Earlier this year, I did a short post on universal health care, quoting a friend who is the CEO of a large hospital: "many of you think you want universal health care, but the cost of universal health care is a cost you are unwilling to pay: access and innovation."

This topic also arose during my recent trip to Europe, where several of the participants in the Fulbright program were strong advocates of universal health care. Then I noticed Fred Wilson's recent negative review of Sicko: "But the premise behind the movie is spot on. Why does the US resist universal health care when countries like Canada and the UK have shown that it works? I have no idea but I think this coming election will see universal health care be a vote getter, big time."

This sort of unqualified enthusiasm for universal health care is something I have heard only from people who have never lived it. Fred received some pushback in the comments, and apparently he decided to do some field research: he had dinner with three Canadians:

I asked them if they liked their health care system. They all said yes, very much, particularly for the day to day needs and common procedures like childbirth. However, they also told me the system breaks down when you get really sick. There's just not enough money for treating terminal diseases and so they "just let you die".

Fred also traded emails with a Canadian doctor, who wrote: "part of the reason the US is so innovative is because your system is designed for it.  as a VC, i think a single payer system would kill your VC friends in health/biotech."

Remember the key words: access and innovation.

Not that those concepts resolve the debate or provide solid guidance about how to proceed. But they are worth remembering when people start rhapsodizing universal health care.

Finally, I agree with Fred that health care is going to be a huge issue in the upcoming presidential campaign, especially if Hillary Clinton and Mitt Romney are the two major candidates. Note that both of those candidates favor some system the achieves universal coverage. (Strangely, Rudy does not list health care among the top ten campaign issues on his website.)

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You probably thought you knew how to cough and sneeze.  Cover your mouth/ nose with your hand or a tissue, right?  Wrong, wrong, wrong.  A friend at the School of Public Health here at Emory pointed me to a public health video encouraging proper coughing and sneezing technique in accordance with infection control guidelines from the CDC.  The basic advice:  sneeze or cough into your sleeve.  Watch the hilarious video, which demonstrates the various ways of accomplishing this with different types of apparel, and in which contestants compete to get it right.

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A recent New Yorker issue carries a fascinating piece on water--the politics, economics, and culture affecting the provision of clean drinking water around the world.  Besides being substantively interesting, the piece contains a number of great statistoids, some detailed below.

The diamond-water paradox (as Adam Smith referred to it) is that although water is essential for life, and diamonds are valued mostly for aesthetic reasons, the price of water has always been far lower than the price of diamonds.  In general, people simply resist having to pay for water.  Only within the last twenty years, for example, has New York City even required water meters.  So water is overused, and shortages result. 

Why don't people want to pay for water?  One explanation is that we generally don't think of water as being used up when it's consumed.  Unlike oil, which is gone forever once it's used, water "never actually disappears:  when water leaves one place, it simply goes somewhere else.  Water that dinosaurs drank is still consumed by humans, and the amount of freshwater on earth has not changed significantly for millions of years."

For developing countries, water shortages are especially problematic.  Increasing urbanization and middle-class prosperity cause people to eat more meat, and meat is enormously more water intensive to produce than agricultural products.  It takes  1000 tons of water to produce a ton of grain, but 15,000 tons to produce a ton of cow.  Great statistoid:  one hamburger requires 1300 gallons of water to produce!  For a steak, it's double that.

Other great statistoids in the piece:

[A] standard cup of coffee require[s] a hundred and forty litres of water, most of which is used to grow the coffee plant.  This means that it takes more than a thousand drops of water to make one drop of coffee.

On the same amount of land that Chinese farmers grow four thousand kilograms of rice each year, Indians grow no more than sixteen hundred, and they use ten times more water to do it than is necessary.

For a large rural and agrarian population like India's, there is strong political pressure to supply water cheaply to farmers.  But that skews farmers' decisions about what crops to plant.  Rice is quite a popular crop, but it's also the most water intensive.  Add in the government's price guarantees, and farmers have no incentive to grow anything else or use less water.  Without rational pricing of water, needy areas do without.  The article goes on to discuss competition for groundwater among farmers sharing the same aquifer. They race to dig deeper and deeper wells to suck out as much water as they can and sell it in times of need--the paradigmatic common pool problem. 

Solutions?  The "hard" path includes more dams, but their ecological costs and toll in human disruption have made them unpopular.  The Three Gorges Dam, for instance, is predicted to provide one-ninth of China's electricity needs when it is fully operational, but 1.2 million people will have been displaced, and 200,000 acres of farmland and forests submerged.  Moreover, sixty percent of the world's largest rivers are already dammed. There is even talk of dismantling existing dams.  The soft path involves simply using less water, which at least in the US has surprisingly been the trend since 1980.  Per capita water consumption since then has fallen by twenty-five percent, driven largely by higher energy costs, environmental laws, and conservation (think lo-flow toilets).  How this all works out on a global basis is up for grabs.

