Music Reality. Captured in user friendly symbols and processed for understanding. Music The Idea Channel. Alain, I think both of us would agree that one of the major problems in the whole medical care area, closely connected with the present crisis, is the practice we’ve gotten into of having the employer, in the main, be responsible for people’s healthcare. Now, I know that wasn’t always the case when I was growing up in the 1920s and 30s, that was not the practice then, at least it was very rarely the practice. How did we ever get into that silly business? I say silly, because I see no more reason why employers should provide in kind healthcare, then they should provide food or clothing or housing. And when we had company towns, people objected to that. Why don’t they object now? What is it? How did we get into this practice? Well, when did it start? Well, we stumbled into it. How? Well, back in the 30s there were virtually no employers providing health insurance. Health insurance was growing up under the sponsorship of the Blue Cross and Blue Shields which were hospital and doctor created associations to assure that there was a financing vehicle to get their bills paid for them. The way the employers got into it, really, was during World War II that the government was spending some 45% of the gross national product and created a tremendous excess demand for labor and it was trying to hold down wages. When you are saying trying to hold down wages, stop-you mean the government had wage in price control? Yes. They set a limit on the wages employers could pay. And so in the face of excess demand pushing against these wages and price controls, oh and another important factor that came into this was that the growth of organized labor recall, back in the 30s, with the Wagner Act and all that organized labor became a much larger and more important force in our economy. So those forces came together in World War II with unions demanding wage increases. Whether unions had been demanding wage increases or not in a booming economy- the employers would’ve tried to find some way to attract workers. Right and so the government, not wanting to yield on the wage and price controls, said you may give health insurance as a fringe benefit. Well, was it the government’s idea that health insurance should be the fringe benefit? It must’ve been the employers thought of the idea of health insurance as a fringe benefit as something they could use. Well, I think coming from the side of the unions that health benefits have always been a wonderful source of bargaining prizes. You know, stick with me boys, last year I got you free doctor visits, this year I’ll get you hearing aides and crutches and next year I’ll get you wheelchairs. So I think that as a source of wonderful sounding bargaining prizes it has always been great for organized labor. But basically as I understand it that the government said you can’t increase the wages, but we will exceed to your demands to have employers provide health insurance. That will not be regarded as a violation of wage control. Right. But should it not have been taxed? Well, again, the way so many things happen in the Internal Revenue Code, it wasn’t the policy. It just happened. And that is, employers started paying for health insurance and since the Internal Revenue Code was silent on the subject, they didn’t pay tax on it. It was untaxed. Then… And pardon me, if I can add my own personal note here, I was involved in 1941 and 42 in developing withholding at source which involved W-1’s, the ambiguous form, my wife has never forgiven me for my involvement. But it involved every employer has to file a form and undoubtedly when we drew up these forms, we never took into account, at all, that there was going to be health insurance. So, it called for cash wage payment. Right and so cash wages were taxed, but not health insurance. The law was silent so they didn’t pay taxes on it. Then, when the issue came up, for example, in the Internal Revenue Code of 1954, by then… 54? Yeah. You mean it didn’t come up till then? As I recall there was a certain amount of questioning of it, but it was sustained, but not codified. So that was nine years it lasted. And by then the practice of free, tax-free employer provided health insurance was so wide spread. So many millions of people were getting so much money from it that politically it would’ve been impossible to tax it. So, it was a thin end of the wedge, if you like. It just grew and there it was. Well didn’t the IRS make some efforts to tax it? I think so. Did Congress explicitly pass a law exempting it? In the Internal Revenue Code of 1954 in Sections 105 and 106, Congress explicitly excluded from taxable incomes that employer contributions first to health insurance and then to just health benefits. It’s always fascinated, me not about this issue alone, but about so many cases how something gets started for one reason, and ultimately develops into something all together different and yet, once it develops- you can’t get rid of it. It’s what my wife and I call in the title of one our books, The Tyranny of the Status Quo. It’s much easier to make a mistake then it is to correct a mistake. That’s true for individuals, too. It’s very easy to bang your car up, but it’s not so easy to fix it after you have. So that’s how it got to be the practice of employers. And then that became, for a time, the second largest by dollar volume and by number of people affected. The largest federal health insurance program- that is the tax subsidy to employers to provide health insurance- that nobody ever had that in mind at all when they passed that legislation, it just happened… it grew. Now on the other hand as I understand it, under present law, if I or any other individual, self-employed or independent, not employed, buys insurance or pays for his healthcare that only gets deductible if its total costs exceed a specified fraction of its total income. That