July 24, 2013


Why Health Care Inflation May Lead to Cheaper Health Care (Dennis Rosen. 7/24/13, Pacific Standard)

More and more, health-care expenses once paid by employers are being shifted to consumers in the forms of higher co-payments and deductibles. And as the rate of health inflation continues to outpace that of general inflation, these trends will accelerate, for the simple reason that without this migration the cost of providing health insurance at its current levels of coverage will become too prohibitive for employers to bear.

And this is where the silver lining comes in. The more this cost shifting occurs, the faster the demise of the current model of third-party payor insurance, which covers everything from flu shots to lung transplants. Health insurance will evolve into something that makes a lot more economic sense: actual insurance that protects against financial ruin because of catastrophic illness. Most routine medical care services, however, will be paid for by patients, out of pocket and through health savings accounts that accrue over years and into which employers and employees contribute.

This transformation of who pays for health care, and how it is paid for, will have two very positive effects on health-care spending.

The first will be the elimination of third-party payors' overhead and administrative margin from the cost of all but the most expensive care. This will immediately eliminate the need for the built-in 15-20 percent mark-up for administrative costs included in current charges and in future ones through Obamacare (and which in practice is often exceeded, as witnessed by the rebate pay-outs).

The second, more significant consequence will be that as patients start bearing the genuine cost of their care, they will start behaving like real consumers and become much more attentive to price. Once health-care services provision is transformed into a true marketplace in which prices are driven both by supply and consumer demand, competition between providers should result in prices falling even further.

The existing model, in which prices are determined through negotiation between service providers and third-party payors, leaving patients who pay out of pocket with the highest bills, would quickly collapse. If your doctor had ordered a chest X-ray, for example, you'd make some phone calls and decide where to get it based upon any number of factors, including price, instead of defaulting to the most expensive facility because that happened to be where your physician works. Likewise, even though you currently pay both for the X-ray and for its interpretation by a radiologist, you might elect to forgo the interpretation if your own physician were able to read the film himself, thus saving yourself the additional expense.

Posted by at July 24, 2013 5:47 PM

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