Economic Populist Commentary

Economic commentary by a pro-capitalist, economic populist. Demand-Side Economic theory. Consists of author's economic views. Questions & comments appreciated. Dissenting views are VERY welcome and encouraged. Main "agenda" is crafting and advocacy of a "populist" economic agenda. A secondary goal is prevention of an economic Armageddon. Encouraging open discussion of US economy.

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Location: Southern California, California, United States

The author is a physician by profession, and a "student economist" by necessity. The current status of our economy necessitates the latter. The intent of this blog is to explain and discuss economics in layman terms. It is designed to promote thought and discussion. It is written by a layman. Comments and critiques of these theories and letters are welcome and ENCOURAGED. Dissenting comments are also WELCOME! They form the basis for discussion.

Friday, April 29, 2005


We definitely have a health care problem in this country. It is certainly much closer to a "crisis" than Social Security solvency. People are dying right now as a result. I have my own solution to the problem. However, I will withhold it until later in this letter. It will make more sense after my description of the current state of health care. I agree with those that believe nationalized health care will be a mess. However, so is our current system of corporatized medicine. Many have not thought of this, but HMO-dominated medicine behaves like socialized medicine in most respects.

My opinion is that we need more "real" free market effect in medicine. The 3rd party-payor system has eliminated most free market dynamics in medicine. Doctors' pay is almost exclusively determined by what Medicare pays. Private insurance companies use Medicare rates to determine physician payments. Physician reimbursement is essentially fixed as a result. If you charge more than Medicare or an insurance company allows, you won't get paid more. Furthermore, the additional amount you can charge is also determined by Medicare or the insurance company. If you don't accept the payor's rate, they will pay you less. However, that's a relatively small problem.

The bigger problem is how you get paid if you don't accept Medicare rates. Instead of the payment being sent directly to the doctor's office, IT'S SENT DIRECTLY TO THE PATIENT.

Let me elaborate. Medicare determines an allowable payment amount for every type of physician visit and procedure. They pay 80% of the allowed amount. The physician can then bill the patient for the remaining 20%. The physician cannot bill for more than that if he wants to get the full 80% of the allowable amount from Medicare. If you don't accept Medicare's payment rate as your full payment, Medicare sends the check directly to the patient. Then the physician has to try to obtain payment from the patient, which is often a disaster. So most doctors accept Medicare and insurance company payment rates. That way payment is sent directly to the doctor's office, instead of to the patient. All private insurance companies base their physician payments on Medicare's allowable amount. Thus, the federal government essentially sets fees for private insurance, as well as for Medicare. This amounts to price controls on physicians. It's essentially impossible for a doctor to survive in California without taking insurance, unless he's doing cosmetic procedures on the rich. Increased physician fees are not driving up the cost of medicine, because the federal government essentially controls physician fees.

In contrast, insurance companies and HMOs can charge as much as they like. They can also merge, so that they eliminate as much competition as possible. So patients have little choice on insurance. There are a limited number of insurance companies. Employers usually offer few choices. Doctors have little choice but to accept all insurance company demands, including their reimbursement.

The largest part of health care spending goes toward administrative costs. Only 9-19% of the healthcare dollar actually goes to paying doctors. The rest is siphoned off by HMOs and insurance companies. A recent article by New York Times columist Paul Krugman describes where the lion's share of the health care dollar actually goes. Here is a quotation from Krugman's April 29th column: "The most striking inefficiency of our health system is our huge medical bureaucracy, which is mainly occupied in trying to get someone else to pay the bills. A good guess is that two million to three million Americans are employed by insurers and health care providers not to deliver health care, but to pass the buck to other people." (The article can be found at the following link: I would paraphrase this slightly and say that 2-3 million Americans are employed by the health care industry to determine how to deny payment for medical care.

Physicians cannot collectively bargain. In fact, if physicians even discuss rates among themselves, IT'S AGAINST THE LAW. It's an antitrust violation. Health insurance companies can merge until they completely control the market, and it's legal. But if 10 physicians (who are not in the same group) get together to discuss reimbursement rates, THEY ARE BREAKING THE LAW.

