Aaron Krowne
February 4, 2006
(last revised Aug 21, 2006)
Over the past few years, I have been marvelling at my own personal interaction with the U.S. health care system. I have received nothing but basically routine, mundane care, and my natural sensibilities are that these services should have been pretty inexpensive. Yet, over this course of time, I would receive my health care statements in the mail (long after the fact of service), and my jaw would drop at the contents.
A few hundred dollars for just one component out of a suite of routine blood screening tests. Almost $200 for an hour of consultation (typically with an RNP, not an MD). Three thousand dollars for an MRI (and no, they didn't let me keep the machine). And these were typical. Yet, apparently, I didn't have to pay any of it.
Every time I saw this, my brain would descend into confusion. How could these services have been so expensive? Why wasn't this ever mentioned to me before being guided into them? How can it be I am not expected to pay for them? How could it be my insurance was so willing to take on such exorbitant costs? If not them, who was really paying for it? Isn't there someone, somewhere, who was receiving these statements as bills and screaming?!
Ah, but the answer is that no one is screaming, because we are all paying for it, thanks to a simple but effective sleight of hand. You see, one of the most reliable things about human beings is that if you put an outrageous burden on them in a way that is indirect, they will thank you and enthusiastically come back for more.
The situation in the U.S. genuinely is bad, no matter how you look at it. This claim goes beyond my own experience, though I suspect it is one that is pretty typical. The problem manifests in many ways: I have friends who get calls from their doctors near the end of fiscal terms urging them to come ``spend'' more of their unused health care coverage.
Anecdotes aside, compared even to the U.S. in the past, things are quite bad. In most economic sectors, we progress over time towards increased efficiency. Not in health care. In health care, we have gone from spending 7% of the GDP on health care in 1970 to a staggering 16% now. 5% of this is since the year 2000 alone. This is a 40% increase. 2004 was the first year since 2000 that the cost of health care had less than a double-digit rise. Premiums have risen by almost 60% since then [3].
Consider also (from the same article):
Further, the quality of service seems to actually be bad and falling--despite the massive cash inflow.
In November 2005, The Commonwealth fund released their report of the state of health care in six major developed nations: The U.S., The U.K., Canada, New Zealand, France, and Germany [7]. In essentially all metrics, the U.S. was the worst:
The margin is quite large, as well, with these uniformly state-based (single payor) health care systems absolutely trouncing the U.S. Germany makes the U.S. look like a backwater in health care.
Clearly, then, most of the money being poured into this vast apparatus is going to waste. How in the world could this be happening?
There is one unique feature of our system: the fact that it is employer-based [3].
In this system, as you likely know, employers are in charge of supplying health plans to their employees. While this isn't legislated,1 steep tax breaks are given for employer-side health care dollars, making it all but guaranteed.
Employers, generally not being in the health care/insurance business, contract this process out to large insurers and HMOs.
The arrangement works like this:
(You might object that employees actually pay for health care too, but as I discuss below, this is essentially a negligible factor).
What is clear from the above breakdown is that the underlying transaction is singular and takes place between just two parties (the employees and the health care provider), yet the real-world arrangement involves four entities and three separate transactions.
Astoundingly, there is no concept of ``paying'' in today's fundamental transaction of receiving health care. Paying has been abstracted away--first to the level of insurers, then above this, to the level of employers paying for insurers.
Health insurance by itself works just fine, so don't take me for a critic of this notion. The problem is that in employer-based health care, employers don't really pay the insurers in a free market manner, and this is what brings the entire system crashing down.
Here are the immediate effects that this strange arrangement creates:
It is easy to see how this results in costs spiraling out of control and a degrading quality of service. The final point loops back to the first, and so the whole sorry cycle of dysfunction continues (albeit at a higher base level of cost each pass through).
Despite the fact that the incentives are obviously lined up foolishly in this system, Americans recently gave an enthusiastic ``thumbs up'' to employer-based health care. In a September 2005 Commonwealth fund survey, it was found that two-thirds of adults surveyed said they would rather have their employer give them a fixed menu of health care options than be given the money to buy health care themselves [6]. Further, they were more concerned with choice over doctors than over health care plans.
But as explained above, these values feed directly into the problem--in fact they might as well be gasoline on a fire. How could consumers be asking for what is the precise opposite of their best interest?
At the root of this paradox is the indirection, subtlety, and deception of the current arrangement.
Recall that in employer-based health care, health care premiums are universally (with respect to the job market) taken ``off the top'' of salaries. This is done automatically and with little fanfare, but can be seen if one desires to actually break down one's pay stub. The largest contribution, which is the employer's, is separated out from the employee's contribution, which is miniscule.
On top of this, employees only have control over changing their part of the contribution, by switching to lower-premium plans. This results in even more attention being drawn to this slice of the pie, leaving the much larger employer contribution out of the conversation--and out of mind.
