"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." -Mark Twain

That fee-for-service medicine is a cause (if not the cause) of the "health care" cost explosion is a matter of received wisdom for establishment policy wonks. Consider these recent examples:

"There is widespread agreement among policymakers, payers, and health care leaders that the current fee-for-service method of paying for care is one of the drivers of the unsustainable growth in health care costs." Hospital Readiness for Population-based Accountable Care, Health Research & Educational Trust, Chicago: April, 2012 

"This antiquated model [fee-for-service] is the culprit behind exponential health-care cost growth." Judith Barnes, Director of Health Policy, Bipartisan Policy Center, The Atlantic, "Moving Away from Fee-for-Service," May 7, 2012 

"The current fee-for-service system raises the cost of care by 20 to 30 percent for services that provide little or no health benefit." Victor R. Fuchs, Professor Emeritus of Economics and Health Research and Policy, Stanford University, The New York Times, Room for Debate, "Competing for Better Outcomes and Lower Costs", June 28, 2012 

"A new study suggests that global budgets for health care, an alternative to the traditional fee-for-service model of reimbursement, can slow the growth of medical spending and improve the quality of care for patients." David Cameron, Harvard Medical School Communications, Harvard Science, "Moving beyond health care's fee-for-service, Global budget payment model lowers medical spending, improves quality," July 11, 2012 

Really? Then why aren't the costs of haircuts, dry cleaning, and lawn care also overwhelming the economy? These services, like virtually all services in a free economy, are provided on a fee-for-service basis. With all due respect, the conventional wisdom has it completely wrong. The problem is not how charges are generated. The problem is how they are paid.

The total cost of "health care" is calculated as shown below:

N x U = C

Where:

N = Total demand for service
U = Unit cost
C = Total health care cost

Whenever potential consumers of any highly desirable service are shielded from the financial consequences of the consumption decision, demand for that service will be virtually infinite.

Insurance programs and plans that insulate patients from the real costs of medical care (especially Medicare and Medicaid) are the primary cause of exploding health care costs, not fee-for-service medicine. National health expenditures in the U.S. reportedly reached $2.7 trillion in 2011. Of that amount approximately $555 billion was expended by Medicare and $398.6 billion by Medicaid, both of which are technically bankrupt. Moreover Medicaid, which consumes an average of 21% of state revenue, threatens to bankrupt states from California to Illinois and beyond.

It is time to face the music and admit that the insurance model adopted from other casualty loss protection products simply doesn't work as an effective way to pay for medical care. Claims against an automobile, homeowners, or life insurance policy are initiated as the result of an external event over which the insured has no control such as an accident, a fire, or death. In the case of insurance for medical services, the insured controls the claims initiation from start to finish. This is a recipe for disaster.

As Medicare and Medicaid are propelled by immutable economic laws and unforgiving demographic realities toward their mathematically-inevitable demise, defenders of these so-called "entitlement programs" have redoubled their efforts to conceal health care costs from patients by expanding socialization of those costs. "The Patient Protection and Affordable Care Act" manages to worsen a very bad situation on both the demand and supply side of the total expenditure equation. It fuels service demand ("N") by expanding the number of "insured" people even as its resource-consuming regulations constrain health care delivery and drive up unit costs ("U") for hospitals and physicians. 

Albert Einstein once defined insanity as "doing the same thing over and over again and expecting different results." The Patient Protection and Affordable Care Act" is hideously misnamed public policy insanity. It is time to rethink our health care assumptions before the nation spends itself into oblivion in pursuit of an impossible dream. It is time for a Plan "B".

FJB


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