Why health care is in trouble.

Our health care system has been built up over the years in a jury-rigged, ramshackle fashion. Before World War II, there was very little health insurance and what there was often was the product of labor union contracts. The early years were concerned with accident insurance and workers compensation laws.

The American life insurance system was established in the mid-1700s. The earliest forms of health insurance, how­ever, did not emerge until 1850, when the Franklin Health Assurance Com­pany of Massachusetts began providing accident insurance, to cover injuries re­lated to railroad and steamboat travel. From this, sickness insurance covering all kinds of illnesses and injuries soon evolved, but the first modern health insurance plans were not formed until 1930.

The Baylor program for school teachers was the first in 1929.

Medical insurance took stride in 1929 when Dr. Justin Ford Kimball, an administrator at Baylor University Hospital in Dallas, Texas, realized that many schoolteachers were not paying their medical bills. In response to this problem, he developed the Baylor Plan – teachers were to pay 50 cents per month in exchange for the guarantee that they could receive medical services for up to 21 days of any one year.

In those days, the concern was lost wages more than hospital care.

In 1939, the American Hospital Association (AHA) first used the name Blue Cross to des­ignate health care plans that met their standards. These plans merged to form Blue Cross under the AHA in 1960. Considered nonprofit organizations, the Blue Cross plans were exempted from paying taxes, enabling them to maintain low premiums. Pre-paid plans covering physician and surgeon services, includ­ing the California Physicians’ Service in 1939, also emerged around this time. These physician-sponsored plans com­bined into Blue Shield in 1946 and Blue Cross and Blue Shield merged into one company in 1971.

The modern insurance plans were very recent in origin. I was there for much of it. The commercial insurers fought the status of Blue Cross, which was not required to have reserves. Blue Cross asserted that it promised hospital care, not payment, so reserves were not necessary.

The 1940s and 1950s also saw the proliferation of employee benefit plans, and the included health insurance pack­ages became more and more compre­hensive as strong unions negotiated for additional benefits. During the Second World War, companies competing for labor had limited ability to use wages to attract employees due to wartime wage controls, so they began to compete through health insurance packages. The companies’ healthcare expenses were exempted from income tax, and the resulting trend is largely responsible for the workplace’s present role as the main supplier of health insurance.

The war produced much of this as wage limitations were in force but fringe benefits, like health insurance, were permitted. A lot of this history is contained in Paul Starr’s book The Social Transformation of American Medicine.

From the first, commercial insurers focused on employer plans while Blue Cross and Blue Shield (which was founded by the California Medical Association to pay doctor bills) were individual plans.

In 1954, Social Security coverage included disability benefits for the first time, and in 1965, Medicare and Medicaid pro­grams were introduced, in part because of the Democratic majority in Congress. In the 1970s and 1980s, more expen­sive medical technology and flaws in the health care system led to higher costs for health insurance companies. Responding to higher costs, employee benefit plans changed into managed care plans, and Health Maintenance Organizations (HMOs) emerged. Man­aged care plans are unique in that they involve a particular network of health­care providers that have been verified for healthcare quality and that have agreements with the insurer about price and related issues. HMOs were originally primarily nonprofit, but they were quickly replaced by commercial interests, and managed care only suc­ceeded in temporarily slowing the growth of healthcare costs.

Two major changes came in the 1970s. In 1978, the federal government established what were called Professional Standards Review Organizations or PSRO. All doctors had to receive training in how to do these reviews and it was immediately apparent that cost was the only consideration, not quality of care.

I decided to educate myself and took a course from an organization called “The American Board of Quality Assurance and Utilization Review Physicians. I took the exam and passed, then attended the annual meeting. This was about 1986. People I met at that meeting informed me that the exams were graded by throwing them up in the air. Any that landed balancing on one edge were flunked. Nonetheless, the experience was valuable because I could see what was coming.

I was president of the Orange County Medical Association that year and had served for eight years on the Commission on Legislation of the CMA, now called The Council on Legislation. This gave me an opportunity to meet many legislators, many state level and some federal. The impression they made on me was that few knew anything about medicine and most were not very intelligent.

