Health Care: Co-Payments and the Internet

As the debate about health care reform has unfolded, at least one thing has emerged that almost everyone has agreed upon:  we are spending too much on health care.  Currently, we spend about 1 out every 6 dollars on health care or 16% of GDP.  On a per capita basis, we spend almost double what the next highest country spends.  And yet, on almost every important indicator from infant mortality to life expectancy to doctors per capita, we lag significantly behind most other OECD countries.  Therefore, it is certainly possible to get better outcomes while spending less money.

One of the major reasons why we spend so much money on health care is because of the way we pay for it.  By and large, the cost of medical purchases, such as doctors visits, procedures, tests, and drugs, are borne, not by the purchasers, but by a third party—namely insurance companies.  Moreover, there is almost no price or quality transparency.  But WRT to prices, most consumers do not care about this, because, as I said above, they are not the ones bearing the cost of their purchases.  Because of this, consumers do not to seek the optimal combination of low cost and high quality.

Co-Payments

Unlike almost any other purchase, those doing the purchasing of health care and those doing the paying are two different groups.  In the health care arena, patients purchase services but a third-party pays most of the cost.  Therefore, unless the insurer charges a large enough deductible or co-payment, the consumer never really feels the impact of their health care purchases.  When a consumer does not pay for a product or if that cost is borne by someone else, over consumption in terms of price and quantity of the good almost always occurs.  However, if insurers make the deductible or co-payment too high, consumers may forgo needed doctor’s visits or procedures.  This can lead to patients developing more serious and costly conditions that may have been averted had the patient simply gone to the doctor earlier on.

To solve these twin problems, a co-payment scheme must be designed such that all consumers immediately feel the impact of their health care purchases (so that they do not over-consume) yet are reimbursed enough by insurers so that they do not under consume either.   A CO-PAYMENT is the portion of a medical expense that the consumer, rather than the insurer, must pay. For example, for a $100 blood test, the insurer may pay $75 and the consumer is responsible for the remaining $25 (of a $100 test).  Co-payments can be a fixed amount or a percentage of the cost of each purchase.  The scale of co-payments should be progressive based on income so that those who are lower income do not forego needed health care because it costs too much and the rich do not consume more than they need.

Price and Quality Transparency

In addition to a co-payment system, price transparency is also needed to drive down the cost of health care.  I know of almost no other market place where the consumers have less of an idea of how much their purchases will cost or the quality of what they are going to get beforehand.  If I want to purchase a new TV, it will only take a matter of seconds before I know how much any number of sellers is offering to sell the TV for.  Yet, when I go to a doctor’s office for a physical and tests, I have no idea how much it costs or how much my insurance company will reimburse me for that visit and tests.  No doctor or hospital that I know of posts their prices on-line.

Furthermore, the market for most other products and services also contains a multitude of publications and websites that rate and review products and services.  Like prices for health care purchases, consumers generally also lack information regarding the quality of the health care they purchasing.  Patients have little information regarding the quality or necessity of a procedure or drug prescribed or the quality of a health care provider apart from word of mouth of friends or the referral of another doctor.  This lack of information prevents consumers from being able to shop around for the best combination of price and quality.

Those selling medical services should be required to post their prices on-line and tell consumer beforehand what services and products will be “sold” to them for each visit or procedure.  The more price information that consumers have, the more likely it is that consumers will pay lower prices because they will able to shop around for the best prices.  Price transparency will allow consumers to gravitate to those sellers who are charging lower prices (just look at what Amazon has done for books and electronics).   This will force the higher priced vendors to drop their prices to attract consumers or go out of business.  According to the Congressional Research Service,

If buyers can see and compare prices for the same good offered by different sellers, the buyers then save money by choosing the cheapest vendor. If goods are similar but not identical, buyers then can compare prices and qualities offered by different sellers and pick whichever offer suits them best. The buyers’ ability to choose an offer that suits them best puts tremendous pressure on all sellers to lower prices, improve quality, or both. Without such competitive pressure firms that are less efficient or that are earning excess profits can remain in the market, and prices will be higher than they would otherwise be.

Simply put, the CRS found

Almost all of these studies found that more information on prices and quality lowered prices, improved quality, or both. . . . Considering all of the evidence of price transparency, the majority of the empirical studies tend to find that greater price transparency, including advertising and reduction in costs of finding information through the Internet, leads to lower and more uniform prices.

I see no reason why the same will not occur in the health care arena.

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