Are for-profit entities the cause of our skyrocketing healthcare prices?

My cousin asked me to comment on an article titled, “Skyrocketing health care costs: Thanks President Nixon!”

That article refers back to a 2011 article of the same name that, well, blames Nixon for everything wrong with healthcare prices in the U.S.

Oh, heck yeah, I’ll comment.

Let me recap the article’s main assertions:

  1. The downfall of the healthcare system can be traced to President Nixon’s choice (as a personal favor to a friend) to allow medical insurance agencies, hospitals, clinics and even doctors to function as for-profit business entities.
  2. The Health Maintenance Organization Act of 1973 (which the article abbreviates as HMOA73) was designed to encourage medical providers to treat symptoms rather than cure the underlying problem. Evidence of this are the warnings of “prolonged coma” and “death” that show up as possible prescription side effects.
  3. (For-profit?) insurers find ways to sell to the healthy and avoid covering the ill. I have added the parenthetical because nowhere in this section of the article does the author use the word “profit,” but given the topic of the article, it wouldn’t help the author’s premise if all insurers did this. This is also true for Assertion #4.
  4. The fundamental opposition between (for-profit?) insurers seeking to avoid paying for the ill and doctors and hospitals fighting back causes higher healthcare prices and higher insurance premiums.

Assertion #1 is the most important, so I’m going to knock out assertions #2-4 first.

Assertion #2: HMOA73 was designed to encourage medical providers to treat symptoms rather than cure the underlying problem. Evidence of this are the warnings of “prolonged coma” and “death” that show up as possible prescription side effects.

  • That’s not evidence of treating symptoms (is death really a symptom? and is it really what medical providers want given that dead patients provide no income?); it’s evidence of our litigious society and government regulation.  The FDA requires “black box warnings” if there’s evidence of a serious hazard associated with the drug, and if drug makers warn you, you or your heirs have a much harder time suing them successfully.
  • The author mentions that there are clauses in the Act that encourage this symptom-centered behavior. I’ve read the law and have found nothing to corroborate that. Feel free to read it yourself.
  • And finally, the very public goal of HMOs is to contain costs, and the way they contain costs is by giving incentives to offer less medical care because the less care the HMOs give, the more money the HMOs make. That is fundamentally the opposite of “forcing people to endure repetitive doctor visits, endless (and often useless and redundant) tests…” as stated in the article.

ASSERTION FAILS.

Assertion #3: (For-profit?) insurers find ways to sell to the healthy and avoid covering the ill.

You know how I earlier explained the added parenthetical? Yeah, that’s the Achilles’ Heel of this assertion. ALL insurers, whether for-profit or nonprofit, find ways to sell to the healthy and avoid covering the ill. It’s actually the point of insurance, to cover you for a potential risk in the future, not a certainty now. Otherwise, it’s call prepaid medical coverage, and it’s MUCH more expensive. But even if it were true that such practice was horrible, unethical, and evil, it’s still not limited to for-profit companies.

ASSERTION FAILS.

Assertion #4: The fundamental opposition between (for-profit?) insurers seeking to avoid paying for the ill and doctors and hospitals fighting back causes higher healthcare prices and higher insurance premiums.

If you’ve read my previous posts, you know that the issue of for-profit vs. nonprofit entities in health insurance doesn’t even make my top ten causes for rising healthcare prices and premiums. The shortage of doctors (caused by de facto government caps on the number of doctors’ internships at teaching hospitals), the conversion of health insurance into prepaid health care, and the de facto price controls set by the Centers for Medicare and Medicaid Services (CMS) are far more likely causes, especially when added together.

However, to show that this assertion fails, all that I have to do is state the fact that all insurers engage in these practices (inasmuch as the law allows them), whether for-profit or nonprofit.

ASSERTION FAILS.

And now to the primary assertion of this article.

Assertion #1: The downfall of the healthcare system can be traced to President Nixon’s choice (as a personal favor to a friend) to allow medical insurance agencies, hospitals, clinics and even doctors to function as for-profit business entities.

Let’s break that down.

First, did HMOA73 allow for for-profit business entities?

Commercial insurers were around before 1973. For-profit hospitals were around before 1973 (for example, the Hospital Corporation of America). In these two categories, the author is incorrect.

During much of the 20th century, doctors could have a for-profit business, but they couldn’t work for corporate entities that did not themselves (somehow) have a medical license. In 1912 the AMA declared that it was unprofessional for physicians to be under corporate control and in 1934 “condemned contractual arrangements whereby lay persons and entities directly profited from the services rendered by doctors.” The theory is that “physicians need to be able to make medical decisions free from the interference of lay persons, particularly lay persons whose allegiance extends more to the bottom line than to the well-being of patients.” This was not law, but licensure requirements allowed courts to forbid this “corporate practice of medicine.” HMOA73 changed that by allowing doctors nationwide to work for corporations. “Although Congress neither expressly preempted nor entirely eliminated the corporate practice of medicine ban in the HMO Act, many commentators point out that the Act severely disabled the doctrine, making a definitive policy statement in favor of a corporate-based, competitive health care market.” (Read here  for the context of those quotes and here for more on the corporate practice of medicine.)

Second, did the inclusion of for-profit entities into health care bring about the downfall of the American health insurance system?

Hmm, let me think about this… no. As I mentioned above, there are many other causes that can be crowned “King of the Downfall.” Also, there is little to no functional difference between nonprofit entities and for-profit entities in health care.

