Why is McAllen healthcare so dang expensive?

Here’s a New Yorker story by a Physician who visited McAllen, TX – our most expensive health care community. He comes back full of observations but no insights. I’ve read these sorts of stories again and again for at least 20 years. At one time I thought they had some mysterious significance that I just couldn’t find. Now they just make me sad and angry.

The New Yorker article applies an essentially Marxian analysis. His argument is when physicians behave like capitalists, they behave in evil and exploitative ways. When they behave in some ill defined and always ‘cooperative’ manner, they behave rationally and sacrificially. Note the separation into categories of good and evil, the righteous and the dark ones. There’s another dark ones subtext that this author and his editors strove mightily to keep hidden: most of the health care professionals in McAllen are Mexican in origin, swarthy mestizos. So the capitalist Mestizos are crooks and the noble, upper Midwest white, cooperative doctors are part of a righteous culture. This is part and parcel of previous Marxian ‘analytics’ about evil Kulaks, dirty Jews and capitalist roaders.

It also has absolutely no explanatory value. As an aside: a doctor analyzing the health care market is like a bank teller analyzing financial markets. In fact it’s worse: because the Doctor has mastered a large body of technical knowledge he things he’s a genius. The teller knows that he’s just a technician.

Alternative explanation using an analytical tool called ‘market economics’:

1. McAllen-Edinburgh-Pharr-Brownsville (the RGV) constitute the most geographically isolated large community (almost 1 Million) in the US.

2. Insurers enforce price and utilization competition by negotiating rates with local providers. They can use neighboring communities to drive harder bargains, thus NY gets pressure from N. N. Jersey, N. N Jersey gets pressure from S. N. Jersey….and so on. The RGV's isolation means that the insurers can only negotiate locally – 3 hour drive through almost empty land – no towns, one stretch of 80 miles without gasoline. (It’s also a very Medicaid market, with insurers having a very low share of spend, again, less leverage).

3. The RGV is a string of 4 mid-sized communities each with one hospital that every insurer must do business with. There is no meaningful leverage so long as the four stick together. And since they are all locally run, probably by Mexican-Americans negotiating with Anglos (or at least locals, negotiating with Dallas), solidarity is easy to come by.

4. Price signals are very, very weak in our system because third party payers pay virtually everything. So the isolation limits any consumer driven competition – If we had a more consumer driven system, there would be strong incentives for consumers to travel to Corpus or San Antonio for care.

5. RGV’s poverty, lack of amenities and distinctly mestizo Mexican culture discourage outside providers who would otherwise be attracted by the lucrative practice environment.

6. The RGV is filled with recent immigrants, has the lowest English language proficiency and highest poverty rates in the US – No surprise. Thus it has the least capable and effective health care consumers.

And no need to use Marxist categories of good and evil to explain a bit of it: just humans behaving as we always have.

Now, let’s analyze Mayo using market economics: Mayo is a world class Tertiary facility located in Rochester, Minnesota. If it had to rely on the local market and a few cheese-heads from across the river for patients, it would be bankrupt in about 3 minutes. Consequently, it draws from a national market. And in today’s world, that means the insured or otherwise third party funded market. If you want to maximize your pool of customers you need to have costs that enable insurance company medical directors nationwide to easily approve patients’ requests for transfer – so to win you both need better outcomes to attract the sick and lower costs to get paid for them. That's good news: it shows that when under market pressure, health care providers can deliver both lower costs and better outcomes. And with no more morality than the McAllen Mexicans had.

So Mayo is far more effective in delivering care than others. The problem in healthcare is that Mayo can’t acquire providers in the RGV and implement their best practice model because:

1. If they did, they would be in the RGV's market and would have absolutely no incentive to economize and

2. Healthcare has very little market for corporate control and health facilities are regulated (by people associated with the local providers in most cases which does wonders for competition) so they would have a hard time buying or building and

3. Even if they could expand, since no one owns Mayo, no one can get filthy rich by expanding a lower cost model all across the country the way Sam Walton did. Expansion means headaches, not wealth.

The capitalists tried to break into the healthcare market in the 70s and 80s and generally were beaten to death by entrenched local interests that controlled the regulatory framework and that had a massive tax advantage to work with. Where they’ve survived it’s been by joining the local oligopoly. After all with the magic money machine paying for most of everything, why not?

The fundamental problem is a broken consumer market. I got hit in the eye with a stick, it took a small divot out of the white of my eye. Hurt like hell, I was concerned. I went to the ER, could have gone to the urgent care center, but I wasn’t paying the bill so what the hey. 750 vs. 100 bucks. If it was going to cost McAllen heart patients 5 grand more for their heart at home, they’d drive to Corpus. Pretty soon, the heart boys in McAllen would notice a drop in business and adjust their rates/practices. So no market, no price or utilization discipline, no market for healthcare control, no incentives for the people who run the facilities to aggressively innovate business models and enter other markets. It’s a wonder anything gets done.

Let me end with a different Universe: Singapore has the 7^th best healthcare system in the world according to the UN's World Health Organisation (U.S: 37, which is a crock but that is another story). According to the Kaiser Permanente Foundation, Singapore spends 3.5 Percent of GDP on healthcare. Singaporeans are a little younger and a little less affluent then we are but not by much. 70 percent of the population and at least 80 percent of the health care providers are Hakka Chinese (used to live there is why I know). 3.5 vs. 16 percent. According to my Mother (and she would know) the Hakka are greediest, graspingest SOBs (her words, not mine) that she has every had the misfortune to deal with (so much for Marxist categories). Yet 3.5 vs. 16. She got so angry at a ‘gotcha’ traffic ticket given by a Singaporean cop that she went to court, shouted at the judge and got the charges dismissed. Yet 3.5 vs. 16.

What’s different? In Singapore, the government covers all ‘catastrophic’ care with a social tax (say anything above 15 or 20 percent of income) – in insurance terms, they run a single ‘national’ risk pool. Everything else (including lots of ‘routine’ surgery) is paid for out of the consumer’s pocket. And as Jim Nabors would say “surprise, surprise, surprise, surprise” when people are paying their own jack they shop round, negotiate, bundle purchases and otherwise behave like that mystical beast: a ‘consumer’.

We are starting to do it here with the HSAs established under W’s administration, here’s today’s headline on a program in Indiana: Indiana saves 35% on health costs with HSAs. What do HSA’s do? Relink consumer choice and price. Just like in the WHO’s #7.

And here’s our real problem almost 95 percent of all expenditures are paid by somebody else. Just like the not for profit public schools and not for profit universities. And just like them, healthcare has experienced ruinous inflation.

Now a question for the Obamacare Left: With the Singaporean example for all to see, endorsed by the UN for cripes sake, why are the only people in this country advocating the selfsame model (aka consumer driven healthcare) conservative republicans and libertarians? Why is there not a single Democrat politician advocating it or New York Times reporter reporting this? 3.5 vs. 16. Why isn’t President Obama doing everything he can to get this wonder of a system implemented in the US? After all, if we only got back down to 10 percent of GDP it would free up an enormous amount of wealth for Americans to use as they pleased.

I have the answer but my good friend Ben Knoll tells me it’s impolitic.