Thus the illusion is created that a reasonable amount is being spent on health care, and that the little guy can spend more or less on health care if he chooses. However, the ``employer'' portion of the premium can easily make up more than 90% of the cost (as in my case)! Indeed, the only reason to keep an employee contribution around is to create at least some moral hazard to prevent people from running in to the doctor for every sniffle.
In the face of this legerdemain, it is easy to see why many Americans might not realize what they are approving of.
Further, there is little any individual can do to change the matter for themselves right now, so the survey above essentially amounts to asking consumers if they want to continue having an important product they need. Presumably, the only other alternative is nothing (imagine if someone had asked you if you liked air conditioning, before central AC was introduced in this country. Of course, you would say ``yes,'' unless you happened to realize that central AC existed and that things could be better off with it).
And now, here comes the surprising part: if you are with me on the above, then the natural conclusion--which you must also agree to--is that Health Savings Accounts (HSAs) are a good thing. And in specific, Bush's plans for HSAs are the correct steps to take to solve U.S. health care.
A bit of background. An HSA is a tax-sheltered investment account, much like an IRA, but which has its contents earmarked for health care instead of retirement. At any age, you can withdraw the contents of the account for qualified medical expenses. Otherwise, the money grows, tax free (assuming of course the investments are fairly sane).
HSAs currently exist (since 2004),2 but they are only half implemented. You are free to contribute your own money into an HSA investment account (if you believe your health care needs are minimal), but you likely won't save much if anything on the premium for the High-Deductible Health Plan (HDHP) required to go along with the HSA. Thus, all the benefit derives from the investment nature of the account and the tax-deductibility of the contributions.
The missing half is the employer contribution. While you're merrily tossing your own money into your HSA and receiving minimal maintenance-level health care, your employer is still pocketing the money that it would have otherwise contributed to your health insurance. Thus, if you get an HSA, you pay once out of your salary (steeply and invisibly), then pay again to actually make deposits you can use.
What Bush wants to do now is to divert this employer portion into the HSA. This makes sense: the money is essentially yours in the first place, but your employer still gets to keep it if you get an HSA. The way things are now, you cannot opt out of the employment group-oriented (effectively, socialized) health care system, and you must continue to subsidize it even if you want to spend outside of it.3
What much of the surprisingly uniform and irrational criticism to HSAs (such as [5]) has grasped on is the current lack of incentives and savings for regular people to choose the plans--completely ignoring the fact that they are only half-implemented.
The real magic of a complete HSA system is that it begins to connect health care consumers with something they haven't seen in a while: prices.
Since consumers are (with HSAs) paying their routine health expenses out of an account with real dollars, they know how much is being spent, and need to know beforehand how much health care services will cost (yes, it turns out you can get this information from health care-givers, if you don't mind committing the social faux pas of asking).
Further, since they aren't going to an insurer or HMO and asking for permission to get a particular service from a particular medical professional, they can go anywhere to do so. Not only will they see prices, but they can actually force care-givers to compete for their health care dollars.
Thus, the old reliable free market feedback loop is re-established: buyers seek efficient provision of a service, and sellers are must compete and adjust to accommodate them. In this case we also have the additional factor that health care providers would know they can no longer rely on ``coercion'' from employers to uphold high costs.
Since ``rents''4 would vanish and the largesse would come to an end, costs would fall precipitously. Instead of just years where the rise in health care costs slowed, we would actually get absolute drops in prices. Based on my own experiences, I wouldn't be surprised if we saw a 30-50% drop in costs.
As the press has rightly observed, not much of this has happened yet. But this observation is generally extended in to the argument that a HSA/HDHP free market cannot work, often with a healthy heaping of distain for the notion of ``shopping'' for health care thrown in [9,2,1,8,4]. These kinds of arguments are wrong because they do not acknowledge that HSAs will bring about conditions that will lower the cost of health care universally.5
For now, the program has only been given little more than a year and only a tiny fraction of the market is using HSAs. The immediate savings in premiums with HDHPs is marginal at the moment, as would be expected. The critical point is the limbo-like state of HSAs: it is basically impossible for a cost-decrease effect to take place as long consumers' salaries are still confiscated in order to subsidize the old system. This money must be released for costs to significantly decrease, as then a moral hazard will be created for employer-based group health care.
With decreased health care costs, more people will be able to afford more health care at a lower cost (including the uninsured). And when costs decrease premiums will too, since premiums ultimately only exist to cover costs. When this happens, the the ranks of the uninsured will be able to shrink as well.
Despite these fairly clear benefits, you can expect health care providers and connected interests to aggressively fight to keep the employer-based system in place. They will invest a tremendous amount of money (your money, ironically) and effort in anti-HSA propaganda.
Fellow citizens, if you don't believe a word I've said so far, then you must at least intuitively know this: when someone you need to buy a service from is opposing a change, then that change is in your best interest.
