I have a theory for why healthcare costs continually outpace the rate of inflation that I've never seen presented before. I would like to share it here for comment. It's not for any of the reasons spouted by the MSM on a regular basis, and if I'm right on the cause, Obamacare will do nothing to stem rising healthcare costs and will, in fact, make them worse.
My argument is that the chief determinant of the price of a good or service in a relatively free market is the weighting consumers place on the importance of price. When situations occur where consumers are shielded from the true price of a good, price no longer becomes an important factor to them when they purchase a product. In this event, other factors take precedence, such as quality, functionality, uniqueness, etc. When consumers are shielded from price, companies are then given free reign to raise prices across the board without harming their sales significantly. In other words, minimizing price no longer boosts their sales or gives them an advantage over their competitors. This causes the natural downward force on price to disappear.
With this in mind, consider what has happened in the healthcare industry because of insurance. Unlike in most any other business, where the first thing you would ask upon walking through the door is "What is the price of X?", and make your decisions based upon the response, in healthcare it has become customary to simply flash the insurance card and pay a flat copay fee. Because insurance pools are being used to pay for almost every single healthcare purchase no matter how insignificant, the price of a healthcare procedure has become an almost meaningless concern to consumers of healthcare industry services because they are shielded from the true cost of medical expenses because of pooling.
Over the last few decades, consumers of healthcare have become almost totally insulated from the price of the services they are purchasing. The result is what we have seen - healthcare prices rising far in excess of inflation. And because Obamacare has effectively added some 40 million new patients to health insurers, I predict that this will only exacerbate the problem of massively rising costs.
The solution is simple - if insurance was limited to only "once in a lifetime" expense procedures, and people paid out of pocket for all other healthcare expenses, consumers would be much more inclined to forego unnecessary procedures and to shop around for better prices through other physicians/companies since they would be directly exposed to these costs. This would once again reintroduce the downward price force into the healthcare market. The question is how the healthcare industry could be reformed without simply placing a ban on health insurance pooling for all but the most expensive procedures.
I've heard that the problem is the tax laws. You don't pay taxes if the employer pays for health insurance, so that pushes people to get it from their employer. State laws then force the employer to insure all kinds of silly stuff if he's paying for it.
Sorry I don't have the details down, it's been a while.
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It's easy to refute an argument if you first misrepresent it. William Keizer
Here are some more things wrong with our healthcare system.
Yes Mark you are correct. Third party paying has played a tremendous role. But there are a miriad of other government interferences that contribute. The Drug Enforcement Agency forcing drug companies to pay a Billion dollars before bringing a drug to the market, or declining permission for thousands of cheaper drugs, the Medical licensing boards creating unionized medicine and monopoly etc. Thousands of laws restricting how and where medicine can be practiced.
Your suggestion of forcing this or that on the insurance industry will just add one more layer of government to interfere with free enterprise.
@MarkJC
Not really a new theory, the third party payment system has been long known as a contributing factor in rising health care costs. In fact, if you feel like doing some digging I recall one or two of the socialized health care systems outside the US actually still have some significant out of pocket costs for the people 'covered', and the prices in those countries tend to be lower than elsewhere for the respective services. That's going on memory though, I can't recall which country or what services, so it may just be my mind playing with me, but I distinctly remember reading about it some time in the past.
Albert: Your suggestion of forcing this or that on the insurance industry will just add one more layer of government to interfere with free enterprise.
It would. But what other options are there? Although I normally stand by free enterprise, in this case it is what has allowed insurance pools to blow up into their current state where they have created a disconnect between price and services received. I believe this is by far the biggest driver of high healthcare costs, but it's something that no politician has acknowledged as a problem that needs to be addressed.
There is a lot of evidence that points to this being the main driver of high healthcare costs.
1) Insurance in other industries: Consider other insurance industries, such as auto, where companies are allowed to increase premiums if you are in a wreck or run up your claims. Because of this, people largely try to avoid making claims and only file them whenever significant damage has occurred, which largely reconnects the link between prices and services received except for serious accidents. Prices in these industries have been kept under much greater control than in health insurance, because this feature doesn't exist in the health insurance industry, since the backlash would be severe if health insurance companies raised your rates if, for example, you came down with cancer.
2) Insurance in other countries: As mentioned above,there is evidence that supports insurance pools being responsible for the rate of rising healthcare costs abroad. In other countries where the populace still pays largely out of pocket (Singapore is one example), healthcare costs are rising at a much lower rate than in countries with large insurance pools like the U.S.
3) Textbook costs: A similar situation to the healthcare industry has been playing out in the college textbook industry, and the cause appears to be exactly the same: a disconnect between prices and services received. Textbook prices have continually outpaced the rate of inflation, just like healthcare. In the healthcare industry, consumers have become more and more isolated from the prices for the healthcare services they receive. Likewise in the textbook industry, because professors solely choose which textbooks students must buy, there is also a disconnect between prices and the goods students receive, in this case textbooks. Professors largely do not care about the price of a textbook, but they have sole power over which books students purchase and select them based more upon reasons other than cost. Again, this has given textbook producers free reign to continually raise prices in excess of inflation since the normal downward price pressure is greatly reduced in the textbook industry.
