Economics

Not Out of Pocket, Out of Mind

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The chart above, created by Reason columnist and Mercatus Center economist Veronique de Rugy, helps explain one reason why health care costs have gone up so much over the past decades: People are paying less out-of-pocket for most medical expenses. Hence, an illusion that care is cheaper than it seems, which leads to more purchases of same. Writing in The American, de Rugy explains:

Much of the rationale behind the current reform of the healthcare system is about controlling inflation in healthcare costs. However, based on the trend presented above, a better alternative to the semi-nationalization that the president has in mind would be to increase individual responsibility for medical decisions and costs. When people aren't exposed to the true cost of their care—even if they pay for it in foregone wages and higher taxes—they consume more.

More here.

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  1. Excellent post by The Jacket. The consumer is not the customer.

  2. I think we have a chicken-and-egg problem. Are healthcare costs rising because fewer people are paying out of pocket, or are fewer people paying out of pocket because healthcare costs are rising? The latter is just as likely, since new treatments tend to be both covered and extremely expensive.

    Hence, an illusion that care is cheaper than it seems, which leads to more purchases of same.

    Somehow, I doubt people are getting elective chemotherapy.

    1. But if a doctor wants to do 4 different tests (just to make sure), and you’re paying out of pocket, you’re far more likely to say “no” than if you’re paying a flat fee for the visit and the insurance company is picking up the rest.

    2. Somehow, I doubt people are getting elective chemotherapy.

      Maybe not for cancer. But restless leg syndrome? Yup.

      1. OH MY GOD I GOT THE CRAZY LEGS!

    3. Somehow, I doubt people are getting elective chemotherapy.

      Chemo drugs, while individually expensive, are not the majority of pharmaceutical purchases. My previous insurance provider had a ten-dollar copay for flonase, so I used a lot more than when I had to pay sixty dollars for it out of pocket. It’s common sense – my insurance costs were the same whether I got the drug or not, so I might as well take advantage of it.

      Responding to incentives, tragedy of the commons, etc, etc.

      1. Actually, a much better analogy would be Viagra, which costs roughly $15 per pill and is covered by few insurance plans.

        If most insurance plans covered Viagra and a month’s supply cost no more than the typical $10 co-payment, then I can guarantee there would be quite a jump in Viagra consumption.

  3. I don’t see how adding millions to the pool of the insured is going to lower costs. Are emergency room visits by uninsured patients really that significant a portion of healthcare costs? Won’t the newly insured use even more medical services?

    1. That’s how it worked in Massachusetts.

    2. All uncompensated health care, of which emergency room visits by the uninsured are a part, amount to $40 billion of the $2 trillion dollars spent on health care annually — a paltry 2%.

      Trying to save money there is truly foolish. It is simply an excuse to mollify the ignorant.

  4. “Nobody should ever spend a dime of their own money on health care.”

    I’m pretty sure I’ve got that right.

  5. Are emergency room visits by uninsured patients really that significant a portion of healthcare costs?

    This is really starting to bug me. If this were a serious issue, hospitals would organize themselves in such a way as to minimize, if not eliminate, this burden on their operations. The fact that they do not indicates to me an incentive to refrain from doing so (like being able to pass on these costs at a greatly inflated rate).

    1. Exactly.

      The most obvious proof that emergency room visits are not a burden to hospitals is the fact that there isn’t a door next to the ER that says “Urgent Care” and that charges a nominal $70 a visit.

      Passing expenses is clearly what is going on here. The complaint is that the uninsured use expensive ERs to treat coughs. Well, frankly, people with coughs go to the back of the triage queue, are seen by the cheapest residents and no specialists, use none of the Level 1, 2, 3 or whatever trauma equipment that actually makes ERs expensive, and in every other way are the most affordable people seen at the ER that day. Nonetheless, they are charged an overhead fee that covers the average patient. I.e., they use nothing that makes an ER an ER, but the costs of an ER as an ER are applied to them.

      Then government grants cover it because they are uninsured. Of the $40 billion spent annually in “uncompensated” care, $36 billion ends up compensated by the government.

      But as we see when Congress actually tries to actually cover these people with actual insurance, the way it is done now is way, way cheaper!