is on the income tax, I think what is now, 5%? Is it 5 or 7? I’m not sure. I think it’s 5%. It used to be 3% and it was raised to 5%. It may have been raised again for all I know. So there is an enormous incentive for an individual who is employed to have the employer continue to do it. That’s right. And if you think back to pre-1986 when many, many people were in the 50% marginal tax bracket, counting the federal, the state income tax in this and the payroll taxes also. I remember about 1978 or 9 a young woman graduating from Stanford was asking me for job advice and I was asking her about the pay and the different options and that night I thought, gee I wonder if this young lady stepping off of the farm and into the job market, what’s going to be her marginal tax bracket? And to my amazement I computed it and it was over 50%. I’m not surprised. You know when you count the payroll taxes, the state income taxes, the federal and you combine them and so it makes an enormous difference to have your employer pay for it. Sure, what it means is that if you pay for it, for every dollar you pay for it, your employer can afford to pay. Instead of giving you a dollar in wages, well I should put it differently. If he gives you a dollar in wages, you have left maybe 50 cents because after you paid your taxes if he gives you a dollar in medical care, you’ll get a dollar’s worth. I won’t say you won’t get a dollar’s worth of medical care, but you get a dollar spent on medical care. Right, a very important distinction. A very important distinction. And that is surely one of the major reasons why costs have gone up as much as they have. I think so. Now the question then comes down to what can we do about it? My own utopian preference, if I had my way, I would like to return to what I think is the right system, eliminating the tax exemption of employer providing medical care. If you eliminated the tax exemption to the recipient of an employer providing medical care, you would establish a very strong incentive for workers and employers to agree on a different method of wage payment. In that case, a worker would have an incentive to have the employer pay him the equivalent of what the employer is now spending on medical care. Have the employer pay it to him in cash and let him manage his own medical care because he could then decide rationally how much he wanted to buy and what it was worth. But you will tell me and you will be correct, that that’s a dream, in the sky that has given the present political situation. There is not a chance of a snowball in hell that you can get that done. So I wonder whether you don’t agree that a second best solution, not the best solution, but a second best solution would be to establish medical IRAs. That is to say, have a situation under which John Jones, the employee, in return for the employer not providing medical care directly, the employer deposits in a special medical IRA account for John Jones, the employee, lets say 10% of his salary whatever may be the average cost that he is now incurring for medical care and that is deposited there free of tax and free to accumulate without paying tax or the interest it earns. And then that ends the employer responsibility for medical care. He has discharged it by paying his fee and then the employee can use that sum as he wants. If he wants to join a HMO, he can. If he wants to buy insurance, he can. If he wants to operate on the direct pay, he goes to the physician and pays him his fee, he can. It would seem to me that ought to be politically feasible and much more sensible than our present system. Well, one of the things I’ve learned in the past decade or two working on this problem is that incrementalism is one of the first laws of our democracy, and that whatever the idea that you bring to the policy process, they put it through the blender and cut it up into very fine pieces and so, I think that that would be seen as a very radical change. It’s fairly incremental. Well, we have an IRA. It’s building on a standard pattern. Put it a different way, suppose that alternative was presented to workers, it wouldn’t be compulsory. But suppose that alternative was presented to workers, my guess is that 90% of them would vote to do it. Well, let me come back to the employment basis of health insurance, well I agree that that’s got a lot wrong with it and if we were starting afresh, now that’s not the way we would go. We wouldn’t want people to lose their health insurance when they lose their job, arguably when they need it the most. You see, you speak always stop. I have to stop you because everybody in this business speaks as if health insurance is the way it should be provided, healthcare. I think that is absurd. I think what people need is a major medical insurance thing, but that the better way for ordinary healthcare is for people to buy healthcare the way they buy food and clothing and housing, by going to the physician and making an agreement with him and paying him his fee directly between patient and… Okay, but, the problem with that Milton is that, today, healthcare expenses are highly concentrated in any given year; something like 70% of the dollars will be accounted for by 10% of the patients or less. Well, that will be taken care of by a major medical. Okay, if you’re saying it would be a good idea to structure it so that people were much more cost conscious, acted like they are using their own money for those things that people could reasonably budget for, sure that makes a lot of sense. But there would remain that what would you do about the 70% of the dollars that are spent on the 10% of the people who have the highest costs. We need to bring some kind of incentive. If you have major medical insurance that 70% would come out of the major medical insurance. But now we have to talk about how do we structure that major medical insurance in such a way that once people are caught up in that there is still some