The sources of why Americans pay more for healthcare and get less: An Insurance Based Infrastructure
The insurance based infrastructure of America’s health care industry is another source of inefficiency and cost. In fact, it boggles the mind that so much doubling up on cost could exist in and American industry today. But first, lets look at the reasons for an insurance based infrastructure.
The idea behind insurance is that everyone pays in a small amount to cover the few that will actually have a claim. It works well when normal market forces are at work. Most people have some form insurance, auto for example. We don’t want to pay much for it, but we also act to keep costs down, as everyone actively tries to avoid accidents. Insurance companies naturally want to get paid, but have no payouts. So, they give good driver discounts to encourage fewer accidents and thus fewer claims. This is the natural push-pull of a market that makes it efficient.
But it is the weakness of the insurance model that they will naturally try to avoid payouts. At the same time, because many pay and few have claims, insurance is business that has long had to be heavily regulated. It is also why you want a competitive insurance market to maintain control. That means lots of insurance providers are needed to keep it efficient. Yet these weaknesses are exacerbated in the health care infrastructure because in part, as I explained at the beginning of the series, health care does function well as a market.
Remember the doctor has the knowledge and the patient has the problem. Add insurance and now the patient is no longer responsible to pay for the value they receive. It is so bad a business model that almost immediately, costs were shifted back on the consumer in the form of deductibles and co-pays. But this has done little to stem the rise in costs that is the result of this odd form of market.
Costs have also risen as a buyer-seller game ensued. In order to control costs, insurance companies began to press their negotiating power over doctors to negotiate doctor’s fees. Because insurers were few, they had monopsony power over doctors (a monopsony is the opposite of a monopoly). They compensated their negotiators based on the discounts they could get and doctors complied by raising their base rates to show they had given a good discount. But this cat-and-mouse game meant that people who were under-insured or uninsured would have to pay exorbitant rates. It priced health care out of reach for them. The result was that with fewer people able to get health care, the population became sicker on average. Thus a direct result of a insurance based system is that it results in a less healthy population (which is why Canadians an Europeans are healthier and live longer, which is were I started this series).
It also makes it more expensive, due to several factors:
1) Doubling up on costs: On of the interesting things about America’s heath care insurance system is that the money passes through the insurance companies twice. The money goes from corporations to insurance companies to doctors and then back to insurance companies to pay for malpractice insurance. The latter puts doctors at odds with the insurance companies a second time as they practice ‘defensive medicine’ to avoid a suit. Defensive medicine it where doctors pile on unnecessary costs to avoid a law suit. All of this means that more money circulates through insurance companies, giving more than one shot at extracting fees.
2) Doubling up on costs: In order to counter the escalation of costs due to this model, insurance companies hired their own doctors to second guess your doctor. So in essence, Americans now pay for two doctors: one who is incentivized to help patients and another who is incentivized to deny their claims. But because the insurance company’s doctors have control over the purse strings, they become the overriding prescriptor of the therapy and health care the patient will get. They do this without ever seeing the patient. So, not only at two doctors being paid for, the quality of health care is far inferior because it is being determined by doctors who never see their patients and may not even a license to practice. At the same time, it is very discouraging to patient doctors, for whom morale has become a big issue.
3) Costs rise and real problems don’t get treated early on, due to insurance doctors setting a conservative course of treatment. In some cases they have not even authorized the right dosage of drugs for the bodyweight of the individual, allowing disease to progress to a more serious state. This results in more expensive treatments needed later on and a less healthily and less able population. This raises costs at the corporate level, making America less competitive and costing jobs.
4) Insurance adds more than two additional layers of bureaucracy to managing the health care system. You have the two layers to deal with insurance claims and malpractice claims. Plus the actual medical care providers have to add their own infrastructure to deal with the insurance companies. Patient’s doctors have to spend wasted time writing letters and preparing documents in an attempt to override insurance doctors, who may never look at them. This bureaucracy adds costs, while making the population less healthy.
So how much does the inefficiency of an insurance based system cost? It has been estimated that as much as 50 cents of every dollar spent on health care in America goes to pay for inefficiency. Estimates of overhead costs in American insurers was measured at 11.7% in 1999 versus 1.3% in Canada. Administrative expenses in healthcare spending was 31.0% versus 16.7% in Canada. Most importantly Canadians are, on average, healthier than Americans.
This would be OK if Americans spent less on healthcare. But Americans spend more on health care per capita than any other country. According to the latest available numbers: in 2000, America spent $4,637 per person. The second highest spender was Switzerland, which came in at $2853 per person — only 61.5% of what American’s spend.
As for your doctor, the time it takes for them to deal with insurers is a real cost. If they spend 15 minutes seeing you and 15 minutes dealing with the insurer and allocate 5 hours a day for patients, that’s 10 people they won’t be able to care for each day. That’s 50 people per week and 2500 per year. If they charge $100 per visit, it’s an annual pay cut to you doctor of $250,000 — even if it’s half that, no wonder American doctors are leaving the profession, not to mention the discouragement of having treatment plans overruled by the insurance companies.
If America’s heath care system is anything, it’s inefficient. If America’s system were only as efficient as the Switzerland’s, it would save well over half-a-trillion dollars! That’s more than enough to provide healthcare to all Americans and bring its level of health care up to global standards.
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