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Don't miss this public health message (click on the pic):

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Four years ago, almost to the day, we had a dustup with Bayer over our too-small ciprofloxacin stockpile.  The mail-borne anthrax attacks on the Senate, NBC News, and elsewhere drove the surge for more cipro.  This past Friday, stories by both the Associated Press and the Financial Times show that a similar, far graver donnybrook may be upon us ... this time, over Roche's exclusive license to make tamiflu (i.e., oseltamivir), a therapy that may help fight avian flu.  Stephen Gordon urges the U.S. government to push forward to make tamiflu now, and pay Roche later.  Tyler Cowen urges a very different approach, focused on inducing Roche to act much faster to boost tamiflu output.  Neither, however, mentions the cipro flap of four years ago.  The deal we struck with Bayer for our cipro stockpile makes a helpful point for today.

Cowen quite rightly warns against expropriating Roche's tamiflu production rights, and the premium those rights bring.  He focuses on dynamic efficiency:  "If we confiscate property rights this time around, there won't be a Tamiflu, or its equivalent, next time."

Respecting Roche's property rights does not, however, entail paying whatever price Roche demands, no matter how high.  A credible threat to trigger our compulsory license rights under TRIPS provides us with important bargaining leverage, and using it will not, I think, prevent there being a tamiflu, or its equivalent, next time.

With cipro, we bargained hard with Bayer and extracted a 46% discount, from $1.77 to $0.95 per pill.  Today, Roche sells tamiflu in the U.S. for $60 per treatment course.  My guess is that we can get a deep discount and still provide Roche a healthy return, so that it (and others) will continue to develop powerful antivirals and other drugs.  If we need to rattle the expropriation saber in our talks with Roche, so be it.

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The front page of the New York Times has an excellent article on the challenges faced by patients in our modern health care system. The article features my law school colleague, Meg Gaines, and her battle with ovarian cancer. After fighting her own battle, Meg decided to help others with theirs:

Over the next few years, Ms. Gaines did a lot of thinking and a lot of talking about her experience as a patient, about how brutally difficult it had been to gather information, find doctors and make decisions. She helped found the Center for Patient Partnerships, which opened in 2001, based at the law school of the University of Wisconsin-Madison. It helps patients with cancer and other serious illnesses find doctors and make informed decisions, even as it trains student volunteers from disciplines like law, business, public policy and medicine how to be advocates for patients.

Well done, Meg!

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David Bernstein at the Volokh Conspiracy and Christine Hurt (below) have both posted about this decision from the Wisconsin Supreme Court, striking down medical malpractice damage caps because they lack a "rational basis", and in particular, fail to limit the costs of health care. I add a few observations.

Professor Bernstein complains that the decision is "remarkably illogical":

Won't have a noticeable effect? It's possible. Is not "rationally related?" Only because the court seems to define "rationally related" as "having a guaranteed large effect."

"Rational" is, of course, a legal term of art, so Bernstein's argument is insufficient to show that the rationality threshhold is lower than the noticeable-effect threshhold.

Professor Hurt, meanwhile, brings a bit of actual empiricism to bear, and points out that there is in fact very little evidence that malpractice caps do their job. She then wonders about that term of art, "rational":

As long as the legislation has or could have an effect greater than zero, even if not noticeable? That is quite a bit of deference there. I would hope that rational basis scrutiny would require some estimation that the legislation would effect its goals to a noticeable degree.

The trouble here, which leads to some of Bernstein's and Hurt's disagreement, is that we have two rational-basis tests. For example, compare Beach Communications ("(A) statutory classification ... must be upheld against equal protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification. ... In other words, a legislative choice ... may be based on rational speculation unsupported by evidence or empirical data.") with Cleburne (finding a statute to be irrational because there was no empirical evidence supporting it in the record) or Stevens' concurrence in Cleburne (suggesting that a statute is rational only if a "rational member of th(e) disadvantaged class" might support it). [The Wisconsin Court collects other cases here.]
This is why C.J. Abrahamson admits in her opinion that she is applying "rational basis with teeth," which involves some judicial scrutiny rather than sitting around like a potted plant. Since the case goes off on the Wisconsin Constitution, which rational basis to apply (toothy or toothless) is surely just a question of state law. One could object that the Wisconsin Constitution mandates some other doctrinal rule, or that there is in fact plenty of empirical evidence despite what Professor Hurt and the Court think, but there's simply no reason to think that the rational basis test imposed by a state constitution should always be the toothless one that Bernstein envisions.

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Ethan at PrawfsBlawg asks what readers think about Lifesharers, a circle of registered organ donors who promise to give each other their organs in exchange for a reciprocal promise.  I have posted briefly about this before.  Ethan wonders if it is a good idea for those who damage their own organs to be able to get to the head of the line by joining this club.  Theoretically, registrants may even face moral hazard if by joining they then take less care of their organs than before.

