3rd Party Payer: How Government Made Healthcare Astronomically Expensive

Uploaded by latewire on 11.11.2012

(Pic: O'Rourke quote) In the previous video we talked about how the United States doesn't
have a free market in Healthcare, and alluded to why the prices are so high. I spoke mostly
about Medicare and Medicaid and mentioned that over half of all healthcare dollars are
actually managed and spent directly by the government. (Pic: Tea party) When people compare
our system to a "socialized" system, what they are forgetting is that our system is
greater than 50% socialized already.
(Graph: Healthcare Vs GDP) Here is a graph of healthcare expenditures as a percentage
of GDP. In 2011, >18% of the total productivity of the United States was devoted to healthcare.
In pure dollar terms, the numbers are even more dramatic, even adjusted for inflation.
The United States government alone spends more per capita than any other government
in the world on healthcare, and that only covers medicare and medicaid patients. (Graph:
Per Capita Vs Others) With public and private insurers combined, we spend more per-capita
than any other country, and our per-capita spending is 50% higher than the runner-up.
We now have an idea of the scope.
(Graph: Obesity Rate)There are many other contributing factors for the rise in medical
care. People are demanding more care due to poor lifestyle choice. The obesity rate is
now at 40%. In addition, people have more disposable income than they used to have,
and the quality of healthcare as well as availability is better. It makes sense that they would
want to spend it on something to help their quality of life and to attempt to live longer.
(Graph: Tort Costs) In addition, the cost of dealing with medical malpractice have risen
dramatically. Though these costs are still only a small part, there's also the matter
of increased spending on tests due to doctors being more and more worried about getting
sued, which is extremely difficult to quantify. (Graph: Trial Lawyer Donations) Making things
worse, trial lawyers donate more money to congressional elections than the entire healthcare
industry, making reform in this area impossible.
(Pic: Colonoscopy) People are also demanding more and more preventative medicine, which
costs far more than it saves. In addition, the demand for elective procedures is rising
as they become safer and doctors start recommending them more. (Pic: Cialis ad) That's not to
mention the demand for expensive new prescription drugs both by doctors and patients which often
provide little benefit over cheaper existing medications, or are for conditions that are
not medically vital. This is, of course, perfectly fine, however in other industries consumption
usually rises as prices fall, often corresponding with less share of personal income being spent
on the product.
(Graph: Meat Consumption)For instance, You can see from this graph that people have been
eating more meat over time. (Graph: Disposable income Vs Food) However over time, people
have been spending less of their disposable income on food. (Graph: What Work buys) In
fact, take a look at this graph which shows how many hours of work the average American
would have to put in to earn common consumer goods. (Pic: black) Why is it that healthcare
doesn't follow this trend? Quality may be rising, but costs are rising even faster.
(Pic: black)In this video, I'll talk about a problem that bares even greater responsibility
than the the elephants in the room run by Uncle Sam and all the aforementioned factors.
This is something totally ignored by politicians but most economists say it is central or even
the most important reason costs are rising.
(Pic: Third Party Payer big) Of course I'm talking about 3rd party payer, and why government
is to blame for the astronomical cost of medical care.
Third party payer refers to the practice of health insurance companies taking your money
and using it to pay your medical bills for you. Insurance is supposed to pay for things
that are unlikely to happen. Health insurance by contrast, has come to mean reimbursement
for just about anything health related. On the face of it, this doesn't really make sense.
Here's John Stossel's take on 3rd Party Payer
[Stossel Clip]
(Pic: 3rd party payer cartoon1)No one would want to purchase car insurance that pays for
regular maintenance on your car like oil changes and new tires. This adds a large transaction
cost to everything bought and paid for using the service, but that's only a small part
of it. Clearly your insurance premiums would never add up to more than you could hope to
get reimbursed for. (Pic: Car Fire)Any insurance company that reimbursed more than uncollected
would go out of business. You would have to slice your tires every day on the way home
from work and buy the best tires in the store to replace them just to get your moneys worth.
Unfortunately, people treat health insurance differently than other insurance, but there
is a reason for this.
(Pic: Cartoon: 3rd party payer2) As ridiculous as it is to have a middleman on common things
that everyone buys like regular checkups and screening tests, there's an even bigger problem.
Since you're paying a flat fee for all the services and drugs you could ever want, there's
no incentive to shop around or to use them in moderation. This allows incredibly inefficient
institutions to exist in spite of their high prices, as well as inflated prices on drugs,
hospital stays, and doctor visits. Here is Nobel Prize winning economist, Milton Friedman,
on the subject.
[Friedman Clip]
(Pic: Middleman cartoon)It's clear that health insurance is a great thing to have in case
of serious injury or illness, or a chronic or terminal disease that is expensive to treat,
but having a middleman setting up an "all you can spend" health buffet is not something
that makes economic sense. As with common practices that don't make economic sense,
the origins of this are squarely rooted in government policy.
(Pic: Tax Seq1)For decades, taxes have been rising on the wages of employed Americans.
The average personal income tax rate on median family income was(Pic: Tax Seq2) 7.4% in 1955
and had (Pic: Tax Seq3)risen to 12.2% by 2010. On top of that, you add in Social Security
and medicare taxes, which were at (Pic: Tax Seq4) 4% in 1955, and had risen to (Pic: Tax
Seq5) 13.3% by 2010. It should be noted also that the maximum taxable income of Social
Security and Medicare taxes is rising as well.
