A Better Approach to Health Care Reform

Dr. Russell Richards

December 2009

This paper addresses the current health care legislation, and recommends an alternative
approach to developing recommendations for new legislation. As I write this, the Senate
version of the health care legislation has just passed with a totally partisan vote of 60 in favor
(the minimum number required) and 39 opposed. Thus, I realize that the approach I
recommend is probably too late to actually impact the legislation that is likely to be passed by
Congress. However, the arguments I make apply not only to health care legislation, but also to
legislation applied to virtually any complex system – for example, energy policy, climate change,
economic stimulus, or education. I hope that our national leadership will agree that we should
be applying formal analytical methods to address critical national problems.

Complex System. Health care is a very large complex system that includes the Federal and
State government; programs like Medicare, Medicaid, Children’s Health Insurance Program
(CHIP); insurance companies providing medical insurance; insurance companies providing drug
insurance; medical device manufacturers; doctors; nurses; hospitals; health care savings plans;
medical deductions from income taxes; pharmaceutical companies; employer-sponsored
insurance plans and others. The complexity of the health care system almost guarantees that
some of the underlying relationships and interactions will not be well understood. And the
results of actions taken will not be predictable. It is highly likely that decisions made about how
to best provide health care will ignore higher-order effects and produce unintended
consequences. Such is the nature of complexity.

Systems Analysis. Systems analysis is a branch of science that exists specifically to address
decision making involving complex systems of systems. It does so by defining explicit objectives
and constraints, and it seeks to determine solutions that optimize the objectives (usually more
than one objective), while satisfying all stated constraints. Since the constraints usually involve
costs, systems analysis is often characterized as seeking the most "cost-effective" solutions.
Systems analysis usually enlists the aid of mathematical models and simulations to help
understand the problem and to explore what appear to be good solutions. Since there is a
great deal of uncertainty in complex systems, the analysis relies on assumptions and
characterizations of uncertainty (usually through the use of probability models).

One would think that in seeking to solve important national problems like health care (which
represents approximately one-sixth of our economy), our government leaders would enlist the
help of systems analysts to find cost-effective solutions. However, there is no indication that
this has been done. There are many organizations and companies experienced in developing
the models and simulations and applying them to study and analyze complex systems. For
example, there are Federally Funded Research and Development Companies like MITRE and
RAND that focus on systems engineering/systems analysis. Furthermore, companies like IBM,
Accenture, Boeing, SAIC, Booz|Allen|Hamilton, and American Airlines have large and capable
systems engineering, systems analysis, or operations research groups. Wouldn't it be
reasonable for the government to invest a few million dollars to have one of these
organizations conduct a formal systems analysis and generate recommendations?

Leverage the Experiences of Other Countries. Since there exist multiple cases where countries
have already put into place government-run health care plans and have operated those plans
for years (e.g., Canada, England, Australia), the systems analysis should be informed by what
these countries have already learned. The analysis would leverage the best of the government-
run health care plans across the world, learn from their mistakes, take the best features from
the various plans, provide American improvements where necessary, and use that as the basis
for the American plan.

Candidate Actions. To populate the potential solution set, the systems analysis would identify
a set of possible solutions which on the surface seem to be promising. Various organizations
have suggested a variety of potential solutions which seem to be promising and which are low
risk and low cost. Below are a few of the suggested solutions:

o Allow insurance carriers to offer products across state lines. This provides better
competition and increased choices.
o Provide significant tort reform. Restrict consumer lawsuits against doctors, hospitals,
drug and medical device companies. Set reasonable limits on non-economic damages for
physical and emotional pain and suffering. Limit contingency fees for plaintiffs' attorneys.
Make it harder for consumers to obtain punitive damages.
o Remove restrictions on Americans getting drug prescriptions filled in Canada or other
countries.
o Provide greater visibility into the costs of various options. Insert the insured into the
process of monitoring costs. Make the insured a stakeholder in the cost and decisions
that are made.
o Provide a one-stop shop where the insured can compare benefits and prices and choose
the plan best for them. Create greater competition among the insurance companies and
lower prices.
o Reduce the demand for healthcare through better fitness and healthy lifestyles. Reward
insureds who are in better shape. Penalize those who are overweight, smokers, drug
users, etc.
o Allow tax deductions or tax credits for health care expenses.1 Expand the use of Health
Savings Accounts (HSAs).
o Utilize top-notch technology, especially information technology, databases, machine-
readable online medical records (properly protected for privacy) to allow better
coordination between doctors and with pharmacists. Share test results. Reduce medical
errors.
o Discover models of success and replicate them (e.g., free health clinics). Identify and
publish "best practices".

