Reduce Costs? Are You Serious?


First, let’s get our terminology right.  There is nothing wrong with out health care system.  There is a problem for many people in paying for their healthcare or health insurance.

Everyone can receive emergency care at any hospital.  No one can be turned away. That has to be understood right from the start.  So there is no lack of health care.  Period.  For those with money or insurance, that means that they (or their insurance company) will pay for the treatment they have received.  For those who cannot or will not pay, the hospital’s accounting department will try raising prices for everyone else to cover their costs.

Cost” is the amount of money it takes to provide the healthcare.  “Price” is the amount of money it takes for the patient to pay for the healthcare.  The congressional plan to unilaterally reduce payments to doctors or hospitals treating Medicare patients is not “bending the cost curve”.  It is bending the price curve, by simply refusing to pay.

Raising taxes on pharmaceutical companies or medical device manufacturers raises costs. If costs go up, so inevitably do prices.  This is where Congress plans to bend the cost curve…upward.

The entire healthcare debate is due to the fact that there are millions of people without any health insurance.

But what exactly is health insurance?  Health insurance is simply a risk evaluation.  Each person who buys insurance assumes that they run the risk of becoming sick, or be in an accident of some sort.  Insurers evaluate the risk of that happening statistically.  For example, out of 100,000 people selected at random, they have statistics that indicate 450 will develop lung cancer.  So they collect premiums from 100,000, and the premiums are calculated knowing the cost of treatment for lung cancer, and the number of people who will have to be covered for that treatment.  It’s just simple math.

Where it gets complicated is that there are lots of diseases, some more serious (and more expensive to treat) than others, and the insurance company’s actuaries have to estimate the statistical probability of the number of people, out of that theoretical 100,000, who would contract lung cancer, leukemia, pneumonia, broken arms or legs, heart attacks, or housemaid’s knee.  Again, they would need estimated prices for treating each, times the number of cases, divided by 100,000, to determine the premium they would charge for their insurance policies.

A significant number of those without health insurance, usually the younger and healthier citizens, have made a decision not to buy insurance, thinking that they won’t need it.  These are probably the same people that drive too fast without seatbelts or enjoy bungee jumping.

Others are unable to buy insurance because they have a pre-existing condition, and even if an insurer was willing to underwrite a policy, the cost would be prohibitive.  If a person has a pre-existing condition, there is no risk – for them.  The insurer has to pay out.  There is no chance that they can avoid it.

A number of these reported millions of people are without healthcare because their employer doesn’t provide it.  Some have recently changed jobs, and are without health insurance while they struggle through the waiting period with their new employer.

Finally, we come to a group who are in this country illegally, people who take advantage of the mandate to treat everyone who comes to an emergency room, but who, in many cases, do not contribute taxes to support medical expenditures.

Unfortunately, regardless of the rationalizations that lead to these behaviors, an actuarially calculable number of these people will require medical care at some point.  Their common bond is that they are convinced someone else will pay for it.

For those folks who have pre-existing conditions, the simplest solution is something equivalent to the concept of an assigned risk pool that is used in those states that require auto insurance but have a history of accidents that would make any insurer reject them.  The idea that anyone can get health insurance after the onset of a disease is like buying your auto insurance after you hit the tree.  The price of such insurance would be higher than a “normal” health insurance policy, but since the cost of the benefits paid out by insurers would be immediate and relatively high, any argument that claims that the insurance industry is doing this only to gouge sick people is ludicrous.  They would lose money on this type of policy.  Lots of money.

But the idea that a person who suffers a disease, any disease, is somehow entitled to free medical care is equally ludicrous, and yet that’s the position of the LPDs who are tugging at our heartstrings in an effort to pass Obamacare.

In fact, the government plans to increase the amount you are spending (your price) by a trillion dollars.  Ok, give or take a few billion.  That way they can control the costs.  Yeah, sure Wilbur.

As someone trained as an accountant, and who specialized in analyzing the costs of production in a manufacturing environment, there is no possible way to control costs through administration.  Costs can only be reduced in three ways:

1. Re-engineer the product, component by component, to eliminate anything unnecessary to the effective end use of the product or service. Eliminate any and all components which add nothing of value to the consumer.

2. Negotiate better pricing from suppliers in exchange for exclusive contracts, larger bulk purchases, and so on.

3. Evaluate the substitution of fixed or semi-variable cost inputs for purely variable cost inputs.  For example, use automation to eliminate labor.  Develop standardized components that can be interchanged among a variety of end products.  Reduce redundant processes. Or increase volume to spread fixed costs and lower the cost per unit.

Reducing prices can only be accomplished in only two ways:

1. Reduce costs.

2. Accept reduced profits.

Only reducing costs will work in the long term.  Reducing profits will work, but only until the organization runs out of money and goes bankrupt.

Is it likely that any government action will reduce costs? Does anyone think that there would be a complete elimination of any non-essential components to health care delivery?  Would the government be able to eliminate redundant processes?  Of course not.

Just watching Congress earmarking special weapons systems for the Department of Defense that the Pentagon doesn’t want, just to protect defense contractors back home should tell you that.  In terms of health insurance, which is currently regulated by the states (as directed by the 10th Amendment), we can already see mandated “features” offered by insurers, such as classifying a toupee as a prosthesis.  Or mandating that insurers cover annual physicals.  Or tattoo removal.  Need I go on?

Of course one of the biggest single expenses for most medical personnel is malpractice insurance.  The cost of this is tied directly to the excesses practiced by trial lawyers.  So tort reform would almost immediately reduce medical costs, and would be a prerequisite to reducing health care prices.

So the idea that any governmentally run health payment system would be a financial enhancement is, you will pardon the expression, silly.  Ridiculous.  Preposterous.  Idiotic.  But very Congressional.

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About Jim Yardley

Retired after 30 years as a financial controller for a variety of manufacturing firms, a two-tour Vietnam veteran, and independent voter.
This entry was posted in Economy, Government Spending, Healthcare, Obamacare, Political Doubletalk, Taxes and tagged , , , , , , . Bookmark the permalink.

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