All You Need To Know To Evaluate Government Health Care Proposals

OK, maybe not all, but there is really one critical issue at the heart of almost all the issues in health care.  It drives whatever cost problems might exist in the system, drives many of the quality problems, and is a source of much of the current dissatisfaction (at least from the middle class) with the current health care system.

For every proposal, you should make sure you understand 1) Who is choosing the amount and quality of the care and 2) who is paying the bills and is therefore trying to pay attention to the cost of care.

What the hell does that have to do with anything, Coyote?  What are you getting at?  Well, perhaps I can begin my explanation by talking about something, practically anything, other than health care.

Take purchasing a car.  When I need a new car, who determines what car I end up with?   Why, I do.  And who pays for the car and shops around for a price that makes sense in the context of the perceived value of the car?  Why, I do again.  The person who uses the car, the person who chooses the type and quality of the car, and the person who pays for the car are all the same person.

This clever procurement model of integrating the payer, the shopper, and the user all into a single individual is one we use for, well, just about every product and service we buy.  Milk, Internet service, DVD's, house painting, airline tickets -- all the same model.

OK, lets consider a model that does not work this way.  Let's say someone just rear-ended your car and, miracle of miracles, they actually have a good, solid insurance policy that owes you for your car repairs.  In this case, you will be consuming the repair services, and have the incentive to find the absolute best, cost-no-object body shop you can find to do the best, most fabulous job fixing your car, because someone else (ie the insurance company) is paying.  The insurance company has a different incentive.  They want to get off with as small a loss as possible, to protect their profitability as well as keeping prices low for future policy-holders.  They are going to want you car fixed cheap, particularly since you are probably not even their customer.  They are going to try to deliver the minimum.

No surprisingly, people tend to get ticked off in these situations, as they grind against the opposing incentives of the insurance company.  It's one reason that the insurance field is highly regulated (because nowadays people complain to their Congressman whenever they get irritated).  It's also a measure of how ineffective regulation is in really managing this friction, since despite zillions of government rules people still get pissed off.  The reason is that there is simply no good solution.   Both parties want a solution at the extreme end of a cost-value scale, neither have much of an incentive to compromise, and neither will be happy with a solution in the middle of these extreme incentives, and no amount of government fiddling with the tradeoff point is going to change this.

OK, but in this example, at the end of the day, it is just a car, and probably this is a once-in-a-lifetime event.  What if we replace "car" with "baby daughter" or "grandmother" or "your life?"  Now, as Bill Murray says, the kidding around is pretty much over.  It is a recipe for an incendiary disaster.  Which is exactly what we have in health care.

If we take these three roles - user, service quality specifyer, and payer/price shopper - there are very few places in medicine today where these three roles are united.  Further, despite the fact that the vast majority of the problems in US health care are demonstrably from this role separation, none of the plans currently being considered by Obama or Congress unify these three parties.

With my high deductible medical policy, I am actually one of the few middle/upper class folks who actually shops for health care.  And I can tell I am in the minority by the reaction I get from doctors and medical services companies, that look at me like I am from Mars when I ask for detailed pricing, or when I order less than the full and complete battery of potential tests and services based on my own judgment and price/value trade offs.  Folks in the medical profession are used to people saying "whatever, the insurance company is paying for it."

We all know the straights that the auto industry is in, but can you imagine how bad their price and product would be if everyone had some sort of policy that purchased just about any car they wanted for them whenever they wanted it?  What do you think would happen to the prices at your grocery store or at BestBuy if the proprietors of those stores knew, absolutely knew, that you were not even going to look at a price tag before you bought what you wanted?  So why do we expect anything but inflated pricing in the health care field?

Devon Harrick via Carpe Diem writes

The market for medical care does not work like other markets. Providers typically do not disclose prices prior to treatment because they do not compete for patients based on price. Payments are usually not made by patients themselves but by third parties "” employers, insurance companies or government (only 12% of medical costs are paid directly by patients, see chart [below]). And the amounts paid are not really market-clearing prices; they are "reimbursement" rates negotiated with bureaucratic institutions and networks. Furthermore, when providers do not compete on price, they usually do not compete on quality either. In fact, in a very real sense, doctors and hospitals are not competing for patients at all "” at least not in the way normal businesses compete in markets.


