The Economics of Disease
Sorry for the delay in this promised blog, but when I sat down to write it, it morphed into a very ugly and complex mess. So, I have divided it into private and governmental case studies so you can better understand how the health care system has become so impossibly complex. And I mean that the health care system is close to impossible to reform. I will start at the beginning, with original private insurance, then explain how it was influenced by the federal government, then finish with the governmental-driven mess we have today.
The birth of private insurance began in 1850 when accident insurance was first offered by Franklin Health Assurance Company to cover costs of injuries to workers in the railroad and steamboat (shipping) industries. The insurance industry rapidly expanded to sixty organizations by 1866. Coverage for illness did not become available until the 1890s. Before this date, patients were expected to pay all their health-care costs out of pocket. This model of payment is now termed fee-for-service.
In the early 20th century, hospitals offered pre-paid services to individuals, which eventually led to the creation of Blue Cross Blue Shield in the 1930s. World War II would expand employer-sponsored health insurance plans as wages and prices were controlled by the government when the labor market was contracted due to the war. Because health insurance and other benefits were not counted as wages, employers used these to be more competitive in hiring the best workers. Unions were very active in supporting insurance as benefits. And more and more was promised.
Because private insurance was not available or unaffordable to the elderly, unemployed, and the poor, the federal government intervened under President Eisenhower in 1956. The name Medicare evolved from the program given to military families under the Dependents’ Medical Care Act of 1956. In 1965 under LBJ, the Medicare we have today was created under or beside the Social Security Act to provide healthcare to those 65 and older. This program is funded by a payroll tax on employers and workers, general funds, and various surtaxes. However, the demand was greater than the supply of funds. So, in the 1980s, steps were taken to change fee-for-service payment to hospitals to a DRG (Diagnosis-related Group) based payment. DRGs group together products and services such as blood tests, x-rays, surgical procedures and other exams done in hospital for one lump-sum payment. Services are identified under the Current Procedural Terminology (CPT codes) and matched to diagnosis codes (International Classification of Diseases or ICD) to determine possible payment. The severity of these ICD codes are modified according to sex, age, discharge status, and the presence of comorbidities and complications to determine what is finally paid for services rendered. The overall purpose was and is to control and reduce payments for care given to hospitals and providers.
Medicare accounts for 15% of all Federal spending and is expected to rise to 17% in a few years as millions of baby boomers age into Medicare and the tax base that supports the general tax fund shrinks. Medicare and Medicaid are already 50% of the income of every hospital in America. Medicare’s influence upon hospital healthcare is absolutely paramount. And hospitals provide most of the testing facilities and operating theaters in every community. In order to control and reduce the expense of testing done in medical facilities and control the number of procedures done in operating rooms, the Medicare has promulgated program upon program to document quality assurance, qualifying protocols which have to be followed, standardized decision-trees for referrals, and create unnecessary unfunded regulations. Hospitals are closing and providers are literally unable to stay within Medicare. The precedents set by Medicare were adopted by private companies to reduce their own payment to providers and to maintain their own profits. What is offered to the public is at a much inflated cost. But the scope of what is offered is reduced. Now mandates of the Affordable Care Act (ACA) have forced private companies into coverages that threaten their profits, so payments for the necessary core healthcare services have been reduced again. The ACA and the attempts to reform the ACA are the spark to dry timber.
More to come!
