"Obamacare - Too Cumbersome, Too Expensive"

Sydney M. Williams

Thought of the Day

“Obamacare – Too Cumbersome, Too Expensive”

February 7, 2011

There is a Dickensian quality to healthcare in America. “It [is] the best of times; it [is] the worst of times.” We have the highest quality modern facilities and the best trained doctors in the world. Yet we have the most cumbersome, archaic billing and payment processes imaginable. Additionally, we have a system under which millions of people have no insurance and the cost of covering those with preexisting conditions precludes many of them from any coverage.

In the most recent issue of Perspectives, the publication of my son Sydney’s firm Lyceum Associates (http://www.lyceumassociates.com/), he describes the current reimbursement schedule. He includes a formula, which is used to determine the fee paid to a doctor for a specific procedure, utilizing the Resourced-Based Relative Value Scale that sets the pricing that Medicare uses in determining fees. The formula is used to calculate the fee for a service [Z]. That service could be an appendectomy, a heart transplant, or a routine office visit; the formula to solve Fee [Z] is as follows:

Fee [Z] = (Work RVU[Z] x Work GPCI + PE GPCI = PLI RVU[Z] x PLI GPCI) x CV

In which:

          RVU[Z] = Relative Value Units for the service [Z]
          GPCI = Geographic Price Index for the service [Z]
          PE = Physician Practice Expenses allocated for the service [Z]
          PLI = Professional Liability Insurance Premium allocated to the service [Z]
          CV = Conversion Factor – the dollar amount Medicare pays for one overall RVU

As my son writes, “Uh? Maybe that makes sense to a Princeton economist – or a PHD in mathematics or, for that matter, to a Wall Street quant,” but the eyes of normal people would glaze over.

This is what happens when the government intercedes in markets and we do not allow consumers and providers to price services. And, in many respects, it is at the heart of the antipathy people feel for the newest entitlement – HR 3962, the Affordable Health Care for America Act.

While the issue of healthcare in America is complex, there are some simple steps that could be taken:

           1) Insurance companies could be allowed to compete across state lines.
          2) People could be permitted to buy the coverage that fits their specific needs, including high    deductible plans, as they do with their homeowners and auto insurance.
          3) Congress could impose limits in medical malpractice suits.
          4) Small businesses could be encouraged to band together to reduce their costs.
          5) Health Savings Accounts could be encouraged, allowing people to pay everyday costs out of their own pocket, reserving insurance for catastrophic experiences.
          6) Whatever program is designed should be one that Congress adopts for its own purposes.

Permitting more competition among insurance providers and allowing people to purchase plans that fit their individual needs, while encouraging people to pay for normal costs out of their own pockets, should bring overall costs down, allowing government to provide support to those unable to get coverage. Some of these suggestions were mentioned by Mitch Daniels, governor of Indiana, in today’s Wall Street Journal. The current system, which traces its origin to postwar America, encourages overconsumption and excessive pricing. It cannot last.

The three entitlement programs – Social Security, Medicare and Medicaid – today consume about a third of the Federal budget. That is expected to grow to about 50% over the next couple of decades, and the trend will persist. The adoption of Obamacare has only made matters worse. George Melloan, a former deputy editor of the Wall Street Journal and writing in Friday’s issue made the point that the real reason 26 states joined in Florida’s suit to nullify the law is because, “The states can’t afford it.” Estimates are that states will be required to add 15 million to 20 million people to the Medicaid roles, a system that is already causing enormous pressure on state’s budgets.

Nancy Pelosi famously said back on March 9, 2010, before the bill was passed: “But we have to pass the bill so that you can find out what is in it, away from the fog of the controversy.” The bill was passed and signed into law. The fog has been lifted (or at least some of it) and the complexities and the costs are there for all to see. Healthcare needs should be addressed, but they must be done so in a manner that provides the consumer a strengthened role in terms of prices paid for services rendered.