  6. Why care about prices when you don’t pay them?

    If Democrats cared about poor people they would be going after doctors and the AMA, but Democrats like keeping poor people poor.

    1. Because rich people vote Republican.

      1. Yes, we do.

    2. Really is that what’s going on? People don’t care about prices since they don’t pay them. Really, is the dead fetus doing the typing today?

  7. What exactly is ‘out of pocket’. Are we talking co-pays, meds and deductibles as out of pocket? Or are you including the cost of a medical plan to those of us who pay it ‘out of pocket’ (in full or in part)?

    Further, as to consumers not paying, consider that if the “private” refers to company sponsored health plans the consumer is paying, indirectly, by lower salary. And that is a trade off which many people seem willing to make when looking for a job (“oh they have a great medical plan!” or ‘they dont cover any medical’).

    I don’t disagree that there is some merit to her premise but I do think there is more to it.

  8. When people aren’t exposed to the true cost of their care ? even if they pay for it in foregone wages and higher taxes ? they consume more.

    Critics would say that it does not make sense people would be “consuming more” of a service that’s provided only after unforeseen events, in this case, an illness.

    But the way one can know if people are overusing a system is to look at their choices when it comes to practitioners. If your out of pocket co-pay is (let’s say) $30.00 regardless of the doctor, then the obvious cost for seeing ANY doctor becomes hidden, even when you have higher end doctors vs lower end doctors. For instance, if you only need to see a doctor for the sniffles, under a free-market scenario, you would simply see the doctor at the local El Cheapo clinic. Instead, if your problem is more serious, you would shop around for an expert.

    Instead, if your insurance HIDES those costs from you, it would make sense a person would NOT BOTHER to shop around and simply find the doctor nearest that person for the sniffles AND any other ailment, even a serious one. And what is logical for one, would be logical for MOST: Soon enough, you have a doctor’s office overflowing with patients because the doctor is conveniently placed in the community, not necessarily because he is the cheapest and not necessarily because he’s the best.

    What you have then is a MISALLOCATION due to PRICE DISTORTION, thanks to the insane system Americans have allowed just to avoid having a free market in medicine.

    By the way, the American Establishment has tried and fought to socialize medicine since the early 1900s. I wonder if the AMA has anything to do with this potentially lucrative effort . . . nah. Taht’s crazy thinking!

  9. The opposition to Obamacare now consists of unions, doctors, small businesses, the elderly, young people who recognize they’ll be footing much of the bill, Tea Party activists, abortion opponents, a healthy chunk of Blue Dogs, those who don’t want to pay for the health care of illegal immigrants, those who are satisfied with their insurance as is, those who fear losing health-care treatment options, those doubtful of big government, those who recognize the present system already has a shortage of general-care practitioners, and those who think the whole thing has been secured by a series of dirty deals to help out Louisiana and Nebraska.

    ther than that, it’s popular.

  10. I still don’t see how they’ve solved anything. If Obama really wanted to pass something that would help, he would have cut employer tax breaks for health insurance, added tort reform, proposed a simplified version and been honest about the limits (cancer treatment above a certain cost is not covered) and reduced the complexity of the whole system. Of course we know that would have pissed off democrats spoon feeders as much as republican immigrant bashers, so it never would have passed. Therefore we compromise at the worst possible combination of handouts funded by “the public” and nothing gets accomplished. Awesome.

  11. This doesn’t address the problem that most medical expenditures are for extemely expensive treatments and tests for serious life-threatening conditions. Most people don’t have the hundreds of thousands of dollars to spend on that, there is a pretty low risk that they’ll actually get one of these conditions, but if they do get one they absolutely want it to be paid for. Thus, insurance is a logical response. Whether it’s private or government provided, high-deductible or first-dollar, a third-party is going to be paying most medical bills. Any solution has to address how to make the third-party payment system better- saying that consumers should pay for their $500,000 cancer treatment on their own is pretty idiotic.

    1. How about this heartlessness adam. If you get cancer and you don’t have insurance then you don’t get the treatment. However, I would consider providing the pain pills for free.

      1. You’re missing the point- even in a completely free market system, health insurance would exist, and most people of some means would buy it. Therefore, most bills would still be paid by a third-party, not the patient. We would still have the problem that the author is complaining about- consumers insulated from cost. The author isn’t proposing a solution, unless she’s suggesting banning private health insurance so that consumers are forced to pay out-of-pocket.

