Simple Ways to Cut Health Care Costs

Which the bureaucrats prevent.

Fixing our health care system wouldn't be nearly as hard if the proposed legislation didn't cost so much.  The smallest estimate we've seen for the cost of the law being discussed in the House of Representatives is $1 trillion over 10 years, but everybody knows that medical programs always cost a lot more than the initial estimates.

We at Scragged have been criticized for cynicism and negativity about our health care dilemma.  Fixing health care is not nearly as complicated as many people make it out to be, but all the simple solutions would take a great deal of money away from politically-connected players.

Anyone who thinks about the situation will realize that we could cut costs a lot if we could get the people who benefit from the current set-up to go along with having their incomes cut.  With costs under control, it would be easier to cover more people. As much as national leaders like Nancy Pelosi like to blame greedy insurance company executives for rising costs, they are far from the only self-interested parties.

Let's take a look at fundamental reforms that would actually make a difference, and whose oxen they gore.

Make Users Pay

The biggest problem with health care is that most of the people who use the system do not pay for using it.  People on Medicare, welfare recipients, and many people with ordinary health insurance know that someone else pays their medical bills.  Naturally, a great many people thus are incentivized to use the health system more often than they would if they had to pay.

This boosts costs tremendously, in two ways: - health providers have no incentive to cut costs because their customers get the money from somewhere else, and customers have no incentive to cut back on how many medical services they use or consider finding a less expensive provider.

In poorer countries such as India, health insurance plans as modern Americans know them simply do not exist.  Instead, the health care "system" operates as it did in America a century ago: like any other service, you go to the provider of your choice, agree upon services and fees, and pay the bill yourself, often in advance.  Not being in a rich first-world nation, Indian hospitals and surgical centers must offer services at low cost to get customers at all.

As a result, competitive pressures force Indian health care providers to be both effective and efficient.  Some of the newer hospital chains offer world-class services at Indian prices without taking the difference out of employee's wages.  They're getting business from uninsured Americans who can afford to travel and some insurance companies are starting to send patients overseas because the savings can be huge.

The experience of India shows that perfectly acceptable modern health care can be provided a great deal more efficiently than in the U.S. and that throwing yet more money at the current system is no way to cut costs.  History shows that government programs which try to cut costs by setting limits on medical reimbursements don't work either - doctors game the system, the quality of care drops via rationing, people gripe, the rules change, and costs go up yet again.

If we are to attack the true source of our health care crisis - incessantly rising costs - we need to give health care providers incentives to operate more efficiently.  The only known way to get any industry to cut costs is to encourage competition for customers, which in turn requires giving customers choices and consequences.  If providers know they have to make customers happy or they'll lose them and their money, outcomes improve fast.

We've written about an acquaintance who seems to regard the emergency room as her second home.  She spends her disability check early in the month, then complains that she doesn't have the money to meet her co-payments.  She has no incentive to cut costs; she knows that federal law requires the hospital to take care of her whether she can pay or not.  She really doesn't seem to realize that the costs of taking care of her get passed on to the rest of us, and if she did she would have no reason to care.

We were questioned about our assumption that she's typical, but there has been plenty of factual reporting on the issue.  In "Austin ER's got 2,678 visits from 9 people over 6 years," the Austin American-Statesman reported:

In the past six years, eight people from Austin and one from Luling racked up 2,678 emergency room visits in Central Texas, costing hospitals, taxpayers and others $3 million, according to a report from a nonprofit made up of hospitals and other providers that care for the uninsured and low-income Central Texans. [emphasis added]

One of the nine spent more than a third of last year in the ER: 145 days.  That same patient totaled 554 ER visits from 2003 through 2008.

When any service is free, there's no limit to demand.  Perhaps the person who spend 135 days in the ER simply wanted to sit in an air-conditioned waiting room and learned how to make up convincing excuses.  Making free medical care available to yet more people will boost spending, not cut it.

