Wrong-Headed Cure for Reducing Healthcare Costs

As the debate about how to reduce healthcare costs rages on, Jeffrey Singer, a general surgeon in Phoenix and Cato Institute adjunct scholar, has published an opinion piece in the Wall Street Journal. “The Man Who Was Treated for $17,000 Less” chronicles how the surgeon “saved” the patient, with a low-cost indemnity type of health insurance policy, $17,000 by pretending that he was uninsured, self-pay. It is a wrong-headed cure for reducing healthcare costs.

healthcare - head in the sandDr. Singer concludes among other things that it is the third-party payment system that interferes with true price competition, so market clearing prices can’t develop. He goes on to chastise Obamacare for expanding the role of the third party and practically eliminating the role of the patient in the delivery of health care.

On the face of it, Dr. Singer’s arguments to diminish the role of third-party payers seem compelling. After all, by bypassing the insurance company the patient paid only $3,000 when he was asked to pay $20,000 upfront. But that’s like saying, “I saved $17,000 by not buying a Rolex I didn’t need.” Based on the examination of assumptions and facts, I contend that Dr. Singer’s arguments are hollow and his conclusions are erroneous.

By Dr. Singer’s own admission, the true price for the procedure was $3,000, and at that price “none of the providers was losing money on my patient.” Why on earth then the providers and the hospital felt compelled to mark up the price to $23,000 for this unsuspecting patient? Could it have something to do with the fact that the insurance policy had no provider-network requirements or preferred-hospital requirements?

These absurd markups saw the light of day, when Medicare released hospital billing data and outpatient services data this summer. As reported in The Arizona Republic, for every $4 charged to Medicare, Arizona hospitals collected $1 from the federal health program for those 65 and older. My own analysis showed that New Jersey had a markup of 6.2 times and the prices were marked up by 5.4 times on average in California relative to what Medicare actually paid.

Contrary to the statements made by the hospitals and providers claiming that charges don’t matter because Medicare doesn’t actually pay them, Dr. Singer’s example clearly shows that anyone without the enormous purchasing power of Medicare or a third party behind them is highly susceptible to these astronomical charges. In other words, Dr. Singer justifies the role of third parties with his own example.

I agree with Dr. Singer that when patients are directly involved in their own healthcare decisions, they are more accountable. However, another major flaw in his argument is the utopian assumption that all patients have the medical and financial knowledge, cost and utilization data, the necessary time, wherewithal, and ability to analyze and negotiate every healthcare expense on literally thousands of diagnoses codes on the basis of quality, outcomes, and price. If Dr. Singer hadn’t gone to bat for this patient, could this patient have accomplished all of what Dr. Singer did on his behalf by himself in today’s system?

If we are truly going to bend the healthcare cost curve down, among other things we must first shine the light on incomprehensible, nationwide markups that have become the norm. As a start, maybe Dr. Singer can start by quoting to all patients regardless of their insurance status the price he actually accepted instead of the “more than enough” $2,500 list price.

If the hospitals and providers accepted and published what Medicare pays as the “standard” price, instead of marking it up 5-7 times, it would automatically diminish the role of third-party payers.  The payers will no longer have to play the game of chicken with the hospitals. And the unsuspecting patients—insured, underinsured, or uninsured—will no longer be caught in the crossfire.

7 thoughts on “Wrong-Headed Cure for Reducing Healthcare Costs

  1. Paul Randall

    You are wrong.
    “Dr. Singer justifies the role of third parties with his own example.”

    Your comment conflates Medicare a single payer system with private insurance 3rd party payers. They are by definition not the same thing.

    As this article demonstrates 3rd party payers do not negotiate in good faith with dominant regional providers over rates because both parties benefit from spiraling costs. 3rd party payers through increased premiums and providers with higher fees.

    Because single payer administrators are non profit they have a direct stake in moderating costs. Individuals do to.

    1. Abhay Padgaonkar Post author

      By definition, a “third party” is an entity that is neither providing (providers) nor receiving (patient) the healthcare service. In that regard, Medicare is no different than private insurance payers. Unless Medicare paid for ALL healthcare costs, it is not a single payer system.

      Show me where the WSJ article says anything about 3rd party payers not negotiating in good faith with dominant regional providers over rates. (Maybe that is what you are reading into it.) On the contrary, the article says that even this low-cost policy “would pay up to $2,500 for the surgeon—more than enough—and up to $2,500 for the hospital’s charges for the operating room, nursing, recovery room, etc.”

      That adds up to $5,000 of reimbursement compared to the $3,000 that the providers collectively accepted. If at all, private insurance companies reimburse at rates more than Medicare rates. That is my experience too.

      The article also conveniently fails to acknowledge that by requiring health insurance companies to spend 80-85% of the premium on activities that improve healthcare quality and other reforms, Obamacare has already restricted the out-of-control behavior of the insurance companies.

      If insurance premiums are too high, the insurance companies are required to cut refund checks, as they have already done to the tune of more than $1 billion.

