WE’RE FROM THE GOVERNMENT AND WE’RE HERE TO HELP

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One of the most valuable lessons we can learn in business is the rule of fixing problems where they exist. Too many businesses get themselves into financial trouble by fixing specific problems with general solutions. For example, they may have employees who are producing at a rate that is thirty percent lower than they were in previous periods, so the general solution is to raise prices on your customers. The specific fix should have been to address the productivity issues first, and when those issues were resolved, and if there was still a need to raise prices, then raise prices. The immediate jump to raising prices risks the loss of customers, which may actually decrease revenues, leaving your staff with less things to do and making them even less productive. In that scenario, the “fix” became a bigger problem than the original problem.

In the case of the United States healthcare system we have been told that the problem is that upwards of forty million citizens are not covered by health insurance. Without dissecting the who, what and why of that statistic, let’s just take it at face value and work from there. The proposed solution is not to address the shortfall of those identified to be in need, rather it is to fundamentally change the relationship of every one of the 320,000,000 United States citizens with their doctor and current healthcare funding source. Essentially this results in more revenues into a very inefficient system and makes the system even more inefficient. It is the equivalent of fixing a leaky bucket by poking more holes in it and pouring more water through it. Government intervention in any business model begins a process of disconnecting the value of the service or product being offered from the cost and pricing model that should dictate the consumer price. It is the unwanted layer of cancer cells that eventually take on a life of their own and distract the organ or tissue from its original purpose. This becomes inefficient at best, and potentially fatal if it cannot be controlled or managed. We are now witnessing the end stages of that process with our healthcare system.

Just as cancer cells take on a life of their own within the tissues or organs of the body, government programs take on a life of their own as attachments to the normal business cycle. In a business model that is fully funded by taxpayer dollars, the burden of any increase in cost will ultimately be carried by the taxpayer, not the provider of services or the receiver of those services. Take the example of a small business that incurs government fines. The astute business owner would calculate the effect on his business and offset this new increase in cost with some other line item of his budget, maybe cutting back on the hours that his employees work or extending equipment upgrades by a year. Both of those options have a negative effect on the local economy due to the fact that either the employee will have fewer dollars to spend or the local equipment seller will not make a sale this year. The businesses that struggle financially are burdened by these fines to the point of closing their doors. The political and politically connected win, while everyone else loses.

The temptation is too great for the cancer cells of big government departments and services to grow out of control. That is why the founders and framers of the United States of America were adamant about limited government. It wasn’t because they had just separated from an oppressive monarchy, it was that they understood that central planning and government benevolence is a losing proposition when all of the consequences are considered. The transference of human nature from the private to the public sector does not change human nature. Ultimately the human animal will do what is in his/her own self-interest over a long period of time. A naturally generous person may give money to the homeless person on the street from time to time, but they understand that if that became their full-time job, they would quickly become needy themselves. In government controlled programs, the natural instinct to be generous is not tempered by the eventuality of being broke personally because it is not your money that you are giving away.
In 1937, the original social security tax was 1.0% of income. In 1966, the original Medicare tax was 0.35% of wages paid by the employee and the same percentage paid by the employer. In 2017, the Medicare tax on the wages of all employed individuals in the United States is 1.45% for the employer and 1.45% for the employee. The Social Security tax in 2017 is 6.2% each for the employee and the employer. Not only have both programs grown in cost well above the pace of inflation for all other goods and services sold in the United States over the same period, both programs are also broke. In the meantime, the government’s willingness to pay more for medical goods and services than the actual value the consumer would bear, has hyper-inflated the overall cost of healthcare to a point where the system is in a crisis. When the vast majority of your customer base cannot afford your prices, you have created an exclusive industry that only serves the wealthy. Introducing another layer of bureaucracy to an already bureaucratic heavy mess, is like injecting more aggressive cancer cells into an already cancer ridden organ.

In an industry as personal and emotionally charged as healthcare, centralized government defining the value of products and services makes even less sense than it does in any other sector. We are told that this is too serious of a problem and affects too many people to be left to the natural devices of the natural market and the benevolence of charities. Ironically, virtually all of the hospitals that were originally built in the United States were built by religious organizations for charitable reasons. If you want to see the effect of secular and government intervention into an honorable endeavor, you need look no further than St. Mary’s hospital in Rochester, Minnesota. Considered one of the best medical facilities in the country, if not the world, St. Mary’s is the hub of one of the most expensive medical cost areas in the United States. It is unlikely that Mother Alfred Moes and Dr. William Mayo (founder of the Mayo Clinic) started St. Mary’s hospital in 1889 with a long-term vision of making healthcare unaffordable for everyone in a 60 mile radius of Rochester. In fact, the exact opposite is true. They committed their lives to providing the best healthcare to all in need. Our Judeo-Christian foundation makes human life precious and valuable. It is the very understanding of that trait that makes healthcare such an inviting target for cynical and unscrupulous politicians.

