I’ve never been told by my doctor “This medicine will cost you 47.50. It will only help 25% of the time. After 10 days your ailment may cure itself.”
Why is this not mandated?
A reader asks (referring to the prices for medical services),
How are people supposed to make decisions/ration their savings (if they have any) when no one can give you a straight answer about how much things cost?
In the United States, about 90 percent of health care spending is paid by third parties. The remaining 10 percent is called out-of-pocket. We have one of the lowest rates of out-of-pocket spending the world, even lower than that in Canada and other countries with more socialized systems.
Much of what seems economically irrational about health care comes from this use of third-party payments. Doctors do not themselves make hard-headed probability calculations, much less give patients the information to make such calculations. Prices are hidden from patients. We waste a lot of money on medical procedures that have high costs and low benefits.
It is natural for economists, like me, to suggest that the way to make the system more rational is to reduce the extent of third-party payments. In my book, Crisis of Abundance, I offered suggestions for reducing third-party payments from 90 percent to 50 percent. I do not think you can reduce them much below that. A large share of health care spending is on a small fraction of the population where the cost of treatment is high, and some combination of government/charity and health insurance is inevitable in those cases. Also, there are people who are so poor that somebody else has to pay for even basic health care for them.
Why do we have a system with such a high proportion of third-party payments? I do not think it is because some evil demon foisted it upon us. I think it is because people like it.
Fifty years ago, doctors liked it, because it encouraged demand. In those days, there were not so many expensive treatments out there, and insurance companies could operate by approving pretty much anything the doctor ordered and paying whatever were the “usual and customary” rates. More recently, as health care costs have started to take a larger and larger share of worker compensation, insurance companies are starting to negotiate harder, and friction is growing between doctors and insurance companies. Still, most doctors would rather take insurance than give up on it altogether. As frustrating as it can be, it is still less trouble than dealing directly with patients on money matters.
I also think that there is a status issue involved. If the doctor does not have to talk about price with the patient, then the doctor is in the position of offering “the gift” of health care. That gives a doctor higher status than that of somebody who is selling you something.
Another point is that when we need health care we are vulnerable, and there is resentment involved in having to pay when you are vulnerable. We feel the same way about charging interest to people who are desperate for money. 2000 years ago, if the only lending had been to growing corporations, then nobody would have complained a bit about the practice of charging interest. Instead, usury was declared a sin because borrowers tended to be people in desperate straits. Even today, the sense of outrage at making vulnerable people pay interest can be seen in the stigma attached to payday lending. Similarly, if you break your arm, having to pay thousands of dollars in hospital bills feels cruel.
Let me repeat Josh Barro’s point that health care is 1/6th of our economy but nobody wants to spend 1/6th of their income on it. When health care spending was lower as a share of GDP, we had the luxury of setting up a system dominated by third-party payments, without the insurance companies or the government imposing difficult restrictions on what procedures could be approved or what doctors could receive in compensation. But health care spending has gotten to be too large a fraction of GDP to be handled that way. The system is bound to change, and the change is bound to feel uncomfortable to many people.
I’m not sure why the doctor can’t recommend a number of treatment options, print out studies which support or don’t support each option then send you to the front desk where they give you the prices. When facing higher ($500+) out of pocket expenses, I always ask for the price of treatment. Each time the office staff says “We have to bill your insurance first to find out.”
How many other products do you decide what to buy and then get the out of pocket price 4 weeks later?
Many clinics have clear price lists:
http://m.cvs.com/minuteclinic/insurance-and-billing/price-lists
There are solid resources for treatment evidence:
http://www.thennt.com
Connecting the two seems simple enough.
Cvs offers a very limited number of services so the can keep it simple. And they are a big corporation setting up this price list nation wide.
Your local provider clinic does a lot more and the services add up quickly with each test and each minute you spend in their office.
Plus what you pay will depend upon your insurance so even cvs can’t tell the price you will pay.
Not at all simple.
Great post
Seconded.
One way that the “socialized medicine” countries deal with this is just to increase the queue time. It’s not a bad idea. Watchful waiting, spontaneous resolution, etc.
One perverse consequence I think we observe with healthcare’s particular method of limiting supply and subsidizing demand is that doctors are so busy that they are likely to over-treat because wise under-treatment takes more bandwidth.
Perceptive! Reminds me of the famous saying of Pascal:
“I would have written a shorter letter, but I did not have the time”
More anecdotal evidence: I’ve probably called 20 doctors recently. Can’t get into any that take our insurance, no problem with the ones that don’t.
This post is excellent throughout, with a strong understanding of the economic and non-economic incentives involved.
“I offered suggestions for reducing third-party payments from 90 percent to 50 percent. I do not think you can reduce them much below that. A large share of health care spending is on a small fraction of the population where the cost of treatment is high, and some combination of government/charity and health insurance is inevitable in those cases. Also, there are people who are so poor that somebody else has to pay for even basic health care for them.”
This is a good evaluation of the system and a reasonable goal. I would add that I think you need to regulate the remaining 50% of expenditures for much more closely then is currently done. As you say, these things are always going to be third party payer, and we ought to treat third party payer expenses with more suspicion. My experience with the state of these expenditures is really depressing. I also think controlling this bucket makes it easier to get people comfortable with the 90%->50% change.