        1. There are tons of health services that are not for catastrophic conditions that higher co-pays could help ration. Insurance will always exist in some form but other systems, like HMAs, also work. Congress attacked HMAs with a vengence because they were doing a pretty good job of controlling costs.

          1. No doubt that for routine medical procedures, consumers paying directly could drive down costs and we could get savings and that should be part of any reform. But the potential savings aren’t particularly large and we shouldn’t delude ourselves into thinking that it’s some kind of silver bullet.

    2. This doesn’t address the problem that most medical expenditures are for extemely expensive treatments and tests for serious life-threatening conditions.

      Cite?

      I am quite skeptical of this factoid given that high-deductible catastrophic insurance plus the deductible usually costs less than comprehensive insurance.

        1. That URL don’t work.

          Is what you are trying to offer a PDF/CDF, or does it just give the median treatment expense?

          1. Sorry try this.
            http://www.ahrq.gov/research/r…..Background

            It’s a HHS report on the distribution of health care expenditures.

            1. The best bit of data there is a figure telling us that in 2002 the top 5% of health care consumers cost 49% of the total for the year. Let’s call it “most”.

              It also tells us that that 95th percentile consumer spent $11,500. If you think that qualifies as “extremely expensive”, I wonder what you think is cheap. That is less than a Chevrolet comprehensive insurance plan costs!

              At $35,500 the 99% percentile health consumer that year is getting into the “expensive” range, and those spending more than that cost 22% of the health care dollars in 2002.

              Care to amend your statement to read…

              A fifth of medical expenditures are for expensive treatments and tests for serious life-threatening conditions

              …?

              I’ll stipulate to that.

              1. Ok, I’ll amend my statement. But I’d point out that the $11,500 is exclusive of insurance premiums, it’s data from 2002 and probably has increased since then, and that’s a pretty significant amount of money for the average middle class family to pay unexpectedly in any one year. Most high-deductible plans have deductibles set at $2000 or so, which suggests to me that this is what most consumers see as the threshold between affordable routine expenses and unaffordable unexpected expenses.

                1. Yes, that is exclusive of insurance — which makes the notion of subsidizing 65-80% of the population to have comprehensive insurance that costs that much rather insane.

                  Well, it’s not insane for the stakeholders… The employer gets to give the employee something worth $14,000 but which, as wages, would be only $7000 to the employee.

                  And I guess it’s not insane for Congress, which gets to look like it’s supplying cheap health care to the middle class while it keeps union votes and health insurance lobbyists on board.

                  It’s only insane for the economy in toto and health care expenditures in particular. Lovely.

              2. Another way to phrase this would be, if everyone in the US in 2002 had a extremely high deductible policy, with a deductible of $11,500 (insured pays 100% below deductible, insurer pays 100% of expenses above $11,500), 49% of expenses would still be paid by the insurance companies.

                1. And 95% of people would be making their decisions of what health care to buy or not to buy completely out of their own pockets.

      1. “I am quite skeptical of this factoid given that high-deductible catastrophic insurance plus the deductible usually costs less than comprehensive insurance.”

        I suspect that this is mostly the result of adverse selection. I.e. high deductible plans are attractive to less risky people to the risk pool is better. Comprehensive insurance has the opposite incentives.

        1. I suspect this is mostly the result of people spending money out of their pocket with every expense rather than not spending money out of their pocket with every expense.

  12. Well that’s a pretty little graph. What it doesn’t offer is anything like the causal equation that de Rugy extrapolates.

    The idea that moral hazard is a significant explanation of raising healthcare costs in this country is inane. Surely other countries with more government involvement in healthcare have exploded healthcare costs due to the runaway moral hazard… oh wait, they pay half what we do.

    People getting care they don’t need is part of the problem (so it would be nice if opponents of reform would quit bitching about rationing… pick a rationale and stick with it). The people buying extra healthcare are the people who can afford it because they are well insured or because they are rich. How does this address the uninsured? Guess they’re being pretty rational consumers by not spending what they can’t afford, then dying.