The next step after employer contributions to HSAs would be to unbundle the plan from employers entirely: you would have the option of getting a third party HDHP, a third party HSA (perhaps even with a discount broker), and third party medical service (perhaps from completely ad hoc sources).
If the employer health care tax deduction were done away with, the picture would get even clearer: your salary would simply increase (by a significant amount), but you could shelter as much of this as you wanted (up to reasonable limits) by placing it in an HSA. Further, HMOs and PPOs would still be around as third party organizations (or likely, still offered by the employer) if you wanted to go that route. The difference would be that all of the premium deducted would come from the employee.
The problem with the U.S. health care system is its employer-based nature. It is the unique factor of the United States' system; correlated with our rapid declines in quality and costs spiraling out of control, as well as shameful performance on the global stage. The system achieves this dubious distinction by completely dismantling the fundamental operations of the free market, despite the fact that it is ``private.'' Indeed, any system where the buyer is distinct from the user and the cost of services is subverted is vulnerable to cost overruns.
We actually don't need a state health care system, as many are clamoring for.6 With relatively little modification, we can complete the nascent HSA system and make it attractive and powerful enough to establish a true free market once again. This solution is not exclusive or elitist: even those who do not opt for an HSA would benefit, as health care prices would universally fall due to competition.
The decline of the employer-based system is real. The U.S. health care system is now the laughingstock of the world, behind the largest European welfare-ocracies. American citizens: it is time to wise up and emerge from your comfortable torpor, and force the politicians to do what is in your own best interests.
If we don't, I'm not sure how much more of this we can afford.
This work is copyright 2006 Aaron Krowne, and is made available under the Creative Commons Attribution license.
Since I first penned this essay, a number of things have happened to me regarding health care that have vastly strengthened my conviction in the arguments made above. As I don't consider myself or my situation particular extraordinary, I think there are valuable lessons in these anecdotes for everyone:
I switched this year from a full-coverage plan to an insurance-based (HDHP plan) with health savings account (HSA), not only because I wanted to sock money away in the HSA, but because I had never really taken advantage of all the privileges of the full managed care-level coverage I had before. It seemed intuitively more efficient to me to go with the preventative and catastrophic coverage that a HDHP provided.
After I switched, I was not terribly surprised that my premium did not go down (to dis-incentivize buying too-little coverage, as I understand). But something else did shock me: the total employer-side contribution didn't go down at all either (still $4,000/yr)
The reader should realize something important: an employer contribution in the form of a benefit is economically the same as reducing that employee's salary by the value of the benefit (before tax). Thus, anything the employer is paying, the employee is really paying, in the form of a lower salary.
With this in mind I investigated further and I found that an ``insurance-only'' HDHP plan should, for the self-employed, cost 40-60% as much as I was paying, on the open market.
Thus, If it were not for the employer-based tax treatment, I could discontinue health care with my employer and buy it on the free market for much less, given that all I desire is preventative and catastrophic coverage. But because I cannot, I have effectively lost $2000 of compensation, which has apparently been pocketed by my insurer. This is a significant portion of my salary, so it really irks me.
This situation essentially proves that there is a gigantic regulation failure in health care, aside from any market failures there may be. Given the sheer magnitude of the cost (100% over-charging here), I can't imagine any natural market failures would be worse.
As I had already attempted to address this problem through the mainstream system, I thought I'd give chiropractic care and therapy a go (despite my skepticism). It helped that it would cost little more than my per-visit deductible in mainstream care to pay out-of-pocket for chiropractic. Thus it seemed I had little to lose.
Much to my amazement, the treatment has led to dramatic improvement. Today I feel like I have a totally new back, and my quality of life has been vastly increased.
Returning to the economics of the situation, the total billing for the employer-based mainstream care for this problem was about $5000 (in the year 2004). In the year 2006, I paid about $800 total for about two months of regular chiropractic sessions (with therapy)--on the free market, mind you.
Conservatively speaking, I'd estimate the chiropractic was at least 5 times more labor-intensive for the health care provider, more effective, and it had a lower total cost. Multiplying the relevant factors, I estimate that the free market solved my back issue at a level of 30 times the efficiency of the ``regulated market.''
The above analysis, of course, leaves out the fact that the employer-based care failed to solve the underlying health problem, despite the expenditure, and much of the labor component was not with the experts in the respective area (i.e. MDs).
This anecdote was not meant to suggest that mainstream medical care ``sucks,'' and alternative/holistic care is the way to go. In my case, chiropractic happened to be the effective method, and it just so happens to be considered ``non-mainstream'' and outside the managed health plan system. This is the key point. Because it was free market, it was much cheaper than would be expected of plan-based care.
Thus, where truly free market sectors of health care still exist, the economics of the situation is dramatically tilted in favor of the health care consumer. Common objections like information breakdown and market failure do not seem compelling to me from experience.
Once again I conclude we need to free the health care consumer from the current ``employer-locked'' system; either with HSAs or by making open-market plans purchaseable by individuals on an even tax basis.