Medical Prices - Why They Are So High

Let's evaluate medical prices by a concrete example. Recently I got a bill for $70 from a lab for a PSA test that I had done last year. This is a screening test for prostate cancer that I like to have done yearly. I had to get some other lab work done so it was convenient to do it when I did. Normally my Medicare coverage would pay the bill but Medicare approves this as an annual test and I happened to be one month early. I don't normally keep that close track of the exact dates of my tests. It's not important to me since the yearly timing for this test is really pretty arbitrary, but for the Medicare regulators it's not necessary at 11 months and 30 days, but is warranted at 12 months and 1 day.

I have access to the Medicare price list so I checked it out and found that Medicare would ordinarily pay the lab $25 for the test and at that price I can assure you that the lab is making a profit. I know that because for a few years I and three other doctors who shared office space had a small office lab and even with a low volume of tests it produced a small income with mostly Medicare payments.

Well where does the $70 charge come from? Medical providers base their charges on insurance reimbursements rather than on market forces of supply and demand. The charge is set to capture payment from the most generous insurers, as common sense would dictate. By law one cannot charge Medicare differently from other insurers but the difference is written off, as it is with other insurers with which the lab has a contract. Of course there is normally little impact on the recipient of the test for whom the charge is $0 unless there are copays and deductibles, but even then almost everyone is protected from the $70 charge by their payer's contract. The only ones who pay the full price are those with no insurance, or those like myself who were thoughtless enough to wish to suit their own convenience.

But wait, there's more. What would be the true market price of the test based on the lab's cost together with the best profit it could achieve in the face of its competition? Well that would only be discoverable in the actual market, but I tried to take an educated guess since I at least know about operating an office lab. Searching the lab supply web sites I found test kits for 100 PSA tests for $350, so $3.50 per test. Of course the lab has other costs and the biggest in any medical operation is personnel. My best guess is that the real market price that one would pay in the absence of insurance or Medicare would be in the range of half of the Medicare payment, $10-15. Keep in mind that some significant part of the lab's cost is involved in the billing process for Medicare and all the insurances. I can't say for sure for labs but for most medical offices this would be in the range of 5-10% of receipts.

I don't know the Medicare process for setting lab test reimbursements, but physician payments are governed by a 30 person committee composed of doctors from every specialty. As in any centrally controlled economic system, as intelligent and possibly as unself-interested as the members of this committee might be, there is no possible way for them to have the on the spot knowledge required to know what the market price should be. Furthermore by setting prices the system is foregoing competitive forces. When all competitors get the same payment there is less incentive to increase efficiency and productivity since doing so will not result in a gain of market share by lowering prices.

The bottom line is that medical prices are far higher than they should be because of our tendency to pay by insurance and yes, Bernie Sanders, because of Medicare. Furthermore since the person who pays the fiddler names the tune our system is paternalistic, requiring permission for everything, so that my test must be done at the convenience of Medicare and not my own. When politicians tell you that they are going to save money for Medicare by eliminating waste you should understand that Medicare by its structure is inherently wasteful. The true cost of that waste is the value of the alternative uses for which these resources could be used.

Thoughts on the Inauguration. Was the Speech Too Dark?

Lately I've tried to stay away from political posts which are causing a lot of inflammatory response from some of my friends. My thoughts about the inauguration are not particularly partisan so I thought I'd take a shot at it. I missed the actual ceremony because I was golfing (eat your heart out you northerners). But I did catch some of the commentary later and watched some of the parade.

The speech was criticized by Trump's detractors as painting too dark a picture of modern America. It was nice to see the high school and military bands parading down the street but the police lining the route shoulder to shoulder and the hoards of secret service men certainly do strike an ominous note about our present society.

Recently when driving out of Chicago from a visit to my son we accidentally took a wrong route and so had to get off the freeway and went briefly through the city streets on the fringes of south Chicago to get back on. I was beginning to get pretty nervous as to where my GPS was taking us and was pretty darn happy to get back on the highway. Yet we were nowhere near the really troubled area.

In the early 60's I was in north Phillie for med school. It was pretty run down then, a minority ghetto. Us newlyweds lived in an old building converted to married student housing right in the middle of it all and yet we walked the streets safely. This was the poverty against which Lyndon Johnson declared war. Today it's light years worse. I defy anyone reading this to drive through the streets of south Chicago or north Phillie, or any of the dozens of other big city ghettos in this country without locking your doors and getting out of the area as quickly as you can.

And how about general safety. I can still recall what it was like to just go to the airport and get on a plane without the long security lines -- before the modern insanity that we've come to accept as normal started. And when I was in 2nd and 3rd grade we used to walk several blocks unescorted except for the school patrols at the street corners. Later, in high school and college, I hitchhiked everywhere. Who would conceive of doing that these days.