    1. Re: Tony,

      The idea that moral hazard is a significant explanation of raising healthcare costs in this country is inane. Surely other countries with more government involvement in healthcare have exploded healthcare costs due to the runaway moral hazard… oh wait, they pay half what we do.

      The true cost of something scarce will always make itself manifest. You may think those countries with government run healthcare have lower monetary expenditures in healthcare than Americans, but waiting in line and having healthcare rationed IS a manifestation of a cost.

      Back in the 70s, during the so-called oil embargo, the Nixon administration imposed price caps on gasoline. Obviously, people would THEORETICALLY spend less money for their gas than with a market price. However, the TRUE COST of gasoline manifested itself via shortages and long lines at the fuel pump. Same thing in the UK and Canada with their government-managed healthcare system.

      1. Even if people actually did stand in long lines and had their healthcare more rationed in those countries, they still get better outcomes at half the cost. Nothing theoretical about it. These things are all measured, even though I know you don’t accept data when it doesn’t confirm what you want to believe.

        1. Please cite this data.

          And please make it something more interesting than infant mortality, which correlates far too much with maternal age, or life expectancy, which correlates far too much with accidental and violent death.

          1. http://www.who.int

            No country with better stats has chosen a free market approach to healthcare.

            You just can’t have your libertarian cake and eat it too. Want a free market in healthcare? Then you have to be okay with more people dying, since your access to healthcare would be dependent on your wealth alone. Just man up and admit that devotion to the market god is more important than fewer people dying, and stop trying to pretend there’s a magical libertarian solution out there somewhere.

            1. I asked for these stats you cite, not a website.

              I want a free market in health care. I also do not terribly mind the poor and the pre-existing conditioned receiving vouchers or outright care at government expense.

              But I don’t want the market to be wrecked in order to delude people into thinking they are not getting welfare.

              Better than three-quarters of the population would get health care just fine in a free market. Why ruin the market’s capabilities to provide the best services at the lowest cost by warping it in the name of affordable coverage?

              1. Because the market does not have this capability with regard to healthcare. Even if you accept the premise that supply and demand is all that’s needed to provide optimal outcomes for things people buy from rational choice, healthcare is not something governed by those normal rules. It’s often both very expensive and very necessary. A rational calculation of cost can’t include your own life.

                1. Re: Tony,

                  Because the market does not have this capability with regard to healthcare.

                  Oh? You mean the myriads of voluntary transactions done by millions every day, that lead to higher food production, better standard of living, access to goods not even kings dreamt about, is incapable of placing a doctor with a patient?

                  Even if you accept the premise that supply and demand is all that’s needed to provide optimal outcomes for things people buy from rational choice, healthcare is not something governed by those normal rules.

                  You’re begging the question: Healthcare cannot be governed by the market because . . . it’s different?

                  Health care is a service like any other. A person who received instruction and experience offers his services to people. That person has the same motivations as anybody else: to profit fro his knowledge (note that profiting does not necessarily mean monetary remuneration). Even Jesus cured the sick to recruit more believers. So why wouldn’t health care be a good like any other?

                  It’s often both very expensive and very necessary.

                  You’re thinking of current costs, which is a mistake. Plumbing services are also expensive in the US and necessary, especially when there is a leak and your house is flooding – does this make Plumbing something the market should NOT handle?

                  A rational calculation of cost can’t include your own life.

                  Why not?

                  1. So what if you need chemo therapy and are poor? Is the magical market gonna somehow make cancer treatment cheap? You can’t really expect me to believe that all medical costs will become as affordable as, say, food, if only we let the magical hand do its job.

                    Health care is a service like any other.

                    Only other services that are necessary to life. How many can you name? How many of those aren’t already monopolized by government?

                    Why not?

                    Because nobody is going to say, “Well I’m a worthless piece of shit, and that MRI costs a thousand bucks. I’ll go ahead and die, it’s the rational thing to do.”

                    Among government’s responsibilities is to protect the lives of its citizens. An estimated 40,000 people die per year because they lack health insurance. That’s many, many more than armed invasion, which we spend trillions in tax dollars to ostensibly prevent.

                    Your free market healthcare system means your life is just as valuable as your ability to pay for healthcare. If you can’t afford a treatment you need, you should die. All you have to do is admit that, I can call you an immoral psychopath, and we can call it a day. Just stop pretending that you can avoid that reality.

