Healthcare Costs

I commented last time that when politicians talk about healthcare, they are really talking about health insurance, a related but different subject.  Just because you can pay for it with insurance, does not make it less costly.  It just shifts around the financial burden, and as I pointed out earlier, that tends to raise rather than lower the overall cost.  (Is it a coincidence that some of our worst crises are in areas of deepest government involvement:  housing prices, healthcare costs, college costs?)  So let’s apply some critical thinking to the issue.

I propose that there are at least eight reasons for high healthcare cost – few of which are in the news.

• ·      Insurance Design:  This was addressed here on August 25, 2011.  You don’t make something cheaper by helping people pay for it.  As long as insurance companies play an intermediary role, separating the provider from the customer, there will continue to be a cost problem.
• ·      Innovation:  This was addressed on September 12, 2011 and January 27, 2012.  New medical technology and treatments save more lives and make recovery times faster, but they don’t come cheap.  We need to understand that we can’t get 2012 medicine for 1970 prices.
• ·      Lack of open competition:  More on this below
• ·      Over-testing: Also covered today.
• ·      Billing and coordination issues:  This was touched upon on January 2, 2012 and will be elaborated on next time.
• ·      Regulations and Restrictions:  Insurance laws vary by state. One consequence is variation in the permission for people with less training, nurses or physician’s assistants for example, to perform certain basic functions reducing the cost and freeing doctors to handle the more complex cases.  More on this later.
• ·      Liability:  The cost of malpractice insurance is passed along.  It’s not the doctors or insurance companies who ultimately pay.  These costs eventually find their way back to us.  More on this later. 
•     Fraud:  This goes without saying, but accounts for about $180 billion a year.

The first subject not previously addressed is lack of open competition.  Open competition tends to keep prices low.  Look at those medical services not routinely covered by insurance, such as laser eye surgery to correct vision.  Over the years providers of these services have found ways to reduce the price while simultaneously improving results.  In the broader medical field, however, such open competition is hampered by confusion/inconsistency about service components and secrecy about pricing.  Both can be traced back to the role of insurance companies as intermediary.

Insurance companies deal directly with the doctors and hospitals, negotiating rates and conditions in isolation from us, the users.  If we move to a high deductible plan we are told to be “smart shoppers” for medical services, but we get little information.  Providers charge different prices for the same service and include different components as they judge appropriate.

If you see three different doctors for something as basic as a routine physical, you will have three different experiences.  You certainly will be weighed and have your blood pressure taken, but whether you leave a urine sample, whether you have blood drawn (at appointment time or beforehand), what the lab tests for and reports on, even whether an electrocardiogram is administered depends on the office.  I know, having moved lately and seen three doctors for initial examinations in the last 5 years.  You really don’t know what to expect.  Here is one of several articles talking about those inconsistencies.

So if you don’t know what you are going to get, how do you know what it will cost?  Doctors don’t post prices.  And if you don’t know what it will cost, how can you be a smart shopper?  Here is an article about the variation in costs related both to the variation in services and also to pure pricing differences.  At one point it says, “…consumers don't even ask about price because they're getting the service for ‘free,’ but also because doctor's offices don't list prices.”  Getting any service for free, an insurance design problem, provides no incentive to shop around.

 Contrast this with getting a service checkup for a car.  You take the car in and know what they will do.  You even sign a contract for the work that gives the exact price or an estimate for larger repairs.  If anything additional is discovered, they must explain it to you and get permission.  A current ad on TV shows how you can choose from three levels of routine service, what they include and what they cost.  They do this because they know their competition is giving you pretty much the same information, and that customers who are surprised generally go elsewhere.  If doctors and hospitals followed the same business model as vision correction and car repairs, it is certain that the cost of healthcare would fall.  Estimates of the savings to the system are between $84 and $178 billion, annually.

The second topic for today, over testing, is directly related to the lack of consistency and also adds to the price.  Fortunately, the American Board of Internal Medicine Foundation is leading a campaign to educate providers and the public about unnecessary medical tests, gathering fact sheets from seventeen medical organizations.  Each group will spotlight five tests for further investigation.  This is another high ticket item, between $158 and $226 billion.  "Consumer Reports has reported what a critical issue overuse is to consumers. A 2010 reader survey of nearly 1200 healthy 40- to 60-year-old men and women, with no known heart disease, risk factors, or symptoms, showed that 44% had received screening tests for heart disease rated by Consumer Reports as very unlikely or unlikely to have benefits that outweigh the risks."

As you can see, the effort to control healthcare costs is far different from providing more insurance as we know it.  Many changes are needed, but those mentioned here emphasize the need to instill more consistency and a more competitive environment into the entire system.