neither the invasion of the Spaniards nor the transporting of Africans to the Western Hemisphere seem to have made much of a dent into the Equadorian genetic pool. As a result, these people give us a peek into what the Incan people must have been like. They are very short in stature but very muscular, and appear to be somewhat mild mannered. Even their food is less spicy than that found in some of the neighboring countries. I saw very little begging or evidence of idleness. Our jingoistic caricatures of hotheaded Latins loafing around aimlessly is not substantiated by these people.

Equador on the surface seems to be a relatively stable economy with an emphasis on a robust fishing industry, a wide variety of agricultural products and some oil. I got the feeling from the people I talked to that there is a nervousness about whether this stability can continue. A major threat is cocaine. The government of Columbia, which is next door, is engaged in a war with its drug lords. So far Equador has been spared from being a significant player in drug trafficking, but the Columbian drug lords are slipping across the border to set up operations that could be a serious problem down the road. Second, Equador’s current president is flirting with Chavez of Venezuela. There is a concern that the Equador’s bustling trading relationship with the United States could be disrupted if the Venezuela populist movement slips into the Equadorian political landscape.

I have run into many people who express a desire to visit the Galapagos Islands, but there is very little mention of the mainland portion of the trip. If you of that persuasion, let me assure you that you are in for a surprise.

Thursday, March 18, 2010

The Stabler Health Cost Reduction Plan

I have identified four primary sources of the rise in costs - the impact of medical research (2/26/10), restrictive entry into medical schools causing anti competitive pricing (3/2/10), an over insured population (3/5/10), and tort law suits (3/9/10). These four issues must be addressed in order to contain health costs. Here are the components of the Stabler Health Cost Reduction Plan:

1. Medical schools must reorganize their teaching methods, particularly in the clinical programs, and use their impressive resources more efficiently in order to double or triple the number of doctors produced each year. If medical educators really put their mind to the project, I suspect that the additional tuition income would come close to covering the marginal costs of educating additional students. The economic savings coming from increased enrollments would significantly reduce costs, increase the availability of medical services and thus produce a far superior health care system.

2. I propose to limit tax deductible plans to those that pay no more than 80% of the ordinary medical costs with a 20% deductible paid by the insured. I believe that in most cases the cumulative savings from lower premiums would exceed the cost of paying the larger deductible. With low cost plans being the norm, universal coverage would be much easier to accomplish.. Moreover, the patient who has a 20% stake in the cost of medical services will pay much closer attention to how the money is spent. The Stabler Plan would allow greater, but not 100%, coverage for catastrophic expenses and would provide some sort of welfare payments for the indigent.

3. It is doubtful that the pace of medical research will ever happen, nor should it. The only way I can see that its effect on medical costs can be reduced would be to invest more public moneys into research to replace the work of pharmaceutical and medical equipment companies. Public investments do not need to be recovered out of the proceeds of sales. Nevertheless, the savings, if any, from that source would require much more investigation and study that I am capable of producing.

4. I see little prospect of material cost reduction coming out of tort reform as long as health care is dispensed in a noncompetitive environment. Therefore, the Stabler Plan requires that the supply of doctors and other health professions be dramatically increased before tort reform is included in the program. (See my discussion in the posting issued on 3/5/10). It would be unconscionable to give the doctors full immunity from the consequences of their tortious actions. Two features of tort reform have merit, however. Punitive damages deserve to be curbed, or even abolished. I believe that it is the province of the criminal laws to mete out punishment. The proper role of civil law suits is to compensate victims for their loss. Second, tort laws could be amended to give the medical professionals a good faith defense. Most medical procedures have a risk attached to them. The defendant who can prove that he or she acted in good faith and with diligence should be given a break.

Tuesday, March 9, 2010

Is Tort Reform Really the Answer to Rising Health Costs?

Is Tort Reform Really the Answer to Rising Health Costs?

Tort Reform is one of the cornerstones of every Republican health care proposal. Normally the tort reform package proposal takes the form of some sort of cap on recoveries. Tort reform is not simply a cost savings device. There are considerations other than cost that weigh heavily in the tort reform debate. My limited concern at this point is whether tort reform can induce meaningful cost savings.

The proponents frequently make the argument that there are too many frivolous malpractice claims. It is true that there are many frivolous claims because, at least in Alabama, the defendant prevails in a very high percentage of the claims filed. Nevertheless, I submit that it is not the frivolous claims that raise the costs most significantly. It is the meritorious claims that cost the big bucks.

Costs of tort reform can be easily identified because virtually every practitioner carries insurance and the premiums define the dominant cost. The complexity comes from the fact that the premiums vary widely based on the specialty. The highest premiums are paid be obstetricians which have been reported to be in the range of $150,000. The reason for this are because babies suffer the most serious damage and have the longest life expectancy extending the time that they may suffer the consequences of an adverse event. Both factors run up the cost of claims dramatically. These premiums are not typical. I suspect that the premiums for pathologists would be toward the bottom of the scale and would be negligible, but other specialties are spread all over the landscape. The point is that there is more need for reform for some aspects of the practice than others.

I cannot figure out whether tort reform would have any effect on the cost of medical services. As I have discussed in another posting, the doctors enjoy monopoly power which means that they can raise their prices above the competitive level. Insurance would be classified as a fixed cost. As I recall from distant studies of price theory the true monopolist will raise prices until the price matches the marginal cost. Marginal cost represent the additional costs for serving one more patient. The cost of insurance does not materially increase when a patient is added.