To me, in a system where the law does not allow for the sale of organs and provides for a donee list that weights donees by priority, the club circumvents that reasoned approach.  Organs may go to those who are not in dire need or to those who have no chance of survival even with the organ donation.

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My Solution

Neither candidate's plan adequately addresses the health care crisis because both plans would only serve to put a Band-Aid on the gaping wound that is health care. The health care solution should be left to the states because, as in the words of Justice O'Connor, "[t]his federalist structure of joint sovereigns preserves to the people numerous advantages. It assures a decentralized government that will be more sensitive to the diverse needs of a heterogeneous society; it increases opportunity for citizen involvement in democratic processes; it allows for more innovation and experimentation in government; and it makes government more responsive by putting the States in competition for a mobile citizenry." Gregory v. Ashcroft, 501 U.S. 452 (1991).

By leaving the health care issue to the states, the health care crisis can be solved by creating a "race to the top" as states compete for businesses. This competitive field would create a broad spectrum of plans as states try to balance the advantages of being a magnate state for businesses and fending of the "brain drain" against the costs of expensive health care coverage. This spectrum will range from states taking no action to states requiring all employers to provide health care coverage. It is between these two poles that the greatest innovation would occur.

Detractors to my proposal would be quick to point out that nothing currently stops states from taking action. This is why the federal government needs to provide an incentive-based system in which the federal government gives grants to states for enacting a certain minimum level of insurance. The federal government also needs to act in a reinsurance capacity to insure state insurance funds in cases of default (much like the PBGC does for pensions). By explicitly deferring the problem to the states and creating an incentive program, the citizens of each state would be forced to urge their state legislators to take action (much like the federal government did with workers' compensation). The incentive program is important to counteract a "race to the bottom" propensity that leaving the issue to the states may have.

The states are the most appropriate level for solving the health care crisis because they have the ability to react to the diverse needs of its citizens. A state can outline problems faced by its citizens and balance it against the needs of employers in the state. California is currently attempting to make this analysis. In Proposition 72, California is looking to force employers with 50 employees or more to provide health insurance to its employees. California is betting that the needs of the state's uninsured far outweigh the cost of losing some businesses. The gamble on California's part is that many businesses would not be able to leave the state because the state provides strategic benefits that other states cannot. Thus, if employers are locked in the state, California can force them to provide employee benefits against their will. The employer would then spread the cost to all consumers by raising the price of their products (much like strict liability does in product liability law).

Proposition 72 is just the tip of the iceberg of what states can do. California is looking to implement a cost spreading method by forcing certain employers to insure. Under my system, California could then use the federal grants to provide tax credits to its employers.

Competition between the states would ultimately promote a "race to the top." If proposition 72 is passed, a boarder state may attempt to compete for those disgruntled businesses by implementing state provided insurance. A state has many options in providing insurance because they are large enough to be actuarially sound in order to self-insure, or the state can use its immense bargaining power with the insurance industry to get the best possible rates (bargaining position is created because the state regulates the insurance industry).

Once a state chooses one of these two routes, they have a multitude of options to fund the plan. The state could raise income taxes, sales taxes, death taxes or real estate taxes if the state wishes to spread the cost to the population as a whole. Another option that the state could implement is to attach "sin taxes" to certain hazardous products. A state could raise the tax on tobacco, alcohol, fast food etc. in order to create a disincentive to use these products and to have its funding derived from companies whose products have a direct detrimental affect on health care costs. Finally, a state could tax businesses heavier than individuals in order to make employers bear the costs. States will try to find the combination of funding methods that provides the most revenue and causes the least amount of harm.

Next, a state is in the best position to reduce the cost of health care because they control many of the factors that underlie the cost of health care. For example, if a state is self-insured, it may choose to have state-run health care facilities to help reduce these costs. The state could implement strict tort reform to reduce the costs of litigation that state-run facilities would face (or tort reform for health care providers as a whole). States are also in prime position to reduce the cost of health care because they have ability to control levels of competition. A state can choose to increase the number of applicants admitted into state run medical schools and increase the number of licensed physicians in the state. This increased competition should help reduce the costs of health care. Under my system, a state would have to weigh the cost of health insurance against the costs of having a lower quality of health care against the costs of limiting patients' ability to obtain relief in cases of negligence. The state is in the best position to conduct this balancing test since the citizens of the state have far more access to state politicians than they do for federal politicians. Thus, citizens would be able to get their voices heard and each state can determine the best route for its citizens. (Also note that states could use its health care system to solve other problems such as high levels of unemployment, "brain drain," or to promote the state as a small business magnate).

Many of the proposals that I have spent the last eight days bashing could also be implemented by the state to reduce the costs of health care coverage. The federal government should keep HSA's because this would help enable people to adjust their savings in accordance to their state's plan. Individual states could enact AHP's to allow small employers to band together to utilize "power in numbers", so long as the AHP does not discriminate based on age or race. States could also provide tax incentives to get employers to act. In all, states are in a better position to implement many of these proposals since they can formulate a comprehensive plan that provides the greatest benefits.

