Solution to rising healthcare costs
Friday, July 11, 2014 10:00 PM
The rising cost of healthcare is hitting more and more Americans in a big way. People are spending a larger percentage of their income on it, while at the same time its quality seems to be going down. So what's going on here? Why are healthcare prices rising so much? Well, one of the biggest reasons is healthcare prices are not transparent.
Dr. Peter Klein (professor of Applied Social Sciences and Director of the McQuinn Center for Entrepreneurial Leadership at the University of Missouri) argues that when we as patients go to the doctor or hospital, we don't know how much we're actually paying for medical procedures. That's mostly due to the "third-party-payer system" that's come to be in this country. Under this system, we patients pay a small up-front cost at the time of the procedure and our healthcare insurance company pays the rest.
He points out a recent study by the Center for Improving Value in Healthcare that demonstrates the wide variety of healthcare prices. It found that in Denver alone the cost for a colonoscopy can range anywhere from $400 to $2800. We as consumers would never put up with this for other goods and services, such as buying a car or going to a restaurant. So why do we put up with it for healthcare prices? Because it's so difficult for a patient to find out what the true price is for a healthcare procedure. Healthcare prices are not transparent. Again, we would never put up with this for the other things we pay for in our lives. Can you imagine if you had to buy "restaurant eating insurance" as a third-party-payer just to go out to eat, and could only eat at a small selection of "in-network" restaurants, and you never knew what the actual price of your meal was, until you got your explanation-of-benefits a month later?
If we had more transparency, there would be more pressure on healthcare providers to compete on price and keep prices low to stay competitive. For example, if hospitals merely advertized a list of prices for blood work, for an MRI scan, for having a baby, for putting a cast on a broken leg, etc., patients could shop around for the best price. Even in the case of an emergency, patients would already have a good idea of which one will give them the best deal. The hospital with the lowest prices for the best care would get the most business. The other hospitals would be forced to lower their prices and improve their care, or risk going out of business.
Unfortunately with the third-party system we have today, the incentive for healthcare providers is to avoid disclosing healthcare costs because it makes it easier to mark up prices a lot more. For example, in discussions with doctors, Professor Klein discovered that a simple injection that costs the doctor less than $10 can be priced to the buyer at $200 to $400, depending on who is paying.
Because of the third-party-payer system, most Americans don't pay for healthcare out of pocket. The insurance company or the government (Medicare or Medicaid or VA) pays. So there is little incentive by patients to learn about prices and then shop around for the best price among healthcare providers.
So why do we have a third-party-payer system if it causes all these problems? Because most Americans have insurance provided by their employer and the IRS Tax Code gives a tax break for people who pay through a third-party. Government tax policy is propping up the third-party-payer system and other things that prevent competition. Without competition, healthcare providers have free reign to raise prices to ridiculously high levels. So what we end up with is higher prices and lower quality.
Buying healthcare goods and services shouldn't be different than buying other goods and services such as cars and shoes or going to a restaurant. The key is to let the market be free to self-regulate prices by forcing healthcare providers to compete with each other on a level playing field. The solution to reducing healthcare costs is to eliminate government intervention that discourages price transparency.
John Pickerill is the chairman of the Republican Party in Montgomery County.