I have been conservative in political philosophy since the age of 19 when I took an Economics class. I enraged my Chicago family when I voted for Nixon in 1960. Kennedy was supposed to be a distant cousin but I had left my naive belief in government behind. Still, I recognized that medicine needed allies if it was to fend off the worst of the legislative assaults on our profession.

I wanted the local medical association to form our own “managed care program,” with members of the association eligible for membership. A friend, named Ed Zalta, was an ENT doc in the eastern LA area. He had had a sideline business of selling electronic medical office software and minicomputers so he was well educated in the necessary skills. I tried to get the OCMA to start our own PPO and Ed tried to do the same thing in the Los Angles County Medical Association. I didn’t have much luck and Ed stirred up a bunch of Neanderthals who insisted he be expelled from his position on the Board of Directors.

It was not going to be easy. Ed started his own organization, called CAPP Care and it became one of the largest PPOs in California. I helped organize it and became a member. Ed used to tell me that I should avoid getting into any kind of trouble with the state Medical Board because he always called up my profile when demonstrating the system IT features. As time went on, and the health care marketplace evolved, he sold it and is retired. Because we could not get doctors to see where all this was going and we allowed other forces to get stronger, physicians lost control of their destiny and many of the physician organizations became defunct. LACMA used to have a beautiful building on 6th street in Los Angeles with a large medical library. Many professional groups used the LACMA building for meetings. That building is now gone and the library dispersed between UCLA library and the Huntington Library in Pasadena. The portion of the library which concerns the history of medicine is now at the Huntington and the collection is called The George Dock Society. The rest of the LACMA library is at UCLA and is in storage. Thus the profession lost control of its own institutions. The AMA is useless and concerned only with the welfare of its own board.

Since 1972, the emphasis has been on cost control. Quality improvement, a concern of mine, is neglected. Some of the cost obsessions have resulted in more costly developments. For example, Blue Cross did not reimburse hospitals based on billing by services. The original program was based on hospital expenses and reimbursement followed the proportion of Blue Cross patients treated per year and the hospital budget. This was discovered by payers and was considered a scandal. Employers insisted that itemized bills be submitted and reimbursement depend on the bill. This is how we got $10 aspirin tablets. Hospitals don’t work that way. They have an emergency room, a lab, an xray department, an operating room and what are called “hotel services,” which means rooms and meals. Johns Hopkins Hospital, in 1895, began this concept and used hotel people to run that part of the hospital. How do you bill for the operating room and emergency room when some patients will have no insurance but must be cared for anyway ?

It is obvious that the paying patients pay for the care of all. These internal subsidies do not compute on spread sheets. It is a bit like the Army. They can’t be run like businesses because they aren’t businesses. Doctors operated much the same way. Many of us cared for patients and did not pay much attention to the financial situation with them individually. When I began in practice, I signed up for MediCal, the California version of Medicaid. My waiting room filled up with women who wanted varicose vein injections. I was a vascular surgeon and that was the only service I offered that interested them. My office staff finally convinced me that I lost money on every case. The material used cost about $15 or $20 and the state payment was $6 and took two years to arrive. After that, I dropped MediCal but would see patients referred by doctors I knew, and of course, trauma cases. I knew many primary care docs who did not even bill MediCal because the cost of billing exceeded the payment.

We are now in a situation where this ramshackle system of insurance has been destabilized, I think fatally. I have studied other health care systems and wrote some posts on my own blog about my ideas for reform. We are a large and diverse country. Solutions that might work in homogenous societies, like Scandinavia, are unlikely to be transferable. Sweden has had some trouble with physician incentives.

Despite the ability of the reform acts to control costs, quality of care was affected as rationing became a primary means of controlling costs . Waiting lists were becoming the biggest concern, especially for surgical procedures. A cause for the lack of quality care was a result of the poor leadership of politicians in control of the health care budget. “When asked about workplace problems, nurses cite the lack of leadership as the biggest concern, not the heavy workload. They see how budget cuts lead to the deteriorating quality of patient care. Politicians who know little about the actual situation in the hospital make cuts without realizing the consequences for the patients.”

