by Ben Stone
From January of this year to present, end of May 2011, two people I know very well have gone through medical screenings, tests, and a minor surgical procedure, none of which are considered “voluntary”. All parties involved had high quality medical insurance partly paid for by their employer, a well-respected international company. In each case the insurance carrier approved of every service provided by the medical professionals in advance. And yet at every stage along the way, the “price” the medical professionals charged for their services exceeded the amount the insurance provider would allow, leaving a balance the “patient” was left paying.
Before going further, let’s get some basic economic facts out of the way:
- If an insurance company doesn’t put a cap on the amount they’re willing to pay for a product/service it will quickly go out of business because there is nothing to keep the product/service provider from charging into infinity.
- If an insurance company doesn’t require the insured to pay some kind of co-pay or partial payment, it will slowly go out of business because there is no motive for the insured to conserve and use the product/services in moderation. The insured will be motivated to “get their money’s worth” and they will over use the product/service that the insurance company pays for.
- The insurance company is motivated to make as much profit as possible.
- The product/service provider (healthcare) is motivated to make as much profit as possible.
- The insured (the patient) is motivated to get the most/best product/service possible for the least money spent.
- The price the insurance company will charge for insurance will be the most it can get given the market in which it competes.
- The product/service provider will charge the insurance company as much as the insurance company is willing to pay.
- Above and beyond what the insurance company will pay, the product/service provider will charge the insured/patient as much as the insured/patient is willing to pay.
- The portion of the insurance that the employer pays on behalf of the insured/patient is simply wages the employer would pay either way.
- Ultimately, 100% of the money the insurance company handles and 100% of the money the product/service provider charges is paid by the insured/patient since the insured/patient is the only one injecting money into the formula and the only one consuming the product/service.
Please take special note of the last three facts. Read them carefully. Sometimes we can be confused by “benefits” we receive from our employer. But all benefits an employer pays to an employee are simply wages and if the employer paid zero in insurance benefits the market in labor would drive them to pay that same amount in some other form. So all benefits are wages including matching insurance payments.
The above 10 facts should be beyond dispute and rather obvious to the casual observer. What may not be quite as obvious is the fact that the government interferes on a myriad of levels, distorting the prices at each phase of this process. And since so many layers of costs are hidden by the confusion provided by the insurance company, the employer and the government, the insured/patient never knows how much they are ultimately paying for the product/service. Therefore the product/service costs far more than the insured/patient would be willing to pay if they actually knew the real price.
At this point in the conversation a fallacy needs to be exposed and dealt with. Rather than laying out a 4000 word essay on price determination, or insisting my reader spend a few hours reading Man Economy and State by Murray Rothbard, I shall say outright that the price of anything in the market is based squarely on what the consumer is willing to pay. It has nothing to do with the cost of the good or service. As a matter of fact, the cost is determined by the price, not the other way around. Unless you’re familiar with Austrian Economics this may sound backwards to you because socialist economists have spent the last 120 years teaching the public to think backwards. But the fact remains that if the market supplies anything at a price the consumer judges to be too high that product/service will not be purchased and the seller will lower the price or go out of business. If the cost of production and distribution are so high that the seller cannot provide a price the consumer will pay, the market will force innovation or invention and drive the cost down to a consumer pleasing level.
Therefore the price of healthcare is determined by what the consumer is willing to pay, not what the healthcare costs the industry to provide. The only way to get a higher price from the consumer than they are willing to pay is to deceive the consumer by hiding part of the price!
Think about an automobile purchase. You go in and talk to the dealer. You find the car you want and agree to a price. When the smoke and mirrors all fade away and its time to write the check, how often is the check written for the same amount as the original price you agreed? Somehow the slick sales person has convinced you of a different price than you agreed to in the beginning. Now imagine if that same car purchase were arranged through an agreement between your employer, an insurance company, and a car dealer while heavily regulated and controlled by several agencies of the Department of Motor Vehicles, the Department of Transportation, and the FTC. Don’t you think they would all find ways to hide some of the price and take some of the plunder for themselves?