incentive for somebody to treat the patient in the most economical way? By having those be private insurance corporations who has every incentive to do that and no different from the fire insurance, life insurance. So let’s go back. We want a regimen in which health insurers were able to contract selectively with doctors and hospitals that they thought were efficient and effective. Not necessarily. Look I think it’s a great mistake to try to figure out what devices a market will produce. We’re not smart enough to do that. If we were, we would be central planners. I would say, you want to set up a system under which the right people have the right incentives. But let me just say in this particular thing about insurers contracting selectively is that the reason the market didn’t produce that until about ten years ago is because the doctors in the hospitals didn’t want that. They wanted a kind of insurance where once you were insured you are free to go to absolutely anyone and it was really a political battle to overturn the law against that and to allow people to make choices and when people wanted to make choices they started choosing HMO’s and preferred provider insurance, that is arrangements where the insurance premium you paid was linked to the doctors you choose. So if you chose economical doctors… that held down your premium. But let’s keep these things separate. For the great bulk of people, year after year, the cost that they would bare would be of the same order or magnitude as a kind of cost they bare now to buy beer and cigarettes for those who smoke or engage in recreation much less than they spend on food because for decades total medical care costs were about 4% of income, 4-5% of income. And if we separate out these major medical costs and they, too, the total of those would only need to be a few percent of income. What’s happened now is that we have an enormously inefficient system with tremendous waste with the most extraordinary administrative complexity you can imagine. So let’s go back. For most people they will get their ordinary healthcare. Actually if you look at the facts, they’re striking. The difference in the premium you pay for an insurance policy which has a large deductible and an insurance policy which has a small deductible is extremely high. If you buy a policy with a deductible of $3,000 versus the deductible of a 100, the difference in premium is almost $3,000. Sure there is a very important reason for that, which is given the choice that people who do not expect to go to the doctor this year choose the high deductible and the low premium because they expect to pay just the premium. Whereas the people who are sick and are expecting to go the doctor soon they choose the low deductible. I don’t doubt that happens. That’s rational behavior. Yes, but it’s also rational behavior that if I have a low deductible, I will be much less careful about how much I spend on medical care than if I had a high deductible. But let me go back to the main point. You were starting to say that given that we have a system in which the employers do it and I take it also you’re taking another conclusion and that is ruling out the possibility of personal medical IRAs. Well I wouldn’t rule that out. I’m all in favor of incentives for saving and for responsible behavior and economy, but I want to keep coming back to keep reminding you that most of the costs and the most inflationary element of the costs are in that 70% that goes with the 10% of the people who are really sick. I don’t agree with you that 70% would be affected that the 70% itself would not be very strongly affected. Let me come back to another aspect of this, which is this market that can be organized effectively at the level of the individual consumer on the one hand and the insurance company on the other hand. And I think that for several reasons, we need to have some collective functions that are, today, performed by large employers which needs to be performed by some other agency. Let me just explain here. First, the administrative costs in individual health insurance because of the marketing, the contracting and everything else are very high, like 40% of premium. Not for high deductible insurance. I beg your pardon. You keep insisting, you keep adopting the common practice now that unless a person has insurance he can’t get medical care. Now that’s nonsense. It depends on the kind of insurance. Most of the people who are uninsured, you know there’s all this talk about 35 million people, most of the them are healthy young people who have decided it isn’t worth the cost of getting insured. Because they know somebody will take of them if they are seriously ill. And I believe that there is a case for requiring everybody to have a major medical insurance program. I believe there is a case just as there is a case for requiring everybody who drives an automobile to have a liability policy. And so I’m not quarreling with that and in my favorite arrangement it would be required that everybody has a major medical insurance program, but a very, very high deductible, not 3,000, but something like 10 or 20,000 or 10% of income, 20% income whichever is lower so in some cases it would be 3,000. Now, lets for a moment, argue on my grounds rather than yours. Let’s just assume that you could have a major medical program for everybody. Now do your arguments have as much cogency? Well, I think so. Why? Well I’d be worried about two things. One is, we’re in a world now where everybody just has major medical insurance. I’m still thinking about the need for some collective action. First of all, insurers are becoming increasingly skilled at charging high premiums to the people who have high medical costs and low premiums to the people who have low costs. That’s right. They should. They’re not opposed to risk premiums for automobiles. And, indeed, we’ve discovered that we have a national disaster because we don’t have risk premiums for