• The provider becomes the agent of the third-party payer, rather than the agent of the patient — even shaping the practice of medicine to the third-party’s view of how it should be practiced.
• The provider no longer competes for patients based on price.
• Absent price competition, the provider no longer competes for patients based on quality.
• Overall, the provider’s incentive is to maximize against reimbursement formulas rather than provide low-cost, high-quality care.

Goodman contrasts this with the growth of walk-in clinics, where patients pay directly for care:

Fortunately (at least for efficiency’s sake) a lot of people are paying for a lot of care out of their own pockets or out of medical savings accounts of one sort or another. As a result, there are about 1,300 walk-in clinics nationwide (see the graph below via Sarah Kliff at Ezra Klein’s blog). These include about 140 Wal-Mart clinics, CVS Caremark’s nearly 550 Minute Clinics and Walgreen’s 355 Take Care clinics. All of these clinics post prices; they keep records electronically; most can prescribe electronically; and, according to one study, they provide more reliable care than conventional primary care physician’s offices. [See our previous reports here, here and here.]

Your column and blog contain a ludicrous and incorrect depiction of health care needs in America, painting a picture where visits with a medical professional are always preceded by a call to 911 and a trip on a blaring ambulance – which is the experience for approximately zero Americans, anywhere. I would be eager to learn of any of your research showing otherwise.

A simple glance at a cost breakdown of the American health care system eradicates your fanciful depiction. According to the U.S. Department of Health and Human Services and the Agency for Healthcare Research and Quality, as much as 75 percent of health care costs in the United States are due to chronic conditions. …

Your incorrect view of the nation’s health care reality is, in fact, one of the chief reasons for problems with the current system, which was originally designed in the 1930s to cover catastrophic events, not chronic conditions, predictable treatments, and long-term care. …

There is some irony in your mistake and in his, in that the government-managed coverage systems you favor are perhaps at their worst in providing responses to the life-threatening illnesses you apparently think all of us are faced with on a daily basis. …

via Consumer Power Report #269: A Letter to Paul Krugman – by Benjamin Domenech – Consumer Power Report.

See also this breakdown of medical spending on different types of treatment.

Are patients consumers?  In 2006, CBS News reported:

Like millions of Americans, Gary Garcia is shopping online, CBS News correspondent Wyatt Andrews reports. But he’s not on eBay or Amazon.com. Garcia needs a new heart valve, and he’s shopping for surgery.

Using a Web site called Health Grades.com, Garcia learns which nearby hospital is the best at heart surgery — and then, to his amazement, he gets an estimated breakdown of the costs. He gets the list price for his operation, the discounted price his insurance will pay and his estimated co-payment.

Check out the video, too.  Vimo.com provides similar information.  There’s also MediBid.com. Its site says:

Patients can find a doctor, family physician, chiropractor, dermatologist, surgeon, dentist, or any other medical specialist on MediBid.  The process is simple; patients register as “Seekers” and post a secure, private request for medical care for anything from acupuncture to total knee replacement surgery or stem cell therapy for cancer. … More than a medical directory, MediBid is a resource where medical consumers can find a doctor, then actively seek bids for the care they need. It gives physicians a direct connection to their patients.

And don’t forget about medical tourism, and North American Surgery, Inc., which offers US-only medical tourism. Is Krugman aware of this?

Krugman claims that “‘Consumer-based’ medicine has been a bust everywhere it has been tried,” but provides no evidence for this.  Has he looked at the successes of employers such as Land O’Lakes, Wendy’s, and Manitowoc County, Wisconsin?  Or how about the results of a study by the The American Academy of Actuaries: Emerging Data on Consumer-Driven Health Plans, which includes cost savings, containment, proper & preventive care, and evidence-based care.

Krugman also wrotes:

Medicare Advantage was supposed to save money; it ended up costing substantially more than traditional Medicare.