                    1. Re: Tony,

                      So what if you need chemo therapy and are poor? Is the magical market gonna somehow make cancer treatment cheap?

                      Why not? What makes you think it would not? Again, you’re thinking in terms of current, US prices. The US is not the one with the free market in health care, Tony.

                      You can’t really expect me to believe that all medical costs will become as affordable as, say, food, if only we let the magical hand do its job.

                      You don’t have to believe it. You can see it for yourself, just by going south of the border. You can see a doctor for the price of a meal. I will not say you can receive care for your cancer for the price of a meal, but it will be much cheaper than in the US.

                      Only other services that are necessary to life. How many can you name? How many of those aren’t already monopolized by government?

                      Food production.

                      Because nobody is going to say, “Well I’m a worthless piece of shit, and that MRI costs a thousand bucks. I’ll go ahead and die, it’s the rational thing to do.”

                      Again, you’re thinking of current US prices. The cost of an MRI is not because of the machine but because of the LICENSED technician. Again, go to Mexico – an MRI costs $150.00

                      Among government’s responsibilities is to protect the lives of its citizens.

                      That’s not the responsibility of government, only to protect the rights of the citizens by enforcing contracts, and to protect the borders.

                      An estimated 40,000 people die per year because they lack health insurance.

                      Sure, their death certificates read: Cause of Death, Lack of Health Insurance.

                      Don’t throw those numbers around when you do not know how they are obtained, Tony.

                      Your free market healthcare system means your life is just as valuable as your ability to pay for healthcare.

                      That’s another red herring, Tony. Even poor people receive aid from charity.

                      If you can’t afford a treatment you need, you should die. All you have to do is admit that, I can call you an immoral psychopath, and we can call it a day.

                      I cannot decide for others, Tony, and neither can you. I can only decide for me, and if I cannot afford a treatment for an illness I have, then I am not anybody to bankrupt my family nor am I a spineless thief (i.e. a socialist) to force others to pay for MY treatment.

                2. It’s often both very expensive and very necessary.

                  If by “often” you mean “something less than 1 out of 100 per person per year”, I suppose you are right.

                  There’s a service that handles scenarios like that. What’s it called again? Oh, right… Insurance.

                  Why shackle 99% of the market based on something that happens less than 1% of the time?

            2. Re: Tony,

              You just can’t have your libertarian cake and eat it too. Want a free market in healthcare? Then you have to be okay with more people dying

              This is a red herring, Tony – everybody dies.

              [S]ince your access to healthcare would be dependent on your wealth alone.

              Not on that alone – you are thinking in terms of CURRENT costs. Under a free market, costs may not be as high as the ones I have experienced in Mexico, where I can see a specialist for $50.00, and medicine can be bought without a prescription.

              Just man up and admit that devotion to the market god is more important than fewer people dying, and stop trying to pretend there’s a magical libertarian solution out there somewhere.

              I won’t answer such slander. Learn how to write, if you want people to respect you.

              1. “Everybody dies.”

                Oh come on. Fine. More people would die sooner. Happy?

                I don’t have to weigh only current costs to make the point that by definition under a free market system your access to healthcare would be dependent on how much money you have. That’s the precise reason advanced countries don’t have free market systems. It’s immoral.

                1. Re: Tony,

                  “Everybody dies.”

                  Oh come on. Fine. More people would die sooner. Happy?

                  Another red herring – sooner than what? You cannot presume to know the future.

                  I don’t have to weigh only current costs to make the point that by definition under a free market system your access to healthcare would be dependent on how much money you have.

                  But this is a red herring – all economic goods derive their obtainability on how much you have to exchange, and if the argument in favor of imposing a government mandated system is to make it more affordable, then it is implied that PRICE would still matter, your capacity to pay would still matter. So why would the PRICE itself be an argument against the free market?

                  That’s the precise reason advanced countries don’t have free market systems. It’s immoral.

                  That’s a non sequitur – you might as well have said other countries have a government run system because it’s prettier.

                  By the way, how moral can it be to force people to pay for someone else’s health care?

                  1. How moral is it to force people to pay for someone else’s child’s education?

                    1. On balance, morally laudable. Thanks for asking.

                    2. Tony,

                      You just made my point that socialists are nothing more than thieves with no character. At least real thieves risk their own lives. Spineless thieves (socialists) cowardly beseech governments to do the thievery for them.