There are numerous flaws with my plan so I will try to address some of them. First, I limited the scope of these posts to employer provided health insurance. There will be some complexity when dealing with Medicaid, Medicare, SSI etc. This complexity is outside of the scope of these posts. My proposal is also inconsistent with business trends towards globalization, since it increases the administrative costs of a national employer. Yet, national employers already face a multitude of state laws and have survived thus far. Another critique to my proposal is that competition may make some states irrational actors causing them to provide greater benefits that the state can afford thereby causing defaults. To combat this problem, the federal government will have to create minimum funding standards and create an agency to inspect the state's books. If a state falls below the minimum-funding threshold, then that state will no longer be eligible for federal health care grants. Also, the federal reinsurance function would help cover states in cases of default.

In summation, the states are the most logical actors to cure the health care crisis because they control virtually all the factors that contribute to the high cost of health care. State creativity will allow for 50 experiments in developing the best possible system. Data will show which states proposals are working and which are failing. The states would then be able to use this data to tweak its systems. This experimentation in combination with the market forces derived through competition between the states provides us with the best chance of solving the health care crisis.

I would like to thank Gordon for providing me this opportunity to post on his site. This was a wonderful learning experience for me. It was really interesting to receive feedback from around the country on a daily basis. Many of these comments forced me to think harder about the health care issue and to rethink some of my ideas. I would also like to thank everyone who read these ramblings and commented on them.

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<font color="purple"><u>Kerry's Tax Incentive System</u>

John Kerry proposes to encourage numerous employers to provide health insurance by creating tax incentives, allowing all Americans access to Congress' health care plan, and by having the federal government act in an umbrella capacity.  Kerry proposes to provide tax credits to small businesses that provide health insurance to low and moderate income employees (credit would cover up to 50% of employers cost).  Access to the Congress' health care plan would utilize "power in numbers" to increase bargaining power of small business employers to reduce premium cost.  Finally, having the federal government act in an umbrella capacity (by subsidizing high cost health care cases), Kerry hopes that providing this form of catastrophic insurance would reduce premiums by an average of $1,000 per American family.</font color="purple">

<font color="purple">The largest problem with these proposals is obvious--where will the funding come from?  Many experts have provided a wide range of cost estimates of these proposals, ranging from the mid to high hundreds of billions up to over a trillion dollars over a ten year period.  Kerry has never clearly articulated where the revenue needed for these plans will be derived from (other than rolling back parts of Bush's tax cuts).  This issue has been extensively covered in the media so I am only going discuss one potential tax implication to small businesses due to these proposals.   

In the second debate, Kerry famously looked into the camera and promised the American middle class that he would not raise their taxes.  For the purposes of this post, I am going to hold Kerry to his word and assume that he will only raise taxes on "millionaires."  The first problem with Kerry's proposal is in his definition of "millionaire."  Kerry is defining "millionaire" as anyone who's combined household income exceeds $200,000 a year.  This definition is going to include income derived from salary, S Corp income, partnership income, LLC income, investment income, etc.  The problem with Kerry's tax increases is that it will have a disproportionate affect on small business.

$200,000 a year may seem like a lot of money for the typical American family, but for a small business proprietor, it only equates to a moderately successful business year.  Small business income is highly unpredictable.  In bad economic years, a small business proprietor will yield far less than that proprietor would in good economic years.  This unpredictability in income forces the small business owner to be conservative with income in boom years because they can foresee lean years occurring in the not so distant future.  Therefore, a small business proprietor will make an estimate of average earnings over a long period of time (maybe for a five-year period) and base spending habits on that estimate.

Raising taxes on people with $200,000 or more a year in income will actually lower the average take home salary of a small business proprietor since it would tax the boom years too heavily.  For example: a small business proprietor may average $150,000 a year in salary for a 5-year period but the income distribution may be $100,000 a year for four years and $350,000 in one year.  Under the current tax system, the percentages in the different tax brackets are lined up so the tax savings of being in the lower tax bracket during lean years offsets the higher tax in the boom year.  Raising the tax bracket of $200,000 a year earners while maintaining the lower tax rates in the lower brackets distorts the offsets under the current system since the small business proprietor gets taxed heavier in boom years and the tax savings in lean years will not adequately offset this heavier tax burden.  Thus, the small business proprietor is being taxed more than a salaried employee earning $150,000 a year during the same period.  This will only stifle small business growth since the increased tax burden during boom years takes away money that the small business proprietor could have used to expand the business. 