1
Currently, one can deduct medical expenses, but only if they exceed 7.5% of one’s adjusted gross income.
Eliminate the 7.5% requirement.
 o Invest more in medical research to find cures and ways to prevent problems. The
cheapest way to address a medical problem is to prevent it from occurring.

Each of the above actions would require neither significant government expenditures nor
government oversight. All offer promise of reducing health care costs without decreasing the
quality of the health care delivered. The systems analysis would explore each of the above
within the context of the total American health care system using appropriate models and
simulations.

The following additional actions can reduce the number of uninsured Americans significantly at
relatively little cost:
o Provide a mechanism so that small businesses and self-employed individuals can pool
their insurance buying power through "association health plans."
o Allow young adults to stay on parents' health insurance plans at least through age 24 and
longer if they are full-time students.
o Provide tax credits to hospitals and physicians for caring for the uninsured and
underinsured.
o Allow taxpayers to deduct the cost of health insurance up to a specified ceiling (say
$7500). This will encourage more taxpayers to purchase health insurance.

The above actions are so sensible that one would think that the current proposed government
legislation would incorporate most or at least some of them. But no, amazingly, it appears that
none of the above actions is prominent in the proposed legislation! I admit that some of the
above may be imbedded in the 2000+ pages of the proposed legislation, but none is prominent
in the current discussions coming out of Congress. Note, particularly, that the proposed
legislation totally avoids any tort reform (concession to the trial lawyers special interest?) and
any consideration of actions to reduce or cover the cost of prescription drug expenses. For
many Americans, drug expenses comprise the greatest health care expenditures – and it is not
even mentioned in the Senate legislation.

I guess the actions listed above are not sexy or grandiose enough to merit consideration. I
believe the thinking is, "If a proposed solution does not cost billions of dollars to implement, it
must not be any good." I would go for the quick, easy and cheap solutions before considering
those that have much greater risk and which will cost hundreds of billions of dollars.

The Congressional Approach. So, how did our Congress come up with their proposed
legislation? Their approach was the "classic political hyena feast with everyone tearing at the
legislation, snarling when any other politicians approached the meat of a favored political
donor, with the net result being a gruesome carcass that will do nothing but stink up the
place.2" As usual, the proposed legislation is full of special deals. Senator Harry Reid has

2
Thanks to Doug Casey for the colorful description of the government approach to producing proposed legislation.
The Casey Daily Dispatch, December 21, 2009.
inserted special provisions in the legislation in exchange for the votes of several key senators.
For example:

o Senator Mary Landrieu, D-Louisiana: received the “Louisiana Purchase” break for her
state worth an estimated $300 million in extra federal spending.
o Senator Ben Nelson, D-Nebraska: received the “Cornhusker Kickback” that exempts
Nebraska from paying the usual share of costs for new Medicaid patients. This benefit is
estimated to cost taxpayers over $100 million. Ben Nelson also won an exemption from
the tax being levied on other Medigap insurance providers for Mutual of Omaha. There is
also the “Nebraska-Michigan Compromise” in which Blue Cross/Blue Shield companies in
both states get a carve-out on the insurance tax while the “Blues” in the rest of the
country get socked with the tax. (Isn’t it nice to be the 60th vote?)
o Senator Carl Levin, D-Michigan: exempted certain insurance companies in Michigan from
a new $7 billion tax.
o Senator Chris Dodd, D-Connecticut: received a $100 million bonus for the University of
Connecticut.
o Senator Bill Nelson, D-Florida: received $3.5 billion to pay for seniors in Florida to keep
their Medicare Advantage policies when seniors in other states will be forced out of
theirs.
o Senator Patrick Leahy, D-Vermont: received special benefits amounting to over $600
million over 6 years for Vermont’s Medicaid program.
o Senator Tom Harkin, D-Iowa: won a provision to increase Medicare payments to certain
low-volume hospitals in rural areas of Iowa.
o Senator Bernie Sanders, I-Vermont: was “persuaded” to drop his concerns after Senator
Reid offered Vermont a $10 billion grant for community health centers.

