Risk and the Pricing System

Malpractice is part of a larger subject called medical liability, which really is all about risk management.

Medical liability, by nature, is a big issue. Any medical treatment that is potent enough to be effective carries big risk. Any system that delivers medicine must include liability costs.

It would be extremely fun to hold a meeting about how transitioning from Insurance back to self-funded health care would affect the medical liability issue. Sadly, it is extremely difficult to write a web post about the issue.

I contend that people who self-fund their care will want the risks associated with a medical procedure included in the price. Let's say a procedure costs $100. It is has a success rate of 99%. A 99% success rate is fantastic. The catch is that the one percent failure leads to a $10,000 expense.

In this simple example, the clinic performing the procedure would make $10,000 for every 100 procedures but would have a $10,000 liability for that one failure.

My simple example was designed so liability was equal to the cost of the procedure. It is not uncommon that the risk of a procedure is greater than the cost of administering it.

In my simple example, patients self-funding care are would not want to take a gamble and have to pay the $10,000 if things go bad. So, the clinic is likely to charge the $200 and absorb the cost of complications.

Imagine that the clinic found that, by adding an extra $20 expense per procedure, they could cut the fail rate in half. They would spend $2,000 on 100 procedures, but cut the expected liability by $5,000.

By factoring the risk into the price, the clinic can convey that the enhanced procedure is a better deal. 120 + 50 < 100 + 100.

I repeat. It is not uncommon for liability costs to exceed the cost of a procedure. The cost of dealing with a birth defect is substantially more than the cost associated with a score of healthy births.

In a free market, a Birth Center is likely to have an expensive intensive care unit. The moms using the center are happy to pay to have access to the unit. It would actually be a selling point.

The unfortunately family that has a crisis during birth would not pay the full cost of the unit. A smart hospital might create a product in which they sold the delivery service and access to intensive care as a single package. In this package access to intensive care component might actually be more than the cost of delivering the child.

There are some big advantages to treating the entire birthing process as single product. For example, many people claim that using a doula decreases the likelihood of birth defects and c-sections. If this is true then a birthing clinic that assigns a doula to each mom could charge a lower price than one with obstetricians alone, while ensuring that family will have access to intensive care if needed.

I love the field of risk management. I think there is a general rule about liability. Your liability system is in good working order if the price of a product or procedure accurately reflects the risk associated with the product. When this happens, people are able to use the pricing mechanism to make the best decisions.

When you look at the status quo, with a system dominated by health insurance, we find that the prices are a complete jumble and people cannot use the pricing system to make the best health decisions.

If ever I could find a group interested in discussing the Medical Savings and Loan, we would spent a lot of time talking about risk management, liability and pricing. I suspect the conclusion of the meeting would be that reviving the paradigm of self-funded care would help us achieve a pricing system that helps accurately communicate risks through the pricing system.

Unfortunately, it is an extremely difficult issue to discuss in a blog post. I would gladly travel to any group willing to host a serious multiday discussion on free market health care. Sadly, I live in Salt Lake City, which is politically dominated by a group that seeks socialized medicine. Here is my contact form if there is any group interested in discussing free market health care.

Tort Reform

Some people claim that tort reform would lower medical costs and improve medical care.

The term "tort reform" means tighter regulation of the medical law industry. We use the obscure term "tort reform" because the conservatives who favor tort reform generally disfavor greater regulation and the progressives protecting the tort industry tend to favor more regulation.

As for me, I believe that the abuses in the tort industry indicate that there are deeper problems in the medical industry and that the conservative drive for tort reform is a case of treating a symptom and not the disease.

Before talking about the disease, I would like to recount a true story.

I worked for an insurance trust. The formula for this insurance trust was fairly simple: We would tally up the claims as we paid them through the year. We would then charge the members of the trust for the claims and tack on a profit margin. It was something like 5%.

We lost a big case for $500,000. After the verdict there was a meeting in which management prattled about doom and gloom for the trust and how we would all have to cut back. Some people in the meeting were visibly distressed; So, I pointed out the obvious.

The charter for the trust said that we would charge claims back through to the clients with a 5% margin. By losing the case, the trust made a $25,000 profit. The lawsuit included legal expenses, so we actually made money on the amount we paid our own lawyers!

By introducing a third party, the insurance industry creates perverse incentives which undermine the integrity of the system. Even worse, large insurance pools create a third party with extremely deep pockets. Having a third party with deep pockets enables the tort industry to ramp up lawsuits and drive costs into the stratosphere.

The perverse incentives are not unique to trusts. The whole insurance industry works on bascially the same mechanism. Insurance companies skim off a piece of the total expenses.

An unspoken truth of the insurance industry is that the insurance companies want medical costs to rise because rising medical costs increase their profits.

The beautiful thing about this system is that politicians who created this dystopia can divert the attention of conservatives by complaining about lawyers and they can divert the attention of progressive by complaining about "the corporation."

This keeps the pundits busy while the rogues on both sides of left/right divide can rob our nation blind.

Sadly, the culture war blinds people to the real problem and real solutions.

The problem is that we are using group funding for individual consumption.

The solution is to restore the concept of self-funded health care.

If we returned to a system in which people funded the bulk of their health care through their own savings, we would restore the incentives in health care.

If the money flowed directly from the patient's saving into the medical system, then it would automatically realign the medical industry to the needs of the patient.

This is the direction I've taken with the Medical Savings and Loan.

The Medical Savings and Loan is a wonderful presentation on free market health care reform. If your group is interested in hosting a meeting on this wonderful concept, please contact me.

Socalized at the Employer Level

People toss about terms without adequately defining them. In 2012, Republicans firmly believe that health exchanges run at the state level (The Utah Law) is free market. while health exchanges run at the State level with Federal regulation (ObamaCare) is socialized medicine.

Having worked in Utah State health care, I would take ObamaCare over RomneyCare any day of the week.

I find the idea that ObamaCare is Socialism and RomneyCare is free market absurd; So, I would like to toss in my defintion of socialism.

Socialized medicine starts when the group becomes the primary provider of care for the individual.

The United States uses a system of employer based insurance. This system socializes medicine at the employer level. Employer based insurance turns our nation's businesses into little feudal kingsdom that completely dominate the individual employees and reduces them to serfdom.

Fixing the system is the matter of designing things so that the individual is the primary provider of care.

Our system of health care is corrupt because it starts with the group, then works down to the individual.

A healthy debate would start with the individual and work out.

This project (A Medical Savings and Loan) is simply an effort to find a group that wants to engage in a discussion of health care.

I three years, I've yet to find a group willing to debate real free market health care reform and am devasted.