Not so fast.  A Pacific Research Institute study states:

“In a very narrow sense, Medicare Advantage plans cost more per beneficiary than traditional Medicare,” said [study author John R.] Graham. Medicare Advantage increases the total costs of Medicare by about $12 billion a year, or about 2 percent. However, because traditional Medicare (a government monopoly) does not pay providers enough to cover their costs, they shift costs to the privately insured. This imposes a “hidden tax” on privately insured Americans that accounts for $49 billion a year: four times greater than the narrowly defined extra costs of Medicare Advantage.

Krugman states: “America has the most “consumer-driven” health care system in the advanced world.”   Really?  One might measure this by how much patients spend on medical care “out of pocket,” that is paying directly with their own money rather than with cash.  At the Health Affairs blog, Thomas Miller and Rohit Parulkar write:

U.S. OOP share of health spending, as of the last comparative figures available from the OECD in 2008 (12.1 percent), was below that of Germany, Canada, and the weighted average of all reporting members, respectively.

Krugman also states: “It also has by far the highest costs yet provides a quality of care no better than far cheaper systems in other countries.”  Krugman provides no citations for evidence to this claim.  For a well-references discussion of the data, see:

1. Health Care Reform: Do Other Countries Have the Answers?, by by John C. Goodman, Linda Gorman, Devon Herrick, and Robert M. Sade.
2. Myth Two in “The Top Ten Myths of American Health Care: A Citizen’s Guide”, by Sally Pipes (purchase, or view PDF for free)

Stepping back from these details, ask yourself: So what if Americans spend too much on medical care?  Do you care if Americans spend too much on car repair?  No, because they are spending their own money, or, having paid car insurance premiums with their own money & made a claim, they are spending money from an insurance company. It’s a private matter, & no one else’s business.  Health care should be the same.  “Spending too much” is only an issue because of government policies that force us to pay for other people’s medical care.  (I think I’m paraphrasing Arnold Kling, here.)

Krugman concludes: “The idea that all this can be reduced to money — that doctors are just “providers” selling services to health care “consumers” — is, well, sickening.”  Krugman has also spoken well of “Medicare for all” and single-payer health care. But wait, back in 1999 the BBC reported that under England’s National Health System,

Up to 500 heart patients die each year while they wait for potentially life-saving surgery. … NHS patients are often put on a waiting list because of other pressures to health service resources. Only an “enormous injection” of cash could change the situation.

In 2008 a Daily Telegraph headline read: Patients ‘should not expect NHS to save their life if it costs too much’.

Shocking – under a single-payer system, people’s lives are just reduced to money!

See also “Diagnosing Krugman,” by Will Wilkinson. He writes:

[L]let’s examine Mr Krugman’s implicit premises. … whatever is [supposedly] crass and profane about patients exchanging money directly for doctors’ services is avoided if the patient-doctor relationship is brought within the matrix of politics. This seems odd to me …

[B]efore the current era, the most common form of health insurance — other than Blue Cross plans — was indemnity insurance with a fee schedule. A typical benefit consisted of so many dollars a day for each day in the hospital. Since the benefit was independent of what hospitals actually charged, this type of health insurance did not interfere with the ordinary workings of the hospital marketplace.

Can we replicate that idea in a way that meets the financial and health needs in the modern era? I think we can.

In thinking about how to design a radically different type of insurance we have to come to grips with two principles that seem to invariably clash:

Principle One: Efficient, high quality health care requires that providers compete for patients on the basis of price and quality and that will not happen unless patients can unilaterally decide how their health dollars are spent.

Principle Two: Since all third-party insurance involves a pooling of resources, the more discretion individuals have to unilaterally draw from the pool, the more wasteful and costly the insurance will be. …

So how do we get around these seemingly irreconcilable principles?

Find out by reading the whole article: A Radically Different Approach to Health Insurance.

(via FIRM.)

