How Capitalism Will Save Us

by Steve Forbes

  In the end, neither Medicare nor Medicaid fully delivers on the promise of meeting the healthcare needs of elderly and poor patients. Medicare coverage is today so inadequate that participants have to purchase private “Medigap” insurance policies to pay for what’s not covered. Program participants today pay a greater percentage of their incomes for healthcare expenses than they did in 1965, before Medicare began.

  This already incomplete coverage is fated to get worse as the population ages and more people enter Medicare. Both freemarket opponents and supporters agree the current system is heading for a Fannie-and Freddie-sized meltdown. The Cato Institute’s Sue Blevins predicts that by 2030, just twenty years from now, only 2.3 workers will be available to support every Medicare patient—compared with today’s 4 workers per beneficiary. Experts call the system “unsustainable.”41

  Staterun Medicaid programs, meanwhile, are straining state budgets to the breaking point. In the state of Florida, with its high population of immigrants and elderly, Medicaid rolls ballooned 40 percent over five years, and the program in 2005 was 25 percent of the entire state budget.42

  Many think that expanding government programs like Medicare and Medicaid will straighten out the healthcare economy. But this would only exacerbate the mess these massive bureaucracies have caused. People will end up paying more for health care whose quality and innovation will continue to decline. The cost will be not only in dollars, but also, in policy lingo, in worsening “health outcomes,” with greater risk to our health and our lives.

  REAL WORLD LESSON

  By imposing a rigidly bureaucratic system of third-party payment with inadequate and capricious price controls, Medicare and Medicaid have massively distorted the entire healthcare economy.

  Q WHAT IS THE REAL WORLD MARKET SOLUTION TO HEALTH CARE?

  A ALLOWING CONSUMERS, NOT CORPORATIONS OR GOVERNMENT, TO CONTROL HEALTHCARE DOLLARS AND MAKE THEIR OWN BUYING DECISIONS.

  The best way to fix health care is to allow the return of a healthier market, where consumers make the buying choices for health care and insurance. Doctors and hospitals will once again become accountable to the individual patient. Do away with the regulations that are today currently driving up the cost of coverage. Make it easier for individuals to buy the plans and care that they want.

  Enabling people to buy their own insurance and care would push insurers and caregivers to become more efficient and come up with new, less expensive ways of providing health care. We see this phenomenon in every other part of a free economy, including a market sector more basic than health—food. Food is more critical to life even than health care. Yet in real terms it is costing less and less.

  With the patient in the driver’s seat, you’d get better care and better service. Your insurer, doctors, and hospitals would treat you like a valued customer. New forms of healthcare delivery would spring up as companies sought to serve individual buyers. More people would be able to afford medical insurance. Fewer would need a government alternative. But even if we still had Medicare and Medicaid, those programs would be easier to finance in a consumer-driven market because healthcare costs would be lower.

  The power of the individual consumer to bring down healthcare prices is illustrated by the relatively low cost of medical services that people buy directly and are not covered by insurance. Two prime examples: plastic surgery and laser vision surgery. Neither is normally covered by traditional health insurance unless the surgery is needed because of accident or disease.

  Plastic surgery has not experienced the kind of price inflation that has afflicted the rest of the healthcare industry even though, in the last fifteen years, technological advances have proliferated and demand has rocketed sixfold. Conventional laser eye surgery that reshapes the cornea so a patient no longer needs to wear glasses costs a third less in real terms than it did a decade ago.

  How do we get there from here? The following reforms would begin to untangle the system:

  Allow people to buy health-insurance policies across state lines. This would enable people to buy plans in states regulated by fewer costly mandates. You should be able to buy a policy offered anywhere, from Arizona to Vermont. Allowing sales of health insurance across state lines would enlarge risk pools, making sicker people easier to cover. And it would increase competition among insurers, bringing down costs. A couple of years ago, the Health Care Choice Act, introduced by Arizona congressman John Shadegg and South Carolina senator Jim DeMint, would have allowed out-of-state insurance sales, while preserving the state’s primary responsibility for regulating health insurance. The bill never made it out of committee. Had it passed, it would have enabled more people to have access to lower-priced insurance. Competition would have blossomed.

  Remove restrictions on health savings accounts. HSAs allow employers to offer health insurance with high deductibles. Companies—and workers, as well—put pretax money into health savings accounts. The account covers the lion’s share of care—mainly routine expenses—that you would normally pay for before your insurance kicks in. That care is paid through the HSA. The money belongs to you. Like a savings or checking account, what you don’t spend remains yours for future use. The HSA earns taxfree interest; funds can be invested, much like an IRA. This is the antithesis of flexible spending accounts, in which the worker loses whatever money in the account hasn’t been spent by year’s end.

  HSAs allow people to use insurance for what it was supposed to be for—catastrophic expenses. Thus, they help lower the cost of premiums. Meanwhile, they let the patient directly buy routine medical care—creating a consumer-driven market.

