My goal for this website was to try to understand a system that has an enormous financial impact on everyone, but makes almost no sense to anyone. It’s a system with hidden costs, enormous mark ups to discourage direct payment and a labyrinth of billing and reimbursement schedules that almost guarantee that no person directly involved could ever understand it. And we’ve started to see why this system is set up this way, who benefits from it, and who loses. The question is: How did it get this way?
I’ve only been in practice for about 15 years and the system, as it is, began evolving long before my medical career began. Still, I can only guess that decades ago when insurance companies started to pay for medical costs, no one intended for it to end up like this. Insurance companies were originally run by doctors. Their idea was to spread the risk. They had a sense that getting sick usually wasn’t fair, so going bankrupt because you were sick probably also wasn’t fair. They had the idea that pooling people in advance made it easier on everyone, and improved access to healthcare.
It’s a great irony that only a few years later, some business people (people who are very good with money, but not so interested in medicine) realized that they could make a lot of money on health insurance if they created a special insurance plan that excluded the sickest people. In other words, insurance for people who probably didn’t need it, which was very different from the original idea of health insurance for everyone, but far more profitable. The idea of preexisting conditions is almost as old as health insurance itself.
Here’s one way to look at how the system came to be: People usually try to find occupations that follow what they love, at least in the beginning. Hospitals can be callous in their billing, as we’ve seen, and doctors like money as much as anyone else, but fundamentally there was a point in their lives when they (doctors and people who run hospitals) decided to get into the profession of helping sick people. Some are genuinely compassionate. Some are biology wonks or technology wonks, or just like the action. But most of them lose interest pretty quickly when they have to start dealing with complicated financial matters like insurance payments.
The first insurance companies were started by doctors, but they couldn’t stay in the game when the money professionals started showing. They couldn’t compete financially, and they didn’t have the mindset to try. So they did what most of us do: focus on the details that interested them (medicine), and left the tedious stuff (finances) to someone who was interested in it (insurance companies). Now the insurance companies could start building a system in their image.
As the system grew and healthcare became more complex, more people came into the health insurance industry who had a good understanding of money but little interest in healthcare. It’s no secret that confused people are easier to take advantage of, so layers of confusion were slowly piled on and profits soared. Insurance companies sell nothing more than security against financial risk. If no one really understands what that risk is (because all prices are hidden or deceptive) then the price of the security (insurance) can be grossly inflated.
Doctors, hospitals, and other healthcare providers didn’t protest as the process slowly grew away from them because, as this started to happen, they too, were making money, and didn’t think they needed to worry about it. As the system became less and less transparent, insurance companies were careful to make sure that all of the major players were kept very happy. But you can’t keep everyone happy forever, and when things get tight, that’s when you start to learn who’s running the system. Now, after 30 to 40 years of slowly allowing all of our understanding of the financial transactions to erode, we are left seeing more and more money dumped into a black hole with little understanding of what happens to it.
It’s rare to see a discussion about healthcare costs that isn’t centered on co-pays, premiums, and deductibles. These are all indirect costs. They tell you almost nothing about the cost of the final product (the medical services that you might need). If the cost of individual components of healthcare are mentioned at all in these conversations, the price given is usually the billing charge. But the billing charge has little to do with what health care costs either. You’ve seen in almost every section of this discussion that the billing charge is a hugely inflated price that almost no one ever pays.
Why would anyone want us to focus on a price that’s almost never paid (unless you don’t have insurance, of course)? Well, one reason might be that it makes it look like all that money is really going into paying for our health care. We all know how important an MRI can be, or an Emergency Room visit, and as long as people think an MRI really costs $4,000, and an ER visit costs $4,500, maybe they’ll resign themselves to paying big insurance premiums, and we can all tell ourselves that it’s the only way we can continue to have “the best health care in the world.”
But if these charges have nothing to do with reality, then neither do any of the discussions. MRI’s and ER visits cost hundreds of dollars, not thousands! This is all a very effective diversion because, if no one ever addresses the real problem, it’s unlikely a real solution will ever be proposed. And if you don’t want people to find out where their money is going, it helps to have them looking in the wrong place.
