Economics, Entitlements

Here, in one graphic, is what’s wrong with American healthcare

Talk about a vicious cycle. The above chart (from must-read healthcare blogger Avik Roy) comes as close as anything I’ve seen to explaining in a picture what is wrong with the American healthcare system. It shows how government policy creates a dysfunctional healthcare market by insulating consumers from the true cost of their healthcare decisions, raising demand/overconsumption of high-end services/costs, prompting more government intervention (like Obamacare) … and more insulation. Rinse and repeat. Here is Arnold Kling on “insulation”:

The health coverage most Americans have is what I call “insulation,” not insurance. Rather than insuring them against risk, most families’ health plans insulate them from paying for most health care bills, large and small. Real insurance, such as fire insurance, provides protection against rare, severe risk. Real insurance is characterized by:

– low premiums

– infrequent claims

– large claims

American health insurance—including employer-provided insurance and Medicare—is the opposite. Families typically are paid claims several times per year, often for small amounts. Premiums are high—the cost of providing insulation often exceeds $10,000 per year per family. However, most families pay these premiums only indirectly, through taxes and reduced take-home pay from employers.

For health care providers, insulation is a bonanza. Because consumers are not spending their own money, they accept doctors’ recommendations for services without questioning them and without concern for cost. Faced with an insured patient, a health care provider is like a restaurant catering to convention-goers with unlimited expense accounts. The customer will gladly take the most high-end recommendation and not worry about the price.

Consumers are happy as well. Insulation relieves the patient of the stress of making decisions about treatment. The patient also does not have to worry about shopping around for the best price.

The problem with insulation is that it is not a sustainable form of health care finance. Individuals, employers, and government are all under stress. Families that are in the individual insurance market face sticker shock when they confront health insurance premiums. Many choose to remain uninsured. Employers are finding health care expenses an increasing burden. A noticeable gap has arisen in the past twenty years between the growth of total employee compensation and the growth of wages. Take-home pay is stagnant or shrinking, as much of the growth in compensation is diverted to health care.

Insulation leads people to over-consume health care services. Americans make extravagant use of services that have high costs and low benefits. Many studies that compare groups with similar conditions show that those with the largest levels of health care spending fare no better in terms of outcomes than those that spend less.

19 thoughts on “Here, in one graphic, is what’s wrong with American healthcare

  1. I’ve thought about the anomaly in this situation for a long time, just never had a term to describe it before. “Insulation” is very appropriate. If the health “insurance” provided for us was really that, the most effective way to provide coverage for an individual or family would be the high-deductible catastrophic care plan, accompanied by an HSA. Wonder which batch of lobbyists have successfully blocked that for so long? Of course, most people are too indoctrinated (into thinking the insurance companies or government should take care of their medical expenses) to actually be responsible enough to consistently contribute to their HSA, just as the 401K participation percentages show.

  2. I’m afraid you’ve misdiagnosed the problem, and as a result, your treatment isn’t going to cure the patient.

    Health care isn’t expensive because of the way health insurance is administered, but rather because Americans insist on being diagnosed and cured of whatever ails them, and no matter the cost… and because society as a whole refuses to tell people ‘sorry, but we’re not going to pay for test A or procedure X’.

    You could get rid of health insurance (or reform it in the ways you propose) and we’d still have the same problems: people want to know what is wrong with them (we’re no longer willing to be told ‘sorry, we don’t know why you’re sick’), they want those problems fixed and if they don’t have the money (for whatever reason), they expect society to step up and pay the bills for them…. at which point society steps up and says ok (with anyone objecting being labeled as uncaring).

    Absent a change in society’s willingness to pay, the solution is to lower the cost of health care (not health insurance). Your goal is to reduce demand by making people feel more keenly the cost of care… but that will only backfire when people need more expensive care as a result of having put off treatment at the earlier stage.

    I propose that we instead look to increase the supply of medical providers and lower the cost of drugs and medical devices. We should be looking to reduce the administrative costs associated with health care (reducing the scope of health insurance would help, as would malpractice reform).

    • You have part of it right Steve. Another part is that the government has so regulated the hospitals, pharmaceuticals, health care costs and treatments that expenses have grown greatly. The lawyers have made malpractice suits a business. Tort reform is a must. Texas made a start on it, but more changes have to be made. The govt drove private physicians into HMOs to pay for malpractice insurance, inflated treatment regimens, lab tests, and office equipment. Costs continued to climb, and now doctors are leaving practices. Medicine was changed. We no longer have family physicians, no longer have good diagnosticians and care managers. We have risk-avoiding physicians.

