Friday, August 28, 2015.

< What's the purpose of the Madoff sentence? | Main | The increasing cost of public equity >

August 6, 2009

The health care finance wedge

health_costs Writing in the Wall Street Journal, Arthur Laffer lucidly identifies one of the key obstructions to controlling costs in America's health care finance system:

Consumers are receiving quality medical care at little direct cost to themselves. This creates runaway costs that have to be addressed. But ill-advised reforms can make things much worse.

An effective cure begins with an accurate diagnosis, which is sorely lacking in most policy circles. The proposals currently on offer fail to address the fundamental driver of health-care costs: the health-care wedge.

The health-care wedge is an economic term that reflects the difference between what health-care costs the specific provider and what the patient actually pays. When health care is subsidized, no one should be surprised that people demand more of it and that the costs to produce it increase. Mr. Obama’s health-care plan does nothing to address the gap between the price paid and the price received. Instead, it’s like a negative tax: Costs rise and people demand more than they need. [.  .  .]

The bottom line is that when the government spends money on health care, the patient does not. The patient is then separated from the transaction in the sense that costs are no longer his concern. And when the patient doesn’t care about costs, only those who want higher costs—like doctors and drug companies—care.

I have an interesting perspective on the health-care wedge. For 20 years from 1980-2000, I was involved in negotiating group health care insurance policies for my law firm.

Over the past decade in my solo practice, I have essentially self-insured by paying health-care costs out of pocket while taking out a family health-care policy with a large deductible to protect against catastrophic injury or illness.

During the earlier period when I was negotiating group policies for my firm, I had a good understanding of the cost of premiums for those policies, but I had no clue about the true cost of medical services and products.

However, since becoming self-insured, I have a very good understanding of the cost of most medical services and products.

Funny how that works, isn't it?

Posted by Tom at August 6, 2009 12:01 AM |


I also have a high deductible policy. What I don't understand is why I am charged more than the third party insured. I normally pay my bill in full before leaving the office and I have to argue with the clerk about the size of bill. (The physician wonders why my blood pressure rises when I enter his office.) Why don't physicians just not accept insurance and let the patient diddle with his insurer for reimbursement? That way, there will be one price for a service and we can dispense of this bazaar approach to health care.

Posted by: Warren M Author Profile Page at August 8, 2009 10:13 AM

Warren, one of the quirks of the existing health care finance system is that the insurers are often billed by health care providers at a higher rate than individuals who are self-insured. I routinely obtain significant discounts from the price I pay for health care services and products when I inform the provider that I self-insure.

As to your question, that is a product of the broken third-party payor system. Many doctors have to maintain large staffs (and accompanying overhead) to collect third-party payments on behalf of their employer-based insured patients. You are correct that it is a wasteful process, but I do not believe that it will change if the federal government becomes an even larger source of third-party payments.

In my view, a big part of the solution is to apply the pricing mechanism of the free market to health care services and products by allowing consumers to handle the cost-benefit evaluation of such services and products. In so doing, the pricing of insured products and services would likely also become more transparent.

Posted by: Tom K. Author Profile Page at August 8, 2009 10:20 AM

Post a comment

Thanks for signing in, . Now you can comment. (sign out)

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)

Remember me?

© 2003 - 2015. Tom Kirkendall. All Rights Reserved.