At one point, Sweden’s tax rates were so high that senior doctors, those affected by taxes on high incomes, would take the last three months of each year off and go to warmer climates until the new year. Germany has similar issues where senior surgeons make the incision and leave the operating room to junior trainees while they work in the clinic for increased reimbursement. When the operation is about over, they return to close the incision.

The NHS has generated numerous scandals in recent years.

Those who do not work in the NHS may be surprised that the suppression of whistleblowing concerns still continues after Mid Staffordshire. Those who work in the NHS are not. Survey after survey since 2010, when the first Francis report was published, has confirmed the deep fear of many staff that raising concerns is asking for trouble. Less than half the staff who raised concerns last year were given feedback on whether changes were made as a result of errors, near misses and incidents. Widespread bullying makes matters worse; 24% of consultants reported that they were bullied last year.

These stories would fit right in with the Obama administration record.

What do we do now ? I don’t think Obamacare can be reversed now or delayed. It will collapse and maybe this will create an opening for intelligent reform. This would look like medical IRAs and high deductible catastrophic insurance for most middle class people. Those with serious pre-existing conditions should go into a risk pool. France handles this by paying for care for the primary diagnosis only. Thus, if you have cancer, treatment of the cancer is free. For other matters, the regular insurance program applies.

For the poor, we used to have big public hospitals and clinics until Medicaid destroyed them. They need to be recreated, possibly with incentives for new graduates to work there for loan forgiveness. Medical school has to be less expensive. In France, medical school is free but there is a steep pyramid system where low grades gets one expelled. When I began my college courses in engineering, the instructor told us to look at the person in front, next to and behind us. He said, “By the end of the year, only one of you will be here.”

Getting rid of PPOs will end the inequitable contracts that inflate “retail” fees while the insurance company pays the doctor and hospital a fraction of the “retail” price. The actual payments are trade secrets. Medicare is as bad or worse. If a doctor treats a patient for cash at a price less than “retail,” it is a crime. Doctors are being harassed daily by such insane regulations. Read Three Felonies A Day, which has a lot of doctor horror stories in it.

You could even read my book.

19 thoughts on “Why health care is in trouble.”

  1. All quite excellent and one-foot-in-front-of-the-other reason, as it should be. But you must back up quite a ways and add another huge fact in. Medical care didn’t used to be able to do much for you until quite recently. I read one analysis which stated that until penicillin came out, doctors killed more than they saved, because of crazy theories they couldn’t drop. The break-even point was 1950!

    Think about it. A hundred years ago, a doctor could set a bone; give you a few things to slow down your bowels or speed them up; quarantine the sick with fair accuracy; discern whether your heart was good enough for the military or other strenuous tasks; tell you what you were dying of, with a vague guess as to how long that might take. Medical care was cheap, for good reasons. X-Rays, antibiotics, anesthetics, painkillers, clean surgical equipment – these are new.

    The crisis in medical costs is not of Obama’s making, nor the insurance companies, nor Big Pharma, nor any of the usual villains. Medical care is now valuable, and we leap for the new chances that we might live, or be pain free, or have children, or not be despondent or psychotic or immobile. Many parties are handling the crisis badly (I would list Barack in that number). But the crisis was inevitable, and it is going to get worse, whatever politicians do.

    Because we are more and more able to keep people alive and reasonably functional. At a cost. At a cost that very few can afford, or will be able to afford in the foreseeable future. Sharing the cost only papers over the problem: we cannot afford what is going to be right there on the shelf, right in front of us, that will keep us alive another year or decade, or even more. We cannot pay, and we cannot turn away.

    Those of us who grew up in less magical times will have it easier. We expected to die before age 90. Before 80. Hell, we’re glad to make it to 70. For the younger, the loss of a century’s worth of life will be unendurable.

