Concentrate more on cutting the size of the healthcare pie and less on how to slice it.

Congressional healthcare solutions are misguided.

For purposes of illustration, let’s assume that healthcare spending is a 12-inch pie.  Congressional solutions must make the pie smaller by stimulating reductions in the prices of healthcare services.  How you slice up costs (among the payers of care) doesn’t work, you still have a 12-inch pie.  Congress needs to stimulate price reductions – simplified and transparent prices – and get consumers to shop for care.

According to the Centers for Medicare and Medicaid Services, the 320 million People in the U.S. spent $3.2 trillion on healthcare during 2015.  Doing the math reveals that healthcare spending in the U.S. was about $10,000 per person in 2015.  That is nearly double the per-capita spending of our neighbor to the north, Canada, and more than doubles the per-capita spending in France and the United Kingdom.[1]

Congress needs to understand that all healthcare costs are paid by the “People”:

  1. as policyholders paying individual or Medicare premiums;
  2. as employees paying their share of group premiums and Medicare employment taxes;
  3. as taxpayers funding government coffers providing Medicaid to the poor or other government assistance programs providing medical services;
  4. as patients with bank accounts to pay self-insured care or for meeting deductibles and out-of-pocket obligations;
  5. as self-employed business owners paying the Medicare portion of self-employment taxes; and
  6. as consumers of products allowing businesses to provide health plans to employees and pay the employer’s share of Medicare employment taxes.

Congress needs to understand that most People fall into several of those categories at any given time.

Healthcare pie

Reducing premiums to affordable levels for “individuals” via tax credits merely shifts the burden to largely the same group of individuals who must now fund the government subsidies as taxpayers.  No matter how Congress slices the 12-inch pie, all costs will continue to be paid by the People and healthcare will continue to be unaffordable.  The only solution is finding ways to cut the 12-inch pie down to a 10-, 8-, or even a 6-inch pie by stimulating substantial reductions in the pricing of healthcare so that national spending falls well below the current $3.2 trillion.  If U.S. citizens spent the same amount per capita as Canadians, the U.S. pie would be a 6-inch pie holding only $1.7 trillion (not $3.2 trillion) for healthcare.

Why is our per-capita spending double that of Canada and European countries?  There are only two realistic answers.  U.S. citizens must either consume twice as many similarly-priced services or we pay twice as much for identical services.  It appears that the latter is the larger piece of the answer.  According to an analysis by the Kaiser Family Foundation, the healthiest 50% of the US population incur only 3% of total healthcare spending ($600 per-capita) while the unhealthiest 1% of the population account for 23% of total healthcare spending ($230,000 per capita).  The unhealthiest 5% of the population account for half (50%) of total healthcare spending ($100,000 per-capita).[2]  The fact that so few people account for a majority of health care spending is telling – hospitals and medical specialists, who primarily provide the more expensive catastrophic and chronic care, must charge significant more for their services in the U.S. than they do anywhere else in the world.

The solution to attain the needed price reductions is price simplification and transparency along with the re-engagement of consumers to shop for medical care. Healthcare providers must discard billing practices based on extremely complex medical codes in favor of setting a single simplified and binding fee “per procedure.”  These complex codes are great for keeping track of a patient’s care, but are far too complex for billing purposes.  Requiring healthcare providers to establish transparent and simplified price tables “per procedure” also renders the need for insurance provider networks obsolete.  Provider networks were designed to negotiate lower costs, but have obviously failed.  Pricing pressure from consumer price shopping activities will ultimately determine prices charged by care providers.

The key, to any solution that works, is the consumers of medical care:

  1. must be able to read and understand their invoice;
  2. must confirm that the price on the invoice matches the publicly quoted price before payment;
  3. must confirm, before payment, that the invoice includes only those services rendered;
  4. must approve the invoice for payment if the patient forwards it to their health plan; and
  5. must be the primary person in charge of seeing that the invoice gets paid (whether by the health plan or out-of-pocket).

In addition, healthcare providers can no longer be permitted to bypass the patient by sending bills directly to insurers for payment.  Any financial auditor will tell you that such an arrangement is a poor internal control that can lead (and has led) to corruption and fraud.

Finally, health plans can then be designed to provide benefits based on the average per-procedure fees of providers in the patient’s geographic area.

The results would be positive for all.  Consumers would have full knowledge of prices in their area and would be free to shop for providers with incentives from their health plans to select lower-cost providers.  Care providers would be free to set prices at their discretion.  Healthy free-market price competition would be stimulated to keep discretionary prices in check without imposing socialist price controls or compromising quality of care.  Health insurers could calculate the average fees in the consumer’s geographic area, inform consumers of the amount covered based on these averages, and create plan designs that give consumers incentives to choose lower cost providers.  Consumers would still be free to choose higher priced care if, for example, they believe the higher price means higher quality of care.  However, they would do so with full knowledge that they would be personally responsible for the excess cost of the care received over the covered average.

 

[1]      According to the World Health Organization, per-capita healthcare spending in other countries for 2014 include: $5,292 in Canada; $4,959 in France; $3,935 in the United Kingdom; and $1,061 worldwide.

[2]      Source: Kaiser Family Foundation 2014 analysis of Medical Expenditure Panel Survey, Agency for Healthcare Research and Quality, U.S. Department of Health and Human Services.

 

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