Even if larger risk pools result in cost savings (for whom?), this no justification for mandatory health plans. How about legislation mandating that everyone who buys an iPhone also buy the extended warranty? A warranty is a type of insurance, after all. Mandatory warranties would expands the risk pool, and hence lower the costs of the warranty. But this exploits the people who prefer not to buy the warranty and insure against iPhone-related risks in other ways.

You might counter this by saying that a health plan is different, and that the uninsured are free-riders who increase everyone else’s health plan premiums when they don’t pay. As I’ve written before, this cost-shift from the uninsured is tiny, especially when compared to how much Medicaid and Medicare increase premiums.

Even if you think forcing people into a risk pool is OK, would this really result in health care cost savings?  Massachusetts is the only state that mandates the purchase of a health plan, but where are the cost savings?  The most affordable plans available on the exchange cost almost three times more than those available in Fort Collins. The Boston Globe reports that the premiums in Massachusetts are the highest in the country and emergency room visits and costs have increased.

One reason is that when politicians mandate that you buy a health plan, they get to define the minimum benefits a legal plan can have. Massachusetts has done this, and national health control legislation (HR 3590) defined them section 1302(a).  These can make many employer-based plans illegal.

With mandatory health plans, politicians pile on costly mandated benefits that increase premiums. Such “benefits” further distort insurance into a prepaid health plan, where customers are insulated from the true costs of treatment. Hence, they are not concerned with how much treatment costs or about more affordable alternatives. Since the patients isn’t paying, physicians have incentive to exaggerate diagnoses such that third-party payers will finance expensive treatment.

Health care prices stay in check when patients are the paying customers.  Examples include abortion (whatever your position on this), Lasik, and cosmetic surgery. When patients pay out of pocket, health care innovation benefits them and results in cost savings.

But mandatory health plans requires comprehensive plans such that the patient is rarely the customer, insurers are. Mandatory insurance provisions such as the one in health control legislation (HR 3590) threatens high-deductible HSA-qualified policies, even though such policies can reign in health care costs. The American Academy of Actuaries reported that such “plans can produce significant (even substantial) savings without adversely affecting member health status.”

If you want to expand risk pools, then push politicians to allow Coloradans to buy insurance available in other states, and those in other states to buy policies sold here. One study predicts that this would make insurance affordable for millions. This method of expanding risk pools doesn’t exploit people entering it. Rather than being forced, they choose to buy the product.

Update: Linda Gorman‘s article on direct-purchase insurance^* mentions how well such insurance already pools risk:

[Health economists Mark] Pauly and [Bradley] Herring report that direct-purchase insureds who had medical expenses about 4 times that of other people enjoyed premiums that were only 1.6 times as high. People who buy a policy and become ill have a strong incentive to continue paying. This may explain why age and sex were generally better predictors of direct-purchase premiums than chronic conditions.¹¹ Marquis et al. concur, reporting that the individual direct-purchase market is “an important source of long-term coverage for many who purchase it” and that “there is substantial pooling” that “increases over time because people who become sick can continue coverage without new underwriting.”¹²

^* That is, you buy the insurance policy (or health plan) directly from the insurer, not through your employer.

Wherever there is third-party payment [insurance, a health plan, Medicare, Medicaid], the goal of innovation is to produce more products that qualify for reimbursement, even if the effects on patient outcomes are only marginal. Wherever there is no third-party reimbursement, innovators are focused on ways to lower cost and raise quality.

Goodman provides many examples of innovation that benefits patients. Just imagine how much more there would be if patients paid more than 12% of all health care expenses. Read the whole article: Where Are the Innovators in Health Care Delivery?

Politicians like to talk about how to keep medical care costs in check, as they’ve increased faster than the consumer price index. Perhaps the cost of abortions can provide insight as to how to keep costs low.  Dan Mitchell at the Cato Institute posted this slide from a Guttmacher institute presentation:

In constant dollars, the cost of an abortion has remained almost constant since 1983. Why?  It’s not that the supply has increased. The Institute says that ” number of U.S. abortion providers rose until 1982 and has declined since.”