    We now have medicine that is worth something. We spent foolishly on snake-oil years ago in our desperation. How much more will we do so now?

  2. Michael, thank you for this post. I didn’t know any of the history you describe and think most people would benefit from reading it. I am going to recommend this post to everyone.

    Thanks again!

  3. “Because we are more and more able to keep people alive and reasonably functional. At a cost. At a cost that very few can afford, or will be able to afford in the foreseeable future. ”

    I know this history and have lived it for 50 years. I started medical school in 1961. I wrote a book about medical history, including chapters on economics.

    I agree that medical costs are a problem. I have previously recommended the French model as a template for reform. It has subsidies but also has market structure. You pay the doctor first, then get a partial subsidy a week or two later.

    One fatal provision of Obamacare is the obstruction of innovation. Medical device capital has dried up. This is the potential future with reduced cost. Medicare Part D was the recognition that medical treatment was more drug oriented since 1965 when the law was written. There are major new treatments coming that may be cheaper ! Islet cell transplant could cure type I diabetes, a disease that affects millions. We are on the threshold of something like the biological equivalent of the PC revolution where Moore’s Law applies.

    Obamacare can kill this.

    I don’t want to make this a book. I already wrote one of those.

  4. Dr. Kennedy, this is an excellent post. I too lived through most of this, although my perspective was different, as I worked in HR (“Personnel” at the time) and as a company negotiator vs. major labor unions. I think that few people understand this history and for most of them, they don’t care; so they’re condemned to repeat many of the same mistakes.

    I was also the President of the Board of a health care alliance in Louisiana representing that area’s major employers in the mid-90’s. There were few docs there that wanted to accept the changing realities of the market, but after some difficult negotiations we were able to get better rates through a PPO type arrangement with the primary care providers that almost all the local docs ended up joining, but that eventually fell apart, too. I don’t know the answer to this issue (if there is an answer), but I agree that it is going to get worse before it gets better. With the current Administration, that’s a foregone conclusion.

    I also bought your book on medical history and found it excellent, as have a couple MD friends of mine that I’ve loaned it to. I highly recommend it anyone with the slightest interest in the subject.

    As a note of potential interest, while I lived in Louisiana we had about a half dozen Canadian doctors who relocated to our area to get away from the Canadian healthcare system…..I wonder what they think of what’s happening?

  5. magnificent work!!!

    What you missed is that ALL government run healthcare systems are 2 tier systems. The bottom tier is for the masses.

    The top tier has the best doctors, best equipment and the very best very private hospitals. This is where the President et al get medical care. Not all members of the ruling class get top tier care. Getting top tier care is a status symbol.

  6. “as a company negotiator vs. major labor unions.”

    We used to have an annual retreat with some outside people to give us ideas. One year we spent a weekend with Alain Einthoven who thought of much of the reform ideas of the 90s. He was interesting although a bit of a dreamer. Another retreat included the head of the health plan for the culinary workers union. He was really sharp and knew a lot about health care.

    One year the CMA had a retreat with Jesse Unruh the “big daddy” of California politics. By that time he was sick with his prostate cancer but was philosophical and entertaining. He is the one who made the rule that, “If you can’t take their money, and drink their whiskey, and f**K their women, and then vote against them in the morning, you don’t belong here !” He helped ruin California but Willie Brown was worse.

  7. A.V.I.,

    But the crisis was inevitable…

    The transition was inevitable. The fact that it has taken the form of a national crisis is a needless tragedy.

    We are in this mess because of prideful fools who thought they could manipulate or outsmart consumers and markets. They failed, as they do everywhere and always. The fact that many of them meant well counts for precisely nothing. Good intentions never have and never will excuse arrogance and willful stupidity.

    At a cost that very few can afford, or will be able to afford in the foreseeable future.

    Not really.

    Cutting edge medical care is expensive, but today’s cutting edge procedure is tomorrow’s standard practice. One has only to look at the growth of medical tourism to see how little of the high price of healthcare is related to any intrinsic cost of the procedures being performed.