The other problem with Kerry's proposal is that the statistics used to justify it are skewed.  Kerry claims that only 2% of Americans derive $200,000 a year or more in income.  Kerry's statistics fail to take into account incomes in a booming economy.  If you look at small business income between 1997-1999, one would see that a moderate percentage of small businesses earned more than $200,000 a year.  Thus, Kerry's tax increases will directly affect a large number of small businesses despite his claims to the contrary.  This would be bad for America since a slow down in small business growth would hurt the entire economy because much job growth in America is attributed to the growth in small business.

The final post will be up tomorrow.</font color="purple">

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HMO Accountability

Kerry's HMO accountability proposal would allow people to sue HMO's for injuries caused by coverage denial. What the plan is really calling for is an amendment to ERISA section 502(a) which limits damages to contract damages for all employer provided health insurance plans. Kerry's plan is clearly a response to the Supreme Court's 2004 decision of Aetna Health Inc. v. Davila, (124 S. Ct. 2488), which held that ERISA 502(a) preempted state malpractice actions against an HMO's treatment decision. (The more cynical side of me believes that Kerry's plan is also a response to the Trial Lawyers lobby).

I have no problem with holding HMO's accountable to state tort actions (or to amending ERISA 502(a) damages) because the facts of these cases are usually pretty egregious and the injured parties deserve more compensation than ERISA currently provides. The problem that I have with Kerry's plan to hold HMO's accountable is that it contradicts his plan of reducing health care costs and frivolous claims.

By opening up HMO's to liability for treatment decisions, Kerry would force health insurers to incur substantial costs in both defending the claims and risk of liability faced. Health insurers would then pass these costs on to all consumers thereby raising the cost of health insurance for all. Also, without implementing some form of tort reform (or caps on his new ERISA 502(a) damages), the liability that these insurers face could be very substantial. Juries would be very sympathetic to a victim of negligent coverage decisions because the insurer would be acting out of business judgment (the Ford Pinto case is an example of what happens when a large corporation chooses to expose individuals to harm because of business judgment).

The large costs of defense and the massive exposure to liability would make insurers more likely to settle claims before they get to trial. This system would create an incentive to bring frivolous claims since an insurer will find it cheaper to settle many of these claims than it is to investigate the allegations and to proceed to the certification program level.

Thus, this plan is not going to cure the problem of rising health care costs, in fact it will raise health insurance premiums. As I stated earlier, I am not against amending ERISA to allow for greater remedies, I am just trying to point out a fundamental contradiction in Kerry's health care plan. Kerry would need to provide more than just a certification program to counteract the increased costs that will be incurred by all because of the expanded insurer liability.

Note: I realize that many of my posts are contradictory (for example arguing for tort reform here and against it in other posts). It is not that I am against many of the proposals themselves, it is that both candidates' plans, taken as a whole, are problematic and would not cure the health care crisis. My final post will go into why many of these proposals would be better implemented by the states and not the federal government because the states can create a more cohesive plan, taking into account their own geographical problems. My first eight posts are meant to point out some of the flaws in each proposal and not to argue that the individual proposals have no redeeming value.

Post #8 in the series will be up on Sunday and my final post will be up on Monday morning.

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VI. John Kerry's Health Care Plan

Introduction

John Kerry is trying too hard to be everything to everyone. He is promising the moon and the stars but fails to articulate where the funding will come from (other than rolling back Bush's tax cuts). In theory, John Kerry's plan would be great. Kerry proposes having the federal government act in an umbrella capacity (i.e. having the government subsidize high cost medical claims) for employers providing insurance; he proposes giving all Americans access to Congress' health care plan; he plans to reduce frivolous claims by implementing a certification program; he proposes tax credits to certain small business employers who offer health insurance covering low to moderate income workers; and he plans to hold HMO's accountable for harm caused by denying patients necessary medical care. Kerry's plan is not feasible without substantial tax increases and will not significantly curb the trend of rising health care costs.

John Kerry's plan is interesting because it contains an obvious fundamental contradiction where Kerry cites frivolous claims as a problem (i.e. wants to implement a certification program) and then in the next breath he wants to hold HMO's accountable for harms caused by denying patients necessary medical care. Thus, his plan is looking to reduce litigation in one breath and increase litigation in the next. Today's post will focus on the problems with the certification program. Tomorrow's post will focus on the HMO accountability issue and its inconsistency with the certification program.

Certification Program

The certification program is intended to reduce the amount of frivolous malpractice claims. Kerry hopes to implement a federal medical certification agency that will review all medical malpractice claims and decide whether the claim is frivolous or not. In theory, the certification agency will be able to make this determination at less of a cost than a trial court could.

The problem with the certification program is that it will create a large federal bureaucracy that will ultimately raise the costs of all medical malpractice litigation. The first flaw in this program is the belief that there are a great amount of frivolous malpractice claims being filed (notice that tort reform makes this underlying assumption as well). A medical malpractice claim is extremely expensive to pursue all the way to trial. The cost of experts along with extensive discovery raises the costs of malpractice litigation well above the costs of other types of litigation. Therefore, an attorney will only aggressively litigate a malpractice case if they believe that a claim has merit. Yet, I am not naive enough to believe that there are not attorneys out there who will threaten litigation in the hopes of obtaining a quick settlement. The problem is that the certification program will not prevent lawyers from threatening litigation and it will raise the costs of bringing valid claims.

