Market competition is not going to fix US health care
Imagine you are getting your car serviced. You bring it to the shop, you get an estimate. When the work is done the shop presents you with a bill. It may be a little more or less than the estimate was, but either way that's what you'll be paying. Now imagine that instead of paying the bill as it's presented, you tell the shop: No, I don't think your work is worth this much. In fact I think it's only worth half this much, and that's what I'll pay. You pay half the bill and walk out, leaving the mechanic with his mouth open.
Sound out of line? This is exactly what happens every day to health care providers across the country. I recently made two visits to a specialty practice group at a large public academic hospital. Here are the services I received:
2 ultrasounds: ~40 minutes of time with each of 2 ultrasound techs and ~20 minutes of time with an attending radiologist (+resident but she was just observing)
~20 minutes of counseling with a pediatric surgeon
~20 minutes of counseling with a high-risk OB
Don't forget all the overhead costs and behind-the-scenes work like maintaining the ultrasound, scheduling the appointments, dictating and transcribing the reports, discussing the case, etc.
The cost for all of this work was $994. I have to say this doesn't sound unreasonable to me, though perhaps others' views may differ.
The insurance company, however, decided the work was worth only $477.12. That left the hospital $516.88 in the hole. But since they have an agreement with my insurance company, I'm not being held responsible for the difference. The hospital is presumably going to eat the cost. (I'm planning to call the practice group and offer to pay the difference, because I got excellent service, I was treated incredibly well, and I feel terrible that my insurance company is screwing over the hospital like that. But that's a side issue.)
In any other line of business you'd be stuck paying the sticker price, regardless of what you thought was fair. Only in health care does a third party get to decide what a provider's services are worth. The doctor or hospital can say ahead of time, we will work with Insurance Company A or we won't; but once they agree to work with that insurance company they are bound to accept whatever the insurance company decides is fair reimbursement.
Surprised at the cost of your health care? Remember that if you or your health insurance company pays in full, you're subsidizing all the people who don't have health insurance, or whose insurance (like mine, or like MediCare) doesn't pay the full cost of the services provided.
This is just one of the many ways that the insurance system divorces the health care system from the competitive forces of the free market.
Here's another one to wrap your brain around: Basic market principles imply a cost for a product or service. The better your product or service, the more you can charge for it and (in a perfect world) the more money you make. Right? Not down the rabbit hole of health insurance. Insurance companies make money by *refusing* the service they ostensibly provide - payment for health care. The more claims they deny, the bigger their profit margin. This completely subverts the competition principles of the free market. It also results in insurance companies spending a lot of money to pay people who figure out how to deny claims. Hence (among other, more complex reasons) why private insurers in the US have three times the overhead of MediCare, which doesn't waste effort figuring out how to deny people's claims.
Check out also this comparison of overhead costs in the privatized US system versus the centralized Canadian system (Woolhandler et al., NEJM 349:768-775):
And hence why placing blind trust in the power of the free market is, at least in this instance, a terrible idea.
In fact, not only is the health insurance system divorced from the principles that make free markets successful, it's divorced from its own founding principle of spreading the risk.
The whole point of insurance is that you have a large number of people at risk for an adverse event. These people all pay into a pool that will cover the small number who actually experience the adverse event. Somehow insurers decided it was OK to start divvying people up into risk pools, so that people who are less at-risk pay less, and people who are more at-risk pay more (or are blocked from getting insurance entirely). Sounds reasonable at first, but it's a slippery slope. As we find out more about ways to predict risk, we can charge sick (or risky) people more and more and healthy (or low-risk) people less and less. Soon you have a system where all the sick people are blocked from participating, or are paying the costs of their own health care with no participation from the healthy community. That's not spreading the risk. You might as well just pull out your checkbook and pay your doctor his fee. Except then you wouldn't be generating profits for the insurance companies.
The only way health insurance is going to work is if we go back to the basics:
If you want to use a risk-spreading model, everybody needs to participate. Young, old, sick, well. No excluding people and no basing premiums on expensively-generated risk profiles. Practically, the only way I can see to do this is a single-payer system. Whether the government wants to do the job itself or contract out to a private company is its own business; but however it's done, everybody (or almost everybody) has got to be enrolled to make it work.
This is why the Obama-Biden health care plan is not going to work.
Obama wants to let people opt out of the national program if they like their own insurance - or if they are simply healthy and don't want to participate. In fact, with a guaranteed-issue plan available there is no reason to buy insurance until *after* you get sick. This would result in healthy people refusing to buy insurance, and the system cannot remain solvent without that crucial population of people who pay in more than they take out.
If people want to opt into private insurance in addition to the national plan, fine, but they can't be let out of the risk pool of the national plan.
The good news is, if everyone is insured, and health care providers can be assured of getting paid in full every time they perform a service, then they won't need inflated sticker prices to cover all the nonpayers and underpayers.