  8. “how little of the high price of healthcare is related to any intrinsic cost of the procedures being performed.”

    Once again, I have to remind people that “retail” price” has little to do with cost and the actual payment by Medicare or insurance is usually a small fraction of what you see. With Medicare, for example, you can look at your EOB and see what was actually paid. In my own case, I see a pain doc about every four to six months. His bill is about $120 but Medicare actually pays him $11. He can’t reduce his billed charge because Medicare would then reset his “profile” to the new charge and pay him 10% of that.

    If you have a plan that pays “20%” 0f the charges after a deductible. the actual payment by the insurance company is often less than your 20% but you don’t see that because the contract they have with the provider is a trade secret.

  9. Very insightful piece based on first-person history.

    The comments offer some twists too.

    AVI’s point can be restated as what better for a wealthy society to spend its riches on than better health? It is a moving target in terms of costs, as Setbit notes. Medical care that is on “the bleeding edge” will be costly – at first. Over time, it will diffuse to commonplace and cheap. Our drug patent system is supposed to work like that although it seems corrupted by regulatory capture of the FDA.

    One part of Setbit’s argument doesn’t hold though – the personal touch. Personal services have little economy of scale of technical substitution, at least until Japan’s robots reach commercial stage.

    If technology can avoid intensive personal services, it will double-pay. The investments in Alzheimer prevention and treatment is the classic case.

    Politically, it looks like Obamacare has ruined (ie “fundamentally transformed”) our resource allocation systems. It is crashing as we speak and the only way to even START to create a new system that can deliver the best health to the population for what we are willing as a society to pay will start through the ballot box.

    Starting with the new Congress in 2015, lets start all over, from scratch. Republicans better have an honest, rational plan in hand. Political special interests will of course have a special voice in the process but our political class must know that they have to deliver.

    Make Obama serve as a terrible warning.

  10. ” Republicans better have an honest, rational plan in hand.”

    They are no more likely to have a “rational plan” than the Democrats were. What is needed is an incremental program to stop the bleeding, then restore something that works. What works is usually something that uses a free market approach. Canada is actually showing the way by going back to private practice after 20 years of leftist commend economy. The obsession with egalitarian solutions has to stop. Let people who are willing to spend their own money do so. Provide a simple bare bones safety net for the poor. A very simple fix would save Medicare. The French allow private arrangements between doctor and patient and then pay a limited subsidy after the transaction. If Medicare allowed balance billing and stopped the fake “retail” prices, it would make it viable.

  11. Dr Kennedy – a very good post that will require my rereading it 2-3 times to fully comprehend it.

    I have felt – if I could force a “perfect world” that we would allow total free market principles to run medicine – that govt interference and forced requirements (a nurse told me during an outpatient surgical procedure that she spent half of her time on the computer filling out mandated forms) – if we capped a limit to how much lawyers could be awarded – I suspect costs could come down – and dramatically.

    And this insurance business – leave insurance to catastrophic incidents requiring major surgery and keep it out of Dr visits for sinus infections.

  12. MikeK and Whitehall,

    “retail” price” has little to do with cost

    One part of Setbit’s argument doesn’t hold though – the personal touch.

    Completely salient points, that I only glossed over for the sake of concision.

    As you said, Mike, reading an EOB can be very enlightening. But that’s part of my point.

    The fact that medical care is deliberately under-reimbursed in many cases requires doctors and hospitals (especially hospitals) to over charge if and when they can, in order to cover costs. This drives up billing and transaction costs for everybody, which is one of the many reasons healthcare is more expensive that it needs to be.

    As for the personal touch, it depends greatly on the person doing the touching. A full workup and course of treatment from a truly world-class oncologist or reconstructive surgeon will always be more than most people can just write a check for. Scarcity drives up price, and the best of the best will always be scare.

    But a routine gallbladder operation, or help managing diabetes? There is absolutely no reason that should cost more than a middle class person should be able to pay from their savings. Not, cheap mind you, but not budget busting. A financially stable person shouldn’t need subsidized insurance for non-catastrophic medical care, any more than they need it for a blown head gasket or a new transmission.