Put another way. Competitive prices have a close relationship to costs. In a competitive environment additional costs translate into higher prices. On the other hand the monopolist charges what the traffic will bear regardless of total costs. Therefore, it would seem to me that the cost of insurance does not govern the prices set by the medical profession for their services.

I suspect you can detect, that I really do not fully know what the economic impact of tort reform on the cost of health care would be. I would like to find studies done by respectable academicians (who are not employed to find a predetermined answer). Under any circumstances I do not believe that tort reform is likely to produce substantial cost savings..

This is the last posting for the week. I will publish the next one on Tuesday, March 16, 2010 . At that time I will discuss my ideas as to the most effective means of containing health costs.

Friday, March 5, 2010

Medical Costs- Are We Overinsured?

Monty and I went to the health department the other day looking for shots immunizing against various diseases we might contract on an upcoming trip. The lady at the desk advised me that my insurance and Medicare probably will not cover the costs. There was a prominently displayed sign on the wall of the nurse practitioner showing the exact cost of each and every shot that was available. We were asked whether we wanted to take a typhoid booster shot. She said that there was some typhoid threat in the jungles of the country we plan to visit, but that if we stay in the city the chance of contracting typhoid are very small. I saw that the shot would cost about $100.00. I considered whether immunizing against an extremely low risk of contracting typhoid fever was worth $100.. And decided not to take it. Would I have taken the shot had it been covered by insurance? Probably. After all there was some risk, and it would cost me nothing.

This story underlines the fact that our own over consumption of medical service is skewed because most of us are over insured. Doctors quickly cite the malpractice threat as a cause of over treatment, which has some merit. Who is complaining that our decisions to acquire medical service are unrestrained by any economic considerations. We are on a treadmill. We utilize more tests, more discretionary treatment because the insurance company will pay for it. The insurance company turns around and increases the premium to cover the costs, and we complain. Put on your glasses. You will see the enemy and the enemy is us.

Nowhere is the overuse of medical services more prevalent than when end of life decisions are faced.. Whenever our loved one dies of a long illnesses we tend to want to be sure that we have done everything we can to save her. That approach is certainly proper and laudable. However, when the decision is made on house money, too many of us keep searching for a miracle and prolong life that would have terminated earlier had not medical science devised means to sustain people who are terminal. The Democratic solution to the end of life dilemma is to have a bureaucrat make the decision taking the family and the doctor out of the equation.

Obama promises that the health plan will not increase the deficit. He is relying in part on a belief that the younger population will pay more in premiums that they will receive in benefits. That is to say, the insurance companies will overcharge the younger population to underwrite the older people who are sicker on the average. I do not know he has made his calculations.

I do know to a point of moral certainty that the additional thirty million persons receive coverage will increase their use of medical services. We already have a severe shortage of medical personnel. Has anyone addressed how we will cope with ever greater demands on a severely stretched health system?

My next blog which will most likely be posted next Tuesday to discuss tort reform. Then, in a following posting, I will discuss the elements of what I would consider to be an effective reform of the system.

Tuesday, March 2, 2010

How Medical Education Has Impacted Health Costs

I have discussed in a previous blog (2/23/10) how economic regulation will not solve the problems of rising health costs.. In the last blog (2/26/10) I discussed how medical research and development leads to rising costs. In this posting, I will lift up the role of medical education.

The Carnegie Foundation published a report prepared by Abraham Flexner in 1910 on the state of American medical education . The report addressed many much needed issues involving the quality and amount of education needed for the training of doctors. Particularly helpful was its emphasis on clinical training.

Other aspects proved to be unfortunate, however. Flexner stated that half of the medical schools should be closed.. Whatever the merits of the suggestion may have been at the time, the American Medical Association embraced that part of the report and engaged in a determined campaign to restrict entry into medicine so as to raise the income of the doctors.

The campaign has been quite successful. As our population has expanded and with the ever growing varieties of specialties that have emerged, medical schools have continued to educate only a small portion of the doctors needed to serve our population.

The University of Alabama is a typical example.. They receive about 2000 applications a year and produce only about 175 doctors. With at least 8 hospitals, over a thousand faculty members, and a budget of perhaps a hundred million dollars, the medical school’s failure to produce more doctors cannot be considered to be a matter of necessity but of choice..

UAB is not the culprit, though. They are applying generally accepted standards which have evolved out of the Flexner Report. High quality education has served as a cover up for the less admirable goal of excessively restricting practice of medicine to a select few.

The adverse effects of restricted entry into the profession cannot be overstated. Nobel Laureate Milton Friedman pointed out in the early forties the restricted entry into medicine has been an efficient means of raising the prices above the competitive level.

Today the scarcity of doctors is growing. Small towns in Alabama must go to India to find a doctor to serve them. Internal medicine doctors can simply open their office and obtain a full stable of patients in a short time. One doctor recently commented to my daughter that if an internal medicine practitioner can see you, you probably do not want him. Doctors with waiting rooms stacked full of patients too often refer even the minor emergencies to emergency rooms because of their inability to adequately serve all of their patients.. Moreover, virtually all doctors in all specialties have little incentive to be competitive in their pricing because of the paucity of competition in their fields. The medical profession has become a gigantic cartel.

Ironically Blue Cross, which Congress wants to demonize, and Medicare are the only two entities of which I am aware that have the economic power to put any brakes on the reckless expansion of charges for medical services.

Medical education needs to be extensively overhauled whereby they will supply sufficient doctors to make the profession competitive. If this is not done from within, then outside forces should be applied to them in much the same manner as the automobile companies were forced to make high gas mileage products.