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When deciding which of two products to buy most people will compare the price and the quality. Other factors may come into play like additional functionality or aesthetics or personal preference but nearly all of us will at least look at the overall quality of the product and the price when deciding whether or not to purchase said product. Price and quality are necessary feature to compare for a free market to operate. We need to be able to compare what we get from one provider (store, restaurant, service, etc) to what we can get from others then we have to decide which is preferable.

Unfortunately that is not the way medicine works. Most of us pick our medical providers based purely on our insurance. We have some choice but not a lot. Yeah you might have quite a number of primary care physicians (PCP) to chose from but if you need anything more you need a referral. Do you get any say in who you are referred to? Not really, your PCP writes it up and gives it to you (or mails it). Then you go to the person you are told to go to. Why? Because if you don’t it may not be covered and no matter how expensive the service may be, it will definitely be more expensive without insurance coverage. In fact most people have no idea of the true costs of any of their health care. Even if you do take the time to read the bills they send you it is hard to make any sense out of them. On top of that you might get 3 or 4 different bills for the same service from the same provider with different amounts on it. Then add in the fact that if you do much more than a Dr visit you may get bills from several different providers. When I went to the ER last I got one bill from the ER Dr, one bill from the ER, one bill from the radiologist and one bill from a consulting Dr. That is 4 bills for one visit. There was no way to know before going how many bills I might get let alone the price tag. When my wife had ankle surgery we paid the surgeon and the facility up front. But after we still got at least one or two additional bills from the surgeon, the surgery center and the anesthesiologist. By the end I had no clue what I was paying for or exactly why I was just sending them money because I owed it.

On top of that most of us have very little information to gauge the quality of health care. Yeah we can read reviews but that say more about bedside manner than health outcomes. Most people don’t know enough about medicine to judge whether are Dr is good or not. Rather reviews are mostly about whether the individual liked the Dr. We also have no clue which hospitals are the best and worst. We don’t know which ones have more or less complications after surgeries. So how do we pick providers? Well many go from word of mouth, others pick a convenient location, some have preferences about the type of Dr (DO vs MD or Psychologist vs Psychiatrist) but very few are picking based on objective measures of quality nor based on the cost of the provider.

This is one major problem with our health care system. There is no transparency for consumers of health care. Simply put we are flying blind when it comes to health care; we have no idea about costs or quality. That means that the consumers of health care have no ability to drive the market through their choices. They don’t have enough information to objectively compare providers so we can’t select one over another based on quality or costs. Without consumers driving the market that only leaves insurance companies and providers driving the market yet they both have a vested interest in maintaining high medical costs. Providers benefit directly from higher prices. Insurance companies also benefit from higher prices. Consider that if an insurance company earns x% off the total of all insurance premiums then if the cost of insurance doubles they can earn twice as much while maintaining the same % profit margin.

What we need is for consumers to have more influence in the market. First and foremost we need some transparency so that consumers are capable of making a rational decision about health care providers and costs. That would require an objective measure of quality for each provider. I touched on this in my post “Health Care, Incentives and Waste”. There are methods for looking at insurance companies, hospitals and providers to measure health outcomes. It involves measuring negative outcomes like ER visits, complications, hospital admissions, hospital readmissions and potentially unneeded ancillary services (like lab work, xrays, MRIs etc). Then the providers are weighed based on the population they service so that we can compare one provider to another and not penalize some for working with populations that may have overall worse health outcomes. When all is said and done providers can be scored based on their overall quality. That would give consumers an objective manner to compare the quality of different providers.

Next some form of cost measure needs to be available to consumers. I understand medicine is complicated and you don’t always know what is going to be needed until after you are finished. In some ways it is like getting your car fixed. You don’t always know what is really wrong until the whole thing is torn apart and at that point you just have to fix whatever needs done. But we could get some type of guideline for costs. A garage should be able to tell you how much it would cost for an alternator for a 2007 Mazda 5 assuming there are no other issues. Well we need something similar for health care. We need an idea how much in general a certain type of service is going to cost. Again there are tools already in existence for this which could help consumers in making decisions. Basically it involves grouping related diagnoses together so that they are mostly similar. Then examine the services and costs associated with that type of diagnosis. From there an average cost for that diagnosis related group (DRG) can be calculated and compared between providers.

Armed with a measure of cost and quality the consumers of health care could begin to make rational decisions about health care consumption. That would allow the consumers to begin to drive the market instead of insurance companies and providers driving the market. It could create some competition to drive down costs. It could also provide incentives to provider to improve the quality of their care and/or reduce the cost of care. And at the very least it could give consumers an idea of how much something may cost before receiving health care rather than finding out months later when the bills start arriving.

Though many still have only limited choices because of health insurance. The insurance company specifies who we can see and what services we can receive. We might be able to pick our primary care physician (PCP) but we may have no choice when it comes to referrals or out patient centers (like physical therapy or surgery centers). So even with information of cost and quality of health care consumers have limited influence over the market because consumers aren’t completely free to chose providers.

In order for consumers to have greater influence over the market we need more choices in regards to health insurance. Most of us get insurance through our work, we have no choice as to what insurance company we end up with. Rather our employer determines what insurance they will offer and we can take it or leave it. At best we get to chose between our insurance and our spouse’s insurance. This limits consumers choices and thus limits their influence over the market. To solve this problem health insurance should be disconnected from employment. Now some will say that health insurance is connect to employment because of market pressures. That may be true but there were other influences too. The two big ones are taxes and group rates. Employers and employees don’t pay taxes on health insurance premiums. This gives both incentive to connect insurance to employment. This one is easy to deal with. Offer employers the same tax break if they give you a health insurance stipend in your paycheck. It would be the same amount of money but just put directly into your paycheck, your employer can then treat those stipends the same has health insurance for the purposes of taxes. The individual would get their tax break when they files their income taxes because the stipend plus any other money spent on health care could be deducted from their income. That would allow consumers more choice in regards to their health care.

The other major reason for insurance being connected to employment is group rates. The larger a risk pool is the more stable the costs incurred are and thus projecting the costs into the future is more accurate. This is the cornerstone of actuarial math (insurance math) and it is the basis of much of what insurance companies of all types do. They need to have an idea how much things will cost and how much they get in premiums in order to operate. Smaller groups are less stable and thus riskier which then requires extra padding in the premium in order to account for the margin of error. That is why it is cheaper to get insurance through your employer than as an individual. Well that is all about to change. The health care exchanges are going to be operational soon. Those will utilize the government’s ability to create a very large risk pool while allowing the market to decide how to cover those individuals. Simply put it will allow large numbers of individuals to group together in order to receive group rates for insurance rather than individual rates. It also allows individual to pick and chose their insurance and level of coverage. Thus if employees were to receive a health care stipend they could pick the insurance they want from a health exchange and the price should be fairly comparable to the group rate they would have received through their employer.

Therefore if consumers have information about cost and quality combined with the ability to chose providers themselves then consumers could begin to influence the health care market. They could help to create greater competition and could help in reducing costs. This is yet another piece in the puzzle needed to get health care costs under control. Though it needs combined with other methods of controlling health care costs such as detailed in my previous posts “Health Care, Incentives and Waste” and “Medicare Overpayment of Medical Supplies and Equipment“.

PS- Much of this is inspired by a piece in the NY Times and one on NPR (the podcast covers this from about 5min to the end) about the difficulty of determining that cost of health care as a consumer. Also thank you ReasoningPolitics for the NY Times article, I have thought about this a number of times but your article inspired me to actually write it down. Finally the part about disconnecting health insurance from employment came from the Heritage Foundation which got me thinking about this problem in a different light.

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