The United States spends an enormous amount of money on health care every year. But individual American consumers do not. In 1998 (the most recent figure I could find) the average American family spent only 5.4% of its income on health care — in contrast to the 16 percent of the GDP or $1.9 trillion that the country spends as a whole.
By contrast, the average family spends 40.8% of its income on housing, 18.3% on transportation and 18.2% on food. Interestingly, spending on clothing – 4.5 % – and health care is comparable.
As health care spending has surged, the proportion paid directly by consumers has dropped dramatically over the past 50 years. In 1960, Americans paid directly for 56% of all the health care they consumed. By 2002 this had dropped to 14% of the total. What’s more, most of that went to peripheral services such as vision care, dental, and over-the-counter medications and not to the core services such as physicians, hospitals, or prescription drugs.
Most Americans don’t even know how much health care spending has really gone up. In fact, while economists and policy makers have been worried about the “crisis” in health care spending for over 30 years, public opinion surveys show that the public holds the opposite view. Since 1973, surveys have asked the public if the United States spends “too much, too little, or just the right amount” on health care. Year after year, about two-thirds of the public says the United States spends too little. At no time since 1973 has more than 10% of the population said we spend too much.
Why this disconnect? Because the United States finances health care services through a system of “Third-Party Payment” (TPP) that makes health spending invisible to its very consumers. Because patients don’t pay the bills – heck, in most instances they don’t even see the bills – health care appears to be “free” to the American consumer who therefore over consumes. By some measures, as much as one-third of the services we use are unnecessary. These include antibiotics for viral infections, annual physicals for young, healthy people, duplicative radiology, tonsillectomies, psychotherapy.
What most Americans have today is called insurance but is not real insurance. They have a Third-Party Payment system of coverage. Real insurance is a two-party indemnity contract between an insurance company and a consumer. The consumer pays a premium to get a benefit in the event of a “loss.” If an adverse event occurs, the insurance company pays the benefit, usually a dollar amount, to the insured consumer. In a system of Third-Party Payment, the insurance company or agency pays health care providers to deliver services to the consumer. It is a triangular relationship that results in confusion, waste, and a lack of accountability.
Since consumers don’t directly pay for the services or even find out how much services cost, they want all they can get. Providers have no reason to object, because the more services they deliver, the more they get paid. Insurance companies step in and try to control this over-use, but they can’t do so in an optimal way. They don’t know what the different needs of different patients are and their one-size-fits all approach inevitably shortchanges some patients. Administrative costs mount as all the parties try to sort out what is needed and what is not, what is good care and what is mediocre or worse, what is the right amount to pay and what is too much or too little. The best estimates suggest that about 25 percent of health care spending goes toward administrative costs – or a staggering $500 billion annually.
And what do American patients get for the extra spending? It is true that the survival rate in the United States for breast cancer, heart disease, and trauma patients is very high compared to other countries. Also, U.S. doctors and hospitals take far more heroic – and expensive – measures to save lives than their counterparts in other countries. Yet the rate of “medical errors” and nosocomial infections – infections contracted in hospitals – in America is very high.
One reason for these problems is that patients don’t control their treatment because doctors, as noted, don’t work for them. They work for the insurance company that pays them. Therefore, they have an incentive to offer those services for which the insurance companies will reimburse them – and not others that don’t get reimbursed such as evening and weekend office hours. This leads to lack of proper physician oversight of patients and contributes to errors.
Furthermore, insurance companies have become way too interested in what is happening between the patient and the doctor. They have become voyeurs, peeping Toms, peering into one of the most intimate relationships in a patient’s life. Is this doctor over-prescribing? Suggesting lower-cost alternatives? Adequately counseling the patient to lose weight, not smoke, exercise more? Is this patient telling the doctor the truth about his behavior, his history?
If our system of Third-Party Payment were applied to any other segment of the economy – housing, clothing, food, or transportation – we would get the same results. Consumers might pay far less out-of-pocket, but, in exchange, they would get inefficiency, inconvenience and erratic quality.
The first step in preserving what’s good in the American health care system while purging the problems would be by giving patients direct control over their health care dollars. Government-run insurance programs such as Medicaid and Medicare can eliminate the federal bureaucracy that reimburses doctors and hospitals and give the money to the beneficiaries to secure their own coverage. And instead of buying coverage for employees, private employers should give workers the money to buy whatever coverage they want. Should employees opt for relatively less expensive indemnity coverage, they ought to be allowed to keep the balance to cover the out-of-pocket expenses of routine care. This is effectively the approach under medical savings accounts.
While giving families direct control over the funds specifically ear-marked for health care might not necessarily reduce health care spending, it would lower administrative costs and increase efficiency and accountability. Reducing health care spending would happen, if it were going to happen at all, only when the dollars Americans’ spend on health care were to compete against all of the other ways they want to spend their money. That’s when we would know how much Americans really value various health care services — and how much they are consuming simply because they can.
Greg Scandlen is the President of Consumers for Health Care Choices.
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