The certification program would require both the plaintiff and the defendant to proffer some evidence at an administrative hearing in order for the agency to make an informed decision (just reviewing the medical records would not be enough because of the complexity of malpractice cases). This would result in a sort of "mini-trial," thereby forcing the defendant doctor to gather evidence and formulate strategy to present a case. The "mini-trial will also inconvenience the doctor since he/she must take time out of his/her busy schedule to attend the hearing (along with any reputation damage incurred by claims). This "mini-trial" will create enough expense, inconvenience and reputation damage to force the doctors to settle minor frivolous claims just to avoid going to administrative hearing (much like employers will settle nuisance employment claims to avoid the expense associated with frivolous claims). Therefore, this system would have very little impact on the filing of frivolous claims in the pursuit of a quick buck.

Next, it needs to be determined whether the certification program is needed. The judicial system has a sort of built in certification program with summary judgment proceedings. Both summary judgment proceedings and administrative hearings would require about the same level of evidence and legal strategy to enable the decision-maker to formulate an informed decision about the frivolousness of the claim (note that in both cases a question of fact would ultimately go to trial). The only advantage that the administrative hearing would have over the summary judgment process is that the decision-maker in an administrative hearing would have a background in medical care. This is a big advantage over a regular judge but the advantage could be better accomplished by creating special regional malpractice courts where the trial judges have background in medicine (much like the court of chancery in Delaware for corporate law).

(It is important to note here that stiffer rule 11 sanctions against attorneys would also reduce the amount of frivolous claims being pursued in the judicial system)

The next problem with the certification program is the Due Process issues involved. To get over the Due Process hurdle the certification program would probably have to implement an appeals procedure. Once an appeals procedure is implemented, how much actual savings are being created? If a client truly feels that they have been wronged, they will appeal the negative agency ruling to a court. The court will then have to conduct a trial to make its determination (unless the administrative agency is given discretion to make broad findings of fact. But discretion to make broad findings of fact would greatly increase the costs of the administrative hearing). Therefore, a full court proceeding will have to occur somewhere along the line for an adequate determination to be made. This will not reduce the doctor's liability of costs in defending frivolous claims.

Another problem with the certification program is that it will raise the costs of bringing and defending malpractice claims with merit. The administrative hearing would add another proceeding to the judicial system, thereby raising the costs of litigating a malpractice claim. By raising the costs of defense, the certification program may actually raise the costs of malpractice insurance since the insurer will be called on to defend the action at both the administrative level along with all levels pursued in the judicial system.

For evidence that the certification program would ultimately fail in its goal of reducing frivolous claims one has to look no further than the field of employment law. If the certification program is implemented in a loose structure in an attempt to reduce the costs of defending such claims, then access to the program will become too easy (much like the EEOC). Once access becomes easy, attorneys will have another weapon to induce settlement of frivolous claims since the threat of bringing action becomes very real because the barrier to entry is lower. Thus, no matter how frivolous the claim is, there will always be an incentive to settle since the doctor will be forced to defend the claim (much like an employer will settle many frivolous employment claims because the costs of the nuisance are greater than the costs of settlement). If the certification structure has a rigid structure, then the process would look very "trial like" thereby not reducing the costs associated with defending the claim. In all, I believe the certification program would have very little impact on the amount of frivolous claims being brought and the potential dangers of such a program are great. The reduction of frivolous claims can better be achieved through other means.

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Tort Reform

President Bush is pushing for tort reform in the medical field in an attempt to reduce malpractice insurance premiums. The underlying theory is that capping the amount of punitive and compensatory damages will reduce the premiums on malpractice insurance, thereby reducing the cost of health care to patients. Also, tort reform is meant to reduce the amount of frivolous lawsuits since personal injury attorneys would be leery to bring suit on marginal cases because the limited awards may make the risks of fronting the costs of litigation less enticing.

Once you start dealing with tort reform in the medical arena you start going down a slippery slope. In theory, tort reform is great. It reduces the amount of frivolous lawsuits in this litigious happy country and it prevents greedy personal injury lawyers from collecting millions on someone else's pain. But in reality, tort reform is extremely complex with numerous arguments against it. The only argument that I will touch on in this post is that it has a strong propensity to discriminate against the poor and middle class.

