Tuesday, May 28, 2013

Lump-sum Health Plans? Why not Lump-Sum Grocery Plans?

Reader W.J. writes: “You may talk about it in your book but I have not finished it. Are lump sum payments for bundled services an effective means of reducing Medicare costs (in comparison to the fee for service model) and if so, do the Medicare cuts in Obamacare adequately accomplish this goal? Or will they have the effect of undercutting incentives to providers no matter how they might be implemented?
W.J., the problem with a lump sum payment plan can be illustrated with a simple analogy: why not a lump-sum grocery plan? Why don’t you give $6,000 to the grocery store at the beginning of the year, and then they are required to provide you with whatever groceries you need for the entire year?
Right away the arguments over what you really ‘need’ break out; the supplier’s and the customer’s day-to-day interests become diametrically opposed.  The customer wants the finest cuts of meat, plus caviar and champagne every day, whereas the store will do whatever it can to deny you anything more than the bare minimum required to keep you from starving. The supplier has every incentive to cut corners, neglect quality and and reduce quantity provided. The store can’t afford to go bankrupt honoring its commitments.
Which is why no grocery store or chain offers such a plan in the market.
If the government were to decree that all grocery stores must offer prepaid food plans, then the grocers would collectively spend millions of dollars negotiating with politicians and government agencies for exemptions and permission to limit what must be covered under The Plan.
Lump sum payments for bundled medical services will indeed have the effect of giving ACOs (Accountable Care Organizations) the incentive to provide the least care possible. Moreover, some providers will go out of business when they find that a small number of chronic or seriously ill patients that they were forced to accept are consuming so much of the provider’s resources that they are taking losses consistently over the long term. This will lead to shortages of provider organizations and services.
In a free market, prices inform the consumer of the relative scarcity of the things he wants so that (s)he can allocate his/her money as he judges fitting; the grocery store or any other supplier has every incentive to please the customer, even the low-income customer (see: Wal-Mart). Every customer’s shopping basket contains a different mix of products in it in accordance with that customer’s needs, wants, priorities and resources. But when it is not the customer’s money being spent due to government ‘planning’, then conflicts are maximized, politics get corrupted and the economy cannot function efficiently; it ends up costing more to the economy as a whole to feed a family than before the government created The Plan.
There is no economic model that can achieve better results than the free market, where knowledge is distributed, information is optimized through the price system and people cooperate voluntarily for mutual benefit. It is the trillion-dollar government interference in the health care market of the past 40 years that has created the crisis.
If the political reality is that government is taking money from taxpayers for the ostensible purpose of promoting the general welfare, then whatever money thus spent should be put directly into the hands of the consumers who have the most direct interest in the outcome: patients in the case of health care, parents (via vouchers) in the case of education. No strings, conditions or features of products or services to be covered or included should be dicated by politicians who lack both the general expertise and the specific knowledge to be in the position to make better decisions than the millions of free citizen actors in market, each of whom has specific, individual needs.
As I wrote on page 69 of ‘Pull the Plug on Obamacare’, only 13% of health care dollars spent in America are currently under the direct control of patients. The closer that comes to 100%, the better off we will all be.