The author above has an interesting analysis.  The one exception to the separation of roles in medicine is cosmetic surgery.  Not covered except in special circumstances by most insurance, cosmetic surgery is something the individual must pay for and thus has a tendency to shop for.  The results in prices are clear.


This pricing differential is all the more compelling because itis probably opposite what most people would initially assume.  As cosmetic surgery tends to be a luxury good, one might expect it to have the higher-than-average inflation rate that many luxury goods have had over the past 10 years.

The flip side of the pricing situation is the incredible dissatisfaction that seems to permeate health care customers.  Because the users aren't paying the bills, health care providers have little incentive to provide good service, as even with bad service the value they provide will be able to exceed the user's price of zero, or close to zero.

But, like with the body shop in the collision, someone is indeed paying the bills.  And that someone faces a choice -- either let customers run amuck and buy absolutely as much health care as they want, or try to ration or restrain the care users receive in some way.  So, when Joe and Mary want the 9th sonogram performed just to make sure their fetus is still doing great, the insurance balks at the cost as unnecessary.  The insurance company is upset, because they feel like Joe, Mary, and their doctor are milking the insurance for unnecessary procedures.  Joe and Mary get upset, because they feel like the heartless insurance company doesn't care about their little darling baby.  Everyone calls their Congressman to tell him or her that they are unhappy and could the government please intervene to make them happier.

And so we get to current health care proposals.  Folks have, rightly, come to the conclusion that a system where the user benefits from the service and decides how much and of what quality should be consumed, while someone else pays, is not sustainable.  However, in response, no one in power is suggesting we end the split.  Instead, they are suggesting that the role of service determination and payment/price-shopping be performed by the government.  We as a consumer will just have to trust that the government will make this price-value tradeoff somehow close to how we would make it for ourselves.

But of course, this is absolutely freaking impossible.  First and foremost is the problem that the government can only choose one policy for everyone embodying a single point on the trade off curve.  But we have 300 million people with 300 million different preference functions.  No one is going to be happy.  Second, the government is a terrible shopper.  We all know this to be true.  So why do we think they are going to suddenly become wizards when it comes to health care?  Third, the government is a terrible administrator.  As a monopoly provider, they simply don't have the inventive to be either responsive of cost-effective.  Again, we all know this to be true, so why are we so willing to hope that things will suddenly change for health care?

The only thing that makes any sense at all to me is to try to give the user of health care some financial incentive to participate in the price value tradeoff and shopping process.  I know that I have simultaneously saved a ton of money as well as substantially increased my health care shopping IQ since our family adopted a high-deductible health insurance policy.  Incredibly, however, this is one solution that absolutely is off the table -- for example, the first step Massachusetts took in their single payer system was making it illegal for consumers to buy the kind of high-deductible insurance I have.  Illegal!


  1. Larry:

    Some people DO have grocery insurance. It's called WIC. I was once at a smaller independent grocery store in a poor area looking for some cereal. The prices for (WIC-approved) cereals were outrageously high because the stores knew that many of their customers used WIC checks and didn't pay the shelf price. The store made more profit selling primarily to WIC recipients than they lost from other customers walking out. And that's an 'honest' store. Surely some stores submit inflated WIC vouchers (higher than shelf prices) and I can't think of how a desk-bound bureaucrat could even detect that.

  2. m:

    You're absolutely spot on with this. Another evidence of your point is that hospital and health care provider profit margins are in the 10%+ area. Health insurance profit margins are in the 3-5% area.

  3. John Moore:

    Yes and no.

    For lower dollar cost items, the high deductible (which is the idea behind Republican Health Savings Plans) causes people to make cost-based decisions, which would result in better functioning of the basic care market, if it were widely adopted.

    However, you don't need to go as far as the government to see the problems with our current system. Corporate health care insurance has almost the same agency problem as government insurance. It covers low dollar expenses, it negotiates at a bureaucratic level with often monopsony power, and it does its best to shed cost not by providing the best care, but by pushing it onto the provider. Most businesses, because of competition for employees, need to provide this kind of care.

