November 10, 2013
David A. Latif: Health care folly
Here's one possible spending solution
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It is beyond technical dispute that the United States has the most expensive health care of any industrialized country in the world. We spend approximately 50 percent more than the second most expensive nation, Norway.

Health care is administered and practiced differently in these countries than in the United States. It is also beyond dispute that on many health care markers, such as life expectancy and infant mortality, we do not do as well as many other industrialized nations. Yet, we spend significantly more.

Arguments to justify some of these underwhelming outcomes include, "the United States has a more diverse population than other countries," or "the United States has a greater obesity problem." These arguments may be true, but counter arguments are that the United States may have fewer problems than other countries in the areas of alcohol and tobacco. For example, in 2012, Norway and Switzerland spent $1,587 and $1,581 per person on alcohol and tobacco respectively versus $673 in the United States. The United States spends $2.8 trillion dollars a year on health care. If health care were a country, it would be tied with France as the fifth largest economy in the world! Now that the Affordable Health Care (ACA) is law, missing from the politicians' lexicon (both Republicans and Democrats) is a glaring fact: The United States could not afford the cost of its health care before the ACA became law, and it cannot afford the cost of its health care after the ACA has become law!

To understand why this is we can look at our health care spending problem in two ways. First, our health care spending now represents more than 17 percent of our gross domestic product (GDP) and the cost has historically increased at a higher rate than general inflation. In fact, by 2070, if spending increases continue as they have, approximately 50 percent of our GDP will go to health care! Many economists contend that it is not possible for a country to have 50 percent of one's GDP going to health care; it is untenable.

A second way to look at our health care spending problem is to look at the Internal Revenue website. Using the latest reported data (2011) you are in the top 44 percent of all earners (regardless of marital status) if your income is above $40,000. Now, under ACA (according the Kaiser Family Foundation website calculator) a family of four earning $40,000 per year on average, pays less than 5 percent of the total premium for a Silver health plan (total premiums depend on age and can be $12,000 or more). The truly important fact is that the money required to distribute the cost of health care (the total premium) requires 20 percent or more of the gross income of a majority portion of our population! These families cannot afford the cost and the United States cannot afford it either. In fact, all but the most affluent of us cannot afford quality health insurance if we have to pay the full cost.

So, can our health care spending problem be fixed? I believe it can by concentrating on price. What would happen if we actually paid for our health care at the point of service?

Would we negotiate quality care at a lower price? Would the cost of medical services and procedures come down? Would we forgo buying some health services that are of marginal benefit? Would we seek alternative therapies? Would concentrating on cost bring price transparency so that we could comparison shop? Would information therapy (i.e., researching alternatives to certain surgeries that might produce better outcomes at lower costs etc) become more prevalent?

Behavioral economics teaches us that the more we are removed from paying the actual cost of a service, the more likely we are to spend more. Behavioral economics also tells us that with medical care, we have a bias to action (e.g., I must get that surgery), even when the risks of action might be higher than the risks of inaction.

Since most with insurance do not pay the sticker price (because of insurance and insurance premium tax subsidies) many in the United States do not care how much their health care costs the system (only "how much does it cost me"). By having third parties pay our costs, we artificially inflate the total health care cost in the United States. How can we take more control of our health care?

For the first five to ten thousand dollars of annual health care costs, Medical Savings Accounts (MSA) can be used to give us ownership of our health care. This could be combined with a catastrophic insurance policy for amounts over the MSA amount. MSA accounts could be funded through government subsidies based on income levels (much like the ACA subsidies go directly to third parties), and/or by employers. The goal is to give the consumer control over his/her health care. Consumers will be far more likely to negotiate reasonable prices for their health care if they are actually paying for it out of their MSA accounts.

However, with this control comes accountability for outcomes. Much like a household budget, consumers will be far more likely to be prudent consumers of health care. I believe the result would be a significant decline in health care costs until it reached the point in which we could truly afford it. And, I believe care quality would improve because health care is an area where overpaying for services does not result in optimal care.

Many of these ideas regarding why concentrating on price in health care can work are espoused by economist John Goodman in his book "Priceless: Curing the Healthcare Crisis."

Latif is a professor of health care management and chairman of Pharmaceutical and Administrative Sciences at the University of Charleston.

 

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