The Second Reformation – Part II

In part I we beat up on banks because they failed the very people who put their trust in them. As it turns out, there is another industry able to do even greater harm than the banks; and it is equally difficult to understand why. I am speaking of course about the health care industry, both health providers and health insurance companies.

The Health of a Society

The health care system in the United State is a competitive one, made up mostly of for profit health care providers and insurance companies. On the surface competition may sound like a good thing. Competition means that doctors should compete for patients by providing the best care at the lowest market price. However, this is far from what happens in the American system. A number of factors over the decades have led to a system out of control and headed for a cliff just as the financial markets have been for decades. Only when the medical establishment crashes, the result could be much direr; our very lives could be stake.

A full examination of the health care industry would take several thick books, so a summary will have to suffice here. Throughout the 1900’s and the first decade of the new millennium the health industry has meandered down a winding path in ill-conceived attempts to improve itself. There was a time in our history when health care was non-profit and non-corporate, and cost so little that except in the worst cases, the need for insurance was negligible.

When you become ill, you go see a doctor. Almost all Doctors now are forced to work for a large health care corporation. As we have seen earlier in the financial industry, corporations care only about making their stockholders happy with increased profit. This fact sets the stage for our first conflict of interest, but it gets worse, much worse.

Most medical care is now provided through insurance. Insurance companies are also for profit corporations.  An insurance company maximizes its profit by paying out less in health care costs than they collect in premiums. On the surface, it would seem logical that insurance companies would force the health provider establishment to keep costs down. However, the reality of the dynamic that arises from the interaction between these two related industries has taken some weird twists that have crippled the system.

The merging of health providers into large corporations has turned medical care into a commodity. There are plenty of sick people to go around, such that doctors rarely have to ‘build’ a medical practice any more. They go to work for a corporation with patients already lined up at the door. In the 60’s, 70’s and 80’s health care costs rose as new technologies made ever more elaborate, and expensive, options available. Hospital corporations figured they could make more of money by performing elaborate and expensive tests. No one complained if excessive tests and procedures were done as long as in the end, the patient survived and insurance paid the bill. Insurance companies were determined to put a halt to this abuse. In another move that on the surface made sense at the time, insurance companies started limiting how much they would pay for a specific ailment, not the treatment. A form of payment known as Capitation. Therefore, a diagnosis would yield a fixed payment to the health provider, regardless of a cost of actual treatment. Some insurance companies are no health providers also as they have merged, and they actually pay the doctor per patient like a salary, then deduct from that the cost of whatever treatment the doctor recommends. This of course puts the doctor in an untenable position.

This move by the health insurance companies had two major effects. The actual cost of treatment was now detached from the cost of providing health care and more easily hidden. There was a drive by corporate health providers to maximize profits by getting as many patients through the door as possible, diagnose early to get the fee they want, then rush the patient out the door with a minimum of actual expense. The fee for diagnoses would have to be averaged over many patients with different levels of care. Doctors who tried to work outside this system, stay independent and charge just for actual services rendered might only receive a partial payment from the insurance company. The result being, that even though they have insurance, the patient had to pick up the difference. Doctors simply could not compete with the corporate machine, and any doctors that were holding out on ethical grounds were forced to join the corporate medical system. The entire medical system is full of quick fixes that had unintended consequences because it is designed from the bottom up not to provide medical care in the best interest of a patient, it is designed to run like any other corporation and make a profit for their shareholders.

When there is a flaw in the design…redesign

When there is a fundamental flaw in the design of something, the last thing you want to do is create a short-term work around to mask the flaw. Eventually a case will appear when the work around fails and the original flaw is able to exacerbate that failure and make things even worse. If you design an aircraft that is too heavy to get off the ground, the best fix is not to simply get bigger engines. The best fix is usually to go back to the drawing board and design a lighter aircraft. You cannot fix a bad design with more bad design.

Our banking and health systems are poorly designed and rapidly failing because of the same fundamental flaw. They both are designed to serve their shareholders instead of the public good. The continued bad practices in the financial markets were not sustainable and eventually resulted in a sort of population crash of the system. That fundamental flaw still exists and so the next failure may be more devastating.

The same is true in health care. They are on an unsustainable trajectory of higher cost and poorer care. You would think with health care tripling in cost compared national GDP that we would have the best system money can buy. The reality however, that we spend three times as much money and we actually have the worst health care quality among the industrial nations.

Additionally, the growth of health care cost is not sustainable. Eventually the system will suffer a form of population crash like the one we saw in the financial sector. All it takes is some event like a mass illness; Avian flu perhaps could push the system to the breaking point where in all comes tumbling down. In addition, this time it might be accompanied with a real population crash.

Good Old Engineering

In part I of this series we looked at how one aspect of the system, banking, is broken. In this second part of the series we examined another industry; healthcare. One can point out a number of areas where banking and healthcare have failed the system, but if all you do is look at the direct cause of the failure, you never really understand how to prevent it from happening again. You end up applying Band-Aid’s to a chronic problem at best, or you get unintended consequences that are worse than the original problem.

Looking only at the points of failure is like examining a crashed jetliner, discovering the failure was a crack in the frame somewhere and then saying simply a crack caused it to crash, so we will give everyone a parachute. If you do not look at what led to a crack appearing in the first place, you never revise the design, and perform the engineering required to prevent the crack from appearing again.

One of the cracks that appeared in the banking system was the fact that banks and investment firms were now in bed together and colluded to create ultra-risky investments while hiding the true risk of the underlying mortgages inside. A huge crack in the health system comes from the fact that two sectors, providers and insurers, compete increase their own profits and against each other with patients stuck in the middle taking most of the fire.

Regulation by the government can place a Band-Aid over the crack, but the underlying cause of the crack is still there. More regulation will likely just result in more unintended consequences, more inefficiency, and higher cost.

What this means is, that while one crack is patched others may start to appear. What is needed to fix this problem is not a patch over the crack, but a change in the design.

The Profit Motive

Why would the banks do what they did that led to the crisis in housing? Why would hospitals, staffed with caring and empathic doctors and nurses, work a system that is so ineffectual and unfair? Why would health insurance companies not just permit but also actually create so much pain and suffering in the world?

The answer is simple. They are corporations, and as such, they have shareholders who have invested in them. The humanity and compassion that is felt by the individual is nonexistent in corporations. Shareholders invest for one reason, to make money. The more money you make, the more investors will push your stock price up, and everyone gets rich. Banks, as the holders and creators of money, have a fiduciary responsibility to the people and society, to cause no harm. Health providers have a moral duty and take an oath to do no harm. However, they answer to their shareholders who demand more and more profit that has the potential to cause a great deal of harm. There is a conflict of interest between doing no harm to the people who put their trust in these institutions, and the investors whose demand for more profit drives all decisions. We live in a world where our financial health and physical health are in the hands of a board of directors who we will never meet, and who will never know the names of their victims.


In summary, we have seen how a basic flaw in the design of our banking and health industry leads to conflicts of interest with the good of society. We have discussed and probably witnessed firsthand the pain and suffering these kinds of conflicts of interest cause. However, no examination of bad design can be complete without offering some suggestions for design changes. That will be the topic of part III in this series.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s