book -Henderson, James W. 2015. Health Economics and Policy, 6th edition. Southwestern Cengage.

read chapter 7 and 8 then read following transcript then choose one question and answer

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Pinky: Hello everybody this is the pinky show. Today we have Dr. Huey with us. Hi Dr. Huey.

Dr. Huey: Hi Pinky.

Pinky: Dr. Huey is a practicing physician that has a background in among other things studying the history of economics in the field of medicine. Dr. Huey thank you for coming all the way out here in the desert just to talk to us.

Dr. Huey: Thank you for inviting me Pinky.

Pinky: Dr. Huey, I was wondering if we could talk a little bit about the current state of health care here in the United States. Lately I have been hearing many references to a healthcare crisis. Can you please tell me what this is all about?

Dr. Huey: Well Pinky much of that has to do with sky-rocketing costs. The cost of healthcare continues to rise at the fastest pace in US history. This year is the fourth consecutive year of double digit increases and the consequences are serious for example health care costs are a leading cause of personal and corporate bankruptcies. General Motors for example, they spend more on healthcare than steel. And Starbucks spends more for healthcare than coffee. Another direct consequence is the huge number of people who can’t afford to have any insurance at all. Currently 46 million Americans or 15% of the entire population have no medical insurance. Another problem is the structure and institutional values of the healthcare system itself. A 2003 study showed that 31% of healthcare dollars or $400 billion went directly to administrative bureaucracy and profits, $400 billion. So now just caring what’s supposed to control costs and extend affordable healthcare to everyone but this hasn’t happened.

Pinky: What exactly is managed care?

Dr. Huey: Managed care refers to any system in which healthcare is administered by a managed care organization or MCO. It’s by far the dominant model for providing healthcare here in the United States. 97% of all US workers who have private medical insurance through their employers belong to some kind of managed care organization. The idea of managed care itself is not new. It was invented so to speak in the 1970’s in response to the wildly escalating costs of healthcare at that time. The basic idea was that managed care was supposed to control costs through a combination of cost control strategies. Proponents of managed care claimed that they would be able to keep costs down by making the healthcare system more efficient. Promoting disease prevention, providing only quote unquote necessary and appropriate care.

Pinky: Using a phrase like, necessary and appropriate care makes it sound like there are lots of unnecessary and inappropriate care being performed by doctors, before managed care came along. Was that really the case?

Dr. Huey: Well before the advent of managed care the typical way of getting health care for the average American was through what we call the fee for service system. That system basically had no controls over access and care. When somebody wanted to go to the doctor they basically just went to which ever doctor they wanted to for whatever reason and then the doctor would run tests. They would treat them one on one, whatever. The doctor might collect money, directly from the patient if they had no medical insurance but more often they would be billing an insurance company and get paid through them. Now you can imagine under this kind of system in which there is no limit on the choice of doctors no limit to access to specialists, and no limit on doctor services, there is actually going to be a financial disincentive on the part of the healthcare apparatus to keep patients in good health. In other words doctors and insurance companies could perform more services and then get paid more money whenever people got sick, right? Under this kind of system the economic results were as one would expect. By the 1970’s this fee for service system had helped create a massive problem, you know. Cost inflation extreme enough to lead President Nixon to declare that the country was in the middle of a healthcare crisis.

Pinky: So how are managed care organizations different from the previous system? I mean in simple terms, how do managed care organizations work?

Dr. Huey: There are actually a few different kinds of managed care organizations, for example you have probably heard of health maintenance organizations or HMO’s, right? There are also these other things called PPO’s and POS plans. Basically these are all somewhat different versions of the managed care model. But what they all have in common is that all managed care organizations are businesses. They have various interconnected parts that all work together to form a whole. Of course they provide patients with access to doctors and nurses, technicians; but they also have administrative and financial workers who create and manage the health insurance policies that are then marketed and sold to the public. So you can kind of think of MCO’s as sort of being a conjoined twin, hospital on one side and insurance company on the other. The insurance side of the MCO will create a range of healthcare insurance plans and market them to individuals or employers. So when a person joins an MCO what they are really doing is buying one of these plans and they are paying for it by making continuous periodic payments, monthly, semi-annually, whatever in order to keep their membership to the MCO active. The MCO collects these thousands and thousands of payments, insurance premiums in MCO lingo, from their customers, which they like to call members, and from this the MCO basically derives its budget. From which it is going to have to deliver all of its healthcare services.

Pinky: So as long as you keep paying the monthly bill to your MCO you are free to just go see the doctor whenever you get sick?

Dr. Huey: Well if you are getting your health insurance from your employer. Your employer is already paying for your health insurance and providing it as a benefit or they may be taking a certain amount from your paychecks to pay for that insurance. That is why most people don’t actually have to mail a check in to their MCO every month. It is already being done for them. In addition to the monthly insurance premiums you have to pay, many health insurance plans also require that you have to pay a certain percentage of your medical bill out of pocket when you do receive some kind of medical treatment or there may be built in controls as to which doctors you can see whether you have to see a primary doctor before seeing a specialist and so on. And like I mentioned earlier there are always controls in place, in the form of quote unquote, only necessary and appropriate care kinds of stipulations. In regards to what kind of tests are ordered or what kind of medical care is actually rendered.

Pinky: Who gets to decide what is necessary and appropriate? I mean wouldn’t a managed care organization be inclined to try and save money and maximize profits by rendering less than necessary, less than appropriate care?