The proper solution is to set up bank accounts where people can put tax-free money aside for health expenses and keep whatever they don't spend.  Poor people can have their accounts topped up by the government the same way their food expenses are topped up by food stamps.  For all the problems that food stamps have caused, driving up food prices is not one of them - other government programs do that.

Making customers pay with money they think of as their own has a powerful effect - we've seen people demand, and get, discounts when it's their money.  If enough people demanded and made price comparisons, costs would fall and quality would go up.

Wal-Mart has prospered by offering products of satisfactory quality at rock-bottom prices; the people shopping there have every ability to go to K-Mart or Neiman Marcus if they thought they could get a better deal, but they choose not to.  Wal-Mart is credited with reducing inflation by 1% per year, and yet we do not notice the quality of their wares declining constantly.

Competition is at work in the retail world, why not also the medical world?  Because government regulations keep the market from working properly.

Tax Health Care Insurance

Some businesses offer tax-free health insurance to their employees.  This is an accidental set-up which came about during WW II.

At the time, there was a labor shortage with so many men off fighting.  Normal economic rules would have forced wages up, but to keep its own costs down, the government made it illegal to raise wages to attract the few available workers.

Instead, companies offered health insurance to compete for the skilled workers they needed.  They argued that health insurance was not part of wages, but were a deductible business expense like rent or the electric bill.  This not only made it legal to offer health benefits to get around the fixed prices of labor, it made health insurance tax free to the employees.

Before employer-paid health insurance, medical services were paid for by customers; doctors and hospitals competed for business as with any other service, and most employers had nothing to do with it.  The custom of having employers pay for health care came about to get around a market distortion caused by the government.

Thus, the problem of health costs rising because customers don't spend their own money as discussed above is a reaction to government meddling in the labor market.  As with most markets, the health care system would operate a lot more efficiently and at much lower cost if government were not involved.

Make the System More Transparent

Like all government-supported monopolies, the health system guards its secrets closely; it's very hard to find out what, say, an appendectomy would cost.

We'd like to see hospitals and other medical folk post their fees for services and their won/lost records on web sites.  Hospitals claim that's unfair because some hospitals get sicker people than others, but so what?  Nobody can make sensible choices without knowledge; customers need to know about prices and success records.

Hospitals advertise for patients.  If they can advertise, they can open the kimono and tell us what they're up to.  It's amazing how a little sunshine eliminates waste! If it hadn't been for the newspapers, we taxpayers would still be paying $600 for toilet seats.

Unfortunately, because of the complex and interlocking insurance company contracts and government regulations, it's almost impossible to find out what your medical bill will be for a service before you have received it.  That makes price competition almost impossible.

Would it be cheaper for you to have your surgery at Hospital A instead of Hospital B?  Who knows?  Getting any sort of estimate is like pulling teeth.

Speaking of pulling teeth, though, the world of dentistry provides an example of price competition working.  Though many people have dental insurance, most don't, and unlike hospital emergencies most dental work can be put off for a few months or even years if need be.

Thus, patients can be price sensitive and shop around to get the best deal.  As a result, we see dentists being more responsive, friendlier, and far less expensive than normal medical doctors - and you can get their pricing over the phone before you even make an appointment.

Make Health Insurance Policies Interchangeable

In "Repealing ERISA," the Wall Street Journal discusses the advantages of offering the same health plan across many states:

Erisa allows employers that self-insure-that is, those large enough to build their own risk pools and pay benefits directly-to offer uniform plans across state lines.  This lets thousands of businesses avoid, for the most part, the costly federal and state regulations on covered treatments, pricing, rate setting and so on.  It also gives them flexibility to design insurance to recruit and retain workers in a competitive labor market. Roughly 75% of employer-based coverage is governed by Erisa's "freedom of purchase" rules.

[emphasis added]

The savings are substantial.  I worked for a small firm and was the only employee who lived in a different state.  That made me ineligible to participate in the same insurance plan as everyone else because my state's regulations were different.

This caused huge hassles every time I encountered the medical system - nobody at my employer or at the insurance broker had any idea how to deal with my state's peculiar regulations.  Getting bills paid even for covered items was an endless, costly hassle.  ERISA lets big companies offer the same health benefits to all employees no matter where they live.

