Monday, May 18, 2009

A Healthcare Idea: Insurance That Doesn't Pay

One obvious, arguably ideal, solution to the problem of paying for healthcare is for the consumer to pay for ordinary costs out of pocket, just as we pay for food and housing, while using insurance to cover extraordinary costs, just as we use it in other contexts. That is not the usual pattern of medical insurance in the U.S., however—typically it covers a large part of the cost of annual doctor's visit, ordinary dental care, and the like. That arrangement has some obvious disadvantages. The customer has no incentive to hold down costs, making it necessary for the insurance company to play a major role in the decision of what services the customer gets from what providers.

One reason for this arrangement is that health care you pay for directly is paid with after-tax dollars, health insurance via your employer with before-tax dollars, giving a substantial advantage to the latter. But there may be another reason as well.

From time to time one sees accounts of a patient who was billed for something and discovered that the cost was much more than what the hospital charged an insurance company for the same treatment. Such anecdotes are not, by themselves, very strong evidence, and I do not know how common the pattern is—I have also seen stories in which the discrepancy was in the other direction, after some bargaining by the patient. But it does make a certain amount of sense. The insurance company is a well informed purchaser bargaining in advance on behalf of lots of customers, so it wouldn't be surprising if it were able to get better terms than the hospital offers to an individual who requires treatment.

This suggests an obvious possibility—"insurance" companies whose main function is not insurance but negotiating prices. Within the current framework, that would mean a policy with a very large deductible, large enough so that the customer ended up paying for all ordinary medical care, giving him an incentive to hold down its cost as best he could. In the limiting case it would mean a company that provided no insurance at all, simply the service of negotiating for its customers, in advance, prices for medical service, and perhaps offering customers advice as to what they ought to purchase from what provider.

To what extent do such arrangement already exist? Is there a problem with them that I am missing? They don't deal with the implicit tax subsidy issue, but they would seem to solve the other problem.


At 12:39 PM, May 18, 2009, Anonymous Anonymous said...

What leverage does this hypothetical negotiating company have? A doctor/hospital would have an incentive to negotiate a lower price with an insurer because the insurer can bring in a large volume of business.

But if I were the doctor/business, I'd have no incentive to cut my prices for a one-off transaction.

At 12:49 PM, May 18, 2009, Blogger Hugh Tauerner said...

As things stand, the insurance companies negotiate contracts with hospitals and doctors' groups as to how much they'll pay for various procedures, hospital room and board, etc.

A doctor or hospital can bill for however much they like, but the insurance company will only pay at its contracted rate.

I'm currently working on some utilization data and the billed amounts are pretty close to double what was actually paid.

When an individual is billed, they're probably billed at the same rate as the insurance company was billed, which is why they can often negotiate a reduction. Chances are even with a deduction, they'll still pay more than the insurance company would.

At 12:50 PM, May 18, 2009, Anonymous Eli said...

As I understand it, existing high-deductible policies do give policyholders access to the insurance company's negotiated rate. The insurance company has an incentive to negotiate low rates because it does not want its customers to reach the full value of the deductible.

At 1:01 PM, May 18, 2009, Anonymous Perry The Cynic said...

In nearly universal practice today, insurance companies negotiate steep discounts off "list price" from health care providers for their clients. These discounts can range from 30-60% and more off list. This has been going on for many years, and as a result the list prices have been raised substantially to (partly) counter-act these discounts. The net result is that uninsured patients overpay, or else are given "hardship discounts" if they are found "deserving" (unable to pay inflated prices) by the providers.

In effect, health care insurance companies in the U.S. are now less in the business of insurance (i.e. actuary balancing of risk), and more in the business of negotiating fees with health care providers on behalf of their massed clients (i.e. a weird kind of union-like activity).

Your idea is apt, and is in effect available under the label of "catastrophic health insurance", i.e. insurance with very large deductibles. Because of the way insurance billing works, costs that "miss" the deductible and are billed to the client are still covered by insurance discounts. While I'm not aware of insurance with infinite deductible, it can be had with deductibles >$10000 (and arguably having *that* kind of insurance is a good idea for many people anyway).

