Health insurance costs are a mix of non-stochastic consumption of services under human control (people pretty much know when they’re going to have a baby, or even a root canal), semi-stochastic (we’re all going to die, but we don’t know when or of what), and truly stochastic (getting hit by a car). On top of that, costs for a given medical encounter are extremely non-deterministic (when you go the hospital with abdominal pain it could be a stomach-ache, or it could be colon cancer). Put these together and you have a genuine problem with price transparency. This is a big part of our cost control problem – neither doctors nor patients have a particularly good idea of what the final paid cost of service will be when they opt for a procedure, because the cost in each case is hashed out between provider and insurer(s) for that patient. Couple that with a fragmented healthcare system in which many providers typically only have responsibility for a portion of the patient’s health and are paid per-service, and you have a situation where cost control is extremely difficult. To make matters worse, all private insurers are just trying to kick patients down the road until they are on Medicare.

It’s not clear to me whether getting rid of Medicare solves this problem, but I believe policy-oriented conservatives (such as are left) believe it would force medical services out onto an unsubsidized market and thus bring price transparency. That has and will work for elective procedures like Lasik, but I’m not convinced there will be a functioning and liquid market to set prices on dealing with a heart attack.

I think the big flaw in James’ post is that he ignores the issues of price transparency and Medicare as the insurer of last resort in cost control. I’d be really curious to know if other wealthy countries have measures that fundamentally increase price transparency and/or prevent the insurer of last resort problems.

I’m not totally persuaded that the current health care bill will “bend the cost curve” in the ways that they describe – I still think the bill skipped any political heavy lifting with respect to the providers, but I do believe they’re talking to the people who know health economics best, so I’m optimistic that it’s a step in the right direction.

Good luck.

There has been significant research (Rand, et al) that indicates that patients are able to make cost-sensitive decisions about when to obtain care. If care is free (no or very low out-of-pocket cost) then more services are used than is medically necessary. On the other hand, with reasonable co-payments, patients are able to appropriately seek needed care. One of the problems with the current Medicare system is that if a person purchases a decent Medicare supplement policy, the marginal cost of a physician visit or service is $0. Before we throw the Medicare baby out, let’s try to rationalize the program so that it encourages appropriate use of care. AARP would be horrified, but if Medicare paid subject to co-pays and had an out of pocket amount, it would eliminate the need for Medicare supplement policies and significantly reduce the cost of administration to the providers–less work for the Post Office and paper manufacturers, but a much more rational and focused payment system. Medicare beneficiaries could elect to enroll in the “higher” benefit and pay CMS rather than insurers. Win/win. Doable in the short to medium term.

There is also a disconnect in any voluntary insurance system. Under current law, hospitals must treat to stabilization. Unless we are willing to revoke those requirements, there is little incentive for those without assets in relatively good health to purchase insurance. (It is highly unlikely that those who elect to go bare would sign a “Being of sane mind, I order you to provide no care to me” order as a condition of being uninsured.) Under these circumstances, a payroll deduction for a national risk pool for care over a high-dollar threshold makes more sense: You can go without insurance but you have to contribute a fair share. We may not like it, but we’re all in this together.

If we spend more on it, that money doesn’t “disappear”, in theory it gets moved from one set of American hands (the government or private individuals) to another set of American hands (doctors, hospitals, drug companies, medical device manufacturers, etc.). One would think, much like a war, that it would be “stimulus”. You would think that increased spending in healthcare would lead to increased jobs and income in the healthcare industry. That in turn, if taxed correctly, would yield higher tax receipts thus helping to fund the government and so on.

So why isn’t this “law of physics” (the conservation of money) working here?

My guesses are:

1) Medical jobs tend to be higher paid, thus it leads to unequal distribution of wealth.
2) The tax system has become regressively skewed and thus the unequal distribution above cannot be recaptured.

I am sure there are other reasons.

Anyway, #1 brings me to another point – when we talk about saving money NO ONE talks about doctor’s salaries. Somehow this is sacrosanct. My opinion is just like the rest of us, they are going to have to take a haircut.

Yes, I know that medical education is expensive, but I’d be more than happy to see government funding (or reimbursement) of medical education provided we could rein in the salaries. I mean there are people at the local hospital doing cardiology who make over $1 million per year. That is just insane, no matter how important the work is and if we want to control this, it isn’t just the insurance companies and the drug companies who will have to be fixed, but also the hospitals and the doctors, who as of current, are sacred cows in this thing.

Finally, in some sense we know where the money is, so taxing ALL Americans is not the answer. The answer is taxing where all the money went – the top richest 2% who now own an unreasonable portion of the total wealth of the nation. Should that wealth be “recycled” more effectively, then the whole system starts working again.

Fact: Everyone will die! no?

Healthcare spending extends life. But it’s the law of diminishing returns… at some level it seems spending 200% of GDP won’t increase average life expectancy more than a year or 2 past what we have today with 20% of GDP spent on healthcare.

I fear at some point we just need to decide how much of GDP we’ll spend on healthcare, socialize it and hope the system spends the $’s on people who are of the age, and condition that it makes sense (that is scary)… otherwise you have 5000% GPD spent, and life expectancy incrementally increases 4 weeks… but then we all starve to death since the economy collapses.

Wake up, people, would you please??