• Jim Kelly

The fatal flaw of Medicare for All

Updated: Apr 19, 2020

Senator Warren spots the wasteful part of healthcare

A few years ago I was in the hospital for a couple days getting my tires rotated, when a young woman from an occupational therapy provider stopped by my room. She asked a few questions to assess whether I needed occupational therapy, determined I didn’t, and was gone within three minutes. When I eventually saw the bill, I discovered we’d had a $500 chat.

Now, $500 on a medical bill is probably insurer-speak for $100, and even that is ridiculous for the conversation we had. For anyone who imagines the US has a free-market healthcare system, the obvious fraudulence of the prices ought to prove all by itself the system is bureaucratic theater.

That conversation also reveals why Medicare has failed to contain healthcare costs, and why Medicare for All won't do any better.

How to make a service cheaper

The steps to making any product, service, or supply chain cheaper are conceptually very straightforward:

  1. Find a wasted $100 bill.

  2. Get people to change their habits so that $100 is saved in the future.

  3. Repeat until you can’t find any more wasted $100 bills, then move on to $50 bills.

Step 2 is hard, especially for a political body. No one wants to change their habits, and if their paychecks are on the line, they'll fight hard against any reform.

But Medicare can't even get through step 1. Institutional payers can never root out much waste because they can't find it. As soon as they set up shop, the data on waste can no longer be generated. In fact the whole concept of waste loses its meaning.

When we say $100 was wasted, we mean that the world on net lost physical resources valued at $100. If you add up the benefits in my example, I gained reassurance that I didn’t need occupational therapy. The therapist who visited my room got some exercise. She and her company's clerks benefited from receiving some money. They were able to buy something they couldn’t before, from someone who in turn could buy something themselves, and so on.

Then subtract the resources destroyed. Paper and ink were consumed. Gasoline and electricity were used sending bills back and forth. The clerks, the therapist and I all lost some of our time. The insurance carrier Anthem had to forego some money, which means it gave up an opportunity to spend it on someone’s cancer treatment or whatever it would otherwise have purchased. And whoever it would have bought from never received the money, so they didn’t buy something themselves, and so on.

When you add it all up, if the world ended up with more resources (or more valuable resources), wealth was created. Society on the whole was made better off. If the total shows $100 was wasted, that says the opposite: society as a whole ended up poorer.

With no market, there is no “waste.”

If producers and consumers don't have to negotiate in a market, there's no such thing as "waste." Nor is there “good value for money.” What’s a ream of paper plus an hour of time minus a reassuring conversation? You can’t do the net-value arithmetic unless you can put everything in comparable units that represent value, such as dollars.

But value is subjective. The value of a ream of paper or a reassuring conversation varies by situation, by individual, and from one moment to the next. Someone else might have been very grateful for that conversation with the therapist. I might have valued it more in a different situation. But in that instance, I didn’t value it at all.

No one at my health insurer, nor in the hospital’s accounting office, nor at Medicare, nor on Elizabeth Warren's staff knows the value of that transaction. They negotiate, bill, and pay a customary reimbursement for “occupational therapy assessment” with no information about the benefit patients received--not the individual patient, not the average patient, no one. So there’s no such thing as “waste” or “good value.”

The needed data isn’t getting lost in the paperwork somewhere, it’s never being generated at all. Only I can assess the value of that conversation, and I never did. Until now, when it’s too late.

In fact, I can't assess the value of something except in very specific conditions. They could ask me how much value I felt I got, but I’d almost certainly overestimate. It would have been awkward to tell the therapist I didn't value her services, and as easy to say a hundred dollars or a thousand dollars if I'm not paying either one.

There is only one way to figure out how much I genuinely value something: see if I’ll pay for it. Then the truth comes out.

“Would you like an Occupational Therapy Assessment for $500, Mr. Kelly?”

“Huh? I didn’t ask you to come by. You’re trying to sell me your therapy services, and you want me to pay you for the sales call? How did you get in here? Nurse!”

The consumer has a vital job no one else can do

Anyone hoping Medicare for All will drive efficiencies in healthcare should find this disturbing news: wherever an institutional payer operates, it necessarily shuts down the natural stream of data about what people want and how much they want it.

Having done so, the institutions are in trouble, because resources aren't unlimited. They need some way to weigh value against cost, so they make up artificial substitutes for value. Medicare and other insurers run on models such as quality-adjusted life years that tell them how good you should feel in various scenarios. What you’ll die of is left up to spectacled actuaries hunched over ghoulish spreadsheets.

Healthcare will not get cheaper until we return power to the people. As consumers, judging value for money comes very naturally to us. And we’re ruthless about cutting off paychecks of anyone who doesn’t deliver it. Yet government policies have tossed us out of that job, and runaway costs are the natural result.

Of all the reforms we might consider next, turning patients back into shoppers with the power of the purse should be top priority.

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