-- perry


At 1:04 PM, May 18, 2009, Anonymous Roger Collins said...

I've thought about the same thing for a long time. I forwarded your post to an exec in the insurance industry. I was a customer of something like this for dental service. They might have called it insurance but it was just a discount card I paid $7 per month for it. The dentists honor the discounts because it is a marketing service to them. The same reasons medical providers take insurance - they like large pools of customers.

At 1:09 PM, May 18, 2009, Blogger Max Marty said...

The main advantage of having someone who would negotiate with the medical services companies on your behalf is that he could shop around at all the places in town that would do whatever needs doing until he finds a good bargain somewhere. This may work for your yearly physical, but it may not work if you have a sudden terrible pain in your ear and have to head to the nearest emergency room. That pain might turn out to be just an ear infection, cost you 3000$ out of pocket (not triggering the high-deductible) and there was no time to call up your agent to find the best deals for this mystery problem that hit you quite suddenly.

I don't mean to be so negative though, there may very well be a good way to solve this problem along these lines.

At 2:02 PM, May 18, 2009, Anonymous Anonymous said...

This is basically what I do with my dental insurance: I'm rich enough I can self insure for anything but a dental catastrophe, but rather than negotiate without any idea what's reasonable and customary, I pay a premium to have somebody big to negotiate terms on my behalf.

At 3:35 PM, May 18, 2009, Blogger Seth said...

There are such companies.

One problem with covering only extraordinary expenses is that total costs are lowered when people have annual checkups. That's why some insurance plans allow those without the usual co-pay; it actually saves them money.

At 4:33 PM, May 18, 2009, Blogger Chris Bogart said...

My health insurance used to work this way before I got a "real" job. I had a huge deductible, and ended up paying most bills myself, but only after the insurance company negotiated the prices downwards. I had an 11,000 bill for a 2-day hospital stay and the insurance company got it down to less than 3,000. Still too much for what I got, in my opinion, but better. I wish I could just go to a vet.

At 5:57 PM, May 18, 2009, Blogger Kim Mosley said...

Sams Club and Costco provide medicine, hearing aids, and eye glasses at discount prices. Petsmart has resident vets. No reason that they couldn't negotiate for other services.

I suspect that people who pay out of pocket don't get normal checkups. They just use doctors when they are sick.

At 6:59 PM, May 18, 2009, Anonymous Uri said...

There are quite a few companies out there that do this--type medical discount card into Google for a bunch of information. Medilinq in particular seems to describe your limiting case well.

At 7:26 PM, May 18, 2009, Blogger Arthur B. said...

Most dental 'insurance' work like this. It's really a prepaid card with a discount.

At 9:36 PM, May 18, 2009, Anonymous Mercy Vetsel said...

Very interesting idea. I'm surprised it doesn't exist.

An HSA is similar except that it still requires you to buy insurance at prices inflated by idiotic state legislators.

A plan that doesn't actually pay anything would allow someone who is purposefully uninsured to get these same discounts.

When I moved from Florida to New Jersey, I found out that my insurance costs would increase 10x, due in large part to the fact that I, a single male at the time, was required by the geniuses in Trenton to buy maternity coverage for myself.

Um, no thanks. I chose to be one of the 40 million tragically uninsured Americans.

Also, the reason the sticker prices are now completely fictitious is that the insurance companies negotiate a discount percentage of the sticker, which really NO ONE pays.

Since no one pays the sticker price anyway, hospitals jack up the sticker price to raise prices on the insurance companies.

Like hyperinflation, it becomes a self-reinforcing cycle until the sticker is five or ten times the actual price.


At 6:24 AM, May 19, 2009, Blogger Seth said...

Insurance companies do have one large advantage over "price negotiation" companies: they guarantee payment (if everything meets their standards).

At 10:25 AM, May 19, 2009, Blogger Robin Hanson said...

