Ballooning Health Care Costs

Jane Gault at Asymmetrical Information is on a roll with a series of posts about the problems with the Medicare system.  Check out her posts on the ,  the media bias when programs are cut, and the rising cost of Medicaid.

The problem in the world of health care costs is actually very simple:  patients have the incentive to over-consume services and providers have the incentive to over-provide services.  Patients consume as many services as possible because some other entity is generally footing the bills, such that the marginal cost to the patient of extra services is generally nil (if you don't believe this, imagine a world where a 3rd party paid for your car - would you choose the same care you drive today?)  Providers tend to over-provide in part for the same reason, and in part as a defensive response to the threat of torts.  As a result, costs go through the roof, and those who pay (government, insurance companies, employers) respond by rationing, which pisses everyone off.

This disconnect between the entity paying the bills and the entity selecting the care cannot endure.  The fix in the future is guaranteed to be one where the decision maker on the selection of care is the same person who is paying for the care.  The only choice we have in designing the system is whether that entity making the decisions is the government (as preferred by statists of all stripes) or the patient. 

We need a system where people pay their own everyday medical bills, with insurance in place for catastrophic needs (which is basically how we take care of our cars).  You could probably incentivize this tomorrow by making personal medical expenses tax deductible while at the same time making employer-provided medical insurance taxable just like every other kind of compensation.  Not only would this fix the incentives problem in the system, but would also eliminate the portability issue associated with employer-provided coverage.

Unfortunately, people have a huge mental block where paying for their own medical care is concerned.  My wife is a great example.  When I became self-employed, she was shocked that I did not get dental insurance.  I tried to explain that we would just use the insurance to pay for checkups and a filling here-or-there, and it would probably cost more than just paying the expenses ourselves.  But for her, medical bills are paid by insurance, not by individuals, and it actually felt wrong for her to pay her own doctor's bill (we have a big annual deductible on our medical insurance too so it acts mainly as catastrophic coverage).  This is not an isolated attitude - it is why many people equate "not insured" today with "not getting medical care".

Postscript:  There is nothing magical about the system of employer-paid medical insurance we have today.  Many large employers implemented paid health benefits as a way to evade government wage freezes during the NRA of the 30's and later in World War II.  In the tight labor market of WWII, government mandated maximum wages could not lure enough workers, so free health benefits were thrown into the compensation mix since only cash wages were frozen.  The system is perpetuated today by a tax code that does not tax health insurance as it does all other parts of the compensation package.

UPDATE:  Or, we could just try this

UPDATE#2:  A small example of the mindset:  Carly Fiorino get $42 million as a parting gift from HP, but still insists that HP privide her medical insurance.  With $42 million, she couldn't pay for it herself? (via gongol)


  1. Dave Schuler:

    Sorry, no biscuit for you. The market cannot function in health care because there is no market in health care. Do you have any actual data that supports the notion that excess demand alone is responsible for rising costs?

    It's counter-intuitive. Look, health care is not like buying a car. I don't like going to the doctor or taking medicine. Do you? Does anyone you know? We consume health care when we must not because we want to. We don't get two legs set when we break one because someone else is paying for it.

    Sure, there's some over-consumption. But that's not the whole problem. Add in subsidization (Medicare, Medicaid, government employee health plans, veterans' benefits, etc.) and (legally) constrained supply and you've got a formula for runaway costs.

    Abolishing health care insurance will not have the results you're suggesting. Those unable to pay will continue to be treated (by law). The costs will be off-loaded onto taxpayers and people who are able to pay. That means that fewer people will be able to pay. That's an out-of-control positive feedback situation.

    Additionally abolishing the subsidies won't help, either. The costs must be bourne somewhere and that means raising the prices for people who continue to be able to pay. That will further reduce the number of people able to pay.

    Both the supply and the demand sides of the equation must be addressed. My first choice for a solution would be to abandon the subsidies, eliminate the prescription drug system, and remove the barriers to entry in health care. Frankly, that's politically impossible (and probably undesireable for public health reasons). My second choice is to manage what we're doing now more efficiently.

  2. FullosseousFlap's Dental Blog:

    Health Care Costs Who Pays?

    Warren Meyer over at Coyote Blog has a good piece on the increasing nature of health care costs and the concomitant attitudes and results:

  3. FullosseousFlap's Dental Blog:

    Health Care Costs Who Pays?

    Warren Meyer over at Coyote Blog has a good piece on the increasing nature of health care costs and the concomitant attitudes and results:

  4. B Briggs:

    Doesn't the HSA program do pretty much what you suggest? It makes the expenses paid, from the HSA, up to the higher deductible of the insurance policy a tax deductible expense. If you don't use all of the amount in the savings account it can be carried over to future years and a new contribution made in the following year. Similar to an IRA except for medical purposes. After a certain age the account is available for withdrawals for any purpose, not just medical. The result is that the consumer is more careful (we suppose) with the spending of their own funds. The insurance covers wellness checkups even before the deductible has been used up and covers catastrophic (sp?) events at an 80% level with a standard out of pocket cap. As a self employed person, I have this coverage for myself and my spouse, and I understand that many other small businesses are begining to offer this coverage to their employees as the premiums are much less than a delux plan.