I’m tempted to look at how women pay for abortions. In a different study , that Guttmacher Institute says that  “Although most abortion patients had some type of health insurance, 57% paid out of pocket for this service … 2% reported using other strategies to pay for their procedures—for example borrowing money from a friend, partner or family member.” Some states restrict how insurance policies can offer abortion coverage, either to anyone or to government employees.

Compare this with medical spending in the U.S. in general, where patients pay directly for less than 12% of all medical treatments.

Since most women pay cash for an abortion rather than through insurance it does not surprise me that abortion prices have been constant.  As Mitchell notes, the costs of cosmetic surgery and LASIK eye surgery have decreased, despite advances in technologies related to the procedures.  I’ve heard objections to these examples – that they are elective procedures, and that the same would not apply to non-elective medical procedures.

This is why the abortion example is useful – regardless of whether you think it should be legal or not.   For any women who sees abortion is a choice, I can’t imagine any woman wanting to be in a position where abortion is the best choice.

Then why are prices for abortion, cosmetic surgery, and LASIK constant or decreasing, while the costs of other medical procedures are increasing faster than inflation?  The best explanation I’ve seen is that the consumer is the customer. Patients are spending their own money, and hence are responsive to price differences.  Providers then compete on both price and quality, as they do in most markets.  As Devon Herrick writes:

Long before a patient enters a doctor’s office, third- party bureaucracies have determined which medical services they will pay for, which ones they will not and how much they will pay. The result is a highly artificial market plagued by problems of high costs, inconsistent quality and poor access. … Can the market for medical care be different? Interestingly, in health care markets where patients pay directly for all or most of their care, providers almost always compete on the basis of price and quality. And because they are not trapped in a system that pays for predetermined tasks at predetermined rates, providers are free to repackage and reprice their services — just like vendors in other markets. It is primarily in these direct-pay markets that entrepreneurs are creating many innovative services to solve the very problems about which critics of the health care system complain.

Or, as Paul B. Ginsburg of the Center for Studying Health Systems Change & Len M. Nichols of the New America Foundation and write:

When someone else pays—the health insurer—patients have little price sensitivity and almost no incentive to economize and make sure the expenditure is commensurate with the clinical value of the service.

That empowering the patients as customer keeps prices down is consistent with the RAND Health Insurance Experiment:

Participants in cost sharing plans spent less on health care; this savings came from using fewer services rather than finding lower prices. Those with 25 percent coinsurance spent 20 percent less than participants with free care, and those with 95 percent coinsurance spent about 30 percent less.

As for quality of care, the RAND study found that:

cost sharing did not significantly affect the quality of care received by participants. … In general, the reduction in services induced by cost sharing had no adverse effect on participants’ health.

Also look at recent data on HSA-qualified insurance plans, wosts increase more slowly than traditional health plans

The Guttmacher Institute sites the following sources for abortion price information:

• Henshaw SK, The accessibility of abortion services in the United States, 2000, Perspectives on Sexual and Reproductive Health, 2003, 35(1):16–24, Table 2.
• 2003-2005: Jones RK et al., Abortion in the United States: Incidence and access to services, 2005, Perspectives on Sexual and Reproductive Health, 2008, 40(1):6-16.

(Thanks to Dan Mitchell for the Herrick quote, and the book Healthy Competition for the Ginsburg/Nichols quote.)

]]> http://www.patientpowernow.org/2010/08/abortion-costs-health-care-costs-insurance/feed/ 6 http://www.patientpowernow.org/2010/07/doctors-treat-patients-pay-cash/ http://www.patientpowernow.org/2010/07/doctors-treat-patients-pay-cash/#comments Fri, 30 Jul 2010 12:00:49 +0000 Brian Schwartz http://www.patientpowernow.org/?p=3198 Continue reading →]]> Jay Parkinson, M.D. writes:

If we really want to find out how to damn near perfectly manage any medical problem as efficiently and cost-effectively as possible, we should be studying how doctors manage the medical problems of the cash-paying doctors they see in their own practice.

