Government health care, learning from Medicare and Medicaid

medical-price-trends2

What’s the real problem with health care?  Can HSA’s really help?  Will government intervention fix all of our problems so we can sing Kumbaya by the campfire?  The chart above may help us to uncover some of the problems by comparing some cases and seeing why differences exist.

Here I have indexed to 1996 as 100, the price of breast augmentation, liposuction, hip replacement, arthroscopy, and the overall CPI as a benchmark.  I consider the breast augmentation and liposuction in one group, and the hip replacement and arthroscopy in the other.  I know from the data that in 2006 67% of charges for hip replacement were paid by Medicare or Medicaid and the same was true for 74% of arthroscopy charges in 2006.

I don’t know these breakouts for certain in the breast augmentation and liposuction realms, but I do know that significant numbers of these procedures are for cosmetic purposes only and are not even covered by insurance, let alone Medicare or Medicaid.  I also know that there are open markets where consumers can shop by price and quality (BidforSurgery.com) rather than find a good doctor and get surprised by a mammoth bill.

However, a large portion of consumers are only concerned with the first part of my last statement “find a good doctor” because they are not paying firsthand the costs of many of the procedures performed and medicines prescribed.  When considering all hospital discharges, a little over 61% of charges were paid by either Medicare or Medicaid in 2006, so the examples I have are slightly higher than the total, but not significantly.

Some within the 30% of charges paid by private insurance may have little or significantly reduced exposure to firsthand payment for medical care as they sport the platinum plated Blue Cross/Blue Shield plan that is significantly subsidized, if not entirely paid for by the employer.  Some are heavily exposed to firsthand cost under an High Deductible Health Plan (HDHP) that is being marketed in conjunction with Health Savings Accounts (HSAs) as a cheaper alternative for small to medium sized businesses.

Now both the uninsured and those with HDHPs suffer from escalating prices for medical care in a market where significant numbers of consumers have little or no price sensitivity because they do not pay for their own care!  A significant portion of this lack of price sensitivity is from those on the Medicare/Medicaid rolls who may not even have the possibility of future cost exposure either.  Thus, a significant portion of the rising costs in medical care are generated by the government, not solved by the government.

HSAs don’t really help to solve the problem when so much of the consumer market has little to no price sensitivity and the only ones hurt are the ones that have the HDHP/HSA and have to pay the cost of care that others are receiving for free.  This may drive down demand for consumers on HDHP/HSA plans, but they are such a small portion of the market that the impact on price is not significant.  In the cosmetic surgery cases, price sensitivity rations care and controls prices because the majority of participants in that market pay the full cost first hand.  Even if all those covered by private insurance were on the HDHP/HSA plan, over 60% of hospital charges in 2006 would have been incurred by patients on the government plans, making up the majority of consumers in that market.

Data used was compiled from the Agency for Healthcare Research and Quality.

Government Health Care

This presidential race has garnered much attention for those who wish to socialize medicine by having the government guarantee health care for all.  Some of the problems in our current system are due to the government being a major customer of most if not all health systems.  However, the government either federal or state do not generally contribute to the profit of these health systems.

Medicare and Medicaid both work under a “cost reimbursement” system that only allows the government to be billed the actual cost of the procedure, rather than the market rate for that procedure.  The effect here is that to maintain profit margins across the whole system the “market rate” for those with private insurance and those who pay for themselves must be increased.  So we pay for the government health care plans with our tax dollars and further pay a subsidy to the hospitals through increased health care costs and higher insurance premiums.

A move to a single payor system (the government pays for and regulates all health care) could eliminate the profit from healthcare and greatly diminish quality.  It’s hard on the people with private insurance to make up the difference for Medicare and Medicaid twice (taxation and subsidy), but if a governmentally run healthcare system eliminates the profits from the industry there will be less pay for doctors, less structural improvements, less equipment upgrades, and more regulation of services provided. 

The effect of this change would not be apparent over night as it would be several years before the lack of structural improvements took a toll on the whole system, but it seems the system would necessarily deteriorate over time as profits were replaced with cost reimbursements across the board.