Healthcare Economics in 8 Minutes (How To Really Make It Cheaper)

"Customers in healthcare ask a different question than customers in most markets. Whether hospitals (as customers of suppliers) or individuals needing an operation, healthcare customers mostly don’t ask, “Can we afford it?” Or even, “What’s the best value for the money?” They ask, “Is it covered? Can we get reimbursed for this?” And the reimbursement or coverage is set by complex non-market mechanisms that in most parts of the market are themselves opaque to the customer. So there is no real customer and no real price signal in most relationships throughout the market."

M. Dodge Thomas thanks for you comments and research. As far as age drift of participants, I personally do not know anyone who is Medicare A & B eligible who carries normal health insurance.

We have the “Gold Plan” plus “Brother’s Keeper” which has a $500 yearly deductible and unlimited financial assistance for all eligible medical bills. None of the “ineligible” conditions have any effect on us. It costs us $150 a piece per month and the Brother’s Keeper catastrophic expense coverage is $40 a piece per year has a quarterly expense that varies a bit but is usually around $25 a piece.

I would point out that young people paying for huge amounts of coverage for congenital conditions and birth defects has never made much sense. No babies are denied necessary medical treatment in this country regardless of their parents ability to pay. In general most young people do not have a large amount of assets that would be at risk if they gave birth to a baby needing very expensive medical treatment. In the past charities such as St. Judes, the Shriners and others have been of great assistance to young families in this situation. It is not a valid reason for government regulated health care insurance.

This doesn’t address the underlying problem however: in a fee-for-service system the incentives are to maximize the services delivered, rather than optimize the cost/benefit ratio of the results achieved.

But if that is true why does the entire rest of the economy work fine on a "fee-for-service" or "fee-for-goods" system?

Isn't the incentive of every other business to "maximize the services delivered" or maximize the goods sold?

As far as I can tell the customers keep the vendors in line pretty well when they know what the services or goods cost.

Fee for service medicine jsut isn’t *like* the rest of the economy.

1) In many situations evaluating the quality of service is impossible for individual consumers, both because they lack the knowledge and experience to make such judgments, and because information required to make them is not available.

For example y9ou or some member of you immediate family have probably had major surgery.

Was accurate comparative information about outcomes for the surgeon readily available? How about the incidence of antibiotic resistant infections at the hospital? Did you vet the anthologist?

If you did (or even could have, since you have limited statistical and medical knowledge) how did you know if you were actually comparing apples to apples - for example, are the demographics of your surgeon’s practice similar to other practices to which it might be compared?

For these and may other reasons, individual consumers can’t effectively compare even fairly straightforward sorts of medical treatment - to the extent these judgement can be made at all, they *have* to be outsourced to organizations with sufficient medical and statistical knowledge to make them.

This problem alone makes individual decision making with regard to health care choices different from buying most anything else.

2) But it gets worse: even if individual consumers *could* make informed judgements about the quality of the care they will be receiving, they often can’t determine in advance what many services - for example a typical hospitalization - are going to cost. Would you buy a car on that basis?

For these reasons, realistic attempts at health care reform are *always* about making the US system *more* like a functional market, not less, for example by focusing efforts on paying for outcomes rather than individual components of treatments.

But it’s not realistic - in fact, it’s counterproductive - to assume that at the individual level purchasing healthcare is like other day-to-day purchasing decisions.

I would suggest that most markets function with imperfect information, and in many cases nearly no information, just speculation.

Somehow those markets do in fact manage to function. From my own experience interacting with the medical industry many of the types of evaluations you suggest could be made by experts in fact aren't, and the actual performance of the system is just as randomized as in other markets.

Of course other markets at least have real pricing, and systems arise whereby consumers can obtain information about suppliers and chose accordingly. Similar processes should be applied to the purchase of health care.

Hospitals, physician groups, and other industry participants hate these ideas because in a competitive market their net income is likely to decrease, and they will be forced to work harder and more efficiently, and face the challenges of the free market.

What is different about purchasing healthcare services is that the sellers can get away with business practices that nobody else can get away with. What other business exists where you can charge a customer $1056 for a service that you actually plan on getting paid $161 for? What other business exists where you can perform a service that regularly sells in the open market for $32 after telling the customer "I don't know the price for that lab test" and then send an invoice for $752 and expect to get paid? What other business exists where you can bill the patient $270 for ten minutes of time with a service provider and then follow up with a bill for $159 because the service provider has an office in a building owned by the hospital, and therefore the time you spent in the waiting room is billable as a "hospital service"?

Customers should be free to negotiate for whatever kind of deals they want with the suppliers, but the best hope for reform is to bring the provision of medical care into the free market.

Actually, there is a lot of innovation taking place in the healthcare market to address such concerns - we just don’t hear much about it because it’s large-scale private entities which are driving the process: self-funded employers, pension plans and unions which are experimenting with outcome-based pricing, competitive bundled pricing, reference prices, medical tourism and the like.

So a lot of the reforms you suggesting are already taking place, and even more aggressively in privatized portions of system than in Medicare and Medicaid.

And most of them are effective pretty much in direct proportion to extent that they subvert current opaque fee-for-service pricing - which is exactly the model that people comfortable with the older system (ex: Tom Price) see as the solution!

So politically, we are increasingly witnessing a head-on collision between older and a newer models of health-care pricing, with the counter-intuitive result that a substantial number of conservatives end up supporting the older model - which is a system that as you note above makes effective market competition *more* difficult.

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