Healthcare Economics

[Gaolee]

This comes up from time to time, so we might as well have a thread about how it got the way it is.

The market incentives we have all come to know and love don't apply properly in healthcare markets. The incentives are disconnected from the results, and the costs are disconnected from benefits.

Start with the patient. The patient generally knows that his or her copay is, but nothing else about the cost of service. There is no need to shop around, because the copay is the same as long as the patient stays within the group of doctors the insurance company has an agreement with. So, there is no price pressure on doctors from the ultimate end user.

Next, the doctor's income is governed by how many patients he or she sees, how many insurance billings he or she makes, and how often he or she gets stiffed by an uninsured patient. Because insurance is guaranteed payment, the doctor prefers insured patients. And, the more different things a doctor has to do to or for the patient, the more billings the doctor can generate. The insurance company has it all standardized, and they will throw nickles around like they are manhole covers, but they don't care as long as insurance premiums are greater than the payments they make and they can delay payments.

The next level in the system is hospitals. They stay afloat by filling beds. They fill beds by getting doctor referrals. Doctors like the latest gagets, whether they are necessary for a given issue or not. I like new tools and equipment, so why would doctors be any different? They aren't, except I have to pay for tools, they don't. The patient doesn't pay directly, the doctors get paid for each service they provide, and the hospitals buy redundant equipment in places they can get lots of referrals. Once again, all paid for by insurance who don't care as long as they make as much money as they possibly can.

A nasty side effect of the hospital gaget wars is urban areas have lots of shiny new equipment in hospitals competing with each other, while rural areas and smaller towns and cities go begging. It has got to the pont hospitals will sign up doctors for satellite clinics to guarantee themselves a steady stream of patient referrals. I know this happens in the Seattle area, so I suspect it is a widespread practice, even if it isn't widely publicized. It is also the reason you hear hospital advertizements on the radio and see them on the television.

So, now we get to insurance. They don't much care what they spend, as long as they get premiums to cover the costs and as long as they can delay payments and ride the float. They make money by holding money, not paying it back out. So, they are more than willing to pay for things they can quantify, but they get really obnoxious when expected to shell out for anything beyond the norm. So, they don't put any cost/benefit pressure on the healthcare providers as long as they can charge premiums they want to charge.

Now back to patients. They are the end consumer in all this mess, but most of them have healthcare through their employers if they have it at all. So, they don't care what the premiums are, but they sure do care if their benefits get cut in any way or if they don't get a free pass for whatever treatments they get.

So, by tracing the money and incentives through the system, you can see where the market's invisible hand ends up in a straight jacket. The same economic Gordian knot applies to prescriptions, too.

There is no elegant, simple way to solve the problem. If we cut out insurance completely, most people couldn't afford healthcare at all, and the system would disintigrate quickly. If we go to a single payer system, it wouldn't contain costs much better than what we already have, but at least it would cut out the insurance companies and their profits. It would also make it a more honest system than it is now and relieve employers of carrying insurance costs for their employees. It carries way too much ideological baggage to get enacted here for a long time, so even if it was perfect, it would be hard to pass.

The way I have come to think about it is in terms of a utility. Regulated public utilities can be either public or private entities, but they are subject to governmental oversight and pricing review. There is already so much regulation in the healthcare industry I don't see much problem with it. In addition, there is plenty of experience and precedent over the years for how to set rates for utilities, making the economic disconnects less of a source for cost inflation and market inefficiency. It still wouldn't be a market driven industry, but like electricity and water, it would be evenly distributed and available at a more reasonable cost than it is now. There would be no prohibition against buying additional insurance or seeing a deluxe doctor, just as people currently buy supplemental insurance for various things or, to go back to the utility analogy, a private generator.

[Mr. Whippy]

A couple of things:

1. Insurance companies DO care about what things cost. Any time they have to pay a claim, it's money out of their investment scheme. Basically, they have all become investment vehicles. You pay in (premiums) and they make money (investments on those premiums). Their only downside is when you file a claim (or your doc does). Therefore, to maximize profits, the trick is to deny as many claims as possible. Aiding this is the escalation of copays and deductibles. The theory goes, that if you have to pay out of pocket you're less likely to go for some incidental little cancer or petty hemorrhaging. The perversity is that they then start to jack up the levels of these copays and deductibles so that you get hit with a huge (up to $5K in some plans) before they have to pay a cent.

2. Docs are incentivized to draw things out. Most surgeons will get paid more to bring you back several times rather than do everything in a one-stage procedure. It's just how the insurance companies set it up. Same forces at work in the internal medicine office.

Other than that, you've hit most of the highlights.

[Dr. D Gas]

You missed a huge part of the healthcare puzzle: litigation. It is literally the driving force behind unnecessary spending and performing unnecessary procedures and diagnostic tests. not to mention a good deal of the paperwork doctors spend time filling out is simply to cover their ass (and the hospital's ass). the time spent filling out this paperwork would probably be better spent dealing with patient issues.