We have a healthcare market that is privately owned. However, it behaves like socialized medicine. Patients have little choice, as well as having little monetary incentive not to overuse services. Doctors have little monetary incentive to provide better service. They won't be reimbursed any more. In fact, they may actually make less. A surgeon who performs more surgery will be removed from most HMO provider lists. He costs the HMO more money. HMOs pick providers based on cost consideration alone. Surgical outcomes have little effect. More surgery means more physician and hospital payments. More payouts mean less profit for the HMO. If the 1st surgery went poorly, HMOs can simply delay or deny further treatment. Eventually the patient just gives up.

I know this, because I was a staff physician at an HMO, as well as one of their patients. When I ruptured a vertebral disc in my back, they referred me to their limited group of spine surgeons. They also knew that none of them would operate, so they'd never have to pay for it. I ultimately bought a 2nd type of insurance and it was eventually paid by them. Interestingly enough, the surgeon who finally performed my spinal fusion had previously been one of the HMO's providers. He was de-selected because he did too much surgery. He was costing the HMO too much money. He was providing too much necessary medical care.

HMOs receive their payment at the beginning of the month. The less of this they spend on patient care, the more they have left. Less medical care increases their profits. HMO's monetary incentive is to provide as little care as possible.

You might think providing bad medical care would cost more money in the long run. It does not. There are several reasons for this. Most HMO physicians receive fixed compensation from the HMO. Most are paid salary, or they receive a capitated monthly payment from the HMO. They are paid the same amount regardless of how many patients they see. It doesn't cost the HMO any more money for the doctor to see the patient. In addition, hospitals are often paid a capitated rate as well. So it doesn't cost much more to re-hospitalize a patient because of bad medical care. So there is little incentive to hire good doctors, only cheap ones.

If a salaried HMO physician spends too much HMO money on medications or lab tests, they fire him. (I was one such physician.) If a specialist does too many procedures, he's deselected. If a patient requires an expensive treatment, the HMO delays treatment as long as possible. The patient may disenroll if the delay is long enough. The patient may also DIE! When an extremely ill patient dies, the HMO SAVES money. They don't have to continue paying for expensive treatment when a patient dies. It's in their best financial interest to let sick patients die. Their "authorization request" protocol was designed exclusively to delay treatment, which saves them money. I had one such patient. Her treatment was delayed through the HMO's "authorization request" protocol. It worked here. The patient died before she cost the HMO much money. They did, however, get her Medi-Cal premiums for a short time.

You might think an HMO would be concerned about medical liabilty for providing poor medical care. You would be wrong. Only doctors can be sued, even if an HMO vetoes their medical decisions. HMOs CANNOT BE SUED FOR MEDICAL MALPRACTICE. They have been excluded by law, first by ERISA, then by Clarence Thomas and the Supreme Court. (The HMO party line is "HMOs don't practice medicine.")

This brings me to my "solution" to the health care crisis. It's goal is simply a return to a level playing field, and a return to a REAL free market. I have posted this letter elsewhere, so I may be repeating myself. Here's my letter:

I DO have a simple solution to the healthcare crisis. But I'd leave it out of the debate because it will not be put through in the near future. Few people would accept my idea as THE solution because it is too simple. It is to repeal one piece of legislation passed in 1974. It is part of the ERISA legislation. It's simple.


This was part of the patient's rights legislation proposed in Congress, but opposed by Republicans and healthcare insurers when the Bush plutocracy first came to power. The only part of that legislation that worried HMOs was the part about ending HMO exclusion from malpractice and allowing litigation against them. The same litigation M.D.s face when they are told what medical care they can provide by HMOs that claim they don't practice medicine.

Ending HMO exclusion from medical malpractice would end HMOs. Doctors would control medicine, not CEOs. We would have a medical system that profited from providing care, rather than withholding care. Doctors might err in the direction of overtreatment. But HMOs profit by withholding treatment. Would you rather be in a system that encourages treatment of disease, or one that discourages treatment?

If we reduce the control health insurers have in medicine, we will reduce the amount of money they siphon off. Patients with more freedom of choice can make decisions based on cost vs. benefit, instead of having that choice made for them.

Having the government give money to health insurance companies to pay their CEOs higher salaries is not the answer. Insurance companies make money by taking your premiums. They lose money paying for medical services. What kind of incentive do you suppose they have? The profit motive of insurance companies is in complete conflict with providing healthcare.

Additionally, we have more than just a problem with the high cost of healthcare. We have a problem with receiving medical care when we pay the high cost. I see THAT as a bigger problem. What good is low-cost health insurance if it denies essential medical care? What good is an insurance card if it provides no real coverage?