Health providers enjoy lobbying state insurance boards to require that their particular specialty - podiatry, mental health services, acupuncture, chiropractic - be covered by any health insurance policy issued in the state.  The more an insurance policy has to cover, the more it costs.

Allowing any insurance company to offer a "basic" catastrophic coverage policy that could be purchased in any state would save a great deal of money, and be particularly useful for many of the "uninsured" who could afford a policy but choose not to because they think it's overpriced.

This problem is particularly severe in small states.  Getting an insurance policy approved by the local bureaucracy costs about the same in all states.  The fewer people in the state, the fewer insurance companies are going to bother jumping through the hoops to get permission to insure people there.  Fewer insurance companies means less competition and higher prices.

Keep the Lawyers Out

Medical malpractice insurance costs are rising fast enough to drive many doctors out of business.  Doctors order extra tests to be prepared to defend themselves against lawsuits.  Nobody can agree on the cost of medical litigation, but it's substantial.  Lawyers argue that the threat of being sued benefits patients by keeping doctors on their toes, but lawsuits are an extremely inefficient way to protect patients because most of the money goes to lawyers and court costs.

Setting up a board to investigate medical issues and make awards as is done with workman's compensation would save substantial sums.

As with workman's compensation, this board would eventually come to be dominated by lawyers and would start handing out more and more money, but there would be substantial savings at first.

Instead of reducing lawsuits, the current health care debate seems to be increasing opportunities for underemployed lawyers to make even more money.  The Wall Street Journal continues:

Currently, lawsuits about employee benefits are barred under the law, allowing large employers to avoid the state tort lotteries in disputes over coverage.  No longer.  As a gratuity to the trial bar, Democrats will now subject businesses to these liabilities in the name of health "reform."  [emphasis added]

Increasing the number of medical lawsuits is supposed to make the system better?  Getting yet more campaign contributions from tort lawyers will make our legislature better?

Make Blame-Free Efforts to Reduce Errors

In "First, Make No Mistakes," the New York Times reports:

In the health care debate, there is one thing we can all agree on: the importance of reducing unnecessary deaths in medicine.  Medical error causes tens of thousands of deaths each year that could be prevented by known techniques and technologies.  And all errors, even those that are not fatal, are costly: 10 years ago, the Institute of Medicine estimated that the effects of medical error accounted for $17 billion to $29 billion in domestic health care spending, and the error rate has not declined since then.

The Times explains that errors are accepted in medical practice so there's no cultural drive to eliminate errors.  This is not true in transportation:

... because that agency [National Transportation Safety Board] views every transportation death as a preventable occurrence, our roads, rails and skies enjoy an unparalleled level of safety.  After any significant accident, the board undertakes an extensive investigation, and makes recommendations to the parties involved to ensure that such an accident never recurs.  While the transportation safety board has no regulatory authority, its recommendations are viewed by the industry and the public as unbiased and therefore credible, and federal regulators usually act with haste to address them. [emphasis added]

It would seem that a Medical Safety Board should be as successful at eliminating errors as the Transportation Safety Board, but the transportation culture doesn't blame anyone for errors because investigators assume that errors are due to problems with systems, equipment, or with procedures.

When an unexplained event occurs, investigators assume that all parties acted in good faith.  People are willing to discuss what they did because they know they won't be blamed.

The usual finding is that some procedures are too complicated, others are simply wrong, or equipment may be at fault.  In any case, all parties form an alliance against errors and work together to prevent future errors by sharing information, fixing the system, and spreading the word.

In a problem-solving culture, someone who identifies a problem before an accident happens is honored.  Only in a demonstrably egregious case of provable gross negligence such as driving a train while smoking pot is there ever any personal consequence for the workers involved.

Medical culture is blame-based because medical issues involve lawyers instead of investigators.  Any medical situation may lead to someone getting sued.  In court, blame always falls on someone and that party must pay.

