Tuesday, April 13, 2010

Time tells the truth: stop the presses.

Wow! I can't say I expected to find a column on economics in Time that I agreed with, especially one on health care.

Barbara Kiviat says she went to a doctor and "and asked how much my office visit and X-ray would cost. Staffers told me that they didn't know and, since I have insurance, I shouldn't care." That's it! That is one of the main reasons for spiraling health care costs in nutshell. As Kiviat wrote: "We are left with the same opaque system of perverse incentives—paying providers for more tests and procedures, not necessary effective ones. And we lack even the most basic element of the free market: price information."

I will take a minor disagreement. Kiviat says that the lack of price information for most health care consumers means we lack the most basic element of a free market. True, but more broadly, we lack one of the two basic feed-back signals in economics. The other being profits. Prices and profits are the two feedback loops that send signals to consumers, in the case of prices, and producers, in the case of profits. Socialism attempted to abolish prices and profits both, in other words, it attempted to abolish economics entirely. Socialism was never an alternative economic system—it was the abolition of economics entirely.

Kiviat notes that in field after field consumers shop around and this drives innovation and lower prices. But this is not the case in health care. Of course not! Most consumers don't pay directly for their care so they don't both with prices. I pay for my own care and I am very price aware.

When I had a bad tooth ache two years ago I went to a local dentist who started telling me that I first had to have an examination. Then they would send me to specialist who would outline a treatment plan. Then I would return to the detist who would perform a root canal and put a crown on. As he rattled off numerous needless steps I saw dollars flying out the window. So I asked for cost estimates. I was told that altogether I should expect to pay $2000. And it would take at least two weeks to finish everything. And, no, in the meantime I was not allowed any pain killer sufficient to dull the awful aching in my mouth—we have to protect people from drugs you know.

I was not intending to suffer needlessly due to the asinine war on drugs nor was I going to wait two weeks or pay $2000. I called one of my readers here, who is in Mexico, and he arranged a dental visit for me. The next day I flew down. I was in to see the dentist that afternoon. He did all the analysis on the spot and began the root canal. It would take 24 hours for the crown to be prepared so I had to come back the next day to finish up. And he was happy to prescribe a good pain killer which allowed me to eat for the first time in days. Total cost for the care was around $400. Add in the airfare and hotel and it still comes in well under $700, compared to the $2000 I was expected to pay in the US.

If more health care operatives had patients leave for other, less expensive services, prices would come down. Those health care outlets that didn't do that would go out of business, or work exclusive for government funded patients, who never care what something costs.

I've also used some of these drop-in health clinics and found them quite affordable. Why is that? Because most of their patients are not covered by insurance. I had a lung infection that didn't want to clear up. The practitioner nurse prescribed the medication I needed and then spent 10 minutes checking for low price alternatives. After she found a low priced alternative she also suggested I cross the street to buy it, instead of in the pharmacy where this clinic was operated, because on this drug the competitor was half the price.

I sent an employee in there to have a problem looked at and he had the exact same sort of price searching done for him. Apparently this is routine because the patients in this clinic care very much about prices since they are paying directly out of their own pockets.

But most Americans have insurance and they pay a flat rate each month regardless of what care they receive. They tend to be lazy and uncaring when it comes to prices. They might want cheaper insurance rates but they don't particularly care about cheaper health care. Whatever the cost, they reason, the insurance company pays for it. This is true of all systems where payment is separated from consumption—people will over-consume and not worry about prices.

This is one reason that forcing more Americans to buy insurance won't help bring down health care costs—no matter how many times Obama tells us it will. The newly insured, who will be forced to buy insurance by Obama, will have the same perverse incentives as the already insured. And because fewer people will be paying out of their own pockets for care, few people will pay attention to the actual costs of the care. That means fewer questions will be asked.

Imagine you are diagnosed with a problem. The physician says that the tests show it to be very likely that you have this particular problem. But he will have some additional, more expensive and more accurate tests done "just to be sure." Are these tests really necessary? If you are paying out of your own pocket you might ask that question. If you are "insured" and someone else pays the bills you may not only NOT ask that question, but you may well demand some further unnecessary tests as well.

Obamacare forces millions of uninsured people to buy insurance. In doing so it moves them from being price conscious consumers to working with the same lack of price information and the same perverse incentives as the rest of the population. So adding more people, who are not price conscious, to the health system can only help drive up costs even more.

Consumers who pull out coupons at the grocery line, in order to save $1 on coffee never bother to ask the costs of various medical care they receive. They never ask for information on less expensive alternatives that might exist. They tend not to query if a cheaper, generic prescription is available. But they will cross town to buy a gallon of milk for ¢50 less than normal. But then none of us pay at the grocery store with our "food insurance" coverage. So we shop around to save a few pennies here or there when it comes to food, and then spend as if were Bill Gates when it comes to our health care.

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