Doctors will not hesitate to spend someone else's money to protect their livelihood. Hospitals will not hesitate to throw a doctor under the bus if it helps their bottom line. patients are more or less apathetic because theyre not footing the bill in the majority of cases. Thus. money is spent with no motivation to reduce cost. the cost of healthcare continues to rise with no real benefit.

[wshtb]

There is a solution:

STOP SCREWING WITH EVOLUTION!!!

[Mr. Whippy]

Originally Posted by wshtb

There is a solution:

STOP SCREWING WITH EVOLUTION!!!

There are those who seriously propose this. There is a cold logic to it. Much cheaper. Would quickly re-adjust human over-population problem.

However, emotionally, I doubt civilization would allow it. It is pretty hard cheese to watch an infant die from an infectious illness which would be cured with 7 days of PO antibiotics.

I doubt many of the squidlies here would be so bold and brazen if there were no way to screw and plate back together compound fractures or surgery to stop the hemorrhaging from a ruptured spleen or torn liver.

And of course, don't forget you wouldn't be able to pop a coupla Advil after that inadvertant get off.

But hey, if you wanna do your part to help evolution, I salute you.

[SXSMITH]

Originally Posted by Mr. Whippy

A couple of things:

1. Insurance companies DO care about what things cost. Any time they have to pay a claim, it's money out of their investment scheme. Basically, they have all become investment vehicles. You pay in (premiums) and they make money (investments on those premiums). Their only downside is when you file a claim (or your doc does). Therefore, to maximize profits, the trick is to deny as many claims as possible. Aiding this is the escalation of copays and deductibles. The theory goes, that if you have to pay out of pocket you're less likely to go for some incidental little cancer or petty hemorrhaging. The perversity is that they then start to jack up the levels of these copays and deductibles so that you get hit with a huge (up to $5K in some plans) before they have to pay a cent.

That's the force that keeps it in balance. Imagine someone paying a bill where there's no one interested in containing costs and no claim is ever denied.

Good work if you can get on the receiving end.

It needs to work like auto insurance. You don't make claims unless you have to otherwise you get dropped for excessive claims.

[Mr. Whippy]

Originally Posted by SXSMITH

That's the force that keeps it in balance. Imagine someone paying a bill where there's no one interested in containing costs and no claim is ever denied.

Good work if you can get on the receiving end.

It needs to work like auto insurance. You don't make claims unless you have to otherwise you get dropped for excessive claims.

That's gotta be the shittiest analogy EVAR.

Lots of auto claims indicates a careless, reckless or dangerous driver (poor driving skills). Even multiple comprehensive claims implies someone driving too fast or not watching for dangerous situations. (ie multiple deer strikes)

Lots of health claims indicates someone with a serious chronic illness (Diabetes, lupus, cancer patient, ulcerative colitis, etc)

Surely you're not making someone with health issues analogous to someone who is a poor driver?

[SXSMITH]

Originally Posted by Mr. Whippy

That's gotta be the shittiest analogy EVAR.

Lots of auto claims indicates a careless, reckless or dangerous driver (poor driving skills). Even multiple comprehensive claims implies someone driving too fast or not watching for dangerous situations. (ie multiple deer strikes)

Oh, like smoking, drinking, over eating, etc.?

Not to worry, we're never going to have Intergalactic Care like some socialists dream of. Can't afford it.

[SlowGoose]

socialists.....

[Mr. Whippy]

Originally Posted by SXSMITH

Oh, like smoking, drinking, over eating, etc.?

Please, indulge me and post a few links to anything that moderately or strongly associates smoking, drinking or overeating to ulcerative colitis, Crohn's disease, celiac disease, Hodgkin's or most non-Hodgkin's lymphomas, childhood leukemias, prostate cancer, lupus, ANY other autoimmune disease, neurodegenerative diseases, hepatitis, Parkinson's disease, Alzheimer's disease, etc....

Dude, here's the beauty. Unless you die suddenly in an accident, you too, will get your low grade lymphoma, prostatic adenocarcinoma or some form of renal failure. Something will eventually come along and adversely affect you too. When your insurance company fucks you, then you'll start wondering who's out there protecting the consumer.

Irony brings it's own sweet revenge.

[SXSMITH]

Originally Posted by Mr. Whippy

Please, indulge me and post a few links to anything that moderately or strongly associates smoking, drinking or overeating to ulcerative colitis, Crohn's disease, celiac disease, Hodgkin's or most non-Hodgkin's lymphomas, childhood leukemias, prostate cancer, lupus, ANY other autoimmune disease, neurodegenerative diseases, hepatitis, Parkinson's disease, Alzheimer's disease, etc....

Dude, here's the beauty. Unless you die suddenly in an accident, you too, will get your low grade lymphoma, prostatic adenocarcinoma or some form of renal failure. Something will eventually come along and adversely affect you too. When your insurance company fucks you, then you'll start wondering who's out there protecting the consumer.

Irony brings it's own sweet revenge.

Look, you live in your own little world of 'hope' and 'change'.

I can accept that.

Good luck.