Thursday, November 12, 2009

Five health insurance issues (4)

In response to my post on catastrophic health insurance, Grim commented:

I like the idea of market-based reforms. However, I'm not sure why a government plan would be better at simulating the market than, you know, the market.

For example, the DeLong plan that I surrender 20% of my income for health care expenses? The market as it currently exists offers much better deals than that.

In general my preference is for a free market with only as much government regulation as is necessary to keep the more predatory impulses of capitalism in check. However, I have a lot of reservations about whether a totally free-market approach is appropriate for health insurance. I prefer regulation that says, “Thou shalt not” rather than regulation that says “Thou shalt”. Once you wander into government telling private companies what they should do, you’re in trouble and that’s increasingly the case with government regulation of insurance companies. They’re being told what they must do - who to cover, what conditions to cover, how much treatment to provide. That’s a bad situation; bad for the companies, bad for the government, bad for the company’s customers.

Yet I understand why we’ve gone down that road. We want certain things from health insurance and we are trying to get them via government intervention while still maintaining - or appearing to maintain - the companies as private entities. I’m not at all sure that’s working well. We may simply be unable to get what we want from health insurance within the framework of our current system.

This is a big part of why I was so intrigued by the catastrophic insurance plans I discuss in my earlier post. These plans may be the best way to address five issues I think any health care or health insurance plan must handle, the issues we’re trying to handle through our increasingly intrusive regulation of the insurance industry. In sorting out why I think these plans are promising, I’ve written at considerable length about those five issues.

My post about the first issue is here; about the second issue is here; about the third issue is here. This post is about the fourth issue; my next post will deal with the fifth issue and then I’ll have a grand finale. As usual, I’ve created a new category - “Five Health Insurance Issues” - to link the posts.

Issue 4: The New York Times, in an article about how Democrats are concerned the health reform proposals on the table won’t control costs, writes (emphasis mine):

There are a variety of ideas for attacking cost increases more aggressively, including setting Medicare reimbursement rates for doctors and hospitals more rigorously and discouraging workers and employers from buying expensive health insurance policies that mask the true costs of treatment.

Guess what? All health insurance policies - private and government - mask the true costs of treatment. I go to the doctor. I have a copay. I pay the copay, let’s say $30. Is that all the doctor gets? I have no idea. Or I go to the doctor. I have a traditional plan so I pay nothing during my visit. The doctor bills my insurance company for $150. My insurance company allows only $70 for the visit. I haven’t met my deductible so I pay the $70. Or I go to the doctor. I don’t have any insurance. I pay $150 on the spot. What is the true cost of the treatment? $50? $70? $150? Who knows?

Why is this bad? For a number of reasons. First, it means patients - health care consumers - with insurance have less incentive to think twice about seeking health care. This reason usually gets expressed as “people go to doctors when they don’t need to”. I’ve never been sold on that idea - I personally would be willing to pay money not to have to go to doctors. I will somewhat grudgingly concede that having insurance means I don’t blink when my doctors tell me I need another blood test or another X-ray or another MRI . And the doctors don’t blink either - we all know I’m not paying for it. But this is not the real problem with that lack of incentive to think twice.

The real problem is that when the true costs of treatment are masked an individual neither has to decide nor gets the opportunity to decide whether a particular treatment is worth what it costs him. This is an easy formulation to attack: why, I’m suggesting some poor person should have to choose between getting a flu shot and putting food on the table. No, I’m not. I am suggesting that all of us should have to choose between getting flu shots and getting FIOS - or buying a latte every morning or buying a new winter coat every year. If you would rather have cable TV than a flu shot why should my tax dollars buy your flu shot?

