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We have spent the larger part of the last year focusing on how to fix health care, but no plan on the table actually fixes it. What’s the underlying problem or more appropriately, what’s the underlying disease we are fighting? Are we sure we know what has gone wrong and where?

To figure out what’s wrong with healthcare in America, it might be helpful to diagnose the problem just like a doctor does. One of the first things a doctor does when he diagnoses a disease is he looks at the symptoms the patient is demonstrating. Why not approach it the way a doctor would? What are the symptoms we can take note of to identify the cause of the disease?

Costs and hidden taxes

The first symptom is spiraling and seemingly out of control costs. At 17% of GDP, compared to 11% in Switzerland and 8% in the UK with inferior results and only a fraction of the population covered. We spend over twice what other countries spend for a system that doesn’t even cover all of our citizens. How did we get to this point exactly? We also get inferior outcomes in many studies of procedures performed and overall we die a lot sooner than in other countries (some of this is higher mortality due to other causes). Within a few years our spending may reach 1 out of every 5 dollars of income produced. It could get even worse then that.

Second. We have large pricing distortions. If you have a strep throat, it's not as if you can log on to the web and see 20 prices for doctors in your area and pick the best price for treatment. Doctors and insurance companies hide the numbers. You can do that in almost any other good or service, why not here? If you are uninsured, you are going to pay a higher price than others for the same treatment and you won't have any idea that's occurring. Even if you are insured, you'll pay less for the same procedure than someone in Medicare.

Medicare often pays far less for procedures than the private insurers pay because the government can set prices by fiat. This distortion “cost shifts” prices from one system, the “public system” to the private one”. This often results in big price increase in private premiums as hospitals with their 19th century accounts shift cost increases to the only place they legally can—private insurance plans.

According to Milliman, an independent actuarial firm, Medicare—and to an even greater extent, Medicaid—underpays doctors and hospitals, shifting costs to private insurers. Milliman estimates that the average family in a private PPO health plan pays an additional $1,788 a year to compensate for underpayments by Medicare and Medicaid, representing a "hidden tax" on commercial payers totaling $89 billion a year.

Volume

We also notice in this “disease” that because public prices are set artificially low, those in the public systems have a tendency to over consume, and doctors needing to make up for low margins by over prescribing procedures to “make it up on volume”. It's a services industry--costs don't decrease with increased scale, in fact they increase drastically. While the procedure are often marginally profitable for doctors they are often disastrous for the system overall and costs for “private” spiral upward.

The Mayo clinic which is heralded as one of the best examples of efficient systems in the world turns away Medicare patients. Only 5% of their patients are in Medicare compared to 29% in other local hospitals.

Why? Mayo calls this a “business” decision and “not a reflection of the current legislative debate”. i.e. They are not stupid. They keep private costs low because they refuse public patients who underpay. They can’t raise prices for these Medicare patients because the prices are set by law. If they take those patients they are forced to pass the costs on the private insurance. It's a microcosm for what is happening throughout the economy.

In short, the artificial barrier between the public and private systems needs to end.

Opting out

Third. These rising private costs encourage younger healthier citizens to opt out of insurance. This “symptom” is easy to recognize and most people are aware of this problem. Since people are uninsured, they don’t get basic preventative care that stops chronic illness before it can develop. By law hospitals are required to treat you and so these costs are eventually socialized typically at emergency room rates which are far more expensive. If you can’t pay these costs are “socialized” and passed on to private insures and the government.

Swiss efficiency

Luckily, we’ve got examples of other health care systems and cost structures to learn how to improve our own, or in some cases avoid similar mistakes.

So lets look at my favorite which is the Swiss system. It's the most expensive system after ours and it’s the most “privatized” system. The Swiss system costs a relatively cheap 11% of GDP. The government provides a subsidy for its citizens to purchase health plans from a system of 85 private insurers. Costs are a bit higher, but innovation is higher and consumers have more control over their own health care. To make this system work in the US you would have to transition all government programs into this “subsidy” system. While the system has attractive benefits, it seems politically impractical. Nobody wants to scare senior citizens and some sort of fold up of Medicare would cause a political firestorm. As panicked as the electorate it is, this kind of a change is probably too drastic. At least for now.

On the other end of the spectrum, you have the purely socialized system in the UK and France with spending at about 8% of GDP. The way to do this in the United States is simply to remove the age limit for Medicare and extend health care to everyone.

'Hybrid disease'

As someone who has greatly benefited from the “free market” and innovation, I’m a strong advocate of the free market example set by Switzerland. I think it would be best for the country and we’d get much better health care in terms of quality and innovation. I think if we give entrepreneurs an incentive to compete and innovate they will figure out how to deliver much better care at a much lower cost. Right now, most entrepreneurs that enter the health care business usually get clobbered by entrenched interests or regulation. There are some notable exceptions to that who I've sent a copy of this piece.

In America we appear to be suffering from this “hybrid” disease, not just in health care but in every major industry. We have systems that mix the worst incentives of public and private to avoid making any real choice as to what kind of system we want to have. This has led to embarrassingly high costs that with the advent of the financial crisis are unsustainable.

This “hybrid disease” has infected major US industries such as telecommunications and financial services. Look at our financial system and disaster we’ve just experienced there and see the parallels in health care:

· We had “quasi” private agencies Fannie Mae (FNM) and Freddie Mac (FRE) receiving government guarantees that allowed them to underwrite massive amounts of debt that induced a massive bubble in real estate. Home ownership was considered a policy priority so the idea of subsidies and aggressive bank lending to subprime was encouraged.

Meanwhile, no real private sector alternative to Fannie and Freddie ever emerged because nobody could compete with the government guarantee. It lowered the cost of capital so much for Fannie that private competition could not enter. Are there areas of health care that private companies won’t compete in now because they can’t?

Medicare mortgages

While many parts of the financial system including banking and insurance were heavily regulated, many circumvented these gaps in the rules. Like in health, you had segments CDO which was essentially “debt insurance” was issued so that banks could issue even more debt and increase profits. This resulted in risky mortgages being even more prevalent and a massive amount of over consumption in real estate. Huge price differences in what Medicare charges, vs state regulations that prevent competition force many of these same inefficiencies?

Somewhere along the way in the last 20 years America has lost the ability to be practical and live within our means. We need to pick one of these two systems as the current hybrid is a fiscal disaster that will bankrupt the country.

America right now is facing it's greatest fiscal challenge. If we make a choice and bring our costs even down to levels of the Swiss system at 11% of GDP we would save almost $840 billion a year. That’s $840 billion that can be spent on tax cuts, health care subsidies for low income earners, infrastructure or energy independence. This challenge is politically difficult but the rewards of fixing this gaping fiscal hole are huge as well. Time for us to make a choice in either a public system or a private one—the hybrid choice of “we’ll take both” is killing us fiscally and literally. We need to make this choice, not just in health care but in many of our most important industries and return to America's practical roots.