03 May 2008

The Failure of HMO's

One night 23 years ago, just before I turned 18, I was walking to the convenience store since my rust bucket of a car wouldn't start (I bought it for $200.00 what did I expect right?). To make a long story short, I was hit by a drunk driver and ended up in the Intensive Care Unit for about 2 weeks. It would take another couple of weeks in a regular room before I would be allowed to go home. Total Bill .... $275,000.00, got the bill shortly after I turned 18, so I was now "legally responsible for it". I had no insurance, only a measly $10,000.00 PIP (Personal Injury Protection) on my car, but
I wasn't driving my car (they paid anyway).
I was standing in front of the mirror in my bathroom, shortly after taking a shower, looking at my shattered face with tears streaming down my face contemplating what the hell was I going to do to take care of this huge hole in my nose, and this massive hole in my wallet called a hospital bill. I could no longer do Tile setting (what I was doing at the time) because of injuries to my back, hell I could barely stand up straight from the abdominal surgery I had just had to put my stomach and pancreas back together (and the removal of my spleen). To top it off, I could just barely use my left leg or my left arm (which was dislocated). I ran some warm water to rinse my face, I didn't want my Mom to see that I was upset when all of a sudden a blood clot on my nose dissolved and blood started pulsating out of the middle of my nose and on to the mirror in front of me. Shocked I grabbed a towel and put it over my face and yelled out, Maaaaaooom!!!
She called the Doctor that did the re-constructive surgery on my face in and he told us to come into his office and he would take care of me right away, he explained to me that he didn't take care of it that fateful night, because he was busy putting my forehead, chin and other areas of my face back together and basically ran out of time after 20 something hours of surgery. After a short office procedure, he took a pebble that had embedded itself in my nose out, cauterized the offending vein and did a fantastic job of fixing me up, and straightening out my nose.
We went to the hospital the following week to see what we could do about the bill. We explained that I was only going to get $10,000.00 from my PIP insurance, and another $10,000.00 from the Drunk Driver's insurance, and that was it, we had no other insurance and no money to pay such a massive bill, and I was unable to work at the time due to my injuries. The hospital then proceeded to contact all the Doctors, they accepted something like 5 cents on the dollar each and the Hospital wrote off their portion of it and that was that. I was no longer responsible for almost $300K in medical bills.
The reason I tell you this story is to illustrate, that I wasn't thrown out in the street. I wasn't refused treatment because I was poor and uninsured. I basically had access to the best health care system in the world. So first things first, let's take the "John Q" image out of our heads, because THAT is not reality.
The video above starts with John McCain's vision of how to fix the Health Care system in the U.S. He is then summarily attacked by the left on the fact that they feel that his policy's don't address things like basic coverage, and 'minimum standards', being from the left they simply do not understand things like 'market forces', it's a completely foreign principal to them. We can only fix the problem, if we understand how we got to the mess that we have today.
People who think we have a lot of economic problems today, definitely didn't live through, or remember the late 70's. Especially during the Carter Administration. We had about double the unemployment figures, four times the inflation rates and Interest rates to buy homes, was 3 times what it is today. As you can imagine back then, people were looking for any possible way to save on their expenses. In this kind of backdrop most people purchased an Indemnity form of health insurance that usually cost about $150.00 a month for a family of 4. The way that it worked was a little complex; you got sick, you went to the doctor, you paid the doctor an office visit. Back then it was anywhere from $25 to $50.00, you make sure you save your receipts or canceled check, done. You got a prescription, your medicine was maybe $10.00 to $25.00, paid for it and saved the receipt. Once you paid out about $250.00, anything over that would be reimbursed to you on an 80% Basis. Once you spent between $500.00 to $2,000.00 out of pocket, depending on the quality of the policy, the Insurance company would take over and pay 100%, up to about 1 Million, again depending on the quality of the policy. Clearly insurance wasn't to be used for the 'minor things' it was only to be used for absolute emergency's. Something like what happened to me.
In the backdrop of the economic upheavals of the 70's, HMO's which originally came out in the '50's started becoming more popular. The promise of the HMO was simple. Your Premium was about the same, possibly a bit higher, but instead of paying up front, filing claims, waiting to get reimbursed, save receipts, all you had to do was pay a Co-payment. See the Doctor, it's only $10.00, go to the Hospital, it's only $50.00 a day, done. There was no forms, no paperwork, no headaches. Seemed like the perfect solution to the Health Care problem. HMO's believed that they could 'manage' health care by providing incentives to the doctors for providing preventative care. An good example of preventative care is Diabetics. Preventative care in this group can have huge cost savings in the prevention of things like Amputations, blindness and other maladies associated with Diabetics. HMO's started having a problem though; whereas before, people would only go to see the doctor when they had a serious problem, like their kids have a fever. Now it's only 10 bucks, no big deal, so they started going to see the doctors as soon as the kids got a sniffle, and demanding Antibiotics to boot! (I'm not even going to go into THAT problem). The point is, people started over using the system, much more often than the HMO benchmarks, which were based on the number of visits people had made under the old system of indemnity insurance, so they had to adjust. The 'adjustments' have been moving skyward for 3 decades now.

