by Dr. Gordon C. Everest, Professor Emeritus, Carlson School of Management, University of Minnesota
Our system is fraught with perverse incentives among three parties: the provider, the “patient,” and the payer insurance company. When you, the patient, have a health-related problem or question, and IF you have insurance, you go to see the doctor, clinic, or hospital. The only incentive to NOT go is the copay or deductible, or the prospect of paying the whole cost if uninsured. The provider has no incentive to say “no”, and every incentive to say “yes” − if you have insurance (or, even better, if you will pay the full “sticker” price). The provider will get paid for your visit so their bottom line incentive is to maximize your visits (or refuse to see you if you are uninsured). The main incentive for the provider is to charge (or bill the insurance company) as much as they can get (away with), as much as the “market” will bear.
Third are the insurance companies, the payers. They get the bill from the provider. Their main incentive is to NOT pay or to pay less. This sets up a battle between providers and insurers. The provider might recode a diagnosis or a treatment to get it approved. The patient can appeal a denied bill.
Insurance companies are not in business to lose money. They will raise premiums, raise copays and deductibles, cut coverage, drop out of a market, or worst case, shut down in bankruptcy. No organization can tolerate sustained losses. The Affordable Care Act said that insurers must spend at least 80 percent of their premiums for the delivery of healthcare. They get to keep 20 percent? Those are good odds in any business. The industry was not even at that level yet when the ACA passed. What a sweet deal. It means that 20 percent of every dollar spent on healthcare contributes nothing to the health of our society (sure, the insurance companies try to make us think it does). That is a pretty hefty margin which we would not tolerate in many other industries.
The purpose of insurance is to cover rare and catastrophic event (such as house fire or car accident), not for regularly incurred expenses. Furthermore, both of these examples are mandated ― you can’t get a mortgage on a house without insurance, and you can’t get a car license without proof of insurance. It is really a misnomer to call it “health insurance” at all. Would we say you can’t get healthcare if you don’t have insurance?
Interesting that the only two parties not fighting are the patients and the providers. They are the buyer and the seller in this marketplace! However, add the insurance companies to the mix and we no longer have a bona fide marketplace. It’s also interesting that the healthcare insurance industry and companies have been notably absent from this conversation.
In the U.S. we have made huge investments in our healthcare infrastructure with the capacity for delivering excellent care. We have modern hospitals with the latest equipment, a great network of clinics and providers, and advances in pharmaceuticals. Healthcare has been one of the strongest sectors in our economy. We don’t want to give it up. Unfortunately, it is accessible mainly in urban areas and only if you have insurance. Ultimately, we are all paying for it.
From an economic perspective, the demand for healthcare is unlimited. Yet the supply, the resources we devote to healthcare are limited ― by the premiums we pay for insurance, by the taxes we pay for the government to provide programs to cover healthcare costs, and the out of pocket costs we are willing and able to pay.
Healthcare should be a universal. For education we have public schools, and mandate that every child must be receiving an education somewhere. It is in the best interests of society for people to be educated… and healthy. Everyone should have access to at least some minimal level of care. We criticize other countries’ “socialized” medicine as being “rationed.” Well, ours is, too − on the basis of money. The default in this country is: you are NOT covered unless you “opt in” by buying insurance or applying for government aid. The insurance companies can’t say no (if it is coded right), but they can pay out less − or increase premiums next year. If you “opt out” (i.e., do nothing), in an emergency, you will still receive some level of healthcare when you go to a hospital. Most states have mandated that you be looked after. We ultimately all pay the price in taxes or reduced services to the rest of us.
Some suggest that everything will be fine if we just have an open free market. Yes, greater competition can lead to lower prices. A free market assumes that the buyer (patient) and seller (provider) are those directly involved in the transaction. Also, any introductory economics class tells us that markets work well only if there is complete, free, and open access to information − pricing, quality, and user ratings of providers. We have anything but in the healthcare industry. In a totally free market, the rich will get excellent care, and the poor would get none. With insurers involved, they require providers to charge cash customers the same amount as they bill the insurance company. To stay “in network” a provider must agree to NOT give discounts to cash patients. Only the insurer gets a discount! I have seen payments cut to as much as 90 percent of billed charges. This keeps both patients and providers captive to the insurance companies. Again, the system we have in place is one in which they cannot lose.
The ACA was a Band-Aid which only delayed the inevitable increase in costs. There was no viable mechanism to control costs, made worse by mandating the coverage of pre-existing conditions and older children, and by removing the lifetime cap. These were good things to do. Perhaps what we got in the ACA was the best we could do at the time and having all the stakeholders at the table. But much work remains to dig ourselves out of this predicament. The current proposals before Congress will not get us there. Things would only get worse for us all.