Blogger AnonymousIsAWoman said...


This piece hit so close to home for me.

First, as a matter of principle, I believe that America does not have a health care crisis per se. Let's label it correctly for starters. There is a health care delivery crisis. America has a dazzling array of technological advances to treat and cure illnesses that only a few years ago were a death sentence, such as many cancers that now routinely are kept under control or put into remission.

More people are living healthy lives even with diseases like HIV/AIDS. That would not have been possible 20 years ago.

But getting access to basic health care services is becoming a grueling ordeal for many ordinary people. Those in HMOs, and even pay-for-service PPOs, find it impossible to get appointments for routine care. It takes 6 months, for example, to get an appointment for a routine screening mamogram. How many women just give up in frustration and don't get checked because of this?

And the culprit is not the doctor with the overcrowded office and not enough time in the day. It's the insurance companies and HMOs that discourage good preventive care service because they are paid a flat fee and have a vested interest in paying for less doctor visits.

Right now we have the worst abuses of socialized medicine but with profits going to corporations who are accountable to nobody. As you point out, they can't be sued. Since they are private companies, not politicians, they can't be voted out of office by disgruntled patients (at least, in theory, when socialized medicine doesn't measure up, there's some politician you can complain to and threaten not to vote for, who can lean on the local bureacracy.)

Secondly, some insurance companies refuse to pay for known treatments that can save lives because the companies deem them "experimental."

This happened to my husband 10 years ago when he needed a bone marrow transplant for non-Hodgkins lymphoma. He was only in his 30s at the time and an excellent candidate for this procedure. But, the night before he was supposed to enter the hospital for this treatment, his insurance company called to tell us they were going to deny the claim.

I took him into the hospital and told his doctors that I would find a way to pay, but they were going to go ahead.

Fortunately, I work for an organization that had excellent benefits and my insurance company not only honored the claim, but would probably have sued his much smaller insurance company for the difference.

His company had deeper pockets and more lawyers than I did. But not more than Blue-Cross Blue Shield, who, by the way, was facing congressional scrutiny for denying the same kind of treatment to government employees. They were in public view and so on good behavior at the time (God bless former Colorado Rep. Pat Schroeder who was investigating them).

We were extremely lucky. But oh the heartache that awful night when I heard those dreaded words from the first insurance company. It left me with a very bitter taste in my mouth for that industry.

And I've heard complaints about insurance companies, similar to your remarks, from friends who are doctors and dentists.

It's the insurance industry that is creating the crisis and needs the reform, not the medical profession.

7:15 PM  
Anonymous shamelesssocialist said...

Thanks for an interesting piece that explains the healthcare situation from a Doctor's point of view.

While I agree with many of your points I have to disagree with your statement that a nationalized healthcare system would be disasterous.

Your solution does not address the fact that 45 million plus U.S. citizens have no healthcare at all. These are not "indigents" but simply working people that can't afford the cost of insurance. In addition, those that do have insurance often can't afford the deductibles so avoid seeking treatment until their condition worsens and they are forced to.

Your solution does not provide a solution to the affordability of healthcare for the average working person. Every other industrialised nation offers some form of socialized medicine to its citizens because that is only way to keep it affordable. The profit motive has to be removed.

8:29 PM  
Anonymous teledude said...

Great article! You nailed it. The third party payor system is the culprit. We need to institute some real market economics to health care delivery... and I like your idea about eliminating the Malpractice exemption for HMO's. Now if we can just get you off this tax the rich business.... :-)

6:10 PM  
Blogger unlawflcombatnt said...


Thanks for your comment. It's nice to see we agree on something.

I think the malpractive exemption is just another way to protect corporate America from responsibility for it's own malfeasance. An HMO can deny a life-saving treatment that a doctor prescribes, and then leave the doctor 100% liable for the HMO's denial. Not only is it unfair, it allows HMOs to control how medicine is practiced, instead of doctors. Removing the malpractice exclusion from HMOs would finish them.

If we could remove HMOs and insurance companies from the equation, both doctors and patients would have more control over medical care. Patients actually would make some decisions based on costs.

Without HMOs and insurance companies, pharmaceutical companies would never be able to charge the prices they charge. Individuals simply wouldn't pay the exorbitant price for some drugs, if it was coming out of their own pockets. Doctors would prescribe the cheapest effective medicine, rather than the one they received the latest sales pitch on.


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