deposit insurance. Surely risk premiums, there’s nothing wrong with risk premiums. Well, I think in the case of health care that it comes up against a social value that sick people ought to be cared for and that risks ought to be taken. Well hold on about risks being a threat. We have a redistributive income tax system already. I’ve always thought it amazing that we should have, first of all we have a redistributive income tax system so that tax rates go up as incomes go up. And then for each individual separate program we also have a redistributive thing. Why should we have housing distributed on a progressive income tax scale? Why should we have medical? I don’t believe risks of people, first of all, many illnesses are self imposed. People who smoke, people who engage in unhealthy habits and I do not see any case for risk sharing in those cases except through purchase of insurance any more than I do in the case of automobiles. Should uninsured automobile owners, let’s take automobile owners, who don’t insure, should the cost they impose on themselves be risked shared, shared across the public at large? No, but I think healthcare is different. Why? In fact more people mess up their health in automobile accidents than in almost any other way. It is fair enough to say that a lot of ill health comes from irresponsible behavior and self-inflicted ill-health smoking, lack of exercise and so forth. Let alone unsafe sex practices. Right. Fair enough. On the other hand, it is also true that a lot of ill-health comes from involuntary misfortunate. And I think here we’re up against a question of social value. I believe that to the extent that it’s involuntary misfortune. There needs to be some way of spreading that risk when the costs get large. That is that people need to be- We already have done that with having assumed major medical insurance. No because the major medical insurance you’re talking about, if it just works at the individual level, the insurers will skillfully underwrite each person and they’ll look at person A and say you’ve had a history of cancer and so next year we’re going to quadruple the premium in your policy. This happens to individuals in small employment groups all the time. And in fact, we’re going to readjust the premium each year to your expected medical costs in the coming year. So the risk spreading part of the insurance breaks down. I want to separate issues. So, let me go to a more extreme case which I don’t like, but which would be far better than what we have now. You have universal major medical with the deductibles I’ve stated, very high, paid for by the Federal Government. Well what bothers me about that is, again, I keep coming back to seeing a regime where the 70% of the dollars are going to be a cost uncontained mode because moral hazard will take over. The patient says I don’t care what it costs because I’m insured. And the doctor says I don’t care what it costs because it you’re insured then there is no mechanism. Where did those 70% come from? They come from costs per bed and hospitals going up 26 fold. And that happens because you have an employer-based thing because you have government assuming responsibility, not simply to pay the insurance premiums. See I would have the medical, the major medicals provided by private people, by private insurance companies. Not by the government, sure, right. And you have government providing Medicare and Medicaid now and those are enormously expensive. Much more expensive then they need to be. So I’m very dubious of your 70% figure based on the present crazy system. Well, that is the figure, it’s pretty well documented. The RAND Corporation did a health insurance experiment in which they found, for example, that any given year the 1% of patients who had the highest costs accounted for 28% of the costs. Take automobile insurance. But this is very different. Yeah, but this is very different from automobile insurance. Why? Well, for one thing because when people are seriously ill, let’s say they have clogged coronary arteries, there is just no end to what can be done on their behalf and the costs can become enormous. There are soft organ transplants and all these things now. We are talking about many therapies that cost 100, 200, 300 thousand dollars. But even on major medical insurance you ought to have a coinsurance payment, just as you do on almost anything. Fine. The problem with that is that just relying on the co-insurance is that people demand financial protection so they’ll want to have a stop loss and they’ll say, after I paid $5,000 out of pocket, or something like that, lets say 20% of income, then I’ll want a stop loss and I want the insurance to pay all the rest. And I would say the problem is that most of the dollars are beyond the stop loss and in the free care zone. And so I think we need to create an insurance mechanism where doctors, who practice economically, can affiliate with an insurance scheme that can offer people a low premium. And that is the key mechanism in the whole thing. But you don’t have to compel that. No, I think that a market system would produce that. I’m not objecting to the emergence of HMO’s or hospital insurance on the contrary. In fact, back in 1962 when I published Capitalism and Freedom I made a case that the organized medicine was preventing the efficient organization of hospitals, but I think organized medicine was preventing it. In fact to this day- what was that ’62? Now 30 years later, I am very happy to be able to tell you my students read that in my course and we talk about that, and I think it was marvelously presented. You talked about, it made so much sense; it would be like a department store because, of course, the individual consumer isn’t going to know who’s the best “ologist” that he might need in the middle of night. So he needs some reputable organization, somebody he can trust, that he can choose ahead of time and so you use the analogy of the department