Social Safety Nets

[_Gunnar]

One thing I really find peculiar, though, is that even though many of them offer unlimited refills, they still, in many cases, list several sized drink options at various prices. Knowing that one can get unlimited refills anyway, why would anyone opt to buy anything but the smallest, lowest price drink offered? Yet I have observed that many people still buy or upgrade to the larger sized drinks! Is this crazy, or what? Some MacDonalds restaurants in my local area, though, sensibly charge one flat fee ($1.00) for any size soft drink, and the customer can choose whatever size cup she or he wants.

In the 1950s, the average soft drink serving cup was 6.5 ounces. Today it is 16.2 ounces.

What's in practice here is the simple capitalist premise that more is better. Two is better than one. Three is better than two.

Years ago, Gillette came out with their twin blade Trac II razor. Two blades instead of one! Better! Saturday Night Live did a parody commercial, where they showed a 3 blade razor: "Designed for people who'll beleive anything." Hilarious!

Now we're up to FIVE blade razors.

There is certainly no argument that it would be easy to circumvent the 16 ounce limit. But please check out the link to James Surowiecki's article:

"...Bloomberg’s proposal makes clever use of what economists call “default bias.” If you offer a choice in which one option is seen as a default, most people go for that default option."

Interesting reading...

Interesting reading indeed! Thanks for providing the link to that! I wonder, though, how Bloomberg's ban would affect customers' choices in restaurants that offer free refills on their drinks? Does Bloomberg also propose to ban free refills?

[_Analytics]

It cuts both ways. If you look at your EOBs, you'll see that insurance companies have negotiated rates with providers that are often 50% to 90% less than the amount on the bill. If you don't have insurance, doctors, clinics, labs and hospitals will bill you and try to collect from you much more than what they charge insurance companies.

I think that another thing that happens is that when medicare is involved, physicians are sure that no matter what they try to bill medicare, medicare will only allow a small percentage of what they billed, so they try to hike up their claim high enough so that even when medicare disallows 50 to 90% of it, they will still get enough to at least meet their expenses and, maybe, make a reasonable profit.

That's not quite how it works. Everything doctors and hospitals do has a procedure code assigned to it. Medicare has pre-determined what it will pay for each code. When providers send bills to CMS, CMS doesn't even look at the amount that was billed—they look at diagnosis codes and determine if the procedures that were done were reasonable, given the diagnosis. If so, they pay the pre-determined amount they reimburse for the billed procedures.

So if providers want to milk the system, they perform more procedures than are necessary, aggressively code the procedures they actually perform, and make care decisions based upon what will cause them to maximize their profits. In that sense the system if broken and doesn't make economic sense. But the fact remains that people need health insurance—it totally makes economic sense for individuals to maximize their utility by paying a fixed premium in exchange for the peace of mind of knowing that if they are unlucky and need expensive medical care, it is covered. The problem is how the care is reimbursed.

That is why HMO plans with capitation make sense—give doctors incentives to take care of people—not to maximize their income by performing the most expensive set of procedures they can justify.

The ACA, by the way, takes great strides into research and pilots on how to do this well. The problem is that people (and the doctors and their lobbyists) want unlimited freedom to the most expensive of everything. That immaturity is the reason why medicine is expensive in America.

[_Gunnar]

That's not quite how it works. Everything doctors and hospitals do has a procedure code assigned to it. Medicare has pre-determined what it will pay for each code. When providers send bills to CMS, CMS doesn't even look at the amount that was billed—they look at diagnosis codes and determine if the procedures that were done were reasonable, given the diagnosis. If so, they pay the pre-determined amount they reimburse for the billed procedures.

So if providers want to milk the system, they perform more procedures than are necessary, aggressively code the procedures they actually perform, and make care decisions based upon what will cause them to maximize their profits. In that sense the system if broken and doesn't make economic sense. But the fact remains that people need health insurance—it totally makes economic sense for individuals to maximize their utility by paying a fixed premium in exchange for the peace of mind of knowing that if they are unlucky and need expensive medical care, it is covered. The problem is how the care is reimbursed.

That is why HMO plans with capitation make sense—give doctors incentives to take care of people—not to maximize their income by performing the most expensive set of procedures they can justify.

The ACA, by the way, takes great strides into research and pilots on how to do this well. The problem is that people (and the doctors and their lobbyists) want unlimited freedom to the most expensive of everything. That immaturity is the reason why medicine is expensive in America.

Thanks for clarifying that for me. What you said makes a lot of sense and leaves me better informed than I was before. What do you think the prospects are of bringing this problem under control? Don't you find it sad (as I do) that there are doctors whose primary motivation seems to be maximizing their income rather than caring for their patients' real needs? I'm sure that isn't true of all doctors (hopefully not even a majority of them), but I'm sure it happens way too often.

[_Analytics]

Thanks for clarifying that for me. What you said makes a lot of sense and leaves me better informed than I was before. What do you think the prospects are of bringing this problem under control? Don't you find it sad (as I do) that there are doctors whose primary motivation seems to be maximizing their income rather than caring for their patients' real needs? I'm sure that isn't true of all doctors (hopefully not even a majority of them), but I'm sure it happens way too often.

It's a pretty hairy situation. You go in to see the doctor, and he is 99% sure what the problem is, but he could be 99.8% sure if he did a CAT scan.

The CAT scan would cost $800. Should he do it? It would help make a better diagnosis. That's in the patient's best interest, right? Doesn't he deserve the best medical care possible? That's why he has insurance, right? Somebody is going to make $800 off the CAT scan, so why shouldn't it be the doctor who orders it?

There is nobody making the hard economic decisions of whether the marginal benefit of a slightly more accurate diagnosis is worth an $800 marginal cost. The patient doesn't care--that is why he has insurance. What's worse, the doctor has a conflict of interest--he owns the CAT machine, and stands to make an extra $800 by simply ordering the scan. Is it wrong for him to have that conflict of interest? After all, it's a convenient service to the patient to get the scan done right in his office rather than at an imagining center.

There are very powerful forces that collectively make trillions of dollars a year performing health care in the United States. Anything that lowers costs will lower the amount of money doctors, hospitals, medical device companies, pharmaceutical companies, and insurance companies make. Would those entitites just let that happen without a fight? Almost anything that could be done to bring costs under control would be construed as rationing or putting an insurance company or government bureaucrat in the middle of the doctor-patient relationship.

That said, there are a lot of smart people working on the real problems, so I am cautiously optimistic that things will improve.