Healthcare costs. It evokes that old saying, “everyone talks about the weather but no one ever does anything about it.” We as a nation have largely resigned ourselves to increasing health-care costs every year. Few if any of us actually stop to think about where the costs come from. When asked, politicians often invoke fraud and abuse, and other platitudes to explain the problem.

But what are we really paying for? Few of us really know, since very few of us directly pay for our health-care, instead relying on third party payors (government/insurers). A brief history lesson may be useful here. There was a time long-ago when any medical bills you incurred were yours alone. You went to the doctor, he gave you a bill for services rendered and you paid him.  End. What does this system accomplish? The same thing it accomplishes at the grocery or hardware store-downward pressure on prices.  Why? Because a doctor or hospital does no one, not even itself, any favors by pricing things out of reach of their customers.  When someone couldn’t pay for needed services, they usually worked it out in trade (chickens or maybe doing some labor for the physician) or family chipping in, and quite often, the doctor would reduce/eliminate his fee for people he knew couldn’t pay. Hospitals worked the same way, with payment plans and community resources to make up the difference.

Now enter a little speed bump in society that is responsible for a large number of things we currently deal with today: World War II.  With workers in short supply (most of them were overseas shooting guns at the time), and demand for manufacturing products historically high (those guys needed guns to shoot after all), manufacturers needed to attract workers.  Normally that would be done by increased wages, but wait…the government froze wages and prices, so even though it would normally be inflationary, the market wasn’t allowed to function freely.  What to do? You still need to attract workers, so enter (wait for it…) employer benefits (ie health insurance) as a lure for workers.  Most people didn’t have (or need) health insurance, but it was “free” so why not? Those early plans paid a percentage of the total bill, and you paid the rest, but with a catch…you paid the bill first, and the insurer paid you back. (Incidentally, WWII was also responsible for tax withholding, but that’s another story).

Now fast forward a few years.  It’s Lyndon Johnson’s Great Society and the “war on poverty.”  Society had a duty to take care of its poor and elderly (and Veterans of course) so enter Medicare, Medicaid, and the VA.  The VA is another world entirely and well beyond the scope of this particular rant, but the same mentality is involved…the government is “here to help.” Medicare and Medicaid were just augmentations to Social Security, and relied (as did SS) on current workers to pay the costs of retirees/poor. In other word they are wealth transfers (welfare) by way of a Ponzi scheme.  These programs were initially set up the same as private insurance, in that they paid a percentage of the total bill, after you paid for all of it yourself.  Fine so far, but here’s the rub…this segment of the population often didn’t have a lot of spare cash lying around.  Answer? Hospitals and doctors began deferring the bill until the medicare/insurance check came, and let the patient pay later.  Sounds great…win-win, right? Ummm, well hold on.  What if grandma doesn’t have the other 20%? She’s on a “fixed income” you know.  Well, hospitals and physicians responded by simply increasing the bill, and telling the patient, “Oh, don’t worry, we’ll just take what your insurance pays.

Uh oh…see where this is going?  Now the patient doesn’t have to pay anything out of pocket, and now, to them at least, it’s “free.”  Also, there was no pressure to keep fees reasonable, and since the patient had no “skin in the game, ” they rarely questioned how much anything would cost.  All of a sudden, hospitals could afford marble halls, and doctors were driving fancy cars, usually parked at the country club on Wednesdays. But then another trend started.  Patients would get the insurance check, and cash it, but not pay the hospital/doctor bill.  They bought a new TV with the money instead.  To combat this, the tradition of having the insurer/government pay directly was begun, cutting the patient out of the loop altogether.  Well now, as far as the patient is concerned, health care really is “free.”  The environment produced advances, innovation, and yes…abuse. The government stepped in first with Medicare/Medicaid and changed from a percentage of the bill, to a percentage of UCR fee-usual, customary, and reasonable.  This was then reduced to “allowable fees” and the government effectively then set prices unilaterally.

Still, private insurance was profitable enough for hospitals and physicians, so they kept accepting the government payout as basically charity care and their need to be “socially responsible” was met thusly. Somewhere in there, however, the private insurers realized that 95% of physician’s and hospitals accepted medicare rates, so why should they pay more? Thus began the slow ratcheting down of “reimbursements” to healthcare facilities/physicians by way of HMO’s and other entities, which leads us to where we are today…total hegemonic domination of a market sector by government and it’s minions in the insurance industry (after all…it’s the insurers who “administer” medicare on the government’s behalf…for a fee). It has now become a game of denials and appeals, whereby physicians and hospitals basically beg for money for what they do, all the while spending money  trying to comply with Byzantine rules.  Hospitals now have no idea how much they actually spend to take care of patients, much less how much and whether they’ll be paid in return.  Physicians are in the same boat.  If an emergency comes in they cannot turn anyone away, but never know if they’ll be paid for taking care that 3am stabbing victim (hint: usually not).

This is the ONLY industry in this country which has absolutely no method to pass on costs to the consumer.  Government mandates increase forced expenditures (EHR, staffing requirements to comply with regulations, etc), so profit margins are down, and often negative.  Those fancy cars have been replaced by Chevy and Toyota in the doctor’s lot, and they don’t get home til 7 or 8, after which time they have to spend 1-3 hours on paperwork they haven’t had time to do. Hospitals are closing because they can no longer meet financial obligations.  I recall vividly several years ago I got two separate letters from an insurer.  One was addressed to me as a policy holder, saying that as much as they regretted it, they were going to have to increase my premium next year because of increased payments to hospitals and physicians.  The other was addressed to me as a physician, saying that unfortunately because of decreased premium revenue, they were going to decrease the amount they could pay for my services.  The result?  In 1982 the payment for cleaning out a carotid artery (the one that goes to the brain) to prevent a stroke was $3500.00 to the surgeon. Now it’s $780.00, which, after factoring in inflation represents a 90% reduction in payment.  On the other hand, over the last 5 years alone, the major insurer’s stock prices have increased over 200%.

So, we have a situation where insurers control everything, and are accountable to no one, costs are spiraling out of control, but the only ones making a profit are.. the insurers.  Meanwhile, for a bit of contrast, look at Lasik surgery and plastic/cosmetic surgery. Neither of those are covered by insurance/medicare, but over the last decade the costs have consistently come DOWN (after inflation), and the process has become more efficient, not less.

Why does it work that way? Many reasons, but the short version is simply that we no longer treat insurance as insurance.  True insurance is where an actuary can predict with some certainty that some covered event will happen a certain number of times in a given year within their covered population.  They then base their premium on that amount to cover anticipated losses plus a profit.  When you have a car accident, you are faced with a choice… file a claim, pay out of pocket, or don’t get your car fixed.  What happens if you file a claim? Your premium goes up, and you factor that reality into your decision as to how to handle the repair.  Now, what if, instead of paying for your gas, oil, and tires out of pocket, you filed an insurance claim for every minor repair? You wouldn’t be able to afford your car insurance either. That’s what we’ve collectively done.  We have changed from “insurance” to a prepayment plan. Which is inherently more expensive, and in the process we’ve ceded control over our health to entities which have motives that are NOT in our best interest.  The ultimate answer is simply this: pay for it ourselves.  Buy your own policy (instead of your employer), file claims yourself(instead of the doctor/hospital), and pay cash for your care.  Costs will come down QUICKLY if we all do that, as will the stock prices of the insurers.