I only point out these taxes to make one observation: The total average American family's wages
have increased in taxation from roughly (Pic: Tax Seq6) 11% in 1955 to (Pic: Tax Seq7)25%
today, (Pic: Tax Seq8) and that's just on the federal level. At the same time, compensation
by employers in the form of healthcare has been (Pic: Tax Seq9) totally untaxed. Again:
11% taxes in 1955, 25% today, and all the while employer-provided health insurance has
been taxed at zero. The results of this tax policy are as one might expect, but before
we get into that, how about a little history?
(Pic: FDR Cartoon) Employer provided health insurance is said to have arisen because of
the wage and price controls of WWII. Employers wanted to pay their employees more but FDR's
misguided war-time technocrats were trying to micromanage the economy. Therefore, their
only option was to find other ways of reimbursement besides wages. Health insurance as a form
of reimbursement was taxed much less than other wages until 1954 when all remaining
taxes on the practice were removed. It was only natural therefore that employers and
employees follow the incentives right into this arrangement. (Graph: Rise of Insurance
1940-60) Between 1940 an 1960, the number of insured went up 7 fold.
By 1965, a little less than 75% of the population had some form of health insurance, and that
number was rising rapidly. (Pic: 1960's Insurance) However, even with this rapid rise in the
insured, it was rare that anyone be insured for care not involving surgery or hospitalization.
For patients seeking treatment in an outpatient doctor's office or wanting a yearly checkup,
it was traditional to pay out of pocket. Medicare Part B, passed in 1965, helped changed this
trend, but the economic reasons for the insurance companies to adopt this are obvious.
(Pic: HealthCareDollarsAt Work)Because of these government policies, health insurance
has changed from actual insurance to a way for employers and employees to subvert the
tax code. This leads to modern "insurance" covering much more than insurance ever should.
Regular checkups, preventative medicine, elective procedures, and chronic medications are all
covered by the majority of todays plans.
(Graph: Rise of 3rd party payer) Now let's take a look at the rise of 3rd party payer
and the fall of patients directly paying for their own medical care. In 1960, roughly 47%
of all dollars spent on health care were paid out of pocket, by 2008, that number was down
to 12%. The rest is paid for by government and private insurance companies.
(Graph: Healthcare Vs GDP) Take a look at the graph of Healthcare Vs GDP once again.
These costs are rising far too astronomically to be accounted for by other factors. There
is something fundamentally wrong with the incentive structure of this industry. Also,
it seems to be inexplicably immune to recession, unlike other industries. This is the typical
pattern of government intervention. Given that these things are true, what do you think
the effect of Obama's 2010 healthcare reform will be?
[20/20 clip]
(pic: black) Essentially, the Patient Protection and Affordable Care Act of 2010 AKA Obamacare
will force the market to increase coverage and therefore will increase costs. It's said
by some economists that there's a critical mass for healthcare spending. If that's true,
we're certainly moving in that direction a lot faster.
(Pic: serenity) The good news is, there's a simple and elegant solution to solve this
issue in an orderly and decisive way. Government could start to once again tax employer-provided
health insurance. Alternatively and in my opinion, preferably, the government could
(Pic: abolish IRS) abolish the income tax altogether. This would eliminate the incentive
for employer provided healthcare, and over time the practice would be eliminated. As
that is happening, people will realize that high deductible insurance is actually much
cheaper. Removal of other government intervention could further lower costs, like state insurance
regulations that reduce competition. (Pic:Medicare Monster) It would also be beneficial to eliminate
Medicare's "discriminatory pricing" policy whereby if a doctor sees someone for free
or less than they charge medicare in his/her office, they can be subject to a raid by the
federal government as well as fines and imprisonment. Essentially, the further government gets away
from healthcare, the more affordable and accessible it will become.
(Graph: Government Spending Vs 3pp) Unfortunately the largest 3rd party payer is government.
Though prices will come down dramatically if government stops manipulating the private
sector via the tax code, (Pic: Old Lady Sequence) the problem of government being such a large
payer will likely still remain. Obviously raising co-pays and instituting a deductible
into Medicare and Medicaid would help, but these solutions are so politically impossible
it gives one a headache to even contemplate. In fact, Americans are so addicted to Medicare
that even the accusation of mentioning cuts in medicare is considered a devastating attack
in political campaigns. With elderly voters flocking to the candidate who promises to
continue this unsustainable system, it will likely be the sacred cow of the US government
for years to come, even with our impending fiscal issues.
(Chart: Negative Income Tax) I would also like to mention at this time Milton Friedman's
elegant solution to the problem of entitlement spending: Instead of offering food stamps
and healthcare, Friedman and most other economists suggest a "negative income tax" whereby the
government just writes an impoverished individual a check for an amount to bring their income
up to an acceptable level. They could then use the money at their discretion, and make
decisions that are best for them, rather than what the government deems appropriate.
(Pic:MLK sequence) Under a truly free market system, customers would purchase health insurance
like they do life insurance: When they are very young, for their whole lives, and at
very low premiums. Just like with Life Insurance, they could keep their plans when they switched
jobs, moved from State to state, or developed a chronic or debilitating disease. Perhaps
insurance could be purchased even before birth. It sounds far fetched, but with a high deductible
plan and the prices of healthcare actually coming down instead of rising, this is not
only feasible, but likely.