with their buyers and all that. It makes a lot of sense. Now, today we would call that a multi-specialty group practice. But why didn’t it develop? It didn’t develop at that time because of the opposition of the medical monopoly. Right. Exactly. And I think the right answer would’ve been to eliminate the medical monopoly. Right, we’re slowly chipping away at that. You know, I’ll tell you something, in my opinion there’s only room for one monopoly, one monopolist at a time. We are chipping away at the medical monopoly by replacing it by a government monopoly. And as between the two monopolies, I’m very uncertain which is worse because at that moment because of this chipping away, we seem headed inevitably toward complete socialized medicine. And I think that would be such a disaster for a country like the United States that we ought not to rule out the possibility of getting substantial changes like medical IRAs. I understand the difficulty that you tend to get very incremental changes in any system and that is an incremental change, but a big incremental change. But lets suppose for a moment that we have the medical IRAs, let’s suppose included in that was a major medical insurance program, now what collective measurement methods, other than the competition of insurance companies for patients and the physicians for service, would be necessary to make that an efficient operating system. Well, I can think of several. One is to do with the definition of the contract. Health insurance contracts are extremely complex. I think many people who write about health policies fail to understand that. They don’t know what’s in their own policy. Nobody ever reads his automobile policy, either. Right and health insurance policies are much, much more complex. And I think that… Have you recently read your automobile insurance policy through? No. Well then… be careful. Okay, you mean that they’re pretty bad too. And, in fact, I think that even the very intelligent individual is not going to be in a good position to judge, is this a good policy or not. There are problems of air pockets. I chair the health benefit’s advisory council for the state employees and we have 27 different competing health plans and recently we have decided that we will standardize on one single contract. And one of the main reasons for that is so that we can understand the contract. And in the process of standardization we found things like, plan A covers transplants including the cost of harvesting and transporting the organ. Plan B in the bold print says we cover transplants too, but in the fine print it says that we don’t cover the cost of harvesting and transplanting the organ. So somebody in the middle of the night suddenly never thought about that, suddenly finds my coverage failed me when I needed it. So I think we need some. Now I’m not saying the government. I’m looking for some other way of doing this, but we need some collective agencies that will- You mean like the consumers’ union? Well, the proposal I have been making this year I call: the health insurance purchasing cooperative. Imagine that all the small employers and the self-employed and maybe even the large employers, in a given area, like San Mateo County, got together said we will create, locally here, a collective purchasing agency. We will, with the board of the directors that responds the members, we will put on our expertise to figure out what is a good contract. What’s economical, but protects people and so forth, and then we’ll put that out to bid, and different health plans will offer their system and style of care to meet that contract and will offer all the people a choice, and people will make a different cost cautious choice. Everybody has to pay. If that is a desirable thing, why won’t it emerge in the market system? Why do you have to have..? Good question. Very good question, for which I have a lot of respect. And hold on, in the market system in which the individual health recipients are the buyers of health services and not the employers. It’s the risk spreading aspect that is market forces are unfortunately centrifugal with respect to risk sharing. That is the healthy young groups are the people who are healthy this year say, we don’t want to be polled with this other group that is having higher costs. Well fine. Why should they be? Why should they be compulsorily polled if they choose not to be? Well, the problem is that two or three years later this group of people, all of whom were healthy- show up with a couple of AIDS cases. But you’re underestimating. Excuse me, but you’re underestimating the foresight of people. People don’t just look at one year. People do all sorts of things in which they provide for contingency. Now everybody knows that if he signs up for this, he is guaranteed renewal for x years or whatever it may be and that if he isn’t guaranteed another plan which offers it cheep will not be guaranteed. Well right now, actually, most people are not guaranteed renewal and that is one of the big. Of course not, because there’s Uncle Sam standing there. Well, in fact, that’s one of the proposed legislature reforms is to require guaranteed renewal, but guaranteed renewal by itself, I’m afraid, wouldn’t be good enough to solve the problem because, you know, they’ll say sure we’ll renew your policy but we’re going to increase the price by the factor of ten. But you see the thing that always amazes me about the kind of discussion that you’re engaging in. We have mountains of experience that writing a law, that good people writing a good law does not mean that a good law will end up as a good law. I’m not advocating that particular law. Okay? I’m offering as evidence that there is guaranteed renewal today that one of the big reform proposals is to require guaranteed policies. But all you want is for people to have the options. You want the market to provide them a maximum of options. And I’m saying if the consideration you’re mentioning