  • Just because a business has declared itself a 501(c)(3) does not mean it does not seek a profit (income greater than expenses). After all, if its expenses are regularly greater than its income, it will have to close its doors. 501(c)(3) status is merely a tax status which limits the business as to how much its income can exceed its expenses and how much it can set aside for rainy days in exchange for tax exempt status. Practically, what does that mean? It means rearranging where certain expenses show up on the balance sheet (now called the “statement of financial position”); what might be a profit to the owner in a for-profit business now becomes higher salaries and bonuses or more staff and other administrative costs, perfectly legitimate expenses for 501(c)(3) organizations. (Please note that tax law has nothing to do with intent. We as a society might INTEND that non-profits work for the benefit of society while for-profits work to maximize profits, but until someone comes up with a mind reading machine or a 100% accurate lie detector test—scary thought—intent remains in the realm of the metaphysical and the marketing department.)
  • Normally, nonprofits live off donations, which naturally limits their growth; however, nonprofit insurance companies and healthcare organizations receive payments for services, further narrowing the difference between a for-profit and non-profit healthcare business.
  • The healthcare industry is full of both 501(c) and for-profit businesses. If there was a significant difference in either processes or outcomes, we would see them. (And the difference would have to be significant in order for this to have brought about the downfall of our healthcare system.)
  • Some healthcare and health insurance structures encourage overtreatment, and some (like HMOs) encourage undertreatment; however, it’s irrelevant whether the company following the structure is a 501(c)(3) (or equivalent) or not.

Now, HMOA73 may have contributed to the current healthcare crisis by (among many other things) allowing the corporate practice of medicine, but that is merely a symptom. Of what, you ask? Of the damage Medicare, Medicaid, and the CMS have done. Dr. James Brook explains in his book, The High Price of Socialized Medicine:

    The big event that brought HMOs into the mainstream was the creation of Medicare and Medicaid.  Starting in 1965, an all-you-can-eat medical buffet opened up for beneficiaries of these programs.  Of course, restraint went completely out the window, and costs began to soar.

Congress then faced the dilemma of how to control those accelerating costs, before they crushed the federal budget.  They could not just start explicitly rationing care, or they would be thrown out of office.  Since the one overriding issue of concern to most congressmen is staying in office, they had to find a way to limit care without being too obvious.

Senator Edward (Teddy) Kennedy and President Richard Nixon advanced a solution.3 It was finally passed as the HMO Act of 1973.  “Sometimes referred to as the father of the modern HMO movement, [Paul] Ellwood was asked in the early years of the Nixon administration to devise ways of constraining the rise in the Medicare budget.  Out of those discussions evolved both a proposal to capitate HMOs for Medicare beneficiaries (which was not enacted until 1982) and the laying of the groundwork for what became the HMO Act of 1973.”4

HMOs were a response to the rapidly escalating costs of Medicare and Medicaid.  They were a small part of the health insurance industry, but in order to be able to absorb millions of Medicare and Medicaid beneficiaries, their capacity had to be increased.  They were therefore forced upon the private sector, and subsidized with tax dollars.

(Dr. Brook goes into more detail, and I highly recommend you read his chapter on HMOs… and then read the entire book. It’s well worth your time.)

Without the federal programs Medicare and Medicaid, there would have been no federal push to “fix” the problem of too many people chasing too few doctors, requiring doctors to suck it up and work for corporations having the open and public goal of keeping costs down as their major purpose of existence.

ASSERTION FAILS.

As for the underlying assertion that the president of Kaiser-Permanente got his buddy the president to do him a favor when writing new healthcare regulations, well, of course he did. For the government and large companies, that’s not a bug of such regulation; it’s a feature. Big companies in heavily regulated industries have every incentive to engage in rent-seeking behaviors like this because the government has more power over their income AND their competition than the customers do. They can kill their nascent competition in the cradle with a few choice words and funnel more customers toward their product without all the hassle of, you know, creating better products. Meanwhile, government officials and regulators, using public health and safety as a cover and a pretext, get control over larger and larger chunks of the economy. No wonder businesses come begging for government crumbs. This is better than gold for a power-hungry politician. (And if anyone thinks this is relegated to solely one political party, they have another think coming.)

Another doctor enters the DPC waters?

I may have helped convince my doctor to drop Medicare/Medicaid and convert to a Direct Primary Care (DPC) model, though the federal government’s new MACRA mandate probably had more impact than my words.

My doctor already spends more time doing administrative paperwork than she does seeing patients, and she doesn’t even do all the paperwork CMS wants her to do. Why? Because it would mean sharing ALL of her patients’ private medical information electronically with the CMS.

Her refusal means the following:

  • This year, she’s dinged 2% of her Medicare/Medicaid payment for not complying.
  • In 2018, she will lose 4%.
  • In 2020, she will lose 20%

Added to the low amount Medicare/Medicaid pays already, why would any small provider stay in the system?

Of course, DPC is not the only choice. My doctor could have sold out to the regional hospital. Last year she told me that all but a handful of the smallest providers in our city did just that. Yes, Obamacare drove them out of business. The result? Higher prices. You see, the hospital–being a hospital and therefore categorized differently–can charge more for the very same services.

So I am very glad that my doctor is looking at DPC. She has to make the decision by October in order to be set for 2018, and I plan to do what I can to ease her way.