This is why I’m so intrigued by the catastrophic coverage proposals I wrote about in my earlier post. The existence of Health Savings Accounts (subsidized for those who need it) gives everyone - rich and poor - a chance to decide how to spend their money: health care or something else. If you never, ever get the flu then skip the flu shot and use the money for something else. If you really, really need to avoid the flu then get the flu shot and give up something else. Under these types of plans if my doctor tells me I need another X-ray, I do a lot more than sit glassy-eyed. I ask how much that X-ray will cost me and when I realize getting the X-ray will cost me, say, as much as buying gas for a visit to my relatives, I’m likely to ask a lot more questions about exactly why I need that X-ray and how bad would it be if I waited and can we just see how things go. The flu shot and the X-ray are there for those who need them enough to pay for them - but they’re not forced on those who would rather spend their money on something else.

There is a second reason why masking the true cost of treatment via insurance is a bad idea: it doesn’t give patients any incentive to patronize providers who come up with ways to improve treatment and/or lower costs - which means it doesn’t give providers any incentive to do those things. For example, let’s say I need shoulder surgery. I can get it done at a hospital-based outpatient center for $3000. I’ll need follow-up pain blocks from an anesthesiologist for a few days and for that I’ll have to go to the Emergency Room - there’s no other way for the anesthesiologists associated with the hospital-based center to handle that administratively. On the other hand, my surgeon participates in a free-standing surgical center. I can get my surgery and my follow-up pain blocks there. The surgery will cost me $2500.

Obviously, I’d much rather go to the surgical center - it’s more pleasant, more convenient, and cheaper - and if I’m paying for my surgery myself, I will. The orthopedic group is rewarded for providing a better product at a lower cost. But what if the surgical center doesn’t participate with my insurance company while the hospital does? Then I get the surgery for nothing from the hospital so that’s where I go. The orthopedic group is not rewarded for providing a better product at a lower cost. And why doesn’t the surgical center participate? Because the insurance company won’t actually pay $3000 for the surgery; it won’t even pay $2500. No, the insurance company pays the hospital $1000 for my surgery. The hospital makes this up by charging uninsured patients a higher price; the surgical center can’t do that - their prices are fixed.

And not only is the surgical center not rewarded for its efforts to provide better health care at a lower price, we also have no idea what the market price for my shoulder surgery really is. It might be $1000, $2500, or $3000. Or it might be $500 or $5000. We simply don’t know and we have no mechanism for figuring that out.

Or take this recent editorial from AARP. According to them, manufacturers are selling power wheelchairs to suppliers for about $1000. Then the suppliers are selling those same wheelchairs to Medicare recipients for about $4000. To AARP this is a clear case of waste made possible by the “medical equipment lobby, which spent $6.3 million in presidential and congressional campaign contributions last year” resulting in “Congress [blocking] attempts to impose competitive bidding.” To me this is a result of insurance masking the true costs of treatment. If I was spending my own money to buy a power wheelchair, I’d look for the best possible price. A supplier who was willing to sell the chairs for $3000 would own the market - until another supplier stared selling them for $2500. When producers and consumers deal directly with each other you don’t need competitive bidding.

Ah, you say, but if I bought catastrophic insurance from my insurance company I’d be well aware of the cost of treatment. Um, no. Somewhat more aware, yes; totally aware, no. Even with catastrophic insurance - at least around here - the insurance company differentiates between in-network and out-of-network providers. The company also decides how much it’s going to allow for a procedure. So my shoulder surgery would still cost $1000 for the hospital-based surgery versus $2500 for the surgical center surgery. The difference is that now I’d be paying the $1000 instead of having my insurance company pay it. On the other hand, I’d probably be less likely to think $4000 was a good price for my power wheelchair if I had the high deductible of catastrophic insurance. So catastrophic insurance can help keep government health insurance from paying unreasonably high prices (that’s not usually a problem with private insurance) but even catastrophic insurance as it’s currently structured doesn’t do enough to expose patients to the true cost of their health care. The true costs of treatment will always be masked to some degree as long as insurance companies stand between the consumer (the patient) and the producer (the health care provider).

