How to bring down the price of health care

First, understand that the price of a service is completely different from the cost to deliver the service. The price is what is paid to the provider by the consumers. The costs are the expenses incurred by the provider (salaries, rent, equipment, etc.) in order to deliver those services to the consumer. As consumers, we don't care one iota what the costs are. For most goods and services, we only care about prices. For health care about 80% of us don't even care about that. Hold that thought because it is important. More on it later.

So, as consumers, we should be focused on the ways that prices are kept in check in a normal market place. Worrying about pharmaceutical marketing costs, physician salaries, or the capital costs of the new multi-million dollar diagnostic equipment should not concern us. We should be concerned about getting competitive pricing and let the providers worry whether they can provide the service at a profit. You know how to do it when you buy a camera, a computer, a car, a camping trailer, skis, an mp3 player, auto insurance, life insurance, a house, a mortgage, service to fix your car, or any one of a thousand other goods and services. And because you do, those goods and services have become cheaper over time or you have got significantly more for your purchase.

Want to make sure that happens with health care? We need to do one thing: put the patient back in a position of responsibility. It is no different for health care than any of the other goods and services. Put the consumer in the driver's seat, and quality goes up and price will come down. You can do that with zero extra costs to you right now. The vast majority of you have employer based health insurance or Medicare where some third party besides you makes the decision about what is eligible. Dump them for inappropriate or routine expenses (cosmetic surgery, pregnancy, maintenance drugs, etc.) by insisting that your employer or Medicare base the insurance on a high deductible catastrophic major medical policy with an HSA. For everything but catastrophic levels of expenses, manage your family's health expenses out of the HSA. If you don't use it up, it is yours to accumulate for you to use in your older age when the expenses are even higher.

People who try this approach find that they are more engaged with the physician, that the physician understands more about the patient, that quality goes up, and health care expenses for the family go down.

It is the most effective way to get control of quality and costs. Unfortunately, it is being ignored in the health care reform debate.

The Effects of Community Rating

Let's play a game. You and I will represent two different health insurance companies. We are each competing for a population of 1,000 potential insureds. Make it simple; half are 20 and half are 50. The cost of the 50 year olds on average is three times the 20 year olds: $750 per month and $250 per month respectively.

Now, you are an egalitarian who believes that everyone should pay the same, so you charge $500 per month, which is the average cost of the 1,000 potential insureds. I am a greedy capitalist, so I have a tiered premium structure that follows the cost. That is, I charge the 20 year-olds $250 per month and the 50 year-olds $750 per month. What do you think happens at first? I will get all the 20 year-olds and you will get all the 50 year-olds. I'll make money and be happy because my premium covers the average cost of the group I got. You, on the other hand, will lose $250 per month per insured because you are charging $500, but the costs of group you got is $750.

This is what happens when you charge the average and your competitor is free to charge in relation to what it costs.

So, the government comes up with a mandate for the insurance companies. Now let's say that insurance companies are required to use community ratings. Something different happens: the 20 year-olds opt not to buy the insurance because it costs too much for them. And both companies lose money.

This is also why the insurance companies insist on an individual mandate in return for issuing policies with community rating and no underwriting. That is the only way to assure that the scenarios above won't happen. The averaging process is what happens in group plans. Strange that no one seems to mind that, but they have huge issues with it in an individual context. Could be that the employer is paying or greatly subsidizing the group insurance.