The blame-based medical culture gives all parties every incentive to hide errors instead of discussing them and working to prevent them in the future.  Anyone who points out a potentially troublesome procedure is shushed to protect anyone who might be liable because they already used the faulty procedure.

Transportation safety people know why their system works so successfully.  When a jet crashed in the Florida Everglades when oxygen bottles were loaded into the cargo hold by mistake and caught fire, the Justice Department spoke of prosecuting the people responsible.  The Department of Transportation reacted in shocked horror - introducing criminal liability would destroy their culture of open cooperation in problem solving and result in a blizzard of falsified records and a culture of cover-ups.  They wanted no part of the blame-based medical culture.

Reducing medical errors would cut costs; cutting costs always reduces someone's income.  Opening up the medical culture to discuss errors instead of concealing them would require protecting medical people from lawsuits; fewer lawsuits would reduce lawyers' income.  Nobody makes much money from transportation errors which makes it politically easier to eliminate them.

Match Skill Level to the Problem

It makes no sense for every patient to be seen by an MD, the most expensive player in the system.  Walk-in health care clinics staffed by nurses are springing up.  They offer low-cost care for simple situations and refer patients to more expensive facilities as needed.

Think about all the times you have needed medical care.  You may have urgently needed the highest of high-tech once or twice - when you're having a heart attack, say, or been in a bad car crash.  The overwhelming majority of your doctor's visits, though, were probably for something trivial - a bad flu, an infected cut, a deep splinter, an earache - where the medically correct answer is a pill, a pull, and a pat on the head.

There's no reason that it takes 8 years of medical training to diagnose and treat the 100 most common problems and to be able to tell when your problem is not one of those 100 and you need to see someone more senior.  More extensive use of nurse practitioners and similar not-quite-doctors would save bundles.

Unfortunately, doctors are vehemently opposed to having their lucrative monopoly compromised in this way.  The AMA works to make getting a medical degree as time-consuming and expensive as possible, on the grounds that we want only the very best and most qualified people become doctors.  Fair enough - but in that case, use such super-experts only for tasks that truly require that level of expertise.

It doesn't take an MIT degree to turn on a light switch even though it took a genius to invent the light bulb, and it doesn't take an MD to treat the sniffles.  We've already explained how to deal with liability issues for such clinics and we need to take the lawyers out of medicine anyway.

Make Better Use Of Technology

People all over the world are using new technology to delivery medical services to extremely poor people.  Poor countries can't deliver health services unless they're cheap, so researchers work hard to create innovative delivery systems.  The MIT article "Can cell phones change the world?" reports:

Four billion people now have access to cell phones, and the MIT Media Lab's NextLab program aims to develop life-changing applications for another billion set to join them within three years.  Each project is based on bottoms-up innovation - student teams begin with human needs, then work with local partners on solutions, testing, and delivery.

Rural health workers in Southeast Asia can consult in real time on a diagnosis with a medical professional in a distant city through Mobile Care (Moca), a clinical information system.  Medical data, such as a prenatal ultrasound image, can be transmitted and saved in a digital medical record.

This technology has been developed in America; why can't we use it in America?  Because physicians are paid only for office visits.  They aren't paid for consultation by email or by telephone, so why would they consider doing so?

Even if doctors could be paid for using such a system, it would be subject to FDA regulations.  There's probably nothing patentable about using cell phones to maintain and distribute medical technology; it wouldn't be worthwhile for any single company to push a system through the approval process because anybody could compete with them.  We've already explained how problems with FDA approvals and other legal obstacles are pushing medical research offshore.

MIT is also working on using cell phones to improve reading skills:

Illiterate women in India have acquired functional literacy in 34 days thanks to the Cellular + Education (Celedu) project that teaches language education via a mobile-platform java game application.

This game teaches people to read in 34 days? That technology might improve our schools a bit.

Innovation or Bureaucracy?

There's nothing wrong with our medical system that American ingenuity can't fix, but American ingenuity is no match for American bureaucracy.  We'd be better off if we chopped back the bureaucracy, but that doesn't seem to be the way the legislative wind is blowing.

