Monday, December 28, 2009

Why We Have a Health Care Cost Problem and Why It Will Only Get Worse: Other People's Money

The chart above shows why we have a health care cost problem. Patients have little direct connection in paying for their care, and their role has fallen significantly. Meanwhile, the government's involvement has grown, as has that of the insurance industry.

Because so many Americans rely on an insurance policy or a government program to pay their health care bills, the internal governors that temper the rest of their purchases are turned off. When a visit to the doctor's office or a diagnostic test costs them a mere $10 or $20 co-payment out of pocket — or there is no charge at all — cost has little impact on their decision to see a doctor. "By not knowing the full costs associated with health care, consumers demand more and 'overuse' it," Kenneth E. Thorpe explained a few years back in Health Affairs.

Americans would be more judicious in seeking health care — they would self-ration — if the right incentives were in place. An effective way to cut overuse and bring down costs would be to encourage through public policy the use of health savings accounts. If consumers used HSAs to pay the full amount for medical care at the point of service rather than letting employer-funded insurance or a government program pay the bills, the demand would fall.

The Democrats' health care legislation, however, puts more distance between Americans and the payment process and promotes dependence on government. That will only drive down consumers' out-of-pocket expenses even further and force overall health care spending upward. Under such a regime, the system will be worse off than it is now.

~Investor's Business Daily


At 12/28/2009 11:04 PM, Anonymous Anonymous said...

It is a runaway spending train.

Gaining speed with the "reform"

At 12/28/2009 11:33 PM, Anonymous Ian Random said...

While I agree with you, the other side is obsessed with showing that veterinary spending is also increasing:

Of course, they never post anything showing that pet insurance is growing too:

At 12/29/2009 2:40 AM, Blogger KauaiMark said...

Even WITH HSA's, doctors can't tell you in advance what anything will cost. I know, I have one. When I ask what the tests will cost, they don't know. "You'll get the bill later"

The last prescription I got for a generic cholesterol medication went unfilled when the lowest price I was quoted was $426 for 90 day supply. This was the same price quoted at two different pharmacies.

At 12/29/2009 3:05 AM, Anonymous Becky said...

Great post! So true. I just finished reading a book titled, "Bend the Health Care Trend" written by two experts in the field of employee benefit planning, Mark S. Gaunya and Jennifer A. Borislow. The authors point out a lot of the same ideas that you have presented in your post. I agree with you that consumers should have the right to choose, not government.

At 12/29/2009 8:42 AM, Anonymous Machiavelli999 said...

Two things I want to mention.

First, the Senate bill will actually require hospitals to publicize their standard charges for services.

Second, it won't really matter because the fact of the matter is markets just don't work in health care.

As an example, take this story that I got from the Marginal Revolutions blog:

The health care reform bill before the U.S. Senate would require hospitals to publicize their standard charges for services, but New Hampshire and Maine have gone much further in trying to make health care costs more transparent to consumers.

New Hampshire and Maine are the only states with Web sites that let consumers compare costs based on insurance claims paid there.

In New Hampshire, the price variation across providers hasn't lessened since the Web site went live in 2007.

The fact of the matter is people don't treat health care like other consumer goods. They do whatever the doctor tells them to do and the doctors don't really care about prices and what's most cost efficient. And in fact, if you ask the doctor or dentist about the cost of a medical procedure that they recommend to you, they get offended.

At 12/29/2009 8:52 AM, Blogger Unknown said...

Two other important factors:
1. Government involvement independent of Republican or Democratic Administrations or more appropriately dependent on either Democratic o Republican Administrations.
2. Escalating cost of heath care compared to CPI. Biggest contributors are aging seniors and the costs of multiple drugs. Not just the copay the actual cost and the doctors CYA due to legal issues (fear of lawsuit)plus outrageous malpractice insurance.

At 12/29/2009 10:40 AM, Anonymous Lyle said...

The vet cost inflation that Ian points out is alternativly an issue of a richer country demanding more services for pets. Pet insurance is still small enough to not dominate that market. But the willingness to pay for tests that could alternativly be given palliative care and/or be put out of their misery shows a willingness to spend on this issue, that may also apply somewhat to human care. Partly it is because pets have become in many cases surrogate children for people, having the advantage that you can get rid of them much more easily than a child, and that the pet does not grow up like a child does.
So one of the issues hiding is how much would we spend on health care if we had an unlimited budget? The rise in mental illnessess suggests that in the past people just lived with the issue or if bad enough were put into the insane asylum.

