Health Care -- Part of the Problem

This is what I know about health care, the way we pay for it, and the options that face us in the US now. It is off-topic, but I'm feeling compelled. (Think of it as my way of trying to push the whole world to talk about issues again).

Competition
Competition does not work in health care the same way it does in other areas. If I want to buy a refrigerator I can do some research. I can decide how much certain features matter to me. I can check the prices at various stores. In the end, I make a reasoned choice about how much I am willing to spend. This activity plays its little part in the market.

When I break my arm I know that, because I have insurance, it will cost me less if I can get my family physician to see me than if I got to the emergency room. If I am out of town, I know it is better to find a "doc in the box" than go to an emergency room. Past that though, I really have no ability to compare service and price. Imagining even that I would be inclined to do research while in great pain, the information is not available to me. If I were to call the various clinics they could tell me how much an office visit was, but not how much they charge for an x-ray, or how many x-rays I would need, or anything else.

There is another factor that is important too. Medical facilities have to pay for their stuff. If they buy expensive stuff (like MRI machines) they try to pay for it by billing the people who use it. If they can keep it really busy, lots of patients can help pay for it. If they can't keep it busy, they have to charge more for each use. So sometimes competition increases costs. This is why many states require some sort of review process before a hospital can expand its services.

Of course, there are ways that competition can affect the price of health care (in a good way), but it is important to remember that those ways are significantly more limited than in other areas.

Insurance
Insurance is shared risk. The first example of something like medical insurance is the case of professors all agreeing to put some money into a pot that would pay for their visits at the university hospital. The point is that a group of people realize that no one of them can afford the costs of a major illness and so everyone puts money in a pot to be used by the person who needs it. If you end up putting money in the pot and don't need it, YOU WON. You didn't get cancer. You didn't get sick. You stayed healthy and enjoyed the security of knowing that if you did get sick, the coverage was there.

In order for this to work people who are less likely to get sick have to join. That is why most large employers pay for a significant portion of the premium for health insurance -- to coerce young, healthy people into participation. Imagine you are in charge of the HR budget. You have $2,500,000/year for 50 employees. You could give them each $50,000 and let decide for themselves whether to pay for health insurance. If everyone decides to pay, it will cost them $5000. Let's say all the young, healthy employees opt out. Maybe they put the $5000/year into savings. Maybe they just spend it. Whatever. Only 30 employees want to join. Well, their combined risk is higher. The insurance company informs them that it will cost them $8000/year. The truly terrible thing is that the more people who opt out, the higher the price is, and the higher the price is, the more people opt out. The insurance system collapses.

So, it would make sense for you, our HR manager, to just pay every $45,000/year and tell them that they all get insurance free! The young people don't think of it as being made to pay out any money, so they don't complain. The risk rating for your employees remains relatively low, and you get relatively good rates.

The Cost of the Uninsured
In the USA around 16% of us have no insurance of any kind. Those people mostly do not get their asthma, diabetes, and high blood pressure treated, at least until it gets out of control. Someone whose asthma is so bad they really can't breathe, will get emergency treatment. If they start to loose their sight, or get gangrene, or have a heart attack, they will get treated. If, like my sister 18 months ago, they take a tumble on a sled and break their ankle in four places, they will get the $30,000 worth of treatment they need.

But they won't have the money to pay for it, and they don't have insurance that will either.

So what happens?

The medical care providers have to pass on the cost to other patients. When you go in and have your arm x-rayed, you pay the cost of your x-ray and the part of the cost of the patient who had no insurance. This is one of the reason those doc-in-the-boxes are often less expensive for these sorts of things. They don't take patients who can't pay. If you show up there with a broken arm and no insurance, they give you directions to the emergency room where you cannot be turned away.

Putting It Together
No one but the very rich can afford to pay for any medical bill they might have. So we have insurance. The cost of insurance goes up when the risk pool that we are in gets smaller, older, or sicker. The cost of care for those who can pay, or whose insurance can pay, goes up when there are more people who have no insurance at all.

Got it?

This is just one facet of the problem, of course, but it is an important one. In my next post I will try to summarize the different options to address it.