By capping the amount of punitive and compensatory damages available to the injured party, tort reform skews the contingency fee calculus, turning what may be a valid claim into a marginal claim in the eyes of a personal injury attorney. (I.e. it shifts the entire calculus a few degrees towards not taking a case. For example cases that would be deemed a marginal case today would certainly not be taken, cases that would be deemed to have a fairly high degree of success would become marginal.) This will cause personal injury attorneys to only take a case on contingency when the case may yield a fairly substantial award and the case has a high probability of success. The personal injury attorney will handle all other personal injury claims on a retainer basis since the risk of litigating are greater than the potential fees. Thus, they will look to eliminate this risk by having the client pay all the costs of litigation. This system would inherently discriminate against the poor and middle class since they would only be able to find an attorney to litigate their malpractice claim on a contingency basis if the potential for damages is great enough and recovery is probable enough. Any claim that does not fit this criterion will be left unlitigated since the poor and middle class would be unable to pay the high costs associated with medical malpractice litigation.

Therefore, tort reform may reduce the costs of health care by reducing the number of lawsuits and amount of damages available but this reduction comes at a cost since poor and middle class individuals would be unable to afford litigating many legitimate claims. Therefore, tort reform would have the effect of leaving many severely injured people under-compensated and leaving many injured people wholly uncompensated. The minor reduction in health care premiums that tort reform would create is not worth the costs it would inflict on the injured poor and middle class.

In conclusion, I am not wholly against tort reform because I too think it is unjust when a personal injury attorney reaps large fees off of someone else's pain. The point of the post is just to briefly hit on the slippery slope that one goes down when considering a tort reform regime. I will touch on tort reform again in upcoming posts.

Note: I was under the failed assumption that readers of my series would have read my first post. Let me clarify this and prior posts. I am calling for the federal government to defer the health care issue to the states (as will be explored in post 9). Tort reform is a definite tool that the states could implement in a comprehensive approach to health care. Under this comprehensive approach, states will be better to handle the slippery slope problem because each state would have individualized needs and concerns (i.e. a state would be in a better position to determine sufficient caps). The point of posts 2-8 are not to entirely scrap each proposed plan, but rather to point out some of the plans flaws. This will allow me to describe why the proposals will be better implemented at the state level. Sorry about any confusion and I hope this helps.

Links to prior posts: post 1 post 2 post 3 and post 4

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IV. President Bush's Plan To Allow The Purchasing Of Health Insurance Across State Lines

Another Bush proposal is to allow people to shop across state lines for health insurance. This proposal is looking to expand a national model of insurance (i.e. see Progressive and GEICO for auto insurance) to the health insurance field. The belief is that people will use the internet or other tools to research health insurance rates across the country and purchase the policy or plan that best suits their needs.

The "shopping across state lines" plan sounds very simple in theory but is actually extremely complex. To better understand the problem, I need to provide a brief history of the insurance industry. In the 1940's the insurance industry pushed for state preemption of federal law in the insurance field in order to avoid being regulated by a much more aggressive federal government. Congress acquiesced to this request and enacted the McCarran-Ferguson Act to give the states reverse preemption power in the field of insurance. States then enacted different bureaucracies to oversee the insurance industry (i.e. the Commissioner of Insurance in Wisconsin). Therefore, each state regulates all insurance polices issued in the state. A state can decide whether insurance is mandatory (i.e. car insurance in most states) what provisions the policies must provide, damages available, regulate guarantee plans and residual plans, etc.

This brief history shows that each state has formulated state specific rules and regulations for the health insurance industry. To overcome the states' insurance structure, Bush's proposal can be accomplished in one of three ways: 1) allow across state line purchases without amending or overturning McCarran-Ferguson, 2) Overturn McCarran-Ferguson completely to allow federal regulation of the entire insurance market, 3) Amend McCarran-Ferguson so that only health insurance qualifies for federal preemption. All three options would be a nightmare to implement and would result in very little savings.

1) Not Amending or Overturning McCarran-Ferguson

By not amending or overturning McCarran-Ferguson, President Bush would be establishing a choice of law nightmare. This can best be explained with an example. Assume a Wisconsin employer has employees who are all Wisconsin residents. The Wisconsin employer decides to purchase an insurance plan from an insurance provider in Illinois since it offers the lowest premiums. Also assume that Wisconsin law mandates that all insurance policies sold in Wisconsin must cover experimental cancer procedures whereas Illinois has no such law. An employee covered by the plan later develops cancer and seeks to obtain an experimental cancer procedure. The employee goes to a Wisconsin court seeking a declaration that experimental cancer coverage is implied in all insurance contracts sold in Wisconsin. Whose law should be applied? Most choice of law tests would say that Wisconsin law should apply since it has the most contacts to the case (I'm simplifying the choice of law analysis for the sake of brevity). Thus, the insurer should be required to pay for this procedure. After a judgment like this comes down, all insurance premiums for policies sold in Wisconsin will be higher to adjust for this increased coverage. This would result in an insurance market that looks exactly like the one we have today and a court system flooded in litigation for insurance determinations (this added litigation would probably raise insurance premiums).