4) Higher inflation for the rich: I believe this pricing mechanism also explains why goods and services that the wealthy consume on average experience a much higher rate of inflation than those that the middle-class consume. The level of downward price pressure on goods/services also depends on the amount of disposable income that a person has available. While cost is a significant factor for those with limited disposable income such as the middle-class, it is of much less importance to the wealthy when they purchase a good/service. Since the wealthy pay less importance to cost and more toward other factors, this effectively reduces the downward price pressure on goods/services that they buy. Producers of the goods the wealthy consume are then given free reign to raise prices at a rate that outpaces inflation.
What we call healthcare is nothing like insurance. If auto insurance looked like our healthcare, it would be payed for by employers and subsidize the costs of everything from gasoline to car washes to oil changes; so comparing the 2 industries is really apples to oranges.
they said we would have an unfair fun advantage
Yes third party payment increases prices. I look at it as another example of the "tragedy of the commons". With a common pool you are incentivized to use resources without regard for their scarcity.
This system exists because of our tax structure. Healthcare benefits are untaxed while income is taxed. This means taking income as healthcare benefits reduces your tax liability. This it gets you into a "commons" trap because of the deferral to third party payment.
This in itself would not be so bad if the healthcare insurance industry were allowed to do business freely. They would adapt to this system. But they aren't free. They must jump through myriad government hoops to legally sell insurance. That ties their hands and reduces competition.
MarkJC,
Pooling on its own is not likely the primary cause of the price increase. Insurance is a risk management product whereby the customer shifts risk to the insurance company in exchange for a fee. The insurance company, if they are good, can take on this risk because they insure lots of people, not all of whom will need to collect. So, while the customer may be insulated from price increases, the insurance company is not and so will work to hold prices down or have to pass the increase on to the customer.
Our health care system does still include risk pooling features, however decades of legeslation has used this base to construct a cost sharing scheme on top of it. The cost sharing scheme is what causes the increase you are targeting, not the underlying risk pooling of insurance.
To go along with what you're saying, John Stossel did a report about this:
http://www.youtube.com/watch?v=3WnS96NVlMI
You're right. But a more encompassing answer is "supply and demand." Taxes, laws, and regulations limit the supply of health care. Taxes, laws, subsidies, and regulation expand the demand for health care. The result is that health care prices are much higher in the United States than they would be with a system of free market health care. What you did was describe one factor which increases the demand for health care services - there are many others. Continue your search for the truth and you'll be surprised by what you find.
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cporter: Our health care system does still include risk pooling features, however decades of legeslation has used this base to construct a cost sharing scheme on top of it. The cost sharing scheme is what causes the increase you are targeting, not the underlying risk pooling of insurance.
Can you explain what you are referring to by cost sharing scheme?
3% too much if you ask me.
In States a fresh law is looked upon as a remedy for evil. Instead of themselves altering what is bad, people begin by demanding a law to alter it. ... In short, a law everywhere and for everything!
~Peter Kropotkin
Mark, I believe he's saying that modern health insurance companies do not actually provide insurance. Insurance is meant to insure you if an unlikely event occurs. So, in the case of health insurance, if you get a heart attack or stroke out of nowhere, the insurance pays. But right now, in the United States, we do not have insurance, we have a cost sharing scheme. Right now, abortions, viagra, birth control pills, and other procedures which are completely voluntary are "insured" (due to law). This drives up the cost of these procedures by increasing demand for them. It also drives up the cost of "insurance" by increasing what it has to cover.
So the point is that if we had real health insurance, costs would be much lower across the board.
Epicurus ibn Kalhoun:3% too much if you ask me.
Eliminating the profit and loss system would literally destroy our living standards.
krazy kaju's explanation is spot on.
Some things are not insurable by definition. Insurance is a risk management product, not a cost management product. If there is no risk (for example, you know you are going to go buy your meds every month) it cannot be insured. You could take part in a cost sharing program where everyone pools their money and buys a bunch of meds for less, but you couldn't insure it.
Current health "insurance" is like someone selling you home fire insurance when your house is already on fire.
"So, in the case of health insurance, if you get a heart attack or stroke out of nowhere, the insurance pays. But right now, in the United States, we do not have insurance, we have a cost sharing scheme. Right now, abortions, viagra, birth control pills, and other procedures which are completely voluntary are "insured" (due to law)."
I've been curious about this for some time. Do you know what law makes things like Doctor's visits covered under insurance?
I don't know why people discuss rising monetary costs of medical care, as if they won't pay a cost that may come in the form of poorer quality, if hospitals cut operations costs as much as possible.
What a spoilt world. Lawsuits happen over one failed surgery, but when hospitals invest in expensive equipment and procedures just to make sure not one thing goes wrong, the problem now is rising medical care costs.
Which one is it?
Davis Sherin:I've been curious about this for some time. Do you know what law makes things like Doctor's visits covered under insurance
As far as I know regular doctor visits are not required to be covered by law. Proper insurance began its slow transformation into what it is today during FDR's reign where wage controls required an outlet for employers to differentiate their compensation. Thanks to tax benefits, that outlet was primarily benefits, of which health insurance was one. An insurance plan that covers doctor visits is more valuable than one that does not.