is an important one, I’m not saying it isn’t, well then, I believe it will be in the self-interest of insurance companies or other groups to offer those options. No. I think what’s happening is more and more insurers are doing several things. One is they produced, they differentiate the product, they produce a great variety of different health insurance contracts in order to differentiate the product that is to make it hard for people to make price comparisons, to segment markets. There is one policy for the people who want mental health and other policies for the people who want eye glasses and so forth to obviate price competition for a package of comprehensive services. And so the segment markets the differentiated products and they select risks. Am I wrong that in many states have regulations about the minimum provisions that have to be included in a health insurance? Yes. Most states have laws about that. Unfortunately those laws have become perverted as you would expect to provide their interests. You know, the people who do creative dance therapy want to require creative dance therapy. There is a state, I understand, in which pastoral counseling has to be included in the insured benefit package. Don’t you think it’d be better off if you didn’t have any of those laws? Those laws, yes, right. Let me stop you for a moment. We agree we’d better off without those laws. You really think if you and I could sit down and write some laws that we’d have a ghost of a chance of having them adopted in a way in which they wouldn’t be corrupted the same way. No. Well, I don’t know. You know I’ve developed some market reform proposals that are being worked out in a legislature form now. And while I’m not too comfortable with some of the changes that got made in the legislative slaughterhouse, I have some hope that maybe something better than what we have now will follow. Although I grant your point, that is, when the legislators, sometimes I feel like I sent you back there in Washington a design for a beautiful airplane. The first thing that happened when I got there is somebody said, well we like your design but we want to take off the left wing. I said wait a minute it won’t fly. And after it gets through to the law, it gets in the hands of the administrators. But let me come back to, I just want to recognize about the employment basis of health insurance, while I agree that it has a lot wrong with it. It does some things that are valuable that I would like to see vested in some institutions. Let’s say it’s Stanford with our 10,000 employees. Ok, we have a benefits office and a benefits committee. We study different contracts and decide what is a sensible contract. And it will protect people because most people don’t have time to become experts on it so we’ll share expertise with our colleagues. We preselect several competing options. We spread risks over our group. That is each health plan charges the same premium to every member of the group and in effect we make them compete on price. That is we don’t let them differentiate the product by, you know this one has eye glasses, but no hearing aides. This one has hearing aides, but no glasses and so forth. We say we want a standard product because we want to make you compete on price, because we think all this stuff costs too much, and we want to put maximum pressure on you to get your price down. Well, let’s see. So suppose Stanford was not responsible for paying for healthcare. Almost every one of those things you are talking about, it would be possible to do independently. By some other institutions. No, Stanford could do it. There’s no reason, Stanford has other things that its faculties organize to do. I know that there are some universities which provide advice about where you should send your children to school. Well, what I’m worried about is, I think this goes beyond just information and advice. It sure does. That’s what I don’t like. Okay, well I guess I’m looking for ways of getting maximum incentives for efficiency and economy, but trying to recognize that there is a collective desire for some risk spreading. I beg your pardon. I believe I want to emphasize personal responsibility, individual responsibility, for oneself and one’s family with as much risk sharing as individuals separately believe they should buy. Well, would you deal with the problem through long-term contracts? If long-term contracts are what people want to buy… fine. I don’t want to legislate it. Let me just say, this is a market in which it’s very difficult to create long-term contracts because medical technology changes. In fact, one of our big problems is that it’s been very difficult to create enforceable contracts at all. One of the big problems that is going on these days… Well, of course, the litigation problem is a separate problem. I always think in the case of malpractice insurance, which has become something of a scam. And what’s really involved in malpractice insurance is that the physician or the hospital is selling the patient two goods. He is selling the patient medical care and he is selling the patient a lottery ticket. People always complain about how much malpractice insurance adds to the cost of doing medicine. In so far that it leads to prevent tests and so on- it does. But otherwise, it’s just the administrative cost. It’s a lottery some people get. Now, it has always seemed to me that a physician ought to be able to say to his patient, look I have two fees. I’m going to separate these two elements. If you will sign a statement releasing me from responsibility, your fee will be x. If you keep the possibility if you want to buy the lottery ticket, in other words, your fee will be higher. You’ll share in my malpractice insurance premium. Right. Now, the only problem with that is that no courts today would enforce it. A hundred, fifty years ago they would’ve enforced it. There has been a change in the litigation explosion and a change in the