In recent weeks, President Bush has spent considerable time talking about health care reform, particularly on the need for greater transparency in health care pricing as a way to drive competition and lower health care costs. The President’s comments echo the growing interest in consumer driven health care and the importance of putting the consumer in charge; not just in charge of the decisions, but also in charge of the purse.
In fact, the way to address the rising cost of health care is to have patients paying more of the bill, not less.
In reality, health care costs have gradually crept up as the patient-the real consumer-has grown more insulated from the actual cost of care. Instead of the patient paying most of the bill, the bill is paid by third parties-generally by the government or private health insurance. As a result, the cost of health care and the price of insurance have steadily increased with little check on price (or quality) from the patient.
Of course, soaring costs have incorrectly brought many to believe that health care is simply expensive by nature, and that there is nothing that can bring costs under control.
The rising cost of health care is like dining on an expense account: let’s call it the Expense Account Effect. When people eat out on an expense account, it stands to reason their bill is higher than it would be if any of them were eating with the family on their own. They order appetizers and dessert, along with the special fish at “market price” (who cares what market price is, right?), and probably even the nicer glass, if not the entire bottle, of wine. The people feasting at the table are entirely unconscious of price since they aren’t paying the bill.
A savvy restaurant owner would no doubt look around and realize that the restaurant’s patrons never care how much the food costs. What was a $22 entrée becomes $27, and up the prices creep. The dining room stays full and no one questions the bill. In some restaurants the menu may not even list the prices-daring the self-conscious patrons to inquire as to the price of their selection.
Who doesn’t love to eat out on an expense account? It’s all the bang, for none of your buck.
Eventually the business owner will look at the charges to the expense account and ask the employees where they can cut back. Cut back? Why, you can’t even get a good meal for less than $75!
And so it is that health care is expensive. Who knows how much it costs? Who cares! We can’t make people pay, it’s too expensive!
In fact, the rising cost of health care clearly coincides with the rise of third-party payment. In 1960, for instance, almost half of health care spending came out-of-pocket, declining to just 27 percent in 1980, and 15 percent in 2004. At the same time, third-party payment grew from about half of health care costs in 1960 to almost 85 percent in 2004. Indeed, the vast majority of the nation’s health care tab is picked up by someone other than the patient-usually the expense account.
Of course, the higher the costs climb, the louder the calls for price controls or a single payer system. If past experience is our guide, we see that shifting the responsibility for payment to anyone other than the actual consumer drives up cost without the balance a free market normally brings.
In fact, who knows how much health care really costs? Not only are prices largely hidden from view, but the prices we pay may bear little resemblance to what the market would normally allow.
More sensitivity to price will go a long way to helping right the market, bringing greater competition to the marketplace and more sensible pricing.