So then we are driven to a set of conclusions:
- The price of healthcare is far higher than the consumer can determine because the employer/insurance company relationship and the government hide a large portion of the price.
- The cost of providing healthcare is far higher than it would otherwise be because of the abundance of personnel required by the employer, the insurance company, various government agencies, and the personnel the healthcare provider needs to deal with each of these players.
- 100% of the price (both hidden and not hidden) of healthcare is paid by the consumer.
- No matter any other factors listed above, the price of healthcare will not and can not exceed what the patient is willing to pay unless part of the price is hidden.
Now for the unsettling part of this article.
When contemplating the price of healthcare, the average consumer will not consider the months and years they pay for health insurance without using it. Neither will they consider the portion of their insurance costs that their employer pays on their behalf. They will look at their pay stub or their pay records and they will imagine no more than a month or two of insurance premiums along with the actual out of pocket amount they will pay to the healthcare provider and the cost of losing a day’s pay to go to the doctor. Lets call this amount the “true price” because it is the price as the consumer sees it. This true price is the actual price the consumer would be willing to pay if not for the price distortions. Now brace yourself. This true price is what the healthcare provider would charge if not for the market distortions! (Remember Rothbard was mentioned above.)
Real life examples:
(Names changed and amounts rounded off but otherwise based on actual examples)
Mary is of an age that she must endure a particular health screening process. Her employer’s human relations representative tells her the procedure is covered under her insurance and she really needs to get it done.
Here is a breakdown of the complete price of the healthcare screening:
- Two separate appointments requiring two half days missed from work – $200 (wages lost)
- Co-pay and payments not covered by insurance – $350
- Payment covered by the insurance company – $750
- Payments made to the insurance company by Mary over the years (unseen) – indeterminable but vast
- Cost of government intrusion into the healthcare market (unseen) – Far more than humanly imaginable
Now lets look at the price as Mary sees it:
- Two separate appointments requiring two half days missed from work – $200
- Actual out of pocket – $350
- Deductions from pay for insurance for one month – $100
Total – $650
That’s it! $650 would be the fair market price for the screening if not for the market distortions!
Now let’s look at Mary’s daughter Jane who had an involuntary minor outpatient surgery.
- One and one half days of work missed for the screening and the procedure and a weekend spent at home recovering – $300
- Co-pay and payments not covered by insurance – $950
- Deductions from pay for insurance for one month (seen by Jane) – $100
- Payment covered by the insurance company (unseen) – $4750
- Payments made to the insurance company by Jane over the years (unseen) – indeterminable but vast
- Cost of government intrusion into the healthcare market (unseen) – Far more than humanly imaginable
The fair market price for Jane’s procedure without market distortions: $1350
In the long run, vast amounts of unseen money is taken from Jane and Mary and goes to support a bloated government bureaucracy, an entire insurance industry that exists purely because of government intervention in the market, and a wasteful inefficient healthcare industry that expends more money in legal defense and public image management than medical research or actual medical care giving.
The impressive facility where the real life Jane and Mary had their examinations and procedures includes a rotunda and a multi-story indoor atrium featuring a grand piano, a waterfall, and contemporary art throughout the building. The parking lot has attendants that prowl the lot in vehicles like you might see at an airport, offering rides up to the entrance where a doorman greets you and offers his services to get you to your appointment. As you pass the doorman, another attendant awaits with further offers of assistance. As you move through an architectural dream only slightly less opulent than the Palace of Versailles, gazing out through walls of glass at the manicured landscape, its hard not to wonder what a CT scan machine costs compared to the cost of keeping all those windows crystal clear.
Perhaps a free market would provide funding for such outlandish medical complexes, but I would be just as likely to believe that a free market would provide drive-up services for most doctor appointments and basic in-home nursing in 30-minutes or less with a simple phone call. And medical insurance would focus more on the big expenses and long term care and less on robbing you and your employer for year’s worth of payments.