Dr. Huey: This is a very difficult question to answer! Depending on how you do the analysis you are going to get different answers. There have certainly been many claims, many of them highly publicized in the mainstream media regarding inadequate care and legal judgment against MCO’s; but there is also little data to support this as a generality that extends across the board. There has also been some data that seems to indicate that the quality of healthcare has actually remained more or less constant, you know extending back to the fee for service era. If this means that MCO’s are doing an equally great job or that the fee for service era also sucked I guess that is very open to debate. A more reasonable conclusion would probably rest somewhere between the two. The National Committee for Quality Assurance, the NCQA, has recently started to collect data to try to answer questions just like the one you just asked. Early evidence seems to suggest that the quality of health care and patient satisfaction are actually slowly improving.

Pinky: So what would be the best way to promote improvements in healthcare? Can you do that while also reducing costs?

Dr. Huey: Well in 1999 President Clinton created this thing called the advisory commission on consumer protection and quality in the healthcare industry. They issued a Patient’s Bill of Rights to protect people from denial of service and other MCO limitations. Around the same time many states passed laws that allowed MCO’s to be sued in instances of malpractice. Securing these rights for consumers was generally plotted by consumer protection advocates as victories; but immediately thereafter the cost of healthcare to consumers just shot up. MCO’s raised their insurance premiums to something like five times the rate of inflation. The MCO’s basically said that they had to do this in order to cover the increased costs of their newly acquired accountability. Was that true? Well it is hard to tell especially since MCO profits increased 10.7% in 2004. Look Pinky the bottom line is that managed care organizations are businesses and their decisions as to how they are going to be run are driven by market forces. As businesses operating within a larger healthcare industry, healthcare is going to be bought and sold as a commodity, priorities are going to be set and decisions are going to be made based on the MCO’s ability to make profits and the patient’s ability to pay. Under this kind of logic healthcare is allocated based on wealth so there is always going to be a problem for people who are unable to pay. The uninsured are totally excluded from the system.

Pinky: So what’s next for managed care?

Dr. Huey: Well here we are in the middle of a crisis, I should clarify when I say we I don’t necessarily mean MCO’s, in general MCO’s have continued to adapt to the constantly changing economies and markets and they continue to make profits. It is really the working people who are feeling the brunt of it. You know patients are having to pay more for less coverage, employers are also incrementally cutting back coverage, patients are now paying more out of pocket. As a nation we spend more on healthcare than any other country, 15% of the GDP. That is over 1.7 trillion dollars in 2003, and yet for all that money spent the US ranks thirty fifth for life expectancy at birth and forty second in infant mortality. The statistics are predictably far worse for those Americans located towards the bottom end of the social economic scale. 15% of Americans have no health insurance at all and the US spends two times per capita versus Canada, a country which has universal coverage for all of its people. With almost 100% of all privately insured Americans receiving their healthcare from some form of MCO. I think it is fair to say that any indictment of the healthcare industry in general is also an indictment of managed care. So the question is, does government have the moral responsibility to take care of its people? Is healthcare a basic human right, that should be available to everyone? Many countries, well actually all industrialized countries except the United States, have universal healthcare.

Pinky: Why don’t we already have universal healthcare here in the United States?

Dr. Huey: Well there has actually been a number of failed attempts over the years. Presidents Roosevelt, Truman, Clinton all of them tried in some form or another. But let’s rewind a bit. During the second World War as a way to control costs and inflation and basically keep the war machine running, there were strict wage and price controls imposed by the U.S. government. One of the side effects of this was that employers began offering incentives in the form of health benefits as a way to compete for workers. That gave rise to the present employer based insurance system that we still use today. This is the historical foundation that essentially really leaved the Federal Government from the responsibility to create and maintain a nationalized program of healthcare. From time to time the employer based system would show glaring inadequacies. For example in 1965 the Federal Government initiated the Medicare and Medicaid programs as partial solutions but the logic of Capitalism is quite clear. The employer based insurance system has obvious limitations and without deep fundamental changes this longstanding crisis will not go away. Part of the problems is established special interest groups that have both money and power. And also the fragmented nature of the healthcare industry produces many competing interests. Patients, doctors, hospitals, pharmaceutical companies, insurance companies, employers, government, I think that is a whole other episode.

Pinky: I think so. I am going to have to ask you to draw me a diagram.

Dr. Huey : Yeah it will have many boxes and arrows.

Pinky: Yeah I want to know whose responsible for locking the creation of the system that would provide health care to everyone. I am also curious as to what their motivations for doing this would be. I mean I’d like names and dollar amounts. Dr. Huey thank you very much for sharing this information with us.

Dr. Huey: Thank you pinky, I always enjoy seeing you.

Pinky: Please come again.

Dr. Huey: I will. Bye.

Select one of the following critical analysis and discussion questions and post your answer. Please write out the question at the top of your answer.
•The managed care system emerged as the alternative payment and delivery mechanism to traditional fee-for-service indemnity insurance. Discuss how managed care organizations work according to Dr. Hui. What do all managed care organizations have in common?

•“As the health care delivery system becomes increasingly cost conscious, physicians are no longer able to serve as advocates for their patients’ medical needs.” In light of this concern, discuss the changing role of the physician in the managed care environment.

•The American Medical Association (AMA) has been actively involved in shaping the regulation of nursing and other health care practitioners. What are the arguments for and against the AMA determining the scope of legitimate activities for other health care practitioners?