Yes, this is an important point: the main benefit of "insurance" is group-purchase negotiated prices. So as others have noted, the best deal is catastrophic insurance, which usually includes such negotiated prices.

At 11:54 AM, May 19, 2009, Blogger All4Generics2 said... recently launched an early version of its drug price comparison Web site. Consumers type in their drug name, dosage and ZIP code, and can find prescription drugs available on discount generic programs and where they can find them in their neighborhoods. The site will eventually offer users information on scheduled immunizations, health screenings and mini-clinics in their area; recalls and warnings; an "Ask the Pharmacist" feature; and an online community in which individuals can share information.

At 12:16 PM, May 19, 2009, Blogger jimbino said...

It is my understanding that Medicare and Medicaid require that they be given MFN status by healthcare providers, which establishes the minimum price for the procedure. When faced with an exorbitant private bill (for the uninsured), I consulted the Medicare billing rates, which are listed by CPT code, for the procedure, lab work and radiology. I had to first find out the name of the Texas agency that handled Medicare claims, then file a FOIA request to get the listing. It appears that our government has an interest in keeping those facts from the taxpayer.

Both the radiologist and lab had submitted CPT codes and I negotiated to pay what they charged Medicare.

But the public hospital would not give me the CPT codes that they are required to give to insurers and Medicare, so I refused to pay. They ended up writing off the entire $1800 they were seeking to collect, probably because they were reluctant to undergo the publicity of a lawsuit that would reveal how much they are screwing the uninsured.

It turns out that the IRS and Senator Charles Grassley have been looking into denying tax-exempt status to hospitals who flout state and federal laws in overcharging and denying service to the uninsured. cf:

My question to David is: What would be wrong with simply requiring that hospitals charge everyone the same price or that they publish all charges by CPT code, at least?

At 6:21 AM, May 20, 2009, Anonymous Anonymous said...

Every insurance statement (medical or dental) I get includes a "billed" price with little relation to reality. A small fraction of this is paid by the insurance company; I pay a usually-small co-pay; and the rest isn't paid at all. Assuming the medical providers aren't operating at a loss, this remainder has to come from somewhere, and the only place I can think of is the uninsured -- not merely paying their own costs, but paying inflated prices to cover what the provider doesn't get from me or my insurance company for my health care costs.

It's a bizarre system, reminding me of the old saying about the Soviet Union: "We pretend to work and the government pretends to pay us." As long as some people have insurance companies negotiating prices for them and others don't, this shell game will continue. I like jimbino's suggestion of simply requiring health care providers to charge everybody the same price for the same service.

At 6:22 AM, May 20, 2009, Anonymous Anonymous said...

I have one concern about David's proposal: yes, the customer has an incentive to keep costs down, but if the negotiating company isn't paying a portion of the health care costs, where is its incentive to keep costs down? The obvious answer is "if they don't do a good job of keeping costs down, customers will abandon them for other negotiating companies," but there would probably be a significant transaction cost (in research, hassle, and paperwork if not in money) in switching negotiating companies. The customers most likely to use such negotiating companies in the first place are also the least likely to check the the company is actually getting them a good deal. I'm imagining widespread kickback schemes.

At 10:10 PM, May 20, 2009, Anonymous Jon Leonard said...

As others have commented, a high deductable insurance plan resembles that.

The biggest problem with it is probably that health care is an area where the rational-actor model fails fairly badly. Preventive care is substantially cheaper than after-the-fact care, but still underused. Effectively, the insurance companies (having an incentive to hold down total costs) subsidize routine checkups, because it is cheaper for them in the long run.

Information inequality also pays a big role: Usually individuals seeking medical insurance need it more than the population at large, (but the insurance company doesn't know how much that's true), and by not being public about prices, medical providers can theoretically extract more money.

A variant on your proposal: Split the price-negotiation & paperwork part of health insurance from the payment (actual insurance) part. So I, as a consumer, select which style of health care I want, and then get bids from actual insurers as to how to pay for it. The point would be to reduce the incentive to deny care for expense reason. The downside would be that prices would likely rise: Health care that is now rationed by paperwork and delay would instead be rationed by price.