  For years, Forbes has provided employees what are, in effect, health savings accounts. The insurance itself is a bargain (relatively) because the policy deductible is high. What makes the plan so attractive, though, is that Forbes gives everyone who works at the company $2,500 each year, which covers most of the deductible. Money that isn’t used is rolled over. If medical bills exceed both that $2,500 and the employee portion of the deductible, traditional health insurance kicks in. When companies initially put such a plan in place, they often see a decline in premiums. Over time, Forbes’s premiums have increased less than those of its peers.

  Insurers are permitted to offer HSAs as a result of the Medicare Prescription Drug Improvement and Modernization Act, signed into law in 2003. So far, only about eight million people nationwide have signed up for them. One reason is because they’re new. But also, people and insurers don’t fully understand them. For people accustomed to prepaid coverage, shopping for health care can take getting used to.

  Another problem is that the government restricts what deductibles are and how much money you can put in your account. If such restrictions were loosened, more people would sign up for HSAs. They would become a greater factor in the marketplace. The healthcare system would have to respond to these new consumer-oriented pressures. A remarkable phenomenon would unfold: Growing amounts of money would accumulate in these accounts. The accounts would grow to become a significant asset for many people, thanks to the miracle of compounding interest.

  If health savings accounts became a major factor in the marketplace for insurance, pricing of medical services would become saner and more affordable. We would finally see the return of genuine insurance—coverage for major risks, instead of the dollar-for-dollar kind of coverage we have now.

  Institute Medicare and Medicaid health savings accounts. Medicaid and Medicare participants would get their own HSAs, much like people covered by private insurance; government would provide a certain amount of money to cover basic expenses, along with a catastrophic policy. Medicaid participants would get food stamp–like vouchers or health debit cards. Medicaid and Medicare recipients would thus be encouraged to shop for health care like everyone else. To get people accustomed to the concept, the program could be phased in; it would be optional.

  Health savings accounts would begin to bring the runaway costs of both Medicare and Medicaid under co
ntrol. Participants would have a positive incentive to hold the line on spending—the prospect of building up their HSAs. HSAs would make government insurance consumer-centric instead of government-centric. It would create a consumer-driven market for health care; the need to please consumers would propel healthcare providers to improve productivity and develop cheaper and better ways of providing health care.

  Make it easier for small employers to pool together to buy health insurance for their employees. This would enable them to spread the risk and pay lower premiums. Allowing small business pools would help to make health insurance affordable for the small employers that currently cannot afford to offer it to employees—and it would give formerly uninsured people access to coverage.

  Allow individuals as well as employers to buy health insurance with pretax dollars. Why shouldn’t you be able to pay for health insurance in pretax dollars? Here’s how it would work: Americans who wanted to buy their own insurance would be able to notify the government of their decision. They would then receive a refundable tax credit—which means either a tax credit or dollars—of, say, $2,500 for individuals, $5,000 or more for families. Equal tax treatment would encourage Americans who preferred to buy their own plans to do so without adverse tax repercussions. The market for individual plans would grow. Insurers would be under additional pressure to be accountable to individual patients. They would deliver more reliable coverage. You’d see a market developing for individual policies, instead of one-size-fits-all corporate policies. By encouraging free choice by individuals, equal tax treatment would allow individuals and insurers to free themselves from the burden of expensive mandates. There’d be more competition in the market for insurance. You’d see downward pressure on the price of coverage.

  REAL WORLD LESSON

  In all markets, encouraging companies to compete for the business of individual consumers inevitably results in pricing and products designed to meet their needs.

  Q ISN’T MALPRACTICE LITIGATION OVERBLOWN AS AN ISSUE?

  A ABSOLUTELY NOT. MALPRACTICE INSURANCE IS A HUGE COST FOR INDIVIDUAL PHYSICIANS AND SOME HOSPITALS. BUT MANY TIMES GREATER IS THE COST OF WASTEFUL DEFENSIVE MEDICINE BY LAWSUIT-FEARING CAREGIVERS.

  In the introduction to this book, we explained that two essential conditions to the successful operation of democratic capitalism are trust among individuals in the marketplace and a legal system that allows for fair and equitable resolution of disputes. Both trust and dispute resolution have broken down in the healthcare economy. The reason: today’s blizzard of malpractice litigation. It’s not just a legal and medical problem, but a critical economic issue.

  In New York City, for example, malpractice insurance premiums for obstetricians are an astounding $137,000 on average—and even more in some suburbs.43 According to an article in the New York Daily News, the high cost of litigation and medical malpractice coverage is the reason why Long Island College Hospital in Brooklyn and other smaller hospitals in the area have closed their maternity wards and stopped delivering babies. It is why Thomas Middleton, a resident of rural Maryland, couldn’t find a new doctor who would take him when his primary-care physician retired. He told the Baltimore Sun, “I had to go through three different doctor groups before someone would take me.”44

  A 2004 study by the Journal of Medical Practice Management estimated that runaway malpractice suits caused a 6 percent decline in physicians in the United States, many of whom work in critical specialty areas, depriving up to 14.4 million people access to critical medical services.45

  Malpractice suits increased the annual cost of employer-provided health insurance by as much as 12.7 percent. Researchers blame this malpractice-driven inflation for a decrease of 2.7 million in the number of workers and their families who were able to get coverage.