Trump's speech was described by Chris Matthews as Hitlerian. I guess exaggerations like that are to be expected in political back and forth. The same comparison was being made of Barack Obama as he gave his rousing oratory before large throngs of cheering fans, although I don't recall it being said by a major news commentator. Obviously it's hyperbole, as anyone with even the most superficial knowledge of the content of Adolph Hitler's speeches or his writings in Mein Kampf should know. And yet yesterday we watched on TV as hundreds of "protestors" smashed large plate glass windows in full view of the cameras. In light of the Hitler comparison it's ironic that this event, so reminiscent of Kristallnacht, was carried out by the protestors rather than the supporters of Trump.

There is economic frustration in the country, especially in the Northeast and Mid-West areas. I surely see it when I'm driving around Scranton. I don't think they see it very well in the rich areas around Washington or along the coasts. The government has increased its safety net programs but they're not really a good substitute for the benefits of an expanding economy.

So is it too dark a picture, or is it reality? I guess in the next couple of years we'll see by comparison.  

Direct Primary Care and Health Savings Accounts

When I was teaching med students from the new medical school in Scranton a couple of years ago I used to tell them not to base their future practice decisions on the present situation in medical care. When I graduated in 1964 very few could have predicted the dismal state that medical practice would be in decades later. I have no doubt that these students will be in a much different environment 10 or 20 years down the road, and I predict it will be for the better.

There's much discussion these days on what should replace Obamacare. However interesting things are happening outside of the government arena which may be a harbinger of things to come.

Although primary care doctors are being chased out of the marketplace by low reimbursements, oppressive government regulations and the burdensome requirements of insurance companies there is a growing movement of what is being referred to as Direct Primary Care. These practices, which are springing up all over the country, are being developed by young doctors who still desire the great personal satisfaction of primary care practice that comes with maintaining longstanding relationships with patients and their families. The concept involves elimination of all insurance and government contracts, thereby dramatically reducing overhead and time wasted on complying with regulations, and then providing all primary care for a modest monthly fee in a much more patient friendly manner. Generally the stable income flow occasioned by direct patient payments permits the physician to place a limit on number of patients which in turn allows for unrestricted time with patients and rapid, often same day, appointments. Usually a large number of services are included such as injections, EKG's, some lab tests, etc. Often arrangements are made with specialists for reduced fees. The plan allows for innovation in modern means of communication, such as cell phone contacts, text messaging and even Skyping as needed with the doctor. Getting into such an arrangement is a scary decision for a young doctor with a family to support but there are pioneers out there with the courage to try it. For those interested here's a web site that discusses it more. http://www.dpcare.org/

This concept is of special interest to those with high deductible insurance, especially combined with a Health Savings Account who are seeking value. HSA's, often funded by employers, are the fastest growing health insurance plan in the country, with 18.2 million people using them in 2016, an increase of 25% from the previous year. This is occurring despite some headwind from the Obama administration. The Dems generally look askance at the idea because HSA's are more of a market based rather than a big government solution to medical care financing. Up to this point monthly payments for Direct Primary Care practices had been ineligible for HSA use because they were being considered insurance premiums, but a new bill is pending in congress changing this and there's little doubt that it will now pass. I was interested to speak with a Washington based friend of mine who is a lifelong Democrat and represents an exercise equipment firm. He is lobbying to make his company's products an HSA eligible expense for those undertaking an exercise program. Unlike health insurance the HSA concept is that funds can be used for any health related expense. I agreed with him that HSA's should include as broad a range of eligible items as possible.

These innovations are the thing of the future in medical care because they are so in line with good economics, controlling cost at the same time as increasing individual choice. They are some of the ways out of the absurd inflationary, rigid, bureaucratic system that we are in but have become so adjusted to over the years that we accept it as normal. But they are just the beginning. With the proper changes things could be so much better, but that discussion is a matter for another time.