At 7:27 AM, May 21, 2009, Blogger Unknown said...

From time to time one sees accounts of a patient who was billed for something and discovered that the cost was much more than what the hospital charged an insurance company for the same treatment.My experience is that it is the other way around. I was recently at the pharmacy to purchase a kind of medicine. The price was stated at $87 plus tax, but when I didn't want to charge it to my insurance the "cash price" was only $22 - including tax.

The same thing has happened a number of times when seeking care (not just meds). The "tag price" is much, much higher than the price paid if you do not charge it to your insurance.

In some cases, I've learned, it is even the case that your provider may tell you that "let's try and charge it to the insurance company, but if they do not pay it there's no cost to you." So there's no price (cost?) for the visit unless the insurance company is willing to cover "the other" price.

I'm not sure how one can find data for these things, but I suppose it would be possible to ask around for price and "cash price" or "without insurance price" - and see the difference.

I have no doubt that this strange cost structure to patients is due to socialized medicine, but it would be nice to prove it.

At 7:38 PM, May 25, 2009, Blogger Unknown said...

One obvious, arguably ideal, solution to the problem of paying for healthcare is for the consumer to pay for ordinary costs out of pocket, just as we pay for food and housing, while using insurance to cover extraordinary costs, just as we use it in other contexts.That would be a horrible "solution". If you pay doctors and drug companies when you are sick, they have a perverse incentive to keep you sick. The same holds for system administrators: you don't pay them for resolving issues, you keep them on salary and make sure that it is in their best interest to minimize the amount of work they have to do.

Any decent solution to medical care involves doctors receiving a huge salary when their patients are healthy and an obligation to pay for drugs and special treatments (of their choice, of course), when necessary. It is the doctors who should insure themselves against extraordinary costs. Otherwise, we have perverse incentives and corrupt decisions.

At 6:38 AM, May 27, 2009, Anonymous Anonymous said...

BTW, there's an interesting article in this week's New Yorker about health care costs.

At 1:52 PM, May 29, 2009, Anonymous markm said...

"My question to David is: What would be wrong with simply requiring that hospitals charge everyone the same price or that they publish all charges by CPT code, at least?"

The political problem is that if providers couldn't charge everyone else - insurance companies included - more than the Medicare rates, many services would be unavailable to Medicare patients. Paying the actual market rate for Medicare services would break the system much sooner. And there are too many voters in the system for politicians to be willing to cut benefits.

At 2:27 PM, May 29, 2009, Anonymous markm said...

Daniel: That is more or less what HMO's were supposed to do - that stands for "Health Maintenance Organization". The problem is, tax laws strongly favoring employer group health care plans forced the HMO's to become just insurance with a limited choice of doctors and even more aggressive second-guessing of expensive treatment options by the organization. Primary care physicians are still underpaid relative to specialists, whose work is more readily documented and proven necessary. I think that will be the fate of any health organization that is chosen by employers rather than the patients.

I have a rather different idea (if the tax laws can be changed), although I lack the knowledge of the medical business or economics to work it out. Buy your health plan from your primary care physician (PCP). This could be a straight insurance plan with low or high deductible, but it can also be a true health maintenance plan offered by a group of physicians. Preventive care would be flat rate, unscheduled primary care would be partly covered with enough fee per service to discourage misuse of the system, and specialist care would be covered by an insurance pool - of physicians, not patients. If only PCPs were in the groups, I expect the current imbalance of the fee structure, which favors specialists, would be reversed, possibly to the extent that specialists become as hard to find as PCPs are now. I think it would be better for the groups to include a selection of specialists and contracts with hospitals. This would tend to limit patients' choice of specialists and hospitals - but you generally have no better way of picking these than asking your PCP, anyhow. And obviously, there must be a contractual requirement to pay for services that the group does not provide, for treatment when travelling, and for emergency treatment.

Aside from changing incentives for some of the providers, this also makes it practical to change jobs and keep your health plan.


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