  Philip Howard, chairman of Common Good, a nonprofit organization devoted to eliminating lawsuit abuse, explains that the direct costs of premiums and litigation are only a small part of the total toll malpractice exacts from the healthcare economy. There’s a much greater cost—the “defensive medicine” practiced by lawsuit-fearing doctors and hospitals. Howard says that all the wasteful and inefficient tests and examinations may cost as much as $100 billion. Howard testified before Congress about his personal experience having to go through such expensive, unnecessary tests:

  I was not allowed to have minor surgery recently until I’d gone through a complete pre-operative examination, complete with chest X-rays and other tests, at a cost to my insurer of $1500. This was basically the same exam I had undergone a few months before at my annual physical, but the hospital would not accept those results, or indeed, even allow me to waive any claim. This was $1500 not available for some person who needed care.46

  Howard said that hospitals have become “a kind of slow motion zone.” Every choice doctors make is “accompanied by forms in triplicate and precautionary procedures.” He testified:

  A pediatrician in Charlotte recently told me that on a routine visit of a healthy child he used to write three lines on the patient chart. Now he writes twenty or thirty lines describing all the things which indicate that the child is not sick. Multiply these procedures by over 3 million doctors and nurses, and you have a system that is unaffordable.47

  Defensive medicine is destroying the trust that is critical to the doctor-patient relationship and to the functioning of the market. Every patient is a potential plaintiff. As a result, Howard says, doctors and patients end up eyeing one another suspiciously: “Quality, cost, professionalism, patient empathy, accountability and effective compensation for injured patients are all adversely affected.”

  “The defensive culture,” as Howard calls it, has other indirect costs: it discourages Good Samaritan physicians from donating their services to charitable organizations, such as the Medical Reserve Corps, for fear of being subject to a legal suit. Clinics, as a result, are having a harder time affording physician care for low-income patients. The proportion of physicians in the country providing any charity care fell from 76 percent to 72 percent between 1997 and 1999 alone.

  No one denies that it can be necessary to sue a careless hospital or physician. According to the Institute of Medicine, avoidable medical errors take more than one hundred thousand lives each year. However, Philip Howard makes the point that the current system doesn’t do a particularly good or consistent job of policing the profession or protecting patients.

  Accountability is inconsistent: inept doctors often keep their licenses while good doctors find themselves liable on baseless claims; [meanwhile,] one out of four baseless claims result in payment, according to a recent study by Professor Studdert and others in the New England Journal of Medicine.48

  Emotion, not the facts of the case, are what drives lawsuits and settlement. According to the New England Journal of Medicine, amounts paid to malpractice plaintiffs were driven by the severity of the patient’s disability, not by whether a provider was negligent, or even whether an injury had occurred.

  Litigation also imposes an immense cost burden on pharmaceutical makers and is a key factor behind the high cost of drugs. According to the Manhattan Institute, the pharmaceutical manufacturer Wyeth (now part of Pfizer) maintains a $21 billion reserve for litigation related to its weight-loss drug fen-phen, which was taken off the market. Lawsuits over the anti-inflammatory drug Vioxx may end up costing Merck as much as $50 billion. The astronomical cost of these legal battles represents nine to twelve times more than each company’s annual research and development budget.

  The specter of a Vioxx-or fen-phen-sized legal nightmare is not only straining the financial resources of these medical care providers and drug makers. It is inhibiting them from taking risks on and investing in new drugs and technologies.

  How do you reform this dysfunctional environment? One solution Philip Howard proposes is a specialized health court system that works the way bankruptcy court and tax courts currently do. Those courts would rely on judges with specialized expertise in medic
al issues to make decisions. They would eliminate juries, which are too often swayed by emotion and reach verdicts unsupported by medical evidence. Reforms that have been adopted by some states include subjecting lawsuits to expert review, instituting a statute of limitations on filing a claim, and limiting awards “for pain and suffering.” Wider implementation of these changes would bring some sanity back to the system and restore some trust and common sense to the practice of medicine.

  REAL WORLD LESSON

  Wasteful defensive medicine, which has distorted both the practice of medicine and the healthcare economy, is the greatest cost of medical malpractice abuse.

  CHAPTER EIGHT

  “Isn’t Government Needed to Direct the Economy?”

  THE RAP Unfettered free markets are so brutal that millions would tumble into poverty without government intervention. We need government to shield people from the pain of boom-and-bust cycles through fiscal policies such as increased spending, changes in tax levies, and monetary policy that “fine-tune” the economy via the money supply and interest rates. Programs such as Social Security and Medicare are also necessary to provide a safety net.

  THE REALITY The key to a healthy economy is creating a stable, predictable environment that encourages risk-taking innovations and new business formation in a free and open market. Government intervention too often distorts markets and inhibits economic activity. By draining individuals and businesses of the resources they need to build wealth and create jobs, government spending ends up slowing growth and keeping people from getting ahead.

  In May of 2009, the New York Times Magazine featured an interview with President Barack Obama. The magazine’s cover line was “His Economy.” The president discussed with reporter David Leonhardt how the United States would emerge “on the other side of the so-called Great Recession.” He asserted that, in the reporter’s words, “the country needed to break its bubble-and-bust cycle.”1