Cost of Health Care

This is an election year, so both major candidates for president are talking health care again, proposing bold new plans to control costs and provide more people with coverage. The focus for both Senator Kerry and President Bush is to control costs of insurance. But that is not the same as the cost of health care, and the difference is extremely important for any long term approach.

Health care costs can be represented in a triangle:



On a visit to a health care provider, the patient is charged for co-pays and deductibles. The provider bills the rest to the insurance company. The insurance company in turn bills the patient a premium for the policy, a premium priced to cover the claims paid out for members plus a profit margin. All three components are part of the cost of health care and must be taken into consideration. The candidates for political office focus on the blue line in the drawing, namely the premium the insurance companies charge their members. Both plans focus on ways of reducing that premium and stabilizing it over time. Properly stated, the candidates want to address the cost of insurance, not the cost of health care.

What is overlooked by both plans is the cost of the actual health care service, i.e. what the provider bills the insurance company. This is the true cost of healthcare, and it is skyrocketing. Routine visits to a doctor can cost $200. A visit to the emergency room even more. These costs are rising quickly, and they get passed on to the insurance companies. Basic economics tells us that as the costs to the insurance companies rise, the premium charged to members must rise. Market forces from employers providing coverage to their employees restrict how quickly the premium can rise. Since the insurance companies cannot recoup their costs through higher premiums, what we see is insurance companies reducing their coverage and raising deductibles for the same or higher cost. I've certainly seen this in my own coverage, where I now have deductibles for care today for which there were no deductibles a couple of years ago, while my premium has increased.

Government plans may control the growth of the premium on a policy. However, this cycle of diminishing coverage will continue unless the true cost of healthcare is controlled. Down the road, we may see more Americans covered by insurance, but getting less healthcare because the insurance covers less. Addressing the cost of insurance without addressing the cost of care is, at best, a short-term band-aid on a growing problem.

What are some of the causes of this skyrocketing cost? Here are a few reasons. The reader will note the vicious cycle represented in these reasons. (I have referenced some sources on this question above via links; I will primarily reference a document from Blue Cross/Blue Shield for the following.)

1. Uninsured Americans. Lacking insurance and usually among the poorer strata of America, these American consume health care but are unable to pay for it. To recover the cost of care given these Americans, costs rise. The number of uninsured is growing, in part because the cost of insurance is rising, in part because the number of uninsured is growing, etc., etc., ad infinitum.
   
2. Unnecessary care. Because we insured have insurance, we readily visit the doctor for any and all questions. We visit the emergency room for questions best addressed by a (cheaper) visit to the family doctor. Such behavior ironically puts that coverage at risk.
   
3. Malpractice insurance. An entire industry of lawyers has sprung up to sue doctors and hospitals for anything and everything. This in turn causes a rapid increase in malpractice insurance premiums. To protect themselves against malpractice claims, doctors then often over test for things.
4. Gouging. This isn't a factor many acknowledge, but the medical community contributes through exaggerated pricing and insufficient screening. I have had doctor's appointments where the only thing that emerged was some pamphlets, but the doctor still billed for the appointment. It was something that could have easily been handled over the phone. In fact, the office should have understood they would not be able to do anything and forgo the appointment in the first place, but why pass up the chance to bill for $150? I do not see any reason an MRI should cost $2000, not when so many people get it. But, of course, as long as there is insurance footing the bill, there is no incentive for the providers to reduce these bloated prices.
   

Any viable proposal to deal with the cost of health care must address these issues.