Dr. Parkinson relates his experience with an allergy specialist who he paid directly, rather than with insurance.  He compares his treatment with what the specialist would have done had he been paid through Dr. Parkinson’s (the patient’s) insurance.

(Via FIRM)

One liberal sage noted in a 2007 paper that “four decades of empirical research” have shown that insulating people through third-party insurance coverage “from the full cost of health care has been responsible for anywhere from 10% to 50% of the large increase in health expenditures.” Ultimately, he concluded, increasing cost-sharing would give individuals a direct stake in more prudent purchasing, as opposed to today’s invisible health dollars that vanish as more expensive premiums, foregone wages and higher taxes.

Those are the words of Jason Furman, now the White House deputy economic director who seems to have been put into witness protection. Every serious health economist in the country recommends reforming the tax exclusion for employer-sponsored insurance, perhaps by converting it to a deduction or credit. Cost control will never stick unless it is extricated from politics and transferred to individuals to make their own trade-offs.

(Via EconLog)

Look, if I’m a self-employed person who right now can’t get coverage or can only buy the equivalent of Acme insurance that I had for my car — so I have some sort of high-deductible plan. It’s basically not health insurance; it’s house insurance. I’m going to — I’m buying that to protect me from some catastrophic situation; otherwise, I’m just paying out of pocket. I don’t go to the doctor. I don’t get preventive care. There are a whole bunch of things I just do without. But if I get hit by a truck, maybe I don’t go bankrupt. All right, so that’s what I’m purchasing right now.

Sorry Mr. President, a product that is equivalent to insurance you buy for your home or car, but pays for unexpected medical expenses is health insurance. As for not getting necessary care or preventive care, The American Academy of Actuaries wrote the following about HSA-qualified (catastrophic) health plans:

Generally, all of the studies indicated that cost savings did not result from avoidance of inappropriate care and that necessary care was received in equal or greater degree relative to traditional plans.  All of the studies reported a significant increase in preventative services for CDH participants.

As for bankruptcies connected with medical expenses, the connection is questionable.  As I wrote in the post linked in the previous sentence,

Not that I am defending the status quo health care policy in the United States.  It needs some real reform to bring down costs to consumers.

The president is not alone in confusing what most people call health insurance with real insurance. What most people have should really be called (and sometimes is called) a “health plan.”  As economist Arnold Kling writes in Insulation vs. Insurance:

The health coverage most Americans have is what I call “insulation,” not insurance. Rather than insuring them against risk, most families’ health plans insulate them from paying for most health care bills, large and small.

In short, the consumer is not the customer, which is a huge problem.

(Obama quote via Cato)

Suppose our government declared that everyone had the “right” to a nice steak dinner. The government would require restaurants to sell $50 steak dinners to all comers. But to keep prices affordable, restaurants could only charge $25. No restaurant could survive long under such a scheme, and most Americans would be outraged at such a blatant violation of restaurant owners’ rights.

But that is exactly what is happening with health insurance in Massachusetts. Events unfolding now in the Bay State should serve as a warning to the rest of America of the danger ObamaCare poses to our health insurance, our health care — and ultimately our lives. …

However, insurers are not allowed to set prices based on market conditions, but must instead petition the state for rate increases.

Recently, the Massachusetts state insurance commissioner rejected 235 of 274 requested rate increases.

Insurers filed suit against the state, arguing that without these rate increases they would be forced to sell their services at a loss. The state then “delisted” the complaining insurers from the government-run exchange where residents purchase plans. Under government pressure, at least two insurers then agreed to resume sales under the old prices.

Insurance companies in Massachusetts are thus required to offer numerous benefits as determined by politicians and lobbyists, but they may only charge what government bureaucrats permit. It would be akin to the government requiring restaurants to sell $50 steak dinners, but only allowing them to charge $25.

Read the whole article: ObamaCare: Insurers Need Permission to Survive; Citizens, to Live.