Thursday, December 09, 2010

Skin in the Game

A longstanding meme here at IB is that health insurance costs increase because health care costs increase; a corollary to this is that, because we are insulated from the true cost of health care, we have little or no incentive to demand its efficient delivery. That is, since the majority of (private) health insurance is subsidized by employers, we don't really know what it costs, and since most of us have some kind of co-pay plan, we don't know the true cost of the care we receive.

If, for example, your employer covered a third of your car payment, would you really know (or care much) what that payment is? And if your car insurance covered oil changes, would you know (or care much) what your mechanic charges?

Human nature suggests that the answer would be "no, not really." After all, if someone else is fronting the bill, we don't have much (or any) incentive to question it or look for a better "deal." We saw this most graphically in the lobster dinner allegory, and now Investors Business Daily puts hard numbers to the phenomenon:

"Nearly 60% of American adults are covered by an employer-based plan ... Because Americans who have employer-based coverage see little money coming out of their pockets when they visit a doctor or go to the hospital, they have little incentive to keep costs down."

Or, to put it more bluntly, "(a) primary reason why health care costs are soaring is that most of the time when people enter the medical marketplace, they are spending someone else's money," as Devon Herrick (of the National Center for Policy Analysis) notes.

There are certainly times, of course, when careful shopping is inappropriate: in the ambulance when suffering a heart attack, the CareFlight helicopter at the scene of the crash. But for the most part, and especially when it comes to routine and maintenance claims, why aren't we more involved?

Another example: the typical prescription drug card now carries a $15 co-pay for generics. But who pays $15 anymore? After all, (almost) all can be found for $4 at Walmart or CVS or Krogers (to name a few); yes, it may involve a little time and travel, but it's once a month (or every three months). Even at $3 a gallon, how far would you be willing to drive to save $11 per scrip? And if you're on several such meds, the cost is even less. So why aren't we using this model for other aspects of health care?

Here's why:

"According to Herrick, for every dollar of hospital care that is consumed, a patient pays only 3 cents. The rest is paid by a third party ... When a patient visits a doctor, less than 10 cents of every dollar of care consumed is paid by the patient. Again, a third party pays the balance."

That "third party" is, of course, one's insurance carrier. But even that's not completely accurate: for the most part, the routine claims are really just a transfer of one's premium to the provider; it's not the "house's money." Still, it obscures the actual cost of the care itself, which then further exacerbates the increase in those costs.

And, as IBD points out (and as we've noted), "Medicare and Medicaid have also had an impact on spending, as they too are third-party payers that ... hide from patients the true cost of medicine." These two schemes actually represent a double-whammy: the first (as IBD notes) is that they pick up the bulk of the tab, which hides the cost from the beneficiary. But that cost doesn't go away: a goodly portion of it is shifted to the private insurance sector, which must then recoup that cost by raising premiums.

So what's the solution?

Herrick takes a novel (and, I think, effective) approach: he considers the case of the plastic surgeon. In almost all circumstances, plastic surgery is elective, and thus not available for insurance reimbursement (and, as we've noted, ineligible for network discounts, as well). So the real cost is very easy to determine: it's what the doctor bills you. One would think that, since so few of these expenses are "outsourced," demand would remain fairly level (or even decrease as folks' disposable income plummets in this economy). But that's not the case:

"1.7 million cosmetic surgical procedures were performed in 2008, "more than 40 times the number performed two decades ago." Yet cosmetic surgeons' fees, he says, have remained relatively stable, rising only 21% from 1992 to 2008."

So there are two effects at work here: on the one hand, patients' demand is higher than ever, but the cost of the care isn't. Why is that? Well, it's pretty simple: when folks are spending their own money (as they almost certainly are in this instance), they have an incentive to find the best "bang for the buck." And since providers are truly at the market's mercy, there's an incentive to keep costs as low as possible. The key is that the patient, not a third party, is in control.

Isn't it time we took control of our other health care needs, as well?
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