By Daniel R. Jones, MD
GCC/Staff
Feb.3, 2010

Many in Congress blame doctors and hospitals for the high cost of healthcare. In reality, Congress should be looking in the mirror for the culprit.

Healthcare costs have been increasing at approximately twice the average rate of inflation for several decades. That’s because greedy doctors and hospitals must be getting rich, right? Wrong.

These cost increases are not making doctors or hospitals rich. Average inflation-adjusted physician incomes have steadily declined, in sharp contrast to the wage trends for other professionals [9, 10].

Meanwhile, many hospitals have gone belly-up, and many others have been forced to consolidate into large chains to survive, reducing competition and availability of care [1, 2, 3, 4, 5, and 6].

In truth, the meteoric rise in healthcare costs is directly attributable to past Congressional actions. It happened as follows.

There was a time when doctors “took care of sick folks” and those same sick folks paid the doctor at the end of the visit. If a doctor over-charged, patients went to a different doctor who charged less.

Healthcare costs were low, less than 5% of GDP [7, 8]. That’s how it was until the middle of the 20^th century.

 

U.S. Health Care Costs in Dollars and as a Percentage of GDP [8]

1950    $12.7 billion  4.5 percent

1965    $40 billion    6 percent

1980   $230 billion  9 percent

2000 $1.2 trillion   14 percent

2009   $2.6 trillion  17.6 percent (estimated)

 

Then came the temporary wage-and-price controls of World War II, and the subsequent post-war economic boom. There is no fundamental reason why employers should be involved in health insurance.

In general, that only increases the costs and complexity of doing business. But during the war, employers were prevented by wartime price controls from competing for employees by raising wages. So they were forced to compete with fringe benefits such as health insurance.

Then during the post-war boom the unions, at the peak of their power, demanded generous fringe benefits, including employer-paid health insurance.

Check any dictionary: the purpose of insurance is to pay “a guaranteed and known small loss to prevent a large, possibly devastating loss” [11].

Using insurance to pay for a flu vaccine or a routine doctor visit is akin to using auto insurance to pay for a flat tire repair, an oil change or a brake job. It is fundamentally inefficient because:

 (a) it introduces a third profit-seeking, resource-using entity into every transaction;

(b) it complicates every transaction; and most importantly,

(c) it removes responsibility for payment from the consumer, thereby removing the consumer’s incentive to bargain-shop and economize.

Contrary to the fundamental purpose of insurance, post-war employer-paid insurance plans often included coverage for expenses such as office visits, tests and minor medical procedures.

Employers didn’t mind because coverage for office visits didn’t cost much because doctors, then still in the habit of competing on price for patients’ business, didn’t charge much.

The insurance companies certainly didn’t mind because, big expense or small, they always get their cut for juggling the money.

 

How Doctors Got Caught With Their Hands in the Cookie Jar

At this point, due to the sudden widespread miss-use of health insurance, the payers of medical services became increasingly disconnected from the consumers of those services.

Doctors soon discovered that, although a patient might complain about $50 for an office visit, they could send a bill for $250 to the patient’s insurance company, and oddly enough, the insurance company would usually pay without question. So they started doing that more often.

Who could blame them? The patients were perfectly happy for their doctors to buy big new mansions next to their banker’s, and park shiny new Mercedes in front of their offices, as long as someone else was paying. Of course, this couldn’t go on forever…

That was the situation when Medicare first appeared on the scene, in 1966. Initially, Medicare functioned essentially as any other insurance company, albeit one created by the federal government explicitly for seniors (more precisely, for Social Security beneficiaries).

And since seniors are mostly retired and have time to vote, and because many were recently retired from jobs that provided medical insurance that covered minor expenses such as office visits, Congress enshrined that fundamental abuse of insurance in Medicare.

Initially Medicare, like the private insurance companies at the time, pretty much paid whatever bills doctors submitted, without questioning. How could they question the bills?

They didn’t understand “medicalese,” and they had no idea what the items on the bills represented or how much they were worth. So the doctors smiled and dug deeper into the cookie jar.

If Medicare hadn’t been involved, the fundamental problem of insurance abuse (and the resulting payer-consumer disconnect) would almost certainly have been corrected by free-market forces.

Due to increasing costs, the insurance companies would have been forced to increase their rates dramatically for policies that included frivolous coverage, forcing most patients back to just catastrophic coverage (the only valid purpose for insurance, remember).

Or the insurance companies would have been forced to limit coverage for office visits and other minor expenses to reasonable limits; beyond that, patients would have to pay out-of-pocket. 

In either case, patients would again have been forced to comparison shop, and doctors would again have been forced to compete on price.

But that’s not how it came down. Apparently Congress was afraid to tell Grandma she might have to shop around again for a doctor she could afford.

So instead of taking appropriate measures to correct the root problem of insurance abuse and the resulting consumer-payer disconnect, Congress, through Medicare, radically compounded the problem by imposing price controls and central planning on medical goods and services (for all doctors and hospitals accepting Medicare).

This occurred incrementally, primarily during the period from 1983 through 1992. Predictably, efficiency has been going down, and costs have continued to rise much faster than inflation, ever since.

Healthcare costs have done exactly as would be expected for an industry subjected to communist economic policies for 3 decades. And no one is to blame but Congress. Unfortunately, the recently introduced “healthcare reform” legislation does nothing to address this fundamental problem.

On the contrary, recent legislative proposals only strengthen the bureaucratic mechanisms for price control and central micromanagement.

This would surely backfire as more and more doctors exit the increasingly meddlesome, punitive and cost-driving Medicare, Medicaid and private insurance contracts; and as 30 million more patients with insurance cards can’t find doctors willing to accept them.

 

Special Footnote: Certainly, other factors have contributed to the rise in healthcare costs, such as the deterioration of our diet, increasing use of technology, our archaic tort system, and our increasing elderly population.

But the primary driver of increasing costs and decreasing efficiency and innovation is clearly government interference that contradicts both fundamental economic principles and American ideals.

 

Source: Jones Plan Blog Spot

 

Editor’s Note: We would like to know what you think. dan@goldcoastchronicle.com