    Another major issue, unfortunately, is that most of health care spending is for high cost collections of treatments - hospitalization of critically ill patients, etc. The high deductible insurance does you no good there. If you need cancer treatment, it is likely to go way beyond your deductible. Furthermore, you are likely to go for the best (which may or may not be the most expensive).

    The combination of these factors with the already huge government participation in the medical marketplace has distorted it terribly out of proportion.

    One thing is for sure: you don't want to simultaneously have the following:
    1) your retirement in accessible assets
    2) no health insurance
    3) a major illness

    You will end up paying as much as 10 times what insurance companies pay for the same treatment (I had one treatment where the ratio was $5000 / $484 ). You will pay $75 for a medication in the hospital that would cost $.50 at home. You will likely incur bills of $200,000 to $2,000,000.

    In other words, if you recover, you will be broke. If you die, your descendants will lose their inheritance (whatever part Obama leaves).

  4. Mike:

    I strongly agree w/ this article because I believe a free market is the best means to empower the individual. The loss of this choice function is a reduction in an individual's liberty, please see the collected works of M. Friedman.
    The last paragraph had several unfortunate typo's Mr. Meyer. "As a monopoly provider, they simply don’t have the inventive to be either responsive of cost-effective"" should read, " As a monopoly provider, they simply don’t have the inCentive to be either responsive oR cost-effective" A minor quibble, but it could confuse a person.
    Love the revised Blog and for ironies sake I'd like to see that image of the coyote riding in a light rail car incorporated into the header of the site.
    M -

  5. Ken:

    My neighbor is a nurse in a large hospital. She keeps me well supplied with shop rags and other new items because when a large bundle of items are opened up to use in the operating room all the new, unused items in that bundle are thrown away! She collects the new, perfectly good stuff and brings it home. With hospitals making no effort to reduce costs in such obvious ways, it is easy to see another reason for such high costs. After all, the insurance companies are paying for it, so who cares?

  6. Bryan:

    Delurking for a first post.

    Another reason that you see nonsensical practices like the one that you've mentioned is that the medical comunity in general spends alot of time worrying about lawsuits. As a result, they take safeguards which are sometimes above and beyond what is nessesary. The fact that cost effectiveness is low on the priority list just exacerbates that situation.

  7. Dr. T:

    That was among the best essays I have read on the problem of government-managed health care. Many years ago I proposed a simple solution to our actual and perceived health care financing problems.

    1. Require everyone to buy catastrophic health insurance from private health insurance companies. (Exception: People can opt out if they can prove they have sufficient assets to cover a major hospitalization.) Bonus: All state regulations of health insurers are dropped in favor of a single national standard. (I'm a libertarian and a federalist, but this is one area where the Commerce Clause should come into play.)

    2. Eliminate employer-provided health insurance. (It's not the task of employers to provide health insurance, and the current system locks sick people into their jobs because they fear losing coverage.)

    3. Allow health insurance companies to offer more complete coverage than catastrophic insurance, but do not force insurers to have uniform pricing or to offer coverage to everyone. This means that fat, diabetic smokers will pay much more for a low-deductible policy than a slim, healthy, nonsmoker.

    4. Persons too poor to buy health insurance can participate in government-approved plans at reduced premiums (based on income), with Medicaid paying the rest of the premiums. (Note that Medicaid would exist only to verify income and family status and to send payments to approved insurers.)

    This plan would give the government only a small role in health care. People with just catastrophic coverage will shop around and negotiate prices, which will drive down the costs of health care. Those who don't want to do this can pay extra for HMO or PPO coverage. There is no downside to this plan, which certainly beats what we have now and what the federal goverment might think up.

  8. Greg:

    Dr. T,

    Your proposal is good, but it would need to address the case of the uninsurable. If you're going to be taking drugs that cost $200 a month for the rest of your life, you're not going to find insurance for $100 a month. With some chronic conditions, you could still be unable to pay for your medical care even with a six figure salary.

    The traditional setup to deal with the uninsurable involves a risk pool, to which all insurers contribute. You could have Medicaid pay the difference for those people who honestly can't afford medical care. It's a philosophical argument: what is the maximum we should require someone to pay?