Also, it usually benefits the insurance company to cover cheap things like checkups that may keep you from developing a more serious (and, therefore, expensive) ailment that they otherwise cover. It's the same reason why I can get a chip in my windshield fixed for free from my auto insurance. They don't want to pay for the whole broken windshield next time I hit pothole or something.
David Sherin:I've been curious about this for some time. Do you know what law makes things like Doctor's visits covered under insurance?
The requirements for what health insurance has to cover differs from state to state. You'd have to check your state laws. Now with the imposition of Obamacare, the federal government will be getting into the business of directly regulating what health insurance has to "insure."
Here is a detailed break-down of state-by-state health insurance mandates: http://www.cahi.org/cahi_contents/resources/pdf/HealthInsuranceMandates2009.pdf. You can find your state, see which health insurance mandates it requires, and calculate how much those health insurance mandates increase costs.
Here is an easy solution Republicans could get behind: http://www.ncpa.org/healthcare/interstate-competition-in-the-individual-health-insurance-marketplace
Pooling on its own is not likely the primary cause of the price increase. Insurance is a risk management product whereby the customer shifts risk to the insurance company in exchange for a fee. The insurance company, if they are good, can take on this risk because they insure lots of people, not all of whom will need to collect. So, while the customer may be insulated from price increases, the insurance company is not and so will work to hold price down or have to pass the increase on to the customer.
Going back to what you said here, you mention that the insurance companies try to hold costs down. I can see how this could be effective in the case of HMOs, since with a specific network of doctors, carriers can negotiate on a large scale to try to minimize costs. Oddly, HMO premiums have gone up even faster than other healthcare plan premiums in the last few years, which seems counterintuitive. On the other hand, there seems to be some (limited) evidence that newer high deductible plans and plans with health savings accounts are proving effective at slowing the rate of increasing healthcare costs from the last few years.
Basically what I'm getting at is this: politicians from either side of the aisle are going to pass -some- kind of healthcare legislation. Neither will be willing to maintain the status quo at this point. If those on this forum were forced to pass some sort of healthcare legislation, (maintaining status quo is not an option), what would it be?
Obamacare in its current state appears to be the most damaging because it increases pooling. Previously, I would have said that single payer could have potential, since the government would be similar to a giant HMO negotiating to minimize costs... but given the failure of HMOs to minimize cost, that doesn't seem like an attractive option either. Right now, the most effective piece of legislation that I can see would be eliminating insurance coverage for all but the most expensive healthcare services - services that really benefit from pooled risk. One option to accomplish that would be mandating extremely high deductible plans to shift the average healthcare payment back to being an out of pocket expense.
The Republicans have come up with some good ideas (for once). See this: http://www.ncpa.org/healthcare/interstate-competition-in-the-individual-health-insurance-marketplace
Using its power to regulate (meaning, to make regular) interstate commerce, Congress could open up the health insurance market for interstate competition. Allowing the exact same cheap health insurance plans that are sold in Kentucky to be sold in Massachusetts would significantly lower insurance costs for most Americans.
You mean it's not allowed?
No. The states have regulated health care and health insurance since the 50s, IIRC. There is no interstate commerce in health care or health insurance, with the exception of mail-order and online pharmacies.
MarkJC:Going back to what you said here, you mention that the insurance companies try to hold costs down. I can see how this could be effective in the case of HMOs, since with a specific network of doctors, carriers can negotiate on a large scale to try to minimize costs. Oddly, HMO premiums have gone up even faster than other healthcare plan premiums in the last few years, which seems counterintuitive. On the other hand, there seems to be some (limited) evidence that newer high deductible plans and plans with health savings accounts are proving effective at slowing the rate of increasing healthcare costs from the last few years.
It isn't counterintuitive, you just have incomplete information. HMOs are more highly regulated than PPOs and other plan types. They aren't afforded the agility to respond to market changes like everyone else. For example, many aren't allowed to shift additional costs onto the end user (higher co-pays, etc.). Since the consumer is the employer, not the end user (the employee), the shifted cost doesn't matter - the amount the business has to pay matters. This amount is higher with less cost shifted to the end user.
High deductible plans and plans with health savings accounts would of course show lower growth because the end user of medical services is now paying their own money. In addition to removing the effects of pooling for smaller things, something that is forced to be covered by an insurer may be worth going to the doctor for if you have a $20 copay, but not worth it if you have to pay $800 in tests and fees. People ration to save money. No surprise there.
MarkJC:Basically what I'm getting at is this: politicians from either side of the aisle are going to pass -some- kind of healthcare legislation. Neither will be willing to maintain the status quo at this point. If those on this forum were forced to pass some sort of healthcare legislation, (maintaining status quo is not an option), what would it be?
Well that's easy:
Remove all regulation on insurance and remove all taxation on any sort of medical spending, research, and investment (consumer and producer side). Remove any government mandated medical practitioner licensing requirements.