Skip to main content

The Real Reason Health Care Prices Keep Rising

Much has been made of the healthcare crisis of late, but very little of it addresses two of the biggest financial problems with the system: the third party payer problem and the reality that health insurance bears no resemblance to true insurance. 

Insurance is a pooling of risk. The odds are that just over one in every 250 people will contract cancer in the next year. Cancer is an incredibly expensive disease to treat. So if 250 people got together and put aside enough savings to cover one case of cancer between them, they have effectively pooled their risk, and, on average, they should have enough to cover the statistical cancer they as a group are likely to incur.

This risk pooling works better in larger numbers. A statistician would be unsurprised if one group of 250 had four cases of cancer while three others had none. But a single group of 10,000 people is much more likely to remain near the nationwide average, and if each of the 10,000 people pays just a little extra, they should be able to cover an extra case or two. Because the risk of cancer is so remote, risk-pooling works. 

The current health “insurance” isn’t insuring against risk - a remote possibility that something might happen to an individual; it’s insuring against near-certainty. Most people are likely to get sick or injured enough to need some form of medical treatment each year. Since the Affordable Care Act outlawed catastrophic insurance - or true risk pooling - what we really see on the ground is more akin to pre-paid medical care. 

This exacerbates an already problematic third party payer issue. When someone with a catastrophic health care plan gets the flu, he is unlikely to seek medical care. For the young and healthy, the flu tends to run its course without complications. It’s only when a cold or flu lingers that he might go to his general practitioner or the urgent care center. Even then, he asks the doctor to consider the costs of the tests he wants to run. 

He’s there for two reasons: to make sure it’s not something more serious, and to get affordable treatment if it’s available. He thinks about the costs of care before deciding to seek treatment, and only does so if the gains outweigh the costs. If that same person gets cancer, he will seek whatever treatment is available and affordable to him. With catastrophic coverage, he will likely be able to afford good care, if not the most cutting edge experimental care available anywhere. 

But when we consider someone with pre-paid medical care, we know that not only is she going to have coverage for catastrophic emergencies, she is likely to go to a doctor any time she’s a bit under the weather. She has paid up front for all her medical care, so she rationally wants to get her money’s worth. The only deterrent to her is the time she will spend sitting in the waiting room, and the small co-pay she may incur. Once she gets to the doctor, there is no reason at all she shouldn’t have him look at every little thing that hurts, in addition to her flu. 

We can see two related problems trigged by the pre-paid model for health coverage. One is overconsumption/overprovision of health services. If you buy a season pass to the pool, you’re going to go a lot more often. The same is true with doctors. If a patient has an all-the-care-you-need pass (i.e. ACA-compliant coverage), it makes sense to check out every little ache and pain. The second is a disregard for the cost of various treatment options. Imagine two hypothetical flu treatments: one that relieves all symptoms after 48 hours and sells for $10 per treatment, and another that relieves all symptoms in 12 hours, but costs $1,500.  Most people who are paying their own costs out of pockets would suffer for the extra day and a half so they could afford their mortgage payment. But someone who has the buffet model is going to press for the opulent treatment. It’s only rational. 

What is not rational is continuing the national conversation on the skyrocketing costs of health care without addressing these perverse incentives. Each of us is paying for everyone else to get far more care, and care at a more expensive price, than is really needed. The fact that these costs are baked in to the price of our “insurance” should not distract us from the fact that we are all paying for them.  

Mike Davis is Research Fellow at 1889 Institute. He can be reached at mdavis@1889institute.org.

The opinions expressed in this blog are those of the author, and do not necessarily reflect the official position of 1889 Institute.


Popular posts from this blog

The Truth About COVID-19: Better Than You Think

As the media turns its attention back to COVID-19, there is a renewed push to shut down the economy. Some states have even begun to scale back reopening plans for their economies; others continue to delay opening. It is essential to look past their catastrophizing and focus on the facts of COVID-19. One fact to consider: while testing has risen 23%, the rate of positive results has only risen 1.3 percentage points to 6.2%. Even as alarmists point to the rise in cases, they still admit that the boost in testing has played a role in the rise in the total number of known cases. Therefore, the total number of positive cases is not of much use in this case, as it only paints a partial picture. The rate of increase in total positive cases is a more meaningful measure, and it has barely increased. Even more important is who is getting infected. The data show that recent cases are primarily younger people. But that’s a good thing; these are precisely the people that are key to building herd ...

Top-Ten in Low Taxes, But Oklahoma Still Has Much Room for Improvement

In a comparison of states’ total taxes as well as spending in certain broad categories that the 1889 Institute has just published ( Oklahoma Government Revenues and Spending in Perspective – Update ), some interesting facts arise. Using federal data, we compared states by looking at the percentage of personal income collected in state and local government revenues. We also looked at the percentage of personal income spent in six broad spending categories: higher education, public education, public welfare, hospitals, highways, and corrections. The data shows that in 2017 Oklahoma’s state and local governments: Extract 13.2 percent of Oklahomans’ personal income in taxes and fees, moving Oklahoma into the Top Ten lowest-taxing states, ahead of Texas.   Spend 12.38 percent of personal income on the six featured spending areas (which include federal dollars), only a little below the national average of 12.7 percent. While 9th overall (least spent being first), Oklahoma is n...

No License, Sherlock: Licensing for Private Investigators

What does a private investigator do? Surely, we’re all familiar with various movies and shows featuring the exciting adventures of Sherlock Holmes or Magnum PI. However, reality is often disappointing, and the fact is private investigation is usually dull and relatively safe. Private investigators are tasked with conducting surveillance and fact-finding missions for their clients, but they gain no special powers to do so.  My recent paper deals with the licensing of private investigators. Oklahoma’s private investigator licenses are governed by the Council of Law Enforcement Education and Training (CLEET), which follows the advice of a committee made up of people who run private investigative agencies. Improved competition is not likely to be in the best interest of these agencies, so it is questionable whether they should be in a gate-keeping position they could easily turn to their advantage. Private Investigators must undergo a series of trainings and pas...

OKC Public Schools Elevating a Privileged Elite over Oklahoma Taxpayers

The hypocrisy of the Soviet Union’s pretense of egalitarianism was well known enough to be the subject of mockery and parody. Ronald Reagan never tired of the jokes . Soviet communism espoused equality, but the reality is that party apparatchiks and government officials enjoyed special perks that no one else had access to. This special class wasn’t officially paid much more than the average skilled worker, but enjoyed privileges like dachas on the coast or countryside, special stores with imported goods and without the endless lines that were commonplace everywhere else, and more advanced medical treatment. For all their talk about eliminating class distinctions, the Soviet nomenklatura —those “doing the people’s work”—could feather their nest with the best of ‘em. Apparently, a similar attitude reigns in our government schools. Our friends at OCPA report that Oklahoma City Public Schools (OKCPS) will not offer in-person instruction to students for the first nine weeks of school this ...