2) Overturn McCarran-Ferguson Completely And Have Federal Preemption Over The Insurance Industry

By overturning McCarran-Ferguson completely, the federal government would have to create an enormous federal bureaucracy and create a substantial amount of legislation to oversee the entire insurance industry (The field of pension law shows that this may not be desirable). Congress would have to regulate everything from health care to auto insurance to life insurance. People would lose any advantages their state has provided them in the insurance field over the years. What advantages would overturning McCarran-Ferguson yield? The answer to this question is quite complex since "for every give there is a take." If the federal government enacts legislation that has stricter coverage standards than your state currently has, then you will benefit from the increased coverage but you will be hurt by having to pay higher premiums. If the federal government enacts legislation that is less strict than the state you reside in, then you will benefit from lower premiums but will be hurt by receiving less coverage. At the end of the day, the average premium cost in America will stay the same as it is today, assuming Congress passes a middle ground standard between the strictest state and the most lenient state, thereby eroding any advantages that the "purchasing across state lines" plan seeks to obtain. [I am assuming that the insurers' savings of having a uniform plan across the nation (i.e. compliance efficiency) do not substantially outweigh the administrative costs of having to deal with the federal bureaucracy].

3) Amend McCarran-Ferguson So That Only Health Insurance Qualifies For Federal Preemption.

Amending McCarran-Fergusen so that only health insurance qualifies for federal preemption would have the same leveling effect as described in option 2, and thus will not reduce the costs of insurance from the levels we see today. It would also create a nightmare for the courts since the courts will have to determine what is "health insurance." It could be argued that liability insurance could fit into the definition of "health insurance" since it provides payments for medical costs. This argument is further bolstered by the concept of subrogation between a health insurer and a liability insurer. The problem is that many different forms of insurance contain a liability function (i.e. home, auto, business etc.) Would these policies be regulated by the states, by the federal government, or by both? This would open the floodgates of litigation on this point.

Therefore, all three alternatives contain flaws that are inconsistent with Bush's policy of a smaller federal government. Both overturning and amending McCarran-Ferguson would force the creation of a large federal bureaucracy to deal with insurance issues. It is the creation of large insurance bureaucracies that Bush is currently criticizing Kerry's plan on. Also, simple economics would tell us that allowing purchases over state lines would lead to little or no change in the average cost of health insurance. It will lower premiums for people who are at the high end of the premium scale (based on geographic location) but it will also reduce the quality of coverage. It would also raise premiums for individuals at the low end of the premium scale (based on geographic location) and will raise coverage. In the end, the costs and benefits will ultimately even out, leaving the problem of high health insurance premiums that we see today.

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III. President Bush's Association Health Plans

Association Health Plans (AHP) are another proposal that President Bush hopes will solve the high insurance premium problem. AHP's would allow small-businesses to band together to create a larger insurance pool. By the theory of "power in numbers", the association will then be able to negotiate more favorable health insurance rates from an insurance provider.

AHP's have many flaws is both the assemblage and the administration of the associations (see Kansas's 1980's experiment with AHP's in which many plans did not charge enough to its participants and the plans ended up going broke), but I will only focus on the one problem that I deem most alarming-- discrimination. AHP's suffer from the problem of redlining. Any rational small-business will not form an association with any other small-businesses whose employees create a greater risk than that of its own. Therefore, small-businesses with many employees in high-risk health categories will be frozen out by other small-businesses with less risky employees looking to reduce premiums. This will lead to two major problems: the first is that small-businesses will discriminate against other small-businesses in the formation of associations based on age, race, disability or any other actuarial category that will raise premiums; and the second problem is that the small-businesses in the greatest need of health care relief will be unable to attain it, leaving employees most in need of insurance uninsured.

Edit: I wanted to address an question that was emailed.
So since all won't benefit equally, none should benefit at all?
I agree that something needs to be done even if it has
disproportionate effects. the problem with AHPs is that the value of
have a large number of insureds is not so great as to reduce premiums
by that much. That is why most large companies are self insured with
an umbrella policy to cover the plan. This trend shows that the
associations will tend towards self insurance as well (once there are
enough participants to make it actuarially sound). The question then
becomes: who will administer this plan when there are numerous
employers? The association will likely hire a 3rd party administrator to run the plan (much like the failed Kansas experiment in the 80's).

Discrimination comes into affect once this association is formed. If
an association has low premiums, then more high risk companies will try to join the association. When they are rejected, the companies will file discrimination suits to enter the plan. The plan will have to formulate nondiscriminatory exclusion procedures (much like insurance companies do)in order to justify the exclusion. Reduced premiums would not be a sufficient justification. The costs of defending the suits will raise the administrative costs of the plan. If an association loses its control over who to let into the association then the benefits of forming an association will be minimal since the plan will have a wide spectrum of risks. Therefore, the only affect an association would have is to reduce the costs for high risk companies and raise the costs for low risk companies while creating a flood of litigation (low risk companies would probably stop forming associations because of this leaving only high risk companies). This would not solve the health care crisis.

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