Obamacare - How to Replace It

Obamacare repeal has become the subject of the day, and it should be repealed. But we should not lose sight of the fact that Obamacare is a small part of the problem and much more needs to be done. This misguided idea was actually an attempt to fix problems in the economics of our medical care that have been developing gradually because of government policies over the past 50 years. It was a government solution to a government caused problem.
The government in its tax policies since the end of WW2 encouraged full medical insurance paid by employers. That was well-intentioned and might have been OK in the 1950's with an entirely different kind of work force. Today expecting that everyone will get all their medical care through their employer doesn't work. Nowadays our economy is far more diverse. People change jobs frequently, or work for small employers or are self employed. Medical care is far more complex and variable and so requires the efficiency and adaptability of a true market.
And then since 1965 there's the big elephant in the room, Medicare (and it's little sister Medicaid) which has become the dominant force in shaping medical care. This program as I've been complaining incessantly has been a major factor in preventing price competition, in stifling of innovation, and in causing misalignment in services. In addition it is killing us financially. And its determined efforts to correct its problems by ever more bureaucratic regulation is becoming nightmarish and absurd.
President Obama and his supporters saw one small aspect of our problem, namely that those who are not covered by employer insurance, such as it is these days, or by one government program or another, are left out of the game. Their solution was to force everyone to play, and to make things even worse by mandating that insurances cover things that people don't need. Evidently, as smart as they are, they have their noses right up against one of the trees and don't see the forest.
The Republicans are touting repeal and replace. There is nervous tittering among the Democrats who think their opponents have a tiger by the tail and won't be able to come up with anything better. Their problem of course has been that they've always been unable to think out of the box of government control. There are some good plans out there, such as one recently proposed by Dr Rand Paul. Also Trump's new HHS Director Dr Tom Price and CMS Director Seema Verma understand the problems well and I think the Repubs will coalesce around a comprehensive plan.
So what do we really need? Here are the components:
First and foremost we need prices to come down. Across the board they're many times higher than they would be if they were based on market forces. Providers of medical goods and services base their prices on insurance reimbursements rather than on their costs and return on investment. Competition to lower prices is absent since everyone gets the same reimbursement from the payers and are paid only for things that are covered. Overhead costs to comply with regulation are going through the roof. Lower prices will be a boon for all medical consumers but especially for those with lower incomes.
A big way to accomplish lower prices is to reduce our dependence on insurance and third party payment. Insurance should be for big, unexpected items, not for everyday expenses. Everybody knows this. No one would buy homeowners insurance that covered blocked sink drains. Paying for ordinary items by insurance causes price inflation and decreases choice. But our problem is that we've got a system where someone else buys the insurance for us even though we're still paying the price through decreased wages. So then we have a high priced system which leads to demands for more insurance. And those who don't have insurance are really stuck paying ridiculously high prices that no one else has to pay. It's a vicious cycle.
So as far as insurance is concerned preferably we should buy our own and own it ourselves so it's ours no matter what job we have. But before that happens the insurance market has to have major revisions to bring the cost down such as Drs. Paul and Price are proposing. When we buy our own we'll want cheaper high deductible insurance and we'll demand that all the regulations on where we buy it and what needs to be covered be eliminated.
We need to get government out of the way except for people that need help. That's a problem for now because we're all adjusted to the present system. But if the government is going to divvy up tax money for medical care it ought to at least be distributed fairly and at present it isn't. This is a big part of the maldistribution in medical care in our country that Obamacare was supposed to address. And whatever subsidies are given should allow for the broadest possible choice of their use. These are all features of the present Repub plans so hopefully we will see some good changes. Personally I think start up government funding of Health Savings Accounts would be an interesting idea.

Problems in Paying for Our Medical Care

I think the intentions of the progressive politicians are good enough. Medical care, at least in this modern era, has become an important basic commodity, almost up there with food and shelter. In wealthy societies such as ours people shouldn't go without it, both for humanitarian and social reasons. It's a big leap from that concept to the idea that everyone should pool their funds into some central authority who is in charge of distributing them out where needed. For the past 50 years we have tried out that system generally and with a real vengeance in Medicare and Medicaid and more recently with Obamacare. We were talked into going with the government instead of the private market and sure enough what we are getting is the Department of Motor Vehicles instead of Amazon.com.

With the deducted payroll tax in every paycheck you are investing in a failing system that long ago would have gone out of business if it were in the private sector. But worse than that you are being robbed of what you are paying for. You are being deprived of the full time and attention of your doctor, paying grossly inflated prices, and coping with a system in which you need layers of permission for even the smallest service. And the efficiencies of modern communication which has been revolutionizing commerce since the first PC was introduced in 1980 has completely passed you by. What you are now getting stuck with is a UNIVAC mainframe instead of an iPhone. Those computers your doctor now types away on are not a sign that medical care is modernizing. They are just data entry terminals for big government and its ever increasing control.

A big part of the problem is price fixing. Medicare fixes the price of every medical service right down to drawing a tube of blood. The insurance companies generally base their prices on the Medicare price schedule. Price fixing eliminates the competitive forces in the market that incentivize producers to figure out ways to get customers by doing things cheaper and better. Back in 1975 the Supreme Court said that local medical societies couldn't fix doctor fees for this very reason but Medicare is doing it again. So without competition medical prices are way too high, probably in general 2-10 times higher than they would be in a competitive system.

But that's not all. A second big problem is third party payment. We really do pay for everything through our taxes and premiums but the way we've worked it out is that the uncompetitive high prices don't really bother us until we're faced with the copays and deductibles. But they really do bother the payers. For the insurance companies every service you use is a liability so they put as many barriers in the way as they can get away with. The government payers rely less on barriers and more on regulations which so far haven't worked at all but they  have the fallback position of borrowing and debt accumulation. How crazy is it that systems that were intended to make medical care easier to get are doing the reverse.

So getting medical prices down and getting buyer choice back in the system is what is needed, not more insurance. How to get there from where we are now without causing major disruption is a real problem. But now for the first time in my long involvement with the medical system we have a chance.