Will Offensicht is a staff writer for and an internationally published author by a different name.  Read other articles by Will Offensicht or other articles on Economics.
Reader Comments
Let's also be sure that we're not buying into the premise that the government should be involved with health care. The most the government should do is make sure that the rules are fair (that doesn't mean non-discriminatory in the true sense of the word), the courts aren't abused and contracts are enforced.

Any proposals must fit within Constitutional bounds. If they don't we've accepted a false premise and will be on the wrong side of the argument from the beginning.
August 7, 2009 1:44 PM
Paul Krugman made his argument for socialization of health care in a recent post entitled Why markets can't cure health care. He says providing health care is unique: " That health care can't be marketed like bread or TV's" where private competition presumably works well. What, according to Krugman, are the differences?

This article discusses his argument and shows that he's wrong.
August 8, 2009 10:22 AM
Where has this website been all my life?
August 9, 2009 7:17 PM
The NY Times believes that medical costs can be cut; they researched medical regions for regions whose costs were below average and studied them.

Yet in studying communities all over America, not just a few unusual corners, we have found evidence that more effective, lower-cost care is possible.

To find models of success, we searched among our country's 306 Hospital Referral Regions, as defined by the Dartmouth Atlas of Health Care, for "positive outliers." Our criteria were simple: find regions with per capita Medicare costs that are low or markedly declining in rank and where federal measures of quality are above average. In the end, 74 regions passed our test.

So we invited physicians, hospital executives and local leaders from 10 of these regions to a meeting in Washington so they could explain how they do what they do. They came from towns big and small, urban and rural, North and South, East and West. Here's the list: Asheville, N.C.; Cedar Rapids, Iowa; Everett, Wash.; La Crosse, Wis.; Portland, Me.; Richmond, Va.; Sacramento; Sayre, Pa.; Temple, Tex.; and Tallahassee, Fla., which, despite not ranking above the 50th percentile in terms of quality, has made such great recent strides in both costs and quality that we thought it had something to teach us.

If the rest of America could achieve the performances of regions like these, our health care cost crisis would be over. Their quality scores are well above average. Yet they spend more than $1,500 (16 percent) less per Medicare patient than the national average and have a slower real annual growth rate (3 percent versus 3.5 percent nationwide).
August 13, 2009 10:10 AM
Gary North has an interesting article on education at

he points out that since the dawn of history, medicine has been a closed guild with high entry costs. This is part of his article:

The Greeks also had medical schools.

These programs were closed to most outsiders. A student had to be accepted. He also had to pay.

In most cases, the information was secret. The student was bound by an oath of secrecy. Here are the opening words of the original Hippocratic Oath.

I swear by Apollo Physician and Asclepius and Hygieia and Panaceia and all the gods and goddesses, making them my witnesses, that I will fulfill according to my ability and judgment this oath and this covenant:

To hold him who has taught me this art as equal to my parents and to live my life in partnership with him, and if he is in need of money to give him a share of mine, and to regard his offspring as equal to my brothers in male lineage and to teach them this art - if they desire to learn it - without fee and covenant; to give a share of precepts and oral instruction and all the other learning to my sons and to the sons of him who has instructed me and to pupils who have signed the covenant and have taken an oath according to the medical law, but no one else.

The training created a medical guild. The guild functioned as an oligopoly. It kept prices high by restricting access to the training.

This is what the college diploma has always done. It has created a guild that restricts entry by non-certified people. This keeps wages high.

To obtain the diploma, a person must pay money to the trainers. The trainers are located at one center or special regional centers. Journeying to the center adds costs. Quitting a full-time job back home also adds to the expense. Forcing students to attend pre-requisites adds to the cost. Everything is done to screen access to the knowledge.

Mr. North points out that the MIT Open Courseware program makes MIT knowledge available for free. This, he says, will have interesting effects.

We know that opening up the licensing process would lower medical costs, which is what the current licensees do NOT want.
August 20, 2009 10:38 AM
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