At 12/29/2009 2:00 PM, Anonymous Anonymous said...

KauaiMark ask your doctor for simvastatin, a generic cholesterol lowering drug available for $4.00 a month or $9.99 at most pharmacies in a wide range of strengths. My doctor writes a 90 day script for me and told me to use a pill splitter. I get a half a year supply for $9.99! Want to find out what a test or procedure costs? Ask the office manager or insurance clerk. Being on top of prices is not really a doctor's expertise. Get on the phone, be persistent, in short be proactive.

At 12/29/2009 2:08 PM, Anonymous Anonymous said...

"Markets just don't work in health care."

BS. There is virtually no market in health care, in the US...that's the problem. I suggest you look at Singapore. Health care markets work just fine when you allow them to work.

At 12/29/2009 2:29 PM, Anonymous Anonymous said...

Machiavelli999, read what Coyote has to say about markets in New Hampshire and Maine.

Markets can work, if you let them have a market.

At 12/29/2009 3:51 PM, Anonymous Junkyard_hawg1985 said...

Great chart. It looks like I'm one of the last chumps in America as I pay close to 100% of my health care expenses out of pocket through an HSA. Because of this, I do shop around, and I will also question and negotiate expenses.

At 12/29/2009 6:07 PM, Anonymous Anonymous said...

As I say, no one eats lightly at the all you can eat buffet....

It used to be you paid 20% with an indemnity plan. Once everything shifted to cheap co-pays, costs got out of control.

Prescriptions are also out of control. I see all the pill bottles my grandparents have and ask what they are for (they are relatively healthy) and they have no clue. Doctors push prescriptions because it is quicker/cheaper for them than doing anything else.

At 12/29/2009 9:42 PM, Anonymous Anonymous said...

Here in Mexico, we pay cash for almost all medical care and drugs. Almost nobody has medical insurance. We don't need prescriptions for medicines. Everything is so cheap, that we get many foreign visitors here who come JUST for medical treatment.

The last time I visited a private doctor, I paid $2.

At 12/29/2009 9:55 PM, Blogger Colin said...

Machiavelli999, the reason publishing prices has had no impact is because there is no incentive for people to shop around since their insurance pays for everything.

At 12/30/2009 12:19 AM, Blogger W.E. Heasley said...

Over utilization is over utilization in any line of insurance. It always drives up claims, the loss ratio looks miserable and eventually price must rise.

Interestingly, if you price an individual health insurance plan with a doctor office co-pay rider and rx card rider, and say a $2500 deductible major medical plan with an 80/20 co-insurance with stop loss at $2,000, then turn around and price the same risk as an HSA with a $5,000 deductible and no co-insurance (insurer pays all eligible expenses after the deductible), the HSA plan’s premium is approximately 55% less.

Further, if you take the first quote and remove the doctor office co-pay rider, the price reduction is significant.

It reminds me of auto insurance claims. Insurers know that approximately 86% of all auto accidents are fender benders. 14% of accidents are much more serious. Hence one of the major price drivers in auto insurance are fender bender claims. Therefore, when you price a risk in auto insurance, higher collision deductibles lowers the rate significantly.

At 12/30/2009 5:34 AM, Anonymous niknaknoo said...

I'm no doctor, but if you have high cholesterol would it not be better to change your diet, eat less fatty foods and do a bit more exercise rather than spend money on expensive drugs?

At 12/30/2009 11:00 AM, Anonymous Junkyard_hawg1985 said...

"I'm no doctor, but if you have high cholesterol would it not be better to change your diet, eat less fatty foods and do a bit more exercise rather than spend money on expensive drugs?"

Yes! With our current system though, the cholesterol medicine is paid by a third party, but the gym membership and healthier food comes out of your pocket.

At 12/30/2009 7:00 PM, Anonymous Anonymous said...

> I'm no doctor, but if you have high cholesterol would it not be better to change your diet, eat less fatty foods and do a bit more exercise rather than spend money on expensive drugs?

Yeah, but lots of people still have high cholesterol even doing everything you suggest.


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