A good analogy is to think of your Auto insurance. You pay about $1000.00 a year. If your car is destroyed, they give you the value of the car. Well imagine if congress passed a law that said that your Insurer now has to cover your Oil changes, replace Batteries, Break Pads, any mechanical breakdown, repair ripped seats, repaint your car every few years, replace burned out lights. Do you think your insurance would still be only $1000.00 a year? It would probably triple! At that point, you would probably go to your insurance company and say, hey "I can pay for oil changes I just want basic inexpensive insurance that pays for the stuff that's too expensive for me". They would then say, sorry, Congress says we HAVE to cover all this other stuff. Is this what we've gotten to. Americans are the wealthiest group of individuals on the planet. Your tell me that they can't pay for a Doctor visit, without someone else paying for it?
If you can indulge me for another moment I'd like to tell you another personal experience. I recently called a doctor that had been referred to us to help us treat our son who has Autism. After explaining to me what they do, I agreed that this might help my son, so I asked how much it would cost. He asked what type of insurance I had and i explained that my insurance, just as most insurance, doesn't pay for Autism, I would have to pay cash. He explained that he normally charges $250.00 for the initial evaluation, then $85.00 per session and recommended 2 sessions per week. I told him that I couldn't afford that, and if he could give me a cash discount. He dropped the initial consultation by $50.00, and the per session fee by $10.00. I then asked how many people he had in his billing dept. He said he had 2 very capable girls. I told him, "Listen doc, Not for nothing, but the truth is at the end of each visit with you, I'm going to write you a check or give you a credit card. You're not going to have to utilize your wonderful staff for me, so they can be chasing dollars due from another patient. You're not going to have to wait 2 or 3 months of fighting red tape with the Insurance Companies or Medicare, your going to have the cash immediately to do what ever you want with, Can we drop the Initial consultation down to $150.00 and the subsequent visits to $65.00?". He paused for a bit, but then agreed. I then went further and explained that I take every Tues. and Thurs. off to take care of my son, and my wife takes every Mon, Weds, and Friday off to take care of him, would it be possible that you can teach us what to do, give us a plan, and we'll just come in once a month for him to review and let us know if we're on the right track. He said that was a wonderful Idea, a little every day would be worth much more than 2 half hour sessions a week. If this was all covered by insurance, would I be as motivated to save some money? Probably not, but I'm saving $8000.00 a year, and my son is progressing very well. While YES this is a very unique situation, I share this with you to illustrate what can happen when market forces are re-introduced into a system where for a long time, there were none.
So here's the whole point. The reason the Health Care system has gotten completely out of whack and out of touch with your average person is because as health care costs began to rise, Doctors found it necessary to start hiring medical billing specialists to handle getting reimbursed by the insurance companies. You know, that annoying little task that most Americans didn't want to handle, well it turns out that it's easy for us, because we simply make our co-payments, but it's not so easy for the doctors. As the HMO's made it more difficult for Doctors to get paid, they hired more Medical Billing Specialists, and so of course, they had to compensate by charging more for their services. It isn't uncommon to find anywhere from 1 to 3 Medical Billing specialists in your average practice, and usually those people make around $30,000.00 per year plus taxes and benefits. When all is said and done, that's about $50,000.00 per year in costs that the Doctors have to incur, just to take care of billing. These expenses have to then be calculated back into the cost of the average office visit. A busy office that has an appointment every 15 Minutes, will see about 32 people a day, figure 50 weeks (have to take vacations right?), that's about 1600 patient visit per year. If that same office has 2 billing specialists, you would have to charge $62.50 per visit just to cover the cost of the Billing Specialists, about another $62.50 for the Nurse and Secretary, another $62.50 for Rent and Insurance, and another $62.50 for the Doctor himself, which brings us to the average of $250.00 for an office visit today. Using this example, If we could cut the Billing Specialists out of the equation, that would reduce an average office visit down by about 25%. The question is how do we do this? Some advocate to use the French Model. All insurance is paid via a clearing house, so the doctors only deal with a single entity to process billing. It's not uncommon to go to a French Doctor, and he is the only one in the office. After he sees you, he processes your billing via the Electronic Payment system and he's done. While Initially, this would definitely cut a MASSIVE amount of waste in the system, you're still left with the same underlying problem which is, that someone else is picking up the tab. There's zero incentive to cut waste and excessive utilization out of the system. Once you have your initial costs savings, Healthcare inflation will continue unabated, because again, they're not billing YOU, they're billing some faceless multi-billion dollar Insurance company or multi-trillion dollar government. Once an inflexible and self serving system like this becomes entrenched, it becomes increasingly unresponsive to the individual needs of the patient. Everywhere that socialized medicine has been tried, the end result has always been rationing of care, long wait times and in many cases people dying, while waiting for treatment, either as an endemic part of the system as in Canada, where countless die in huge waiting lists for many 'common' procedures, or in shortfalls in emergencies, like in France where 14,000 died in the heat wave of 2004.