If people want to yell "Socialist!" when they hear these arguments that's fine, but what are they going to do about maintaining solvency in the health care system? If you want to stick to your capitalist guns then your only viable option is laissez-faire, fee-for-service, truly free-market health care. (And if that's what you want you'd better be prepared to see a lot of poor people dying of treatable diseases.)
Because what we have now is not working, and for the reasons detailed above neither are any of the other half-cocked hybrid attempts to apply competitive market principles to a system that turns them on their heads.
TIP:
Enter the amount, and click "Tip" to submit!
Bellwether Vance
Stephanie Tames
Redstocking Grandma
Saturn Smith
Heather Michon
LuxeCalmeVolupté
Salon.com
Comments
I agree with you that the market is not the answer for health care, largely for the second reason you get into: there's an incentive for insurance companies to prevent health care. That's the big ticket item, as far as I'm concerned. When large, wealthy corporations are motivated to keep people unwell, they will succeed.
"A better analogy would have the car company assuming that the customer was going to pay for only half and therefore raising the price to begin with, so that the portion they actually receive better reflects their real cost."
It's true (and I mention that in paragraph #8), but as I said in the antepenultimate paragraph, providers wouldn't need to inflate their sticker prices if they could be sure of appropriate payment in the first place.
"PS: Was this post your way of letting us know that congratulations are in order?"
It wasn't meant as an announcement (I think I might have mentioned the whole bun-in-the-oven business elsewhere in passing), but thanks! Really I've been swirling these thoughts around for a long time (and they probably would have been more appropriately addressed during election season) but actually seeing that my insurance only paid
I think it's axiomatic that a for-profit insurance industry can't be involved with health care. A sick person wants to get well, no matter what it costs; the insurance company wants to make money, no matter who gets sick or dies. These goals don't dovetail; they are in direct conflict.
Maybe I'm just a wild-eyed progressive, but the solution seems pretty obvious, nu?
One difference (not the only one) between your car repair analogy and healthcare is that the nature of insurance is different. This impacts customer behavior. For normal car breakdowns, auto insurance is not involved. You pay yourself or you live with the problem. It is only accidents/thefts and then only big enough ones that cause insurance to come into play.
For healthcare, many plans are "full service" maintenance plans where any service is covered and the customer is paying very little. There was a theory that maintenance plans would lead to better health and lower costs. However, like most non-linear "systems", changing the incentives changes behavior. Basically people will consume less and seek lower prices for something they have to pay for themselves versus when they only pay a fraction and someone else pays. So, "full service" insurance may have led to an increase in demand that exceeds the benefits of "maintenance." Moving further way from the market to a government program has the risk of making this worse by further distancing the consumer from the actual purchase.
The other obvious difference between car repair and healthcare is that at some point people *by choice* stop paying to repair a car and buy a new one. With health, people are willing to spend any amount of the insurance money to keep repairing the old model because they are the car and don't want to go to the junkyard to be crushed. Under goverment healthcare, they may be told when they have to do this.
"Maybe I'm just a wild-eyed progressive, but the solution seems pretty obvious, nu?"
So you'd think; but various breeds of conservative are constantly waving their hands and saying the magic of the market will fix everything about health care. (Although I suppose recent events in the economy at large have caused the deregulators to become more circumspect about their views lately.)
And I don't hear a lot of pundits acknowledging the hard truth that everybody needs to enroll in order to make a national plan solvent. Obama seems to think he can have his cake (a national plan) and eat it too (choice of private plans) in this case; but as I said in the post I think that's a pipe dream.
"For healthcare, many plans are "full service" maintenance plans where any service is covered and the customer is paying very little. There was a theory that maintenance plans would lead to better health and lower costs. However, like most non-linear "systems", changing the incentives changes behavior. Basically people will consume less and seek lower prices for something they have to pay for themselves versus when they only pay a fraction and someone else pays. So, "full service" insurance may have led to an increase in demand that exceeds the benefits of "maintenance.""
Yes - this has been a big problem with Britain's NHS.
Actually I think insurance is a silly way to deal with routine medical expenses. (I originally had a line expressing this sentiment in the blog post but deleted it because I thought it just clouded the picture.)
I would actually advocate fee-for-service for routine care (checkups, coughs and colds, stomach flu, etc.) but a national plan to cover unforeseen large expenses. It's possible that this would result in poor people avoiding routine care, but I don't know that that's obvious a priori. If all the economic fat in the insurance system were cleared out, routine care would probably be quite cheap.
"Moving further way from the market to a government program has the risk of making this worse by further distancing the consumer from the actual purchase."
Another way to deal with this is with copays. Those create an incentive to use health care resources appropriately but don't break the bank. I would advocate this approach if routine care remained out of reach of low-income Americans.
"The other obvious difference between car repair and healthcare is that at some point people *by choice* stop paying to repair a car and buy a new one. With health, people are willing to spend any amount of the insurance money to keep repairing the old model because they are the car and don't want to go to the junkyard to be crushed. Under goverment healthcare, they may be told when they have to do this."
As I said, if people want to buy extra private insurance *on top* of their government health care that is fine. My point is that this shouldn't let them exit the national system. It should be an optional supplement.