What I do know is this: I don’t have to buy my own health insurance because my wife gets it through her employer (she only works in my office one day per week). After our children were born, she took time off from work. It was then that we realized how much our policy actually cost since we had to pay for it ourselves while she was on leave. For a family of four with no medical problems, it cost just over $1,300 a month or $15,600 a year (for an HMO!). When she re-enrolled this year, it had gone up to $1,500 a month or $18,000 per year! For comparison, my malpractice insurance cost me about $2,950 a year. Liability insurance on our two cars cost $680 a year. Office insurance for my practice is about $1,170 a year. My life insurance is $588 a year and our homeowners insurance on two houses is about $1,270 a year. In total, ALL of our other insurance policies COMBINED cost just over a third what our health insurance cost ALONE! And this for a family with no medical problems (and free doctor visits).
So where is all of this money going? A number of reasons have been proposed for why the cost of healthcare is rising faster than almost anything else. Is it the aging population? It stands to reason that older people have more healthcare needs. However, almost all of the medical costs for anyone over 65 are covered by Medicare so private insurance companies aren’t responsible for these. And part of the reason we’re living longer is that we’re keeping young people healthier (though no healthier than in other developed countries). Treating blood pressure or high cholesterol early and aggressively, for example, is not only inexpensive, it can postpone a heart attack or stroke (both of which are very expensive) for decades.
Is it the increasing use of technology in medicine? Certainly there have been a lot of technical innovations that have revolutionized medical care in the last 30 years, but this has happened in every industry. Furthermore, technological costs tend to decrease over time. How much does an I-phone cost now as opposed to four years ago? How much more can it do now?
A CT scan or an MRI used to cost thousands of dollars when the technology was new, now they go for only a few hundred. It’s true that they are used far more often now than twenty or thirty years ago but it’s also true that people are hospitalized for far fewer conditions, hospitalizations are far shorter for a given condition and so is post-surgical recovery time. All of this because most of the medical and technical innovations have managed to decrease, not increase, the total amount of time and resources needed for most patients.
Many of the medical devices that have recently been developed are also very expensive. If there were a way in which I could tell you the price of these I would, but the purchase price of most of them varies from hospital to hospital and is a proprietary secret between the hospital and the device maker. Still, the majority of these are used primarily in Medicare patients so again, they have only a limited effect on the cost of private insurance. Even so, as with other innovations in medicine, most of these devices have resulted in a decreased amount of time the patient spends in the hospital and less total money spent.
Earlier, we saw that the cost of most of the commonly prescribed medications as well as many routine diagnostic tests have become so inexpensive that you would hardly notice them if you added them to your weekly grocery bill. In the medications section, I gave the example of a person with diabetes, high blood pressure, high cholesterol, congestive heart failure, coronary artery disease and an enlarged prostate who could get all of his medications for about $200 a year. If he takes his medications, follows a strict diet and goes for a walk every day, his conditions are likely to remain stable for years and he’ll only need to see the doctor about four times a year. At about $100 per appointment that’s $400 more a year. Add the cost of blood tests taken before each appointment to check his liver and kidney function, diabetes control and cholesterol and that’s another $300-$400 a year. So this chronically ill patient with multiple medical problems can be managed most years for a total annual cost of about $1,000.
Few of my patients under 65 have that many chronic medical problems. Most of them have three or less. Even so, I have a patient with only high blood pressure and high cholesterol and because he has to buy his own insurance and is considered high risk by the insurance companies, his premiums for just his own coverage are $900 a month. In the 9 years that he’s been my patient, he has not run up enough medical bills to ever even meet his $2,000 deductible. He even buys his medications at Costco so the insurance isn’t even involved with that. He’s 64 now so, next year he will be eligible for Medicare and, for roughly one third the price, Medicare will cover 80% of his medical expenses for the rest of his life. The private insurance plan that cost nearly $100,000 over the last decade will be done covering his medical conditions. And they’ll have paid hardly anything for his medical care. Again, where is all this money going?