In my mind the major issue is trust. Both deciding what should be third party payer, and what that third party payer should pay, are contentious issues. If nobody trusts each other and all the people involved don’t have much binding them together its very difficult to arrive at a rational bargain on those issues. I don’t see anyone dealing with the issue of institutional or individual trust. I guess because you can’t put it in a regression model, or because trust is an expensive to build asset.
“Let me repeat Josh Barro’s point that health care is 1/6th of our economy but nobody wants to spend 1/6th of their income on it.”
My worry is that at 1/6th of our economy, 1/6th of our society has a very strong incentive to lobby against change, at least any change that would make it less then 1/6th of our economy. People with insurance they like also feel a stake. Other countries have done a better job of not getting to this point, but no other country has ever had to shrink their healthcare sector. I think this is the hill we will die on. Change will come…when we are flat broke.
Great post. I maintain that the 3rd party payment problem is perhaps not the key issue. That explains high demand, but not the much higher costs per purchase, for the same drugs, procedures, etc. If US prices were closer to what prevails in other developed countries, then much of our current trouble would be alleviated.
Great post, Arnold. Just one quick comment:
I also think that there is a status issue involved. If the doctor does not have to talk about price with the patient, then the doctor is in the position of offering “the gift” of health care. That gives a doctor higher status than that of somebody who is selling you something.
That may be a factor, but I suspect that the bigger reason is the Hansonian aspect of it on the consumption side: we have a 3rd party payer system primarily because we want to show that we care about our fellow Americans, and for patients to have to think about and talk with their doctor prices and fees when they’re sick or injured would undermine the signalling aspect of this system.
Markets at work. To list prices is to invite competition which must be avoided at all costs. They wouldn’t be able to charge anything near what they do if they had to disclose it. Yet where are the calls to list prices, to total costs, to compare them? Making people pay more is lame without making pricing transparent and information easy. This is both why out of pocket is less and prices are highest. Markets don’t solve this because there is no incentive in solving it; the incentive is to obscure it, and it is very easy to since there is a lot of customized and personalized provision and many different items to shift costs between and hide them in. The market solution is free universal care, so no one has to pay anything and providers can charge whatever they like. Not allowing the latter is called socialized medicine.
Whoa, up is down.
I think it is way simpler. We over train doctors so that we can entrust them with the power to say “if a treatment exists, and I deem it appopriate, then you get it.” So, cost and price is not an issue.
Is that why supermarkets never mail me circulars with prices in them? Because they don’t want to invite competition? Oh wait, nevermind…they do that every friggin’ week, I guess because they have this crazy notion that people are price sensitive and will seek out low cost providers of goods and services.
I can see a little something to it, but it is probably more effect than cause. A lot of uncompetitive things try not to advertise their prices.
It is funny how conditioned healthcare is. Whenever I inquire about prices they always seem confused.
“Still, most doctors would rather take insurance than give up on it altogether. As frustrating as it can be, it is still less trouble than dealing directly with patients on money matters.”
I was surprised to learn in 2008 that my favorite PCP no longer accepted insurance at all. Patients could pay up front and deal with the insurance companies themselves… this of course, cuts off anyone who can’t pay the full price up front and ensures the doctor gets paid. (I didn’t have enough up-front money to see her.)
My therapist is out-of-network for my current health insurance, and refuses to join networks unless they tell her how much they’ll pay first. They won’t tell her, so she doesn’t join.
A friend in Colorado would rather pay out of pocket for her physical therapy rather than jumping through her insurance company’s hoops… if it weren’t for working towards her yearly deductible.
I think the future might be those who can afford it cutting deals with their doctors rather than wrestling the third parties for a dubious payment that may never arrive.
Good post and good comments.
Here’s something I’ve been wondering: If everyone lost their healthcare and paid cash for services, would fees really come down that much, or would doctor fees stay super-high simply b/c the AMA restricts the number of doctors? In other words, how much of the problem simply stems from the cap on the number of doctors we graduate each year rather than the structure of 3rd party payments?
I’d also imagine that the AMA or regulation (for which that the AMA lobbies) prevents us from seeing PA’s or nurses for a lot of simpler medical conditions, but I have no idea how big an effect this is. Does anyone know?
When you consider what your employer pays for insurance premiums I suspect a lot of people pay 1/6 of their income towards healthcare. It is also hidden so people don’t consider that part of their income.
This article is a few years old but I just saw it this week when it was linked in the comments on another website discussing this issue:
https://www.theobjectivestandard.com/issues/2013-fall/dr-josh-umbehr-on-concierge-medicine-revolution/
What are your thoughts on this concept?
My wife and I pay our physician $49/month each for regular access and treatment. This covers up to 15 visits each/year and basic lab work. (For example, my PSA blood test cost $8.) The physician does not accept any third-party payments, not even Medicare/Medicaid. Thus his office staff is one person handling two physicians, a lab tech, and a few nurses. I have my physician’s personal cell phone number. I had a medical emergency in another city, and I was able to talk with him on the phone and receive his advice. Look at his incentives: the more people he helps to keep healthy, the more people he can receive into his practice. He has no incentive to insist that I visit him regularly, or to do expensive tests or procedures. He is able to address multiple health issues in a single visit, a practice that most third-party payers disallow. And we, the consumers, pay for 100% of the care he provides, without the cost-multiplying effects of third-party payment. For walk-ins, he provides an examination for a flat fee of $50.