It is well known that special concessions were also made to Senator Joe Lieberman, D-
Connecticut and Senator Max Baucus, D-Montana. In addition, the taxpayer will be picking up
the costs of concessions made by Senator Reid to special interests like the Longshoremen’s
Union, the American Medical Association, and the pharmaceutical industry. Senator Reid also
inserted changes that will provide more Medicaid funding for specific states. The Senators from
Montana, North Dakota, South Dakota, Utah and Wyoming will get the “Frontier Freebie” – an
increase in Medicare payments to hospitals and doctors. Three states – Pennsylvania, New
York and Florida – all won protections for their Medicare Advantage beneficiaries when the
program is facing cuts nationwide. There are also exemptions for certain insurance companies,
and tighter restrictions on abortion coverage. And, of course, Reid abandoned the public
option – at least by that name. Senator Reid has defended the long list of revisions to the bill,
considering it to just be the cost of securing the backing of the Senators and the special
interests3.

3
The 2000+ page length of the Senate’s proposed legislation can probably be explained by the revisions made to
accommodate special interests and to spell out the concessions made to secure the votes of key Senators. I have
been told that the entire legislation for Canada’s health care reform was 18 pages and that the legislation for the
original Social Security was 68 pages.
I know this is the way things work in Washington, but it is difficult for me to view these as
anything other than outright bribes using my money! Our Senators are trading benefits to their
states or other special interests in exchange for long-term costs for the nation. I guess their
thinking is that passing a bad bill is OK if it includes a good deal for their states or special
interests.

The Senators themselves recognize that the wheeling and dealing that takes place is not
necessarily good for the country. Senator Jim DeMint, R–South Carolina, made a motion to
insert one more amendments into the health care legislation that would prohibit “cash for
cloture.” The amendments would prohibit Senators from accepting targeted earmarks for their
states in exchange for votes on legislation. The Senate would not even consider the proposed
amendment.

What a ridiculous way to do business! The political approach will never yield an optimal
solution. In this case, I fear it is generating very bad solutions that will result in higher (not
lower) health care costs, higher taxes, significantly greater debts, poorer health care, and
increased government involvement – solutions that are likely not even feasible.

It is not surprising that even supporters of the Senate bill acknowledge its shortcomings. Paul
Krugman4 stated, “It is a seriously flawed bill, and we’ll spend years if not decades fixing it, but
it’s nonetheless a huge step forward.”

Estimated Costs. Let us now examine the costs of the changes proposed in the Senate version
of the legislation. The Congressional Budget Office (CBO) has provided a set of numbers that
proponents of the proposed Senate legislation like to use. The bottom line from the CBO
analysis is that the proposed legislation will result in a “reduction of the deficit by $132 billion”
over ten years by cutting Medicare and other programs to the tune of $483 billion and by
increasing taxes and fees by $521 billion. Now, the CBO does not exactly have a stellar record
in estimating costs. Almost all previous such estimates of costs related to social programs have
underestimated the actual costs by significant amounts. For example, the estimates of the cost
of Medicare were off by an order of magnitude. Furthermore, I am skeptical that the
government will actually get around to cutting Medicare and other programs by $483 billion.
Imagine: More people insured and the deficit reduced. That is quite a trick. Let us look a bit
more closely into the numbers.5

Since it is difficult to relate to costs when dealing with billions or trillions of dollars, I will
convert some of the costs to ‘dollars per person.’ The ten-year cost of insuring an additional 27
million people is $871 billion. This cost comes almost totally after 2015. Thus spreading this
total over 5 years, we get a cost per year of over $165 billion. This amounts to over $6,000 per

4
Paul Krugman, “Dangerous dysfunctional government”, Virginian Pilot, December 22, 2009.
5
The numbers I am using were obtained from an article written by Randall Hoven in the American Thinker, “Merry
Christmas from Harry”, December 23, 2009
person insured per year. As a sanity check, consider typical costs of insurance plans today. A
high-deductible plan for a family of four can be obtained for $4,000 ($1,000 per person). Even a
“Cadillac” comprehensive plan can be obtained for $16,000 for a family of four, or $4,000 per
person per year. So the federal government will spend over six times as much as a high-
deductible plan and 50% more than even a generous comprehensive one.

