Between saying and doing,many a pair of shoes is worn out.–Anonymous
This chart came across my desk today and it really illustrates the problem that we, as consumers of healthcare products and services, face today.
While companies and insurance carriers fight over premiums and providers and insurance carriers (including the government as the nation’s largest insurance company) fight over reimbursement rates, the sludge bucket at the bottom of the funnel is the consumer. While employer costs for health premiums have skyrocketed 114% over the last 10 years, employees’ total out-of-pocket costs have risen 147% during that same period. By comparison, over that same 10 years, general inflation has risen 27% in the aggregate (2.4% per year increase on average).
As I’ve highlighted before, the typical price of family coverage now runs about $13,000 a year, but premiums are expected to nearly double, to $24,000, by 2020. That equals nearly a quarter of the projected median family income in 2020. In 2009 the average individual spent about $17,000 on housing and $6000 on food according to the U.S. Department of Labor. Just think about that. By 2020, we might well be spending nearly as much on our health insurance as we do on housing plus food (inflation-adjusted). That just can’t possibly work. I need at least 25% of my income to supplement my collection of shoes that look amazing but are really inappropriate to wear to work. If I have to spend 25% of my income on health insurance, it is going to seriously cramp my shoe fetish.
According to Professor Richard K. Vedder, a Senior Fellow at the Independent Institute, a non-partisan think-tank, the only two things in America for which costs are inflating faster than healthcare are college tuition and cigarettes (see full article here). How ironic. The arch-nemesis of the effective healthcare consumer (smoking) and the cure for many of the ills of bad healthcare decision making (education) are the two things that are becoming less affordable than healthcare itself.
It’s hard to feel bad about the rising cost of cigarettes so I’m not going to dwell on that issue.
Interestingly, Dr. Vedder points out that there are striking similarities that lead to the disproportionate rates of inflation that characterize both healthcare and higher education. Here are the top contenders in his list:
- over-reliance on third party payments; in other words, the people who pay are not the same people who reap the benefits
- non-profit orientation and lack of a bottom-line mentality, which reduces incentives to cut costs and makes it difficult for organizations to measure their value-creation
- lack of information about how costs are allocated and how users can measure value
- high fixed costs due to long-term contracts, making it difficult to rapidly shift resources to serve demand
- barriers to entry for new participants due to licensing and investment requirements
- price discrimination, defined as charging customers different amounts for the same services
- large amounts of government funding, which carries with it a requirement to conform to extensive and costly government regulation
Wow, who knew that we could create such a screwed up delivery system not just once, but twice! Healthcare and higher education: separated at birth and in a two-way tie for Least Likely to Succeed. Way to go America! Next stop: housing (oh wait, I think we already screwed that up too).
Clearly Dr. Vedder’s list highlights how important it is to align incentives between all of the parties that participate in a major economic relationship. In healthcare, that means that every unit of medical care delivered must find ways to advantage the patient and the provider and the payer (whether private or public). Each of those players must see tangible financial and clinical benefits from the transactions in which t
hey take part if there is to be any efficiency gained in our healthcare economy. As long as our healthcare system fails to bring these incentives into alignment, we are going to have an increasingly unhealthy healthcare system, apparently serving people who can afford only to be educated at the School of Hard Knocks. I can only imagine the state of their shoes.
Note: this post also appeared today in Medical Device and Diagnostic Industry’s online magazine
Aligning incentives between all of the parties can only happen if individuals take responsibility for themselves in preventing preventable diseases. The obesity epidemic, increase in prevalence of type 2 diabetes , and smoking-related diseases should be disincentivized in the cost sharing equation. Those who choose to be obese, smoke cigarettes, live sedentary lifestyles, etc. should pay a bigger share of their healthcare costs. Those who maintain a healthy lifestyle should pay the least because in general they cost the least. I am aware that less educated people at lower socio-economic levels are more likely to have unhealthy lifestyles, but I reject the idea that less educated people are unaware of the risk associated with obesity and smoking. This is about guiding people in the right direction, and nothing does that better than taking money out of their pockets.
I definitely agree with you one many of the issues, but I also think if you back people too far into a corner you take a risk that you end up paying anyway and you also have to take into account genetic differences in people that may make them sick and expensive. It is a tricky balance but there is no doubt that personal responsibility has to be part of the equation and that incentives can work to encourage good behavior.
There are seven bullet points in Lisa’s blog, with each covering a different factor that’s driving healthcare prices higher. However there’s a corollary to her sixth bullet point that probably deserves to be a new bullet point of its own: For people with health insurance, it’s very difficult to compare the price that they’d be charged by various providers to perform a particular procedure. The providers themselves often don’t know, and if they do, they’re often subject to confidentiality agreements that preclude disclosure of reimbursement amounts. Don’t believe me? Try it sometime. It’s quite frustrating and you’ll almost certainly give up. In short, the concept of shopping for a good price is fundamental to the efficient functioning of all free markets but it’s virtually non-existent in healthcare, at least for those covered by insurance.
Noel, that is definitely a real issue, I agree. Not only is there no price transparency, but there is no meaningful concept of getting value for your money. Lisa