    Chronic conditions, even those that don't make a person uninsurable, should be treated with a plan of care, with incentives for taking actions that help ameliorate the disease (a Type 2 diabetic losing weight, for example). However, currently, these provisions run afoul of some states' anti-rebating laws.

  9. persnickety curmudgeon:

    Careful when trying to evaluate the "price" of healthcare.

    First, with prescription medicine for example there is an awful lot of smoke an mirrors. Say a drug company charges $100 for a month supply of drug A which costs $10 to make. The employer pays a "discounted" $60 and the recipient a $20 copay. The insurance/PBM provides a kickback of $40 to the drug company who then writes off a $20 loss instead of a $90 profit.Who the heck knows what goes on in this industry. The employer gets a tax credit for provding insurance,the employee may pay for his plan pretax or itemize expenses.

    What is the true cost of the medicine?

    If the alternative to the $100 a month pill is a hospital stay and surgery at $40,000, what is the opportunity cost/savings here? Who can tell anyway cause alot of these charges never get paid and are total write offs. This is the next shoe to drop in the economic meltdown.

    Everyone from doctor's to hospitals, to drug companies, to insuracne companies is booking sales and profits and carrying the debt from the sale of services and product at made up prices and a huge percentage will never be paid thus distorting any attempt to come to a true price of anything.

  10. Bertha:

    Another angle - division of specialities both by dr and by location. A small example, our son injured his finger playing football. We didn't know if it was broken or dislocated. We started at the pediatrician's.

    1. Pediatrician does an x-ray. It's broken, go the ER to get it set.
    2. ER does an x-ray. Yes, it IS broken. They splint it and recommend a hand specialist.
    3. Hand dr. does an x-ray, recommends surgery, and on and on.

    So 3 different places did their own x-rays within the span of about 24 hours. I understand the need to see a specialist sometimes, but it's nuts that they each repeat work that could easily be passed along from one dr/facility to the next, such as an x-ray image.

  11. Mark:

    I, too, had a high-deductible plan and needed knee surgery -- nothing major, just overuse and 51 years of mileage on the knee. When I actually tried to shop around (after all, it was my money that was going to pay for a lot of the treatment) it was almost impossible to get pricing information from the various surgery centers, MRI providers, etc. The typical answer was either "We don't give out that kind of information" or "I don't know -- we've never been asked that." The chart on cosmetic surgery inflation vs. other medical costs says it all.

  12. Scott Fraser:

    Three comments to your excellent post:

    1. We live in Massachusetts and have a high-deductible policy -- your last paragraph may need fact checking.

    2. My experience, like yours, suggests people with high-deductible policies will price-shop healthcare and manage interventions UNTIL they reach the "maximum out-of-pocket" specified in their policy. My experience suggests that once you cross that magic line, you revert to the "normal" purchasing behavior when someone else is paying the bill -- you don't care what it costs and want only the best of everything on offer. In fact, you accelerate the consumption of services at year end before the deductible resets.

    3. Recognizing that I was in a good position to help my insurance company manage costs (and perhaps lower future premiums), I once tried to help them by pointing out what I believed was either a mistake in the hospital's billing or gross over-charging for what I knew was a very simple procedure -- specifically, a charge of $1100 for six squirts of liquid nitrogen to freeze common skin lesions with no more than a minute of billable physician time consumed. (Note: this was in addition to the $975 charge for a 20 minute skin exam). The insurance company wasn't interested in investigating it, so I asked the hospital billing office. They said it was the "normal and customary charge". On my next visit I took it up with the dermatologist. She was ignorant of the charges for her services. The experience left me wondering what a concerned health care consumer is to do?

    Ignorance and peverse incentives are at the core of the problem.

  13. Charles:

    Good posting on health care. Not very valid, however. As briefly mentioned in another comment, the vast majority of money spent on health care is major medical (hospitals, surgery, cancer etc) whose cost go far beyond even a high deductible. Co-pays & deductibles will shorten long lines and reduce prices for routine medical needs which are a small minority of the total medical expenditures.
    I am going to disagree on the efficacy of government intervention as well. I am no friend to big government but I am also a pragmatist regarding what works. The realistic facts are that we have our system vs single payer in every other developed country where it is wildly popular.
    Their system costs about 12% of GDP - Ours cost 17% of GDP
    Their system covers everyone - ours leaves 45 million with no coverage and millions more with inadequate coverage.
    Their system spends about 10% of the money on bureaucracy - Ours spends 25%.