    I agree that we need to add taxation to the employee of the premiums paid by the employer just as we do for employer paid life insurance over 50,000 of coverage. However if we tax the employee this might affect the employer's ability to claim deductions on the same. Possibly taxation of excess benefits used (other than unavoidable catastrophic events) would also curb the frivilous usage of health care that increases the costs to everyone.

  5. The Glittering Eye:

    Making plans, health care costs, and bureaucracies

    With the Becker-Posner Blog's observations on health care that I linked to this morning and the recent related posts from Coyote Blog and Different River both of which suggest that the rise in health care costs can be explained solely...

  6. KC:

    This is the way we all need to go:

    My wife and I will be starting our account this week.

    Synopsis: You treat your body like you treat your car. You get catostrophic coverage with a high deductible (>$5k) and then you can bank cash into a Health Savings Account that follows you around for life... regardless of state, employer, income, etc. And it's all pretax.

  7. Rx News & Notes:

    Ballooning Costs...

    [A]ll market driven forces rely on an informed consumer. While there is a plethora of information available both on- and off-line, at present there are very few resources for a consumer to get comparison information about medical and pharmaceutical p...

  8. Rx News & Notes:

    Ballooning Costs...

    [A]ll market driven forces rely on an informed consumer. While there is a plethora of information available both on- and off-line, at present there are very few resources for a consumer to get comparison information about medical and pharmaceutical p...

  9. epador:

    Interesting points on the employer benefit not being taxed angle, but if you look at health care cost historically, the exponential rises occurred not with the advent of employer sponsored health plans, but Medicare. Read: socialist government involvement.

    Major costs in health care include labor, administration, pharmacy and procedures.

    Labor costs problems could fill a library, but one unique turning point was the loss of the diploma nurse and the advent of BS nursing. RN's moved out of the ward/trenches and into administration/academia, increasing their salaries but not the actual number of bedpans emptied, banadages changed or patients soothed/healed.

    Administration costs are related to the business of cornering and maintaining market share, and dealing with myriad regulations. Markets funded by insurance money (government $$ a big proportion of this). Regulations spawned by the government putting out all this money.

    Pharmacy costs relate to drug costs, and this is related to what the "market" will bear. The subsidized and costs-relatively-hidden-from-some-of-the-consumers market. Thanks to insurance, private and government, $$.

    Procedures costs driven by a re-imbursement system that favors "skills" over cognitive based efforts. The promises that an RVU system would fix this have not been realized. I'd love to see what would happen to our health care system if we went to a straight hourly rate for physician services. Might save a whole bunch of money in billing, administration, etc., not to mention change some of the arrogance and procedure-only stance of some surgeons...

  10. Nolan Martin:

    This has always been an issue ever since. I think that the government is not taking this thing seriously. During presidential debates, we usually hear candidate bragging their health care programs. And included in the said programs are cost reduction methods. However, there has been a decline of fund allocation as other concerns become more of a priority. This will never be solved unless a colective effort is made by the government and health institutions.

  11. Thomas N. Campbell:

    It's going to be hard for the insurance, pharmaceutical, medical, and legislative monopoly to hold onto the facade that they provide the right approach to health care, esp since their system has vaulted MDs into the leading cause of death (See "Death by Medicine" by Gary Null et al online). 900,000 are unnecessarily dead each year from this system; that's over 2400 a day (Iraq is 2.1 US soldiers dead per day). Null's study is not the only one that exposes medical-performance shortcomings (See JAMA Vol 279(15) p1200 and the Barbara Starfield, MD, study in JAMA 2000. Or you could just read "Who's Representing the Healthy? by me and get all those studies in one place.)
    As a CEO on Ron Insana's CNBC roundtable discussion pointed out recently, "At the bottom line, we need fewer people going to doctors, if we plan to control costs." That means having healthier people. What motivates people to be healthy? Does free insurance provide motivation? It is more likely to produce a tax increase to pay for the "free" insurance.
    Rather than resort to socialism to attempt to repair our health-care problems, it might be worth asking if our current system provides incentives for good performance or disincentives for poor performance. It doesn't; everbody in the group pays the same premium. Group-health plans dump the poor-performance cost overruns onto the employer, the government and worst of all, onto the healthy policyholders, who end up paying a large portion of the premiums for those who fail to maintain their own bodies. Who is that motivating?
    Capitalism can fix the health-care problem, and part of that solution will be for people to own their body performance through individualizing premiums.
    Best regards,
    Dr. Thomas N. Campbell, DC