A few days ago Surgeon67 wrote an article detailing the impact of the insurance industry on healthcare costs.  His central premise is that insurance companies drive costs up through inefficiencies.  His solution (although not detailed in the article) involves some sort of mechanism by which patients pay providers directly.  He also included peripheral anecdotes that would imply that physicians have nothing to do with the increasing costs of healthcare.  He pointed to a couple of examples in which surgeons get paid less today for routine procedures than they used to.  Please note – that is not Surgeon67’s central premise – his central premise is that insurance companies drive up the cost of care through inefficiencies.  I do not dispute that point.

Let’s look at an interesting set of data though


Take a look at Normal Birth/Live born.  The trend is from $3,107 per live birth in 2000 to $7,332 per live birth in 2015.  If you look over at the CPI inflation calculator here  you will find the inflation adjustment would be $4,307.  That is, over a 15 year time horizon the cost inflation for Normal Birth (complications of pregnancy and birth is a different category) has increased almost 3 times faster than inflation.  It is absolutely not the case that for each birth the insurance company keeps over half the money for themselves, so what gives?  Tonsillitis has gone from $486 to $1,658.  Headaches have gone from $650 to $1,124.  Why do I pick these?  The reality is that tonsillitis treatments have not become massively more effective since 2000, and neither have headache treatments.  If we look at cancer or cardiac it is possible to argue that treatments have become more expensive because new treatments are more effective.  So I focus on normal birth, tonsillitis, and headache.  We could also add in back pain and see the same general trend.

We can turn to Health United States (the 2016 book, for some reason the 2017 book lost many of its tables) and see some interesting trends.  Physicians assistants have increased wages from $29.17/hour to $47.73 per hour (inflation expectation: $40.39).  Registered nurses from $22.31 to $34.14 (inflation expectation: $30.89), so both of those are slightly over inflation.  The spend for Physician and Professional services (not hospitals or dentists or prescriptions – these are just doctor’s visits) has gone from $288B to $634B – more than doubled.  Let’s take it one step further, the number of active physicians has increased from 692k to 855k.  That means the professional services have been increased from $416k per physican to $741k per physician (inflation expectation: $575k per physician).  The number of RNs and Nursing Assistants (the largest groups of non-physicians in the medical space) have grown roughly in line with the number of physicians, and their pay per hour is just barely above inflation.  Nurse Anesthetists, Nurse Practitioners, and Nurse Midwives weren’t counted in 2000 so it is hard to compare, but the number if RNs is 10x these three groups combined.  So then, where do you think your extra money per physician visit is going?  Note that the cost of insurance is counted separately, so it is not to insurance.  It is not to billing either. It is not to nurses or assistants.  Who is left?

Let’s look at one other area.  Table 93 gives some nice national numbers for healthcare expense.  With a little bit of back calculation you can get the inflation adjusted growth in per-capita GDP and the inflation adjusted growth in per-capita NHE (national health expenditures).  Over a 15 year period the growth was $6504 in per-capita GDP growth, and $3086 in per-capita NHE growth.  That means for every extra dollar earned $0.47 went to someone in the healthcare industry.  The healthcare industry is literally half of all the growth in the country over the last decade and a half.  Yes, insurance costs have gone up faster than inflation, but then so has pharmaceuticals, hospital care, physician services, other professional services, dental services, residential and personal care, home health care, nursing care facilities, durable medical equipment, non-durable medical products, and structures and equipment.  Effectively the entire industry is working to raise the bill just a little bit faster than inflation every year.  Everyone in the industry is making off better than the average growth for the nation (except medical transcriptionists).  Anytime anyone in the medical industry talks about how times are tough, or they are underpaid as a group, or their area is not keeping up with the economy as a whole the fact is they are either misinformed or lying.  Perhaps some of these are true on a local level, but the industry as a whole is doing well.  I suspect for those in direct contact with patients are uninformed.  I suspect for those in hospital management and at the top of the insurance companies they are lying.

Well then, so what?  The fact is if we want to pay less for health care then we have to recognize the vast majority of our healthcare spend goes directly to labor costs.  We can continue to drive efficiency gains (we have fewer beds serving a larger population, and fewer hospital admissions), or lower the average salary of health care professionals.  The doctors on this site will jump to how “unfair” that would be.  However, these prices are largely set by fiat through government policy.  Effectively the argument is that the government price floor needs to be raised.  They would also suggest that expanding the scope of practice for high level nurses (nurse practitioners, midwives, and anesthetists) would lower the standard of care.  Here the idea is to use government power to restrict competition from alternatively credentialed professionals through licensing.  The basic idea then would be “sure, use the government to bring down prices overall, but the government policies that protect me should be retained.”

Let’s consider what a free-market solution would look like for normal birth (90% of births).  You have a high deductible insurance plan with a $5,000 deductible.  You look up the cost of care at ~10 Ob/Gyn and Midwives in your area.  You then meet with 2 and select one as your provider for $4,500.  Over the next few months you pay $500 per monthly visit with the balance due after delivery.  You receive no extra bills from the hospital, anesthetist, nurses, or peripheral services.  In fact, if you didn’t sign a cost estimate you don’t pay.  Right now somebody comes by and tests your baby’s hearing, and then you get a $300 bill.  That really ought to be a part of the “normal” delivery package.  You want the spa package with epidural and week long recovery?  That will be an extra $6,000.  Notice the actual bill ($4,500) is below the deductible – the insurance company is cut out completely.  The payment is bundled so the clinician has an incentive to keep costs low, and the patient knows the cost before hand.  Complications?  The reality is that almost all complications are either associated with high risk pregnancies, or are emergencies.  A nurse midwife will probably not accept complicated pregnancies, and so will refer the patient to an Ob/Gyn.  Emergencies don’t always have the patient’s doctor present, and would be treated as such (the hospital based specialist would be involved), and would fall under a different category of care.

“But let me pull out one special case from 15 years ago that would have resulted in…”  Special cases do not make good policy.  Build a rational policy that works for 95% of the population and then lets look at how to address the other 5%.