    Those are real numbers. Their system is inarguably more efficient at spending money. Most of the dire predictions of 60 trillion dollars of unfunded government liabilities over the next 75 years are based on projecting out the excess money wasted on our medical care system. Adopt the other system and we save about 1 Trillion dollars a year (the 5% of GDP difference between theirs and ours) and those future disaster scenarios mostly dissolve.
    Another interesting idea where government intervention could help comes from Dean Baker. He suggests taking clinical trials away from drug companies and fund them publicly. Once completed, the drugs would be released as generics without the monopoly patents to any drug maker. Cost of the trials would be about 30 billion dollars. Savings on drugs cost would be about 10 times that. Sounds like a deal to me!

  14. Emma:

    As a British reader I really enjoyed your article, but I have to pick up Charles' comment as he seems to have swallowed Michael Moore!

    All other developed countries do not have a single payer system, most have a multi-payer, multi-provider system - almost all (including the French and the Germans) have some amount of co-payment on everyday expenses. (None are comprehensive, all have cost problems and care issues. The Netherlands has an interesting looking new system.)

    The UK is (almost) alone in having a single payer, single provider system - and it is without doubt terrible. Thousands of people die unnecesarily because of socialised medicine in the UK, the costs are inceasing, and the standards of care are poor (for instance cancer survival rates are half those in America).

    The USA has by any measure the best quality healthcare in the world, with the best doctors, best hospitals, best quality and range of treatments. And boy does it pay for it! Where the USA falls down is both in universality of coverage, and in unnecesary complexity that Coyote does a very good job in exploring! The USA performs poorly in the recent well publicised WHO international health comparison, where three of the five judging criteria are related to equality and access, rather than quality of care, where it is ranked first (the final criteria is cost).

    The OECD give the following figures for Health Expenditure (2006) as a % of GDP, (the amount of that spending which is public rather than private I put in brackets)

    USA 15.3% (45.8%)
    UK 8.4% (87.3%)
    Netherlands 9.5% (62.5%) (2002/4 data)
    France 11% (79.7%)
    Germany 10.6% (76.9%)

    What IS shocking is that US PUBLIC healthcare expenditure is equal to that of the UK, yet leaves many with no coverage. Yes American healthcare is a mess, by all means reform it, but do not think that Government is any more than a small part of the (and by no means the whole) solution - as a facilitator, not a provider. And don't throw the baby out with the bathwater!

  15. Shazbot:

    youre all a bunch of raving lunatics...

    Capitalist healthcare. Rofl!!!
    Free market is rockin' for the nation now isnt it!!!

    You cant expect the average population to study into the menutia of each healthcare treatment they recieve, often in emergent situations. It takes years for Dr.s & Nurses to understand what is and is not important to their acute treatment. For patients to get a menu of treatment options and choose what they want or dont want, or what they can or cant afford is Rabid!

    The OP has made an astute observation, but unlike the legislators he/she belittles, theres no proposal there; no implementable solution.
    Just a lot o' hot air.

  16. Mike:

    Medical insurance is not really insurance; catastrophic medical health insurance would be better, but what most people consider health insurance amounts to free health care. Look at the other three major forms of insurance people deal with. Auto insurance covers unusual occurences, not routine auto maintenance, but what many want "health insurance" to cover is precisely the routine functions. Look at home/renters insurance. If my TV is stolen, insurance covers that, but if my TV breaks, my home/renters insurance does nothing. Finally, take life insurance. Here's a situation where the insurance company would like me to be healthy and live a long time, but they cover absolutely nothing to help that along. At most, they encourage me with lower rates for certain behaviors.

    In essence then, health care provision should not be by an insurance mechanism. A better scheme needs to be developed that encourages people to take care of themselves, but provides for catastrophic support. The real problem is that we've evolved a sysetm that devotes the bulk of the services to either the worst actors or individuals near the end of their lives (long after they've ceased to be productive).