treatment of liability insurance, which I think has been a very bad thing which makes such an agreement unenforceable in the courts. And I wonder how many of these contracts that you’re talking about are unenforceable for that reason and how many for perfectly valid reasons? Well, let’s see. You got me. I’d have to think about that. Yeah, but that’s really a problem. Of course these problems all get intertwined. And what is it that they are intertwined into because that sets a background. We’ve been having a movement away from individual responsibilities and social responsibilities. That movement reached its peak in countries like Russia and China. We’re heading in that direction. We’re only part way there. We’re only half way there. But I shudder when I think of the ultimate consequences of continuing to move in that direction. Well, obviously, you can’t separate out medicine from the whole society. But I don’t think we’re disagreeing on that. I mean the kind of reforms I’m proposing and designing are trying to roll back in the direction of increased, I talk about the need for informed and responsible choice, price conscious choice. Everybody has to bear the economic consequences of their choices and be rewarded for making the most economical. But it’s in the context of a model that I think might actually be politically feasible. Well, I’m just trying to urge you to be a little more radical; to extend your vision of what’s politically feasible, because I’m not thinking this solely in terms of medicine. I believe there is a movement building in this country which is reacting strongly against the trend we’re developing. I think the Perot phenomenon was a manifestation of that phenomenon. Perot, himself, would’ve gone in the opposite direction. He was a big government man. He wasn’t a personal responsibility man despite all his rhetoric. But the attempt, the desire by people all over to find some movement in that direction, so I think that there is, I don’t think we’re going to continue heading in this direction and I think in area after area we ought to try to think, somewhat more radically in the direction of how we can provide mechanisms or ways of movement or ways of thinking about things which will help us to move farther back away from the social responsibility, to personal responsibility. I’m thinking that given strongly held social values that people who are seriously ill ought to be cared for, that we can move in the direction of individual responsibility while still having some spreading of risk. Let me note that socially held position is very old. If you go back before there was Medicare, before there was Blue Cross/Blue Shield seriously ill people, in general, were taken care of. In the 1930s or 20s, when my wife and I were growing up and we went to hospitals, we never were asked do you have an insurance company? We never were asked. In an emergency you were taken into the hospital and treated and then later they’d come around and try to give you a bill and find out how it was going to be paid. But today, you go into a hospital you can’t get treatment until you’ve delivered them three insurance cards or some assurance of financial responsibility. So that social feeling of responsibility of somebody who is seriously ill has eroded, it’s not gotten stronger it was stronger before we had this system. Of course, the costs are, these things all interrelate to each other there are dependent variables. But the costs are enormously higher now as you’ve noted and medical technology can do all these very costly wonderful things. Many of those costs are higher not because of the improvements of medical technology. Not because of the improvements in medical care. After all… many of the improvements of medicine make cost cheaper now, not more expensive, by providing means of prevention, by advance inoculations, by shortening the stays in hospital. But let’s say a bypass graft operation efficiently provided will consume the annual income of the average American. Let’s take a bypass operation, because I’ve had two of them. And I can speak with some personal authority. You read the bill. Yes… and my first one was nothing like so- as expensive than my second. And my second was nothing like so expensive as I hear people now talking about, and that’s not because there has been any improvements whatsoever in the techniques or in the success rate. It’s entirely because of an addition of administrative costs and new regulations. But still… the fact would remain I think- My initial bypass operation when I had it in 1972, if I recall the costs were in the neighborhood of $3,000. That was not something which was beyond the reach which exceeded the annual income. You mean that’s the hospital and the doctor? I had it in Mayo Clinic. I won’t guarantee it wasn’t four, but it certainly wasn’t 10. I had it in 1972… that was 20 years ago. And what do we have in the price level? Fourfold… fivefold? From 1972 to 92… probably at most a doubling or a tripling. Make that $6,000 today. No, I think it would be more. But the Mayo Clinic is an efficient provider. The second one I had at Stanford Hospital which also is supposed an efficient provider. No, I wish it were, but I don’t think anyone would claim that. They would say because of the teaching responsibilities and a lot of other things. They are striving to become so. But nonetheless, if you look at the figures on administrative costs, alone, unfortunately in the study I made, I was hard put to get decent figures on administrative costs. You’re much more an expert in this area than I am. And I’m sure you can get them. I would love to see a breakdown of total medical costs between administrative cost and actual medical costs. I know that the fraction of total costs going to physicians has been going down… not up. Well, physician gross incomes are about 20% of the grand total of health care costs, and that’s been roughly steady… but of course, there have