These two reasons together - lack of incentive to consider the opportunity cost of purchasing health care on the part of patients and lack of incentive to produce a better product at a lower price on the part of health care providers - are also bad for society. It means we have no hope of reining in health care costs via individual decision-making and will be forced to do so by more draconian means such as paying providers less and refusing to pay for certain treatments. This will result in a “one size fits all” approach that will provide some people with services they would have foregone in order to get other, unavailable services they need or want.

So point the fourth: As currently structured, all insurance - private or government, cheap or expensive, HMO or traditional, catastrophic or first-dollar - masks the true costs of treatment from those who purchase that treatment. This is bad for patients and bad for health care providers and bad for any hope of reining in health care spending through individual decision making.


Figment and Reality said...

Free market works well where all parties are knowledgeable or informed. Unfortunately, the system is badly stacked against the consumer. We pay $50 for a blood panel that actually costs only $4 to run, including overhead for the lab. The rest of the cost is for billing and profit. The insurance companies do a better job negotiating rates than Medicare as I mentioned in previous comments but they in turn overcharge us for the copay. However, the insurance company justification is that the high $50 fee covers areas where they don't make such high margins. As long as they need to make money they will try to make the highest margin for the least cost.

You can see this phenomenon by going to Walmart or Costco for a prescription. Using the generic on their list, each prescription is $4/month for most routine maintenance drugs. If you go through the "drugs by mail" with your insurance company, the same drug may be up to $25/month. It turns out is is cheaper to not use the insurance companies mandated mail drug plan and go straight to Walmart because you pay for the "other drugs they don't have good contracts to buy". My wife and I now ask the doctor to go through the $4 list to find the least expensive option for a drug before agreeing to the doctor's first choice, recommended by their local pharmacy rep. This is the kind of cost control that will end up saving significant money by being knowledgeable consumers.

Until there is some real openess in showing costs and offering alternatives, none of the solutions provides real savings in this area. We need to all be accountable for keeping costs down but the system leaves us at the mercy of providers and insurance companies. I don't see how any approach that doesn't force personal accountability could work to save these real costs. Yet I also don't see how we force personal accountability without some better method to force up front disclosure by the providers.

This means I fully agree with the blogger that free care or insurance based medical care keeps costs down. It makes no difference which approach to health care is chosen, HMO, PPO, HSA, Medicare, etc. you have, we are at such a knowledge disadvantage in that we can't make reasonable decisions.

To get to your other main issue about catastrophic care versus other approaches. I like the idea of catastrophic coverage and an HSA to cover other health care. It encourages responsibility. If we have "skin in the game" and fuller disclosure we then have an incentive and means to ask for alternatives and make decisions that are right for us. Many people still won't be good consumers but at least we would have a means to try to keep our own health costs in control. We can only make it harder for people to make bad decisions but we can't legislate against our own lack of effort to keep our own costs down. We can't stop all the bad decisions without limiting choice for everyone.

Just like we can't guarantee everyone's 401K/403B or IRA plan will make money we can at least give the investors some information to make reasonable choices. The same should apply to our medical care.

Figment and Reality said...

I did not proof my comments too well. Where I said -

This means I fully agree with the blogger that free care or insurance based medical care keeps costs down.

It should have read - I agree that free care or insurance based care doesn't keep health care costs down.

Sorry if it confused anyone. I will have to keep my posts shorter so I don't make this kind of error so often.

Elise said...

I will have to keep my posts shorter so I don't make this kind of error so often.

Well I'm certainly not going to be someone who suggests shorter comments. :-)

I do agree the information problem is stacked against the consumer. However I think that if we all had to actually choose our own health care with no insurance company involved to steer us toward one doctor or another and to hide the costs from us, we'd figure out how to get the info we need. It would take a while to get prices posted and so on but we'd get there. And I can see a role for governments in insisting prices be clear. Sort of like when the government forced grocery stores to display prices.

I often think that the most useful function government can perform is insisting on sunshine.