Kind of like how you still have to pay the taxes that support public education even if you choose to shell out for a private school for your own kid.
The most important point (for me) is that the conclusion I draw from this - and hope others will as well - is that the Democratic Party simply is not prepared to offer solutions to social and economic problems that will tread too heavily on the toes of Big Business - in this case, the all-powerful Big Health Insurance. We are never going to be able to create a society that really puts people before profit as long as we keep supporting a political party that is beholden to corporate interests, even in the smallest degree. Think about it.
Usually the way reimbursements are figured is this: Each service, or CPT code, is considered to consist of a certain number of "units" of service. This is called RBRVS. The insurance company contracts to pay the provider a certain dollar amount per RBRVS unit-say, $56. The doctor bills, the units and dollars are calculated, and the bill is paid.
The charges from the doctor (and I worked in provider billing as well as in health insurance and now for a self-funded plan) do not seem to have quite so predictable a basis, and can differ considerably among providers, although the amount reimbursed by the insurance company will be the same.
"I'm pretty sure your insurance reimbursement to the provider covered the entire cost, and made a contribution to profit."
It's hard to make a judgement about this specific interest, but it is certainly true that health care providers take losses on many, many services that they provide.
If you look at the "MediCare" link in my blog post you'll see a paper that finds the average loss to a hospital in a revision hip arthroplasty to be in the thousands of dollars. In fact, just the cost of the fake joint is now 70% of the average MediCare reimbursement, never mind the cost of the work to do the surgery.
We routinely take care of patients for whom we know the hospital is not going to receive a dime (because they are uninsured or because their insurance has denied authorization for the treatment). Hospitals can and do take losses all the time.
They do. Mostly from uninsured, Medicare, and Medicaid patients. They stay solvent by charging more to patients, like you and me, with private insurance, that is, cost-shifting.
I think we're already paying, in a crazily inefficient way, for universal coverage.
You have a great point about the excessive overhead. I think the figures cited refer to overhead experienced by everyone--patients, providers, insurers. A single payer system,with a single claim form, single rules about what is and is not covered, would result in so much less overhead! I very much hope we go in that direction.
I just think that demonizing one part of the system (insurance companies) while not looking at excessive treatment costs (providers) isn't helpful.
My take on the bills you received is not, oh poor doctor! Insurance is stiffing them! but, why are they charging so much, when they are quite willing to take half of that?
I know I receive bills from the execrable LabCorp (execrable for their terrible bookkeeping, not for their services), for which they receive payment from my insurance company at about a 28% rate. People without insurance are on the hook for the whole
thing!
The solution is going to have to come with concessions from all the stakeholders--those of us already insured, the insurance companies, which may disappear, government reimbursement policy, provider billing, patients demanding unnecessary treatments, everybody.
I like the idea of a Medicare for all type of plan, that covers basic services, and lots of preventive care. Then employers can offer standardized upgrades, similar to the Medicare supplement plans. Bookkeeping, billing, treatment protocols, etc. would then be streamlined for providers, requiring less office staff, requiring less underwriting and care managers at insurance companies, and it would be easier for we, the people to navigate.
Oh shoot, this is long, blah blah, sorry.
It's one of the most cogent, incisive, decisive comments on what is wrong with healthcare in America.
And this shows precisely how the insurers' business model is a fundamental betrayal of the public trust: "The whole point of insurance is that you have a large number of people at risk for an adverse event. These people all pay into a pool that will cover the small number who actually experience the adverse event. Somehow insurers decided it was OK to start divvying people up into risk pools, so that people who are less at-risk pay less, and people who are more at-risk pay more (or are blocked from getting insurance entirely)."
So right. The insurers fragment the pay-in pool, making the system more expensive to manage and less risk-immune (if we consider that NOT getting the insurance coverage you've paid for, or not having equal coverage is a failure of the system, a risk-eventuality realized). They do this, why?
Profits. They can take away more of the money put into the pool. The problem? That's not really their money. They decide how much to extract, and when, how much to devote to profits and how much to save for a rainy day, when their clients/investors may actually need what they paid for.
By extracting ever more profits and returning ever less of the pie to those who paid to make it, they have re-engineered the system to be a sort of corporate welfare where people who are ill and at risk are paying major corporations to walk away with their money. Insurance can only be "innovated" so far, before it becomes fraud.
I think any solution has to include the provision that NO insurer can be allowed to refuse coverage to anyone or to punish people for infirmities they are not responsible for contracting. If we don't start from there, there is really no point whatsoever pretending that private insurance will work.
http://open.salon.com/blog/kanuk/2009/04/03/sticking_it_to_the_man_at_the_private_medical_insurance_co
http://open.salon.com/blog/kanuk/2009/03/11/health_care_comparison_universal_versus_us-style_systems
http://open.salon.com/blog/kanuk/2009/03/14/health_care_comparison_us_vs_universal_-_update_on_part_i
http://open.salon.com/blog/kanuk/2009/03/29/health_care_comparison_universal_vs_us_-_part_ii