Everyone seems to have criticism, but nobody has a solution. So, what is the solution? When I started my career in 1987 it was as the original Sports Medicine Coordinator of a small-town hospital in southern Minnesota. The hospital had hired a gifted young orthopedic surgeon by the name of Dr. Jeff Garske in April of 1987. One of Dr. Garske’s requests when he was hired was that the hospital start a Sports Medicine program. Although nobody knew what that exactly meant at the time, they put out a search for a “Sports Medicine Coordinator” in the summer of 1987. I applied for the job and was hired in August of 1987 fresh out of school. As the program got started and advanced, I was directed by the Hospital Administrator to try and offer more services that would be covered by insurance. This quickly became a point of contention between me and my employer because I realized early in my healthcare career that insurance covered services and products were perceived at a different level of value than fee for service/product offerings. My contention at the time was that we needed to do exactly the opposite and develop services that were affordable out of pocket for the consumer. Although my reasoning was not fully developed in 1987, it was basically that the true value of whatever was being offered could not be realized with the pollution of a third party that was paying all or part of the bill. The real smart people won that battle, I went on to the next step of my career and healthcare proceeded to become the insurmountable mess that it is today. To be more specific, the exact opposite of what I was advocating for in 1987 is the standard today. Health insurance covers regular check-ups and minor regular care, while imposing inflated premiums to pay for those services and massive deductibles before emergency and surgical procedures are covered. When it comes to the more serious maladies that used to be covered by what was once called “major medical” insurance, there is a disincentive to have these things done because of the financially onerous deductibles. Conditions are left untreated until they become worse and more expensive and personal responsibility takes a backseat to government regulation.

Somewhere amongst the layers of administration, regulation and government management of healthcare lies the true cost of providing care to individual healthcare consumers. The small percentage of dollars that goes to actual patient care would shock even the most ardent supporter of government controlled healthcare. I wish I could be more specific, but by design, it is virtually impossible. If you are a business owner and feel that your CPA has a convoluted way of reporting your business performance numbers to you, healthcare is infinitely worse. I have analyzed large hospitals with all of the normal tentacles of services and departments. It is a daunting task, but possible. When costs are more related to the fiscal threshold of the payer rather than the value to the consumer, then the consumer becomes almost irrelevant in the process. If I know that a nurse working on a patient care floor of a hospital is paid $25 per hour with an addition of 30% to cover payroll taxes and benefits, then an hour of that nurse’s time has a cost of $32.50. In a typical hour, if one-half of that nurse’s time is billable to patient care, then he/she has an actual cost of $65.00 per hour. This is a definable and manageable cost to deliver a specific healthcare service to a specific healthcare consumer. In a 40 hour work week, the hospital that employs that nurse, must bill and collect $2,600 in order to break even and cover their costs. On a more macro level, the hospital may employ 100 nurses in the same capacity, so it must bill $260,000 for that week to recover their costs. The result of managing the nursing staff to a 60% productive (billable time) level would reduce this cost to $216,667 which represents nearly a 17% reduction in cost. Unfortunately, the way it works in healthcare is that the hospital puts pressure on the funding mechanism to increase their payment for the services supplied by their nursing staff. An opportunity to make the process more efficient is lost and the value to the consumer is unrecognized.

A granular analysis of every healthcare provider in the country would reveal the problems where they exist and set the stage for true and effective management of them. Anything short of that will be more of the same. I would defy the most esteemed healthcare economist to show me an effective method of cost control by managing the payment mechanism. In fact, that has been tried, is what is currently being tried and is exactly what is failing. In a continuous game of Whack-a-Mole, where one cost seemingly reduces due to the restriction of payment, another pops up. While the secondary mole is addressed, the original problem resets and returns with a vengeance costing more and more in a never-ending cycle. The government solution wins a series of battles, and I would submit possibly all of the battles, while losing the war miserably. It is an inarguable point in light of the fact that healthcare inflation has risen at a rate that is more than twice the level of general inflation for all other consumer goods and services since the advent of Medicare in 1966. As asked earlier, who is really motivated to know what the reality of the cost to provide healthcare in a provider to consumer model? Until that motivation shifts to those in a position to change it, the problem will persist.

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