Now let’s consider the sources of the funds that will generate the deficit reduction. Below is a
tally of program cuts, fees and taxes that will be put into place:

• Excise tax on high-premium plans: $149 billion

• Penalties for being uninsured: $108 billion
• Other “revenues”: $264 billion (extra taxes on drugs, medical devices, and health
insurance providers and a hospital insurance tax)
• Cuts in Medicare, Medicaid, and the Children’s Health Insurance Program amounting to
$483 billion in total with the largest amounts as follows:
o $186 billion from permanent reductions in payment rates for fee-for-service
o $118 billion for payment rate reductions based on bids submitted
o $43 billion from reducing payments to hospitals that serve low-income patients

The “deficit reduction” comes mostly from the first five years. This is because the taxes and
fees start in 2010, but insuring the uninsured comes only comes after 2014. By 2019, the
“deficit reduction” will be only $16 billion (using the CBO numbers)6. Thus, even by the CBO
numbers, the legislation does little to solve the debt crisis despite the claims of Obama, Reid
and Pelosi. The good news is that the plan offers some hope of extending the life of Medicare
by attacking the waste and inefficiencies in the healthcare system. But, one would need no
new legislation to do this.

What are some of the other significant features of the proposed legislation?

• It would require individuals to obtain acceptable health insurance coverage (or pay a
penalty).
• It would penalize medium-sized and large employers that did not offer health insurance.
• It would impose a number of mandates, including requirements on issuers of health
insurance, standards governing health information, and nutrition labeling requirements.
• It would have ‘multi-state’ plans that would be offered under contract with the Office of
Personnel Management (sounds like a ‘public option’ to me).
• It would have an Independent Payment Advisory Board which would be required under
certain circumstances to recommend changes to the Medicare program to limit the rate
of growth in that program’s spending. The recommendations of this Board would go into
effect automatically unless blocked by subsequent legislative action.

6
As I write this, I hear on the television that the CBO has just issued revised estimates that show the plan will
increase the deficit, not reduce it. Apparently, its original cost estimate had some double counting of benefits of
reducing Medicare costs. I will stay with the original CBO estimates. I don’t believe either of them.
 • It would raise the tax rate for upper-income taxpayers.

Conclusion. I have offered a systems analysis approach to addressing America’s health care
problems. The approach is summarized below:

Contract with a qualified systems analysis organization to conduct a formal analysis of

America’s health care system. Define objectives and constraints. Construct models and
simulations of the complex system. Collect real data. Survey the experiences of a broad
sample of countries that have years of experience with government provided health care.
Capture the lessons learned. Select the good features and eliminate and improve on the
failures. Identify other promising solutions (such as those listed above). Exercise the
models to explore the results of taking specific sets of actions. Recommend the actions
that appear to be best.

From the point of view of generating cost-effective solutions, the above approach would
certainly be preferable and more defensible to the “Congressional approach.” For less than the
cost of the concessions made to one of the above senators, Reid could have enlisted the
services of the best systems analysts in the world and focused on "optimal and feasible"
solutions as opposed to "expedient" solutions that are likely unaffordable.

For those who would argue that the systems analysis approach would take too much time (I
estimate that a quality analysis would require a year), I recommend that we incrementally put
into place actions like those listed above that are low cost and low risk and which appear
promising on the surface. This would be done for some actions, even before the results are
obtained from the formal analysis. Doing this would allow verification of the desirability of
implementing the actions both from real-world experience and from the models and
simulations.

Let me emphasize the desirability of proceeding slowly and incrementally. Yes, lots of things
need to be fixed. But not all things need to be fixed at one time. In the proposed legislation,
most of the actions that will reduce the number of uninsured will not happen for at least 4
years (and it is debatable that any of the proposed actions will reduce costs). That is plenty of
time to take small but meaningful incremental steps. It is characteristic of complex systems
that responses of the system to actions taken are unpredictable. There are typically higher-
order interactions and relationships among the many variables that frequently result in
unintended consequences. Thus, a proper approach to addressing a complex system is to take
small incremental actions, observe how the system responds and adapt as necessary.

Let's not jump in and make wholesale changes – certainly not over 2000 pages of changes that
were produced “politically” -- to remake a system that comprises one-sixth of the U.S. economy
and really works pretty well. Too much is at stake. It is important to get it right.
Dr. Richards is a systems analyst residing in Suffolk, VA. He retired from MITRE
Corporation in 2008. He received his Ph.D. in mathematical sciences from Clemson
University. He was a tenured professor of Operations Research and Systems Analysis at
the Naval Postgraduate School in Monterey, CA. He left the academic world to run a
small business providing modeling and analysis services, primarily for the Department of
Defense. At MITRE, he managed the Operations Research and Systems Analysis
Department. He has over 30 years experience in systems analysis.