Tuesday, December 12, 2006

Why Is Health Care So Expensive? You Don't Pay

Imagine that you went shopping for a new car and you only had to pay 13% of the sticker price, and somebody else picks up the other 87% of the cost - how would that affect your car shopping? That $70,000 Jaguar XJ8 that was previously way out of your price range would now cost you only $9,100, so you might now be able to afford it. That $22,000 Toyota Camry would now only cost you $2,860, so you might buy two instead of one.

And what about grocery shopping if you only paid $13 out-of-pocket for every $100 worth of groceries? It wouldn't take Nostradamus to predict that you'd be eating a lot better than you are now, and probably your dog would be too.

When it comes to spending on health care, it isn't any different when we only pay 13% of the cost and somebody else (insurance, employers, HMOs, government) pays the other 87% (see graph). And it wasn't always like that - as recently as the 1960s, almost half of health care costs were paid out-of-pocket by consumers, and consumers were probably a lot more cost-conscious.

From today's
Investor's Business Daily: Workers with employer-provided health plans were surveyed recently about their sensitivity to the cost of care. As expected, because 87% of the costs are paid by somebody else, consumers of health care are insulated and unconcerned about costs:

• Fewer than half said they consider costs when deciding to see a doctor or fill a prescription.
• Only 38% ask their doctors about lower-cost alternatives for recommended treatments.
• Less than one-quarter bother to ask about the cost of an office visit before making an appointment.
• And only one in 10 said they chose a lower-cost option for a test or treatment in the past year.

This bizarre market is no accident. It is the result of federal tax policy that has encouraged the growth of "third party" payment of health care since WWII. Tax laws provide a full tax benefit only for health care paid by employer-sponsored plans.

This has given rise to low-deductible plans that funnel as much health spending as possible though insurance companies. At the same time, Medicaid, Medicare and other government programs increasingly take on the burden of paying for health care.


At 12/13/2006 9:58 AM, Anonymous Anonymous said...

As you stated: Medicaid, Medicare and other government programs increasingly take on the burden of paying for health care. The taxpayers fund these programs. So aren't we all paying for the 87% of health care regardless of our individual needs?

At 12/13/2006 11:22 AM, Blogger Mark J. Perry said...

Yes, but we see and feel the 13% because we pay that out-of-pocket by writing checks for co-pays for office visits, perscriptions, etc., and the other 87% is invisible to us, and we therefore are insulated from the full cost of health care.


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