Extended hospitalizations are becoming increasingly rare. The time spent in the hospital is less now than in the past for most diseases. The medications needed to treat HIV are certainly not cheap, but the overall cost of treating HIV has dropped because of these medications. HIV is now a chronic illness that only rarely requires hospitalized care whereas, prior to these drugs, most people with HIV were critically ill and in the hospital for much of the course of their disease (before dying). Even organ transplants are done far more efficiently and with fewer complications than in the past. Some of the anti-rejection medications are now going generic making post-operative treatment less expensive as well. Most specialists I know claim that they get less, not more, for procedures than they received twenty or thirty years ago so, again, where is the money going?
There are patients who have neither Medicare or Medicaid who will get a very serious and expensive illnesses each year but are they really more common than house fires or major traffic accidents? The insurance needed to cover these (auto and home owners) cost only a fraction of the price of health insurance. And don’t let anyone tell you that it’s because of malpractice insurance or lawyers! Most people believe that medical malpractice is very expensive, but my malpractice insurance cost about one sixth the price of our health insurance.
It’s true that health insurance coverage is far more comprehensive than other types of insurance. As I’ve said, no one would use their car insurance to replace a burned out headlight, buy gasoline, or change the oil. In fact, healthcare is the only industry where insurance is used to pay for practically everything. But this is necessary in large part because even the most trivial expenses in healthcare have such an enormous mark up. If you don’t use your health insurance, you could never afford the (unreal) inflated price.
Is it a coincidence that the only industry that uses a third party to handle almost all financial transactions has the highest rate of inflation? Paying someone to pay your bills for you will always result in you paying more (how could it not?). Sometimes people argue that healthcare is so complicated that people could never understand the cost of what it provides (even some of my colleagues in medicine have suggested this). This amazes me. We live in a society where we regularly purchase cars, plane tickets, computers, complicated cell phone plans and a multitude of other goods and services, all of which have multiple factors that contribute to their price. Still a price is given for these goods and services and that price is paid by the consumer. There is no need to bother a third party for any of these other important and complicated financial transactions. So what makes healthcare so special? What about healthcare makes it the only industry in this country where the people involved can’t place a true value on what they do?
I’m not arguing that insurance is never needed in healthcare. There are, and probably always will be, many diseases for which almost no one could afford the appropriate treatment. In these cases, catastrophic coverage with a high deductible would probably be enough for most people. But the problem with many of these plans is that insurance companies now purposely inflate the price you will pay for any medical service (see insurance companies). This guarantees several thousand dollars in medical bills anytime someone with one of these plans needs any kind of healthcare. I can only assume that this is a ploy to get people to buy more coverage.
Hospitals, labs, doctors and pharmacies are all complicit in this extortion by billing patients the full price when their insurance won’t pay. They (we) are at least somewhat culpable. Their excuse is that they would be underpaid if they didn’t continue to play the game the insurance companies force on them. That may be so, but as long as they continue get the majority of their payments from a highly reluctant third party, they will continue to work harder and spend more money to get each dollar. A willing customer gives you cash up front, only a fool would discourage this.
Even though we get our insurance through my wife’s employer (and it’s very good coverage), it’s hardly the best deal for us. The $1,300 dollars a month that her employer pays to the insurance is almost pure profit for them. Outside of the birth of our two children, (which we covered with one year of premiums), we use them for practically nothing. If my wife’s employer offered catastrophic coverage with a high deductible that cost only $300 a month, my wife could potentially get the extra $1,000 dollars a month in her paycheck.
What I’m proposing isn’t radical. We in the healthcare industry need to place an honest value on everything we do, sell our products only for what they are worth and involve a third party for payment only when absolutely necessary! In what other business would this be considered radical?
But above all, whatever you do, never let anyone tell you that we pay this much because that is what the best healthcare costs. It doesn’t. The money isn’t spent on caring for your health. And don’t let them tell you that this is how the free market works. It’s not a market, and it’s not free.