Fundamental Problem in America’s Health Care System

Problems Health Care

The Fundamental Flaw


The history of our current health care system is so important to understanding the cost control problem.  It was during the period of the 60’s, 70’s and 80’s that shaped our attitudes toward healthcare.

Medical care during that period was relatively inexpensive.  In the 1940s, group medical plans began to take off as an employee benefit to induce loyalty among current employees and as a recruiting tool to attract better workers.

It was not uncommon during this period for medical plans to pay medical bills in full with only a small $100 medical deductible.

The Fundamental Flaw

Herein lies the beginning of the mess we find ourselves in today.  The reason I know this so well is because my business was providing these plans to employer groups.  I watched it first hand spiral out of control.

The abuses of these rich medical plans by the early 80’s were already legendary.  Why were they abused?  Intuitively, you already know the answer.  It doesn’t take a genius to understand that in this system costs are of no concern at the point of purchase.  And excluded from the decisions regarding cost of treatment is the premium paying employer.  Imagine a parent sending a teenager into an auto dealership with instructions to buy whatever the salesman thinks is best.  The teenager and the salesman are quite happy, but it is the parent who is stuck paying for a Ferrari.

Making a Profit

First, let me say that I am a big fan of profit.  Profit is merely taking in more than is going out.  Every organization from a large corporation to a family unit should strive to have more coming in than going out.

However, with these new medical insurance plans in place, making a profit for doctors became too easy.  Prior to these major medical plans, doctors were constrained by an individual’s ability to pay.  We have all heard about the good old days of patients paying their doctor with chickens or vegetables.  So, for the first time in history, doctors have a system that pays them promptly with essentially no questions asked.   And in this new system there are lots of incentive to give their patients what they wanted.  If a doctor was unwilling, then there is another doctor down the street who will.

By the 1980’s, the abuses of prescriptions, bogus hospital stays, and questionable medical tests are legendary.  I knew of one local scam where once per year an employee benefit plan would pay a hospital indemnity benefit of $250 per day for every day an employee was in the hospital.  His medical insurance had a $100 deductible and paid 100%.  It became routine for employees in this company to go in the hospital for 10 days once per year.  The employee made more money in the hospital than on the job so he took advantage of a little R&R in the hospital.  And of course a doctor was in on this scam.

No Incentive to Hold down Costs

So, doctors now had a system that made profits easy and even the ability to develop exorbitant profits and they did.  It was not only doctors who benefited from this new system.  Everyone associated with drug companies, medical equipment, hospitals and a host of fringe services figured a way to get in on this action.

Did the patient have any incentive to control cost in this system?  Absolutely not.  They understood the doctor was given carte blanche with no thought given to cost.

Managed care’s development came in the 80’s as a method to help control the abuses.  However,  it was still in the interest of both the patient, the hospital and physician to find a way to get the most services possible since someone else is paying the bill.  Insurance companies and providers have gone round and round for years as providers looked for ways to lawfully and sometimes illegally game the system.

So, did the patient continue to barter with the physicians?  Obviously not, and it actually became poor manners and an insult to a physician to question how much a medical charge would be.  (This attitude still exists in many doctor’s offices today)

How about the insurance companies?  Surely, they could control costs, right?  In their defense they have come up with many initiatives to control costs through managed care.  But ultimately, they always had a failsafe ability to raise rates to guarantee themselves a profit.  If the insurance companies were not able to hold down provider’s costs the insurance companies would simply pass on higher premiums.

The legal community wanted in on this gravy train too and large deep pocket malpractice insurance companies were a target.  Defensive medicine sprang up when they could prove that a physician with all the tests at his disposal missed something, and is now portrayed as negligent.  Making the case easier was the lack of financial restraint in the healthcare system thus defensive medicine was born.  If the costs and benefits of defensive medical tests were given to the individual, there is no way this practice would be as out of hand as it is today.

In summary, we designed a system with no real way to control costs and because of it they have spiraled out of control.  In the next system we will look at socialized medicine where the government as provider and administrator can and does control cost.  We will also examine at what cost does the government as provider and administrator serve the patient.

The first article in this series is 10 Steps to Reduce Health Care Costs in America. 

The next article in this series is Winners and Losers in National Healthcare.



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