  3. THere’s one big problem with this chart — unless you are on Medicare or Medicaid the government doesn’t subsidize health care.

    THe problem is more that people can’t understand the costs rather than they are insensitized.

    • Actually, the government subsidizes all healthcare. All premiums paid are deductible from income tax. In employer-sponsored plans, the employer deducts the premiums. Self-employed individuals claim the deduction themselves. Insurance companies themselves subsidize premiums for those within the plan, in the form of “insured levels”.

      From a % standpoint, a single person pays more than a family does. Within the family tier, those with one child are hit much harder than those with more than 1 child. Take vaccinations: it obviously costs more to vaccinate 3 children than 1. But the family with 3 children pays the same premium as the family with 1 child.

      And while the pros/cons of this kind of subsidization are debatable, the fact is that in the marketplace, we don’t buy anything else like this. Even the additional cell phone on the family plan costs $9.99 per line/per month.

  4. I would suggest one alteration. Instead of (or in addition to) “Government Subsidizes Health Insurance,” “Government Interferes With Health Insurance,” either by favoring employer provided coverage, mandating minimum coverages, or attempting to fix prices.

  5. Good find, Jim.
    The term insulation is clever and poignant, but the characterization off by a country mile in one important regard.

    People today are NOT happy that they only have insulation instead of insurance. Old-fashioned “coverage” meant a measure of comfort and security, that was appropriate and earned. Today, the only folks who have that same measure of comfort and security are the ones who haven’t been stung by an insurance denial or semi-denial YET. So-called managed care (which is really managed bills) has led to a situation where there is no longer a definitive answer for what used to be the simplest question, “Am I covered for X?”

    A few decades ago the answer was simply either “yes, 100%”, “yes, Y%” or “No.” Today the industry formerly known as “insurance” gets away with not having a straight answer to that question (for any X) until medicine is prescribed, treatment is needed and procedures are complete. (Ever hear of the call-first-bleeding-or-not-or-else policy?).

    That’s not insurance. That’s not security. That’s not comfort or piece of mind or worthy of a civilized, post-industrialized nation.

    The phrase “and reduced care” belongs on 3 spots on the graph. Very sad.

    The remedy to secret terms and conditions is the same in any industry or situation: Sunlight.

    - The Next 10 Amendments

  6. Sorry Charlie, but “Government” and “Private Health Insurance” are in cahoots. At the State level, they run an “oligarchy” managed by political appointees. They have done this for decades and it’s a stacked deck that prevents real competition and real market solutions. Need proof? The big insurance companies worked behind the scenes with the Obama people to craft Obamacare. Why? Sheer greed, they wanted the money from mandated coverage of the 60 million or so Americans (and growing) who were opting out because the insurance companies were not offering enough value for otherwise healthy people. Unless or until we get portable health insurance, in a national market, with tax deductible premiums for individuals, with HSAs… we will not get market driven, competitive, superior health insurance and healthcare. Obamacare only goes from bad to worse. We need to get the government OUT of the way, they are the problem.

  7. Steve is right… the answer to the question, “Why are prices high?” is ALWAYS the same: either demand is too high, or supply is too low. To decrease demand, people can either get healthier lifestyles or they can be required to pay for valuable healthcare services out of their own pockets. Since neither of these is foolproof or particularly realistic, the only other option is to increase the supply of service providers.

    Insurance is not the answer, it’s the problem… any form of health insurance other than catastrophic coverage should either be illegal or extraordinarily tightly regulated. How on earth could anyone conclude that the way to lower prices is to insert a profit-making entity between patients and doctors???

  8. The “insulation” factor is being overplayed in this analysis. The vast majority of medical expense in this country, perhaps 85%, is attributed to the treatment of serious illnesses, such as cancer, diabetes, kidney failure and heart disease. The waste of someone going to the doctor for a cold has the same visibility of someone on food stamps buying steak. It happens, and it shouldn’t happen, but it is only one of many factors affecting program cost and generally it is not terribly significant.

    • If the demand is higher for people with colds or other issues that don’t absolutely require treatment, the limited supply of doctors is stretched (fewer new doctors become oncologists/etc.) and there are fewer to supply care for cancer/etc. which raises the cost of those treatments as well.

  9. I would love to be able to pay for only the health care that I use. The problem is, if I buy my daughter’s three asthma medications at a pharmacy I would have to pay almost $1500. Yet this same medication costs the insurance company only a fraction of that cost. I jokingly asked the pharmacy if I could get the insurance discount. I am pretty much forced to buy insurance, which, thanks to Obamacare went up 38% the first year, and 49% the second year. Right now, I am behind in my health insurance payments, and don’t know how I can catch up, especially when my husband lost his job. The lowest health insurance my family can qualify for is over $3K per month. My income is less than $2K per month. The numbers don’t add up, do they?