been… They were 25% before World War II. Okay, I meant since 1960 or something like that. You’re a young man; you see you don’t go back as far. Hmm, well, it’s hard to sort out on this business of administrative costs. Part of it gets back to, one important source of the administrative costs are dealing with individuals and small groups in health insurance markets, so I’m looking for… Tell me what government-run programs. I didn’t say anything about government run programs. Tell me what government run program, no; no I’m saying something different. What government run program is efficienty? Well you know… I’ll have to tell you when you’re asking me that, recall Milton that I spent the 1960s as point man for Robert McNamara trying to bring cost effectiveness to the defense department. I know. I know that very well. People when I say that now they kind of laugh what a quixotic task. And I say the main thing that I learned then was that the ideal weapons system is built in 435 congressional districts and it doesn’t work. (Laughs) And so I certainly came away convinced that they were systematic reasons why one can not expect the defense department to be efficient. There are 435 congressmen who don’t care whether the weapons works- they just want it built in their district with jobs protected and so forth. It’s not very different in health care and so ultimately, I think, we both agree, I think, that the direction we ought to move in is greater individual responsibility. Much greater… right. We ought to move in the direction of more privatization, if I may call it that, of health care. Right. And in particular we ought to move in the direction of making it possible for individuals, rather than their employers. Yeah, right. Now I’m- I suppose- more radical and optimistic about how far you could conceivably go in that direction. And about how much good it would do than you are, because you’ve been more deeply involved in trying to do something. (Laughs) You get worn down after a while. Well it- that and it trying to looking for efficient mechanisms for dealing with administrative costs, achieving economies of scale, … getting the information codified and communicated in such a way that people can understand it and act on it without having to first become a Ph.D. in medical economics. Now we have to close our… we move away from the question of what we would like to see happen. We might take just a minute for me to ask you a question. What do you think will, in fact, happen? Well, first we’ve got this monster you know 820 billion dollars of spending now, growing 11% per year. So, I think that something serious is going to have to be done pretty soon. Although when ever I say that, I think of my great professor Paul Samuelson who was asked once.” Do you think there is going to be a recession next year?” And he said, “Yes I do but of course you have to remember that I predicted 11 out of the last 5 recessions.” So, I think of that modestly and I think I have predicted 20 out of the last 0 health care crises. But I think we’d agree that this has just gotten why too expensive, something has to be done. My feeling is we are on the fast track toward complete socialized medicine. Now I think we are coming to a kind of a fork in the road. One point of view is we ought to make a serious effort to make market mechanisms work and they include that kind of things you were talking about: informed responsible individual choice, that people have to understand that this costs money if they want something that costs more than something else- they have to pay for it… and so forth. Versus the alterative- which has a strong contingent in congress, wants to impose federal price controls on doctors and hospitals and drugs and everything else. And I think we would both be pretty horrified by that prospect. Don’t you think the other track, or the second track includes the government assuming complete responsibility for payment of medical care. What’s called the Canadian or the British system. Which are, as I see it in the American context, I think it’s operating badly there. And in Britain in particularly- where you have a growing contingent of private medicine, side by side. And in Canada, they have the safety valve of coming to the United States. Its interesting, British Colombia, you talked about bypass operations, they have such a long waiting list that they made a contract with a hospital in Seattle. To do I think something like 200 bypasses at an average cost that was considerably less than there own average cost under there socialized system. That was smart buying. Very smart, buy. But what I’m saying is if you move in that direction the ultimate result will be health rationing and long waiting lists. Well, the interesting thing is in Britain, of course, a couple of years ago, the conservative government made a major move in the direction of restructuring into something called the internal market, and to restore market mechanisms. And to say that where as previously each district health authority was the monopoly supplier for all services. Now the district health authority becomes the purchaser on behave of people in its district but, the services that they buy are supplied competitively. So, they have done the thing brought all the trouble as you had predicted, that is by completely socializing it they destroyed any incentive for people to use the services economically or for people to improve the efficiency in which services were provided. The efficiency got worse and worse and worse, the waiting times got longer and longer and so they have moved back toward market mechanisms and it’s very interesting to watch the first returns are quite promising. When hospitals realize they are in competition they start innovating in ways that start bring down the costs. Well, I hope we don’t have to go through that costly process… that we can learn from their experience. I sure hope so. But, I’m very pessimistic in this area.