  2. Shalesh Kumbhat

    I’ll repeat what has already been debated ad nauseum in that Medicare and Medicaid severely underpay providers and thus providers overcharge other payers to offset losses to government-insured’s. Rather than go single-payer and accept its lower quality of care and much longer queue times, I’d rather see a health system with more competition amongst providers on the bases of price and quality such as in elective procedures or, frankly, in almost every other good or service we buy. Maybe gov’ts should still subsidize emergency care, but other procedures could leave the costly hospital setting and be shopped by consumers. Consumers could choose between Nieman Marcus’s, Macy’s, and Walmart’s — all provide good quality, though some provide more amenities at higher cost.

    1. Abhay Padgaonkar Post author

      It is well established that The U.S. vastly outspends other OECD countries on per capita health care spending, but still ranks low when it comes to the health status of its residents. Much of the difference comes from prices. Doctor’s fees are more than double the average cost. (http://www.nationaljournal.com/healthcare/for-health-care-americans-pay-more-and-get-less-20111123)

      Medicare is not mandatory for any providers. If Medicare supposedly underpays compared to some preordained income level providers assign themselves at the expense of the taxpayers, they can opt out.

      But if the providers are going to give themselves the right to mark up the list price 7-8 times so that they can rob Peter to pay Paul, they should be prepared for the backlash rather than blaming third party payers as Dr. Singer attempts to do.

      1. Shalesh Kumbhat

        It’s certainly true that doctors are paid much more in the US than in other countries and that suppressing doctor pay and severely rationing health procedures would bring down system costs. Again, I’d rather see this accomplished using market forces (competition and consumers with more “skin in the game”) than through government fiat. We already have one single-payer (and single-provider for that matter) system in K12 education that is very costly, has no innovation, and is horrible for the poorest people in our country. We don’t need another one.

        As to your point about providers opting out, that’s what the Medicare Actuary said would happen (1 in 6 would opt out) after ObamaCare take $716B out of Medicare over the next ten years. Some people just never learn that price-fixing always produces sub-optimal outcomes relative to market-pricing (and I’ll take your point that our current system doesn’t provide competitive pricing).

        1. Abhay Padgaonkar Post author

          Obamacare is rightfully leveling the playing field between specialists’ reimbursements and primary care physicians. However, there is neither any evidence of pay suppression nor rationing. There is no single payer system and certainly not a single-provider system. The nearly-trillion dollar private insurance industry is doing very well, thank you very much. Although there is more consolidation, nobody even comes close to owning the provider market.

          All these (e.g. pay suppression, rationing, single-payer, price-fixing, etc.) are misguided scare words used by those who benefit by fear mongering. They are interested in maintaining the status quo and have “zero answer” to make the situation any better. (http://www.washingtonmonthly.com/political-animal-a/2013_08/why_there_is_no_obamacare_repl046490.php).

          “Market forces” is a code word for “don’t interfere with our profit-making machine at the expense of the society.” Obamacare is requiring health insurance companies to spend 80-85% of the premium on activities that improve healthcare quality and instituting many other reforms related to preexisting conditions, lifetime maximums, and children under 26, etc. These are not reforms that unregulated “market forces” would have engendered on their own. Market forces cannot always work when there are very strong, entrenched lobbies of all special interest groups except for those representing the patients. That’s where the government of the people must come in.

          1. Shalesh Kumbhat

            You get lobbies in activities where the government is most involved. In private transactions, there is no government except for tax reporting. If you think there is too much lobbying now, wait until government grows its share of total healthcare spend from 45% to much more.

            And really if cost control was really important in American healthcare, then what you don’t want is to do is mandate rich health plans for every American. Most people simply need high deductible plans (to cover catastrophes) with hsa’s to cover interim expenses. It seems that people who want a greater government role in health care confuse “health insurance” with “health maintenance” and so we get the 80-85% insurance spend to cover things like contraception (what else can the plans spend on unless the 80-85% includes the notional value of catastrophe avoidance). Just like auto insurance shouldn’t cover oil changes, health insurance shouldn’t cover contraception or tooth paste. When it does cover these things, the costs necessarily go up and that’s why people can’t afford health insurances and why premia are surging (by 30% or more) as ObamaCare takes hold. I suppose the bright side of ObamaCare’s poor design is that few young people will buy this very expensive insurance even with the small subsidies offered in the exchanges and the insurance companies will eventually refuse to participate to avoid the adverse selection problem where only sick people enroll.

            You seem invested in the idea that “market forces” and “profit making” are bad things and the people who propose them are bad people. If you can overcome this, you can see an alternative to a consumer-driven design that will lower costs while maintaining quality:
            1) Provide individuals tax credits for high deductible health insurance and continue hsa tax credits. This insurance is portable from job-to-job since it is not tied to an employer.
            2) Allow health insurers to compete over state lines
            3) High risk pools for those with preexisting conditions
            4) Allow individuals and small businesses to buy group coverage
            5) Med Mal reform
            6) Entitlement (Medicare/Medicaid) reform with government providing tax credits to retirees to purchase insurance rather than being a direct insurer.

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