Two health care reports were released this week. One is on the sharp increase in health insurance premiums this year, and the other is a survey of physicians regarding whether they provide more treatment to their patients than is necessary. These two reports were not coordinated, but their findings are closely related.
From 2010 to 2011 the average price of a family policy increased by 9 percent, resulting in the average cost of family coverage breaking $15,000 per year for the first time. This is a significant hike well over inflation, wage, or employment growth. Also reported was that 28 percent of physicians say they provide more care than their patients actually require. Incidentally, they cite fear of being sued as the primary factor. Texas has reduced this problem better than many other states through meaningful tort reform. However, there is a greater cause and effect at work here. Patients are receiving more care than necessary from doctors who are in turn billing the insurance companies for this unnecessary care. Insurance companies then require more money from customers, who are also the patients, to cover the cost of care. The patient/customer is now incentivized to get more unnecessary care to make the insurance premiums more valuable to them. These two reports illustrate the core problem with rising health care costs in America: third party payment.
Third party payment is the system whereby most price signals are removed from the direct interaction of the patient and the provider. This leaves the patient with the incentive to consume as much of the best health care as possible because the immediate cost to them is marginal. Insurance companies then make payments with the incentive to maximize their profit margins. However, there is no interaction between the patient and the provider on the value of the health care being provided. If a physician told a patient that they needed x-y-z test, the cash paying patient is far more likely to ask questions, such as, “Why do I need this test?” The patient would then know the price and the justification for the test and be able to make a value decision – otherwise known as a price signal. It is the lack of these value based decisions that is one of the driving forces behind rising health care costs.
Milton Friedman said there are four ways to spend money. Two of these are: “you can spend your own money on yourself” and “you can spend other people’s money on yourself”. When you spend your own money on yourself you have great incentive to find the best value for your money. However, when you spend someone else’s money on yourself you have great incentive to get the highest quality and quantity with less regard to the cost. The American health care system is based on the latter of these, and it will not be sustainable until it is based on the former.
– Arlene Wohlgemuth