A good friend of mine is part of the problem that I'm talking about here in the U.S. Self employed, he pays about $1200.00 a month for a top notch HMO that covers himself, his wife and his 2 kids. I pointed out to him that he could buy a 'Catastrophic' policy for only $300.00 a month and save himself $10,000.00 a year. he then exclaimed, "yeah, but that has a $5000.00 deductible!" I told him, are you kidding me? You're saving $10,000.00 a year! When was the last time you even went to the doctor? He said he couldn't remember, but decided to keep his plan anyway. People like him are the problem, because since the Doctor knows that HE is not paying him, it's his Insurance company paying, they don't have to be competitive. They don't have to care about what their price is, and only once we get that dynamic back into the system, will we see real change in the way that things are done.

Keeping this in mind, direct payments under $500.00 to doctors from Insurance companies needs to be outlawed. If people went back to the old system en masse to where they called got a quote, shopped around, that would go a long way towards putting Market Forces and price sanity back into the system. A way to insulate people like my friend would be to create a new type of policy. Replace HMO's with MSA's or Medical Savings Accounts. Here's how it would work. Insurance companies can offer it as a package deal and charge the client the same amount per month that they're charging now for an HMO, with the difference being that the premium will only be, like in my friend's case, $300.00 and the $900.00 a month balance goes in the MSA. MSA accounts would be linked to a 401K, and once the balance exceeds $5000.00, anything over that amount would go into the 401K. Insurance companies wouldn't be allowed to make exceptions for things like Autism, like they do now, and everyone should be required to buy a policy, even if it's just a basic Catastrophic plan with no MSA attached. The reasoning behind this would be to keep hospitals from being on the hook for a couple hundred thousand, like what happened to me. This should help to keep costs down. The Poor should also get catastrophic policies paid for by either employers, or by the government if they can't afford their own policy and are unemployed. Smaller businesses of less than 25 employees should have part of their payroll taxes defrayed to help with the costs, based upon the profitability of the company. The poor should also get MSA accounts, funded by a combination of Employers, and Existing Social Security and Medicare taxes. Keep in mind that the Government ALREADY pays for Medicare, and this would simply be a diversion of existing funds, new taxes would not be needed to fund this.
The reason HMO's and PPO's need to be eliminated, is because with about half the population enrolled in either an HMO or PPO, it takes those shoppers out of the market. They are not out there shopping their doctors, asking for price breaks and most of all, those people still require the battalions of Billing Specialists to be employed by the doctors. With the Billing specialists still on the Doctors payroll, it will be difficult for them to lower their prices.
The dictionary defines Insurance as "coverage by contract in which one party agrees to indemnify or reimburse another for loss that occurs under the terms of the contract" Instead of letting us pay for something, then get reimburse us for it, the HMO's have redefined insurance to take on a MUCH larger role in our lives than we would like to admit. HMO's have themselves become a form of "social program" that decides, what doctors we get to see, what specialists we get to visit and what particular things they will and will not pay for. We need to put these decisions back in our own hands and remove this "overlord" type of system that makes far too many of our own personal decisions for us. Switching to a Catastrophic Policy model in combination with MSA's would go a long way towards giving us back our freedom of choice and as an added bonus, better retirement security.


  1. Well, you made some good points. Right up until you started forcing people to have insurance, forcing government to subsidize for the poor, and forcing employers in there too.
    So close, and yet so far away.

  2. Here's the thing. There's a government mandate that says that a hospital MUST give you treatment, regardless of your ability to pay. If I'm running a hospital, and my profit margin is 10%, but 10% of my clients can't pay then I'm not losing 10%, I'm losing 100% of my profitability. Because of this, I have to double my profitability, therefore requiring everyone else that DOES have insurance to subsidize those who don't.
    So take your pick. Either you subsidize them the inefficient way, by forcing EVERYONE to pay more for their insurance and health care, or you subsidize the source of the problem. I figured, telling hospitals NOT to treat these people would never be an option to the American People.
    Truth is, the working poor ALREADY pay almost 20% of their pay (half by them and half by their employers) into Medicare & Social Security. By tapping those resources, we can simply redirect existing revenues for a better outcome, without the need to raise additional taxes.

  3. I think you have the choice between these two..Either you subsidise them the inefficient way, by forcing EVERYONE to
    pay more for their insurance and health care, or you subsidise the
    source of the problem..


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