        2. Re: Tony,

          Even if people actually did stand in long lines and had their healthcare more rationed in those countries, they still get better outcomes at half the cost.

          Well, Americans back in the 70’s got their gasoline – eventually. I cannot fathom why waiting in line compared to NOT waiting in line is to be taken as having “better results”. Unless the doctors in more socialistic countries are cleverer than the American doctors, curing the sniffles should be the same end RESULT – what counts is how QUICKLY it was done.

          You must think that people’s TIME does not cost.

          Nothing theoretical about it. These things are all measured, even though I know you don’t accept data when it doesn’t confirm what you want to believe.

          If you’re again talking about the WHO’s statistics on people’s life expectancy, the numbers can only be taken as suspect, because they take the US (a territory three times as big as all of Western Europe) as a whole when comparing individual countries, which have more homogeneous populations. Not even comparing Mexico with European countries makes sense, since the northern states are as big as some of the European countries and have a comparable life expectancy, whereas the southern most states have a lower life expectancy. The WHO tends to average them all – it will NEVER be an apples to apples comparison.

    2. “so it would be nice if opponents of reform would quit bitching about rationing… pick a rationale and stick with it”

      Once again, Tony, you prove that despite the amount of time you spend trolling this site, you really don’t pay a lick of attention.

      If you had, what you would have heard over and over and over again was that rationing is inevitable when you have a product with limited supply and essentially unlimited demand. As libertarians, we prefer price rationing, where the price set in a free market serves to limit demand.

      You, as a idiot liberal, prefer government rationing, where a pointy-headed bureaucrat decides based on statistical studies that saving $x million dollars in exchange for y number of deaths is an acceptable tradeoff, and so you can’t have that treatment you need.

      1. I know you prefer market-based rationing. But it’s limiting demand on something whose demand is not based on what people want to pay but what people need to pay. The marketplace makes a calculation on acceptable deaths too, and it is much less favorable to human life.

        1. Re: Tony,

          I know you prefer market-based rationing. But it’s limiting demand on something whose demand is not based on what people want to pay but what people need to pay.

          Economically, there is no difference, Tony. You are however relying on emotional arguments. A price is an indicator of scarcity. If you have one MRI machine and 10 clients, and you cannot use the machine on more than one client at a time, the price for one MRI for one person will reflect this economic (and PHYSICAL) fact. The Price IS a rationing metric, it tells you just how much of something is available.

          If there are suddenly 20 clients for the same MRI machine, the subsequent price WILL reflect this – because the machine still handles only ONE client at a time. The higher price sends signals to other suppliers to get into the business of offering MRI services and invest in machines. So maybe ONCE the price of an MRI may be double than at other times of lower demand, but once other suppliers make their offer, the price comes down.

          Instead, a government-run system will not operate under a price system; the true demand for services may not be known, or more likely, may not be met, because investment will not depend on entrepreneurs but on budgets.

          The price system actually serves to SAVE lives because more machines or more services allocate through entrepreneurship to the places of higher demand.

          The marketplace makes a calculation on acceptable deaths too, and it is much less favorable to human life.

          Except that the market does nothing – the market being simply the name given to the network formed by everybody that freely trades. The decision is thus not centralized, but totally decentralized. Since the actors would be the same people that get sick, then the decisions are made directly by them AND their suppliers. Governments centralize the supply and cannot do more than guess on the demand – hence the long queues.

        2. The marketplace makes a calculation on acceptable deaths too, and it is much less favorable to human life.

          The “market” makes no such calculation. The individual consumers of the limited resource make each choice for themselves about the marginal utility of the given resource, as Old Mexican already said.

          That is why the market system in healthcare is more moral and humane, because the people directly affected by the decision are the ones making it.

          Or in Palin-shorthand, DEATH PANELS!

  13. Anyone experience anything about the easy google profit kit? I discovered a lot of advertisements around it. I also found a site that is supposedly a review of the program, but the whole thing seems kind of sketchy to me. However, the cost is low so I’m going to go ahead and try it out, unless any of you have experience with this system first hand

    http://www.onlineuniversalwork.com

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