    The fact that every-day people should have to face the prospect of bankruptcy to pay for treating an illness is a completely manufactured state of affairs, the causes of which are perfectly well known to many people who refuse to see otherwise.

  13. By the way, I add my name to those saying THANK YOU for this post. I was actually already familiar with much the history you cover here, but I have never seen so much of it presented in so clear, complete, and concise a form.

    Kudos, Dr. Kennedy.

  14. In trying to keep this a manageable length, I short circuited a couple of topics. For example, one reason why medical associations couldn’t form PPOs, was the The Maricopa County Medical Association case.

    Maricopa County Medical Society, by agreement of their member doctors, established the maximum fees the doctors may claim in full payment for health services provided to policyholders of specified insurance plans. Arizona filed a complaint against MCMS in Federal District Court, alleging that they were engaged in an illegal price-fixing conspiracy in violation of the Sherman Antitrust Act.

    The medical association, in trying to set up a local PPO, required members to agree to a MAXIMUM fee schedule to join. It was not mandatory like Obamacare. The idea was to offer a program for middle class patients who would be assured of reasonable charges. The FTC went after them and assigned treble damages. After that, any doc who wanted to organize such a plan had to quit practice as a doctor to do so. Ed Zalta did quit.

    HMOs, like Kaiser, began as non-profit, staff model, organizations. That is they employed the docs on salary and were like co-ops. In the 1990s, the for-profit HMO came along and signed doctors, under pressure of losing all their patients, to below cost contracts. They put the non-profit HMOs, like Family Health Plan in California, out of business. The medical profession was whip-sawed by government and large insurers. Blue Cross went to for-profit and that is why they are now “Anthem-Blue Cross.”

    It’s a very long story but we are near the end of it now. Something new has to happen.

  15. Q: Who has the Power over our HealthCare?

    A: They will make the “reform” after ObamaCare does what it was designed to, what it was stated to do, what it is already doing – collapsing private insurance Health care.

    That’s the “opportunity for Reform”. You don’t have to speculate that it will collapse and create an opportunity for reform. It was billed to do exactly that.

    I’m not in Health Care. I’m in defending my people. My diagnosis is you are incurably victims. I’m not alone.

    This will force different treatment.

  16. I remember seeing a graphic a few years ago that showed medical costs over time compared to the general cost of living. The two cost lines moved slowly upward together until 1967, a few years after the Great Society programs kicked in, when the medical cost line took off and left the general cost of living line further below with every year.

    My guess would be that a similar line could be drawn for college tuitions or general educational costs as well—they would be similar to the overall cost of living until the onset of major federal funding programs, then they would take off.

    One of the major unintended, but thoroughly predictable, consequences of big government programs is their inflationary effect on the focus of their good intentions. Huge amounts of money with little or no accountability or standards of success equals rising costs every time.

  17. “The medical profession was whip-sawed by government and large insurers.”

    As did Finance, Farming, Real Estate, Energy…and so on.

    One might discern a pattern.

    At a certain point one might think that people would recognize a pattern. For Religious reasons [Progressive] and reasons of narrow short term interest they will steadfastly refuse to face the painfully obvious no matter how painful.

    You see – most people will do anything to avoid trouble. That’s nature. Trouble exists whether it’s acknowledged or not, however perhaps one’s personal troubles can be avoided OR DELAYED WITH INTEREST COMPOUNDING if one steadfastly denies troubles existence.

    Never say ye were not steadfast when your issue and theirs ask why they are slaves. Because in this ye are steadfast. Ye will be slaves or nothing, you’ll not stop doing nothing until that Holy Grail is grasped.

    Kneel Sir Steadfast.

    And stay there.


    But change is always certain. Except in people, who seldom change. Do remember – Citizen Steadfast.

  18. “what better for a wealthy society to spend its riches on”: a society has no riches. Riches belong to individuals, charities, churches, states, … but not to a nebulous “society”.

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