  10. This is why Accountable Care Organizations are at the heart of the Affordable Care Act. These systems are designed to shift risk to providers, removing the insulation assumed in the article. They are already proving to be restructuring the economy of healthcare. An even more interesting model is the PCMH model that CareFirst of Maryland has launched which creates a system of credits and debits to make the Accountable Care Orgaanization idea even more powerful.

    It is easy to oversimplify the debate in the absence of the facts.

  11. This chart only reflects a part of the problem. Also driving up costs are:

    Abusers of the system who use emergency services and leave without paying. Communities with high illegal alien populations display this factor the most. Doctors and hospitals must then increase the billing amounts to paying patients to compensate for the losses such abuses incur.

    The high cost to doctors of malpractice insurance. These costs result from frivolous claims and high pain and suffering awards. Since revenues must rise to meet expenses in any business, doctors must adjust their fees upward to compensate.

    Also, Gone are the days when a doctor’s office included the doctor, his secretary/bookkeeper and (maybe) a nurse. The overly complex nature of filing insurance claims now has doctors employing full time personnel whose responsibility is solely to handle all of the various forms of insurance, the purchase of technology and software specifically designed for insurance, subscriptions to insurance companies to allow access to their networks, and technicians to keep it all running. All of these things cost money. Costs and feees to patients must rise to cover all of these.

  12. The fact that (practically all) other countries provide better and cheaper government subsidized healthcare makes this chart completely bogus.

    • Cheaper? Yes. Better? Hell no. Wait times are longer, doctor’s shortages are constant (like the NHS shortages the UK has had for decades), and innovations in care are virtually nonexistent (relying instead on new technology and innovations coming out the US).

  13. I appreciate the intelligent approach to answer this complication question, and the idea of reflexivity amplifying the problem.

    I think that there are other factors as well. Tort reform may be necessary to limit claim. regulatory compliance should be streamlined.

    Health care is 18% of American GDP versus about 4% in or less in Asia. Yet I get MUCH better results in Thailand or even Japan.

    As an example, I live in Thailand an expatriate American. Health care here is excellent, as it is a competitive, “free” market. I priced plastic surgery (not covered by insurance) for my Mother in America. It would cost nearly $120,000. We did in Thailand for less than $7,000. The results were fantastic. I have three children. We were in American visiting and thought about having the baby there. the cost of insurance and the deductible for 1 child birth was 2x time the Thai cost (less than 4k), and we stayed in the hospital equivalent of a 5 star hotel room.

    Before my mother’s plastic surgery as a precaution, I insisted that she gets body scans and and heart check up. She insisted that American health care was superior and that she was already well scanned. to make a long story less long, a single Thai cardiologist found 1) a coronary blockage, undiagnosed in America and 2) lung cancer. The blockage was very obvious and, frighten by a lawsuit, the American doctors who missed it, took care of it right away. The cancer was more interesting. My mother, terrified that the spot, identified by the Thai doctor, MIGHT be lung cancer, forced her American doctors to scan her ever six months, focusing on the spot. After two years of scans, and four doctors, an American doctor, finally agreed with the 24 month old Thai doctor and treated the spot, which was indeed cancer.

    My mother would have died from either incident, most likely prevented by a single Thai doctor, humble, poorly paid but who ran the scans himself (normal procedure).

    Yes, if a doctor in Thailand (most are US trained and very smart), screws up, I cannot sue him or her for millions of dollars. I would only receive tens of thousands.

    In America we needed an emergency ultrasound when my wife, pregnant, took ill. we waited 2 hours and never even saw a doctor and Northwestern in Chicago. A nurse/tech ran the procedure and told us the baby was ok. She was rude and WRONG to point of malpractice.

    We flew to Thailand and walked in. A doctor conducted the ultrasoud and three doctors reviewed the results. the fetus was CLEARLY abnormal. We should have sued Northwestern for malpractice, and the nurse/PA who did the scan there. Idiot. the malformation was obvious, when we learned the proper shapes of fetuses.

    Lawyers and lobbyists are mostly responsible for high cost of health care. What is even worse is the poor quality often found there.

    Drugs are mostly generic in Thailand and 1/4 the American price.

    America leads a lot of the medical advances that benefit the world. That matter cannot easily be separated from standards of care, but why are Americans paying 3x other OECD countries per person.

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