Wednesday, February 11, 2015

This May Be the Biggest Problem with American Healthcare. And the President Agrees

Third-Party-Payment Destroys Market Efficiency

  • In 1960 about half of our healthcare expenses were paid by the government or an insurer.  
  • Today people pay less than 12% of their own costs.  
  • Whether it is the government squandering taxpayer dollars or your child blowing the the $10 you just handed him for video games, other people don't spend your money anywhere near as efficiently as you do. 

This is an excellent column from Investor's Business Daily on one of the single most fundamental problems in U.S. healthcare.  My text is in black, IBD's is in gray:
President Obama almost sounded like a free-market health care reformer during a recent interview. Too bad he can't even imagine letting the private sector fix things.

In an interview published this week on, Ezra Klein asks Obama why health care costs so much more in the U.S. than in other countries. It was a perfect set-up for Obama to blame greedy insurance companies, drug companies and doctors. 
Instead, Obama gave a surprising — for liberals at least — answer: Health costs are being driven up largely because most health bills are paid by third parties. 
Actually, our problem is worse than that in America.  We really have, overwhelmingly, a fourth party payment system.  Medical groups and insurers haggle over reimbursements. Insurers repackage that menu of prices, slap a premium on it and sell it to businesses. Then businesses massage it and reprice a fraction of it back to employees in the form of employee contributions.

Employees see the $500 (or whatever amount) coming out of their paycheck every month for their family contribution and they make the economically rational choice to use that plan without too much thought and no real incentive to determine what the best price of a procedure is at competing hospitals.  That even sounds funny for me to type, doesn't it?  "Competing" hospitals.  Once that $500 a month is coming out whether you visit the doctor or not, the $25 copay for an office visit means almost nothing.  Back to IBD's article quoting the President:
"Mostly we've got a system where everybody gets their health insurance through their employers," he said. "For those of us who have an insurer, we don't track (costs). And the market then becomes really opaque and really hard to penetrate." 
Obama even says, "Moving in the direction where consumers and others can have more power in the marketplace ... makes a lot of sense." 
This is the most accurate and insightful observation on America's broken healthcare system I've heard from the President since 2009 when he noted that Medicaid was broken and we can't simply solve our problems by dumping more folks into that dysfunctional system. Unfortunately, no fixes were installed and the President's health insurance reform did exactly that.
This is almost exactly what free-market health care reformers have been saying for decades. 
As the ... [above] chart shows, private insurers and the government paid for about half the nation's health care costs in 1960. By 1980, they covered more than 75% of health costs. Today, they pick up more than 88%. 
This rise in third-party payment for health care — driven by government programs and decades-old tax policies — largely shields consumers from the cost of care, which fuels inflation, distorts the market, increases paperwork costs and makes pricing agonizingly opaque. 
But while Obama managed to hit on the right diagnosis, he utterly failed to understand its implications. In his next breath, in fact, Obama says that he's expanded this third-party system so people can "have peace of mind." 
ObamaCare limits deductibles, limits annual out-of-pocket spending, mandates first-dollar coverage for a host of health care and so on. As a result, the Centers for Medicare and Medicaid Services (CMS) expects that by 2023 private insurers or the government will pay for more than 90% of the nation's health costs.... 
I encourage you to read the entire IBD story, here.

If you want to read more about why healthcare inflation has slowed slightly in recent years see here.  It began in 2006.  It is because the economy has been so bad, people are self-rationing care unless that care is absolutely necessary.  The prevalence of higher deductibles and copays in Obamacare have accentuated that impact.

Lastly, shopping for price does matter immensely in healthcare.  Whatever system we devise must incentivize people to comparison shop.  HSA-compatible PPO plans are one great way to accomplish this.  With those plans individuals can pair up high-deductible insurance with pre-tax savings accounts that roll over from year to year and travel with them to cover healthcare expenses.  See the below listing on the prices for a knee-replacement surgery from around the U.S.  Without an incentive for an end user to compare prices, these market distortions will never be resolved -
  • $16,000 in Alabama; 
  • $19,600 in Fresno, California; 
  • $41,000 in San Diego, California; 
  • $61,000 in New York and 
  • $31,000 average U.S. cost. 
   Source: Forbes slideshow