The Sad State of the Healthcare "Market"
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The Sad State of the Healthcare "Market" A typical hospital bills your insurance 10 -20x more than a fair market price for any given medical procedure. This isn't surprising: the healthcare industry is a chaotic mess of middlemen and bureaucrats, and everyone takes a cut. When you cut out everyone except a doctor and a patient, you'd be amazed at how low prices can get. The healthcare industry is simple in theory: doctors provide medical services to patients in exchange for money. Brilliant! But a generation ago, patients stopped actually paying f or these services themselves, instead relying on their insurance plans to cover everything on their behalf. This is already extremely strange; in what other industry does a third party pay for everything you buy, in exchange for a flat monthly rate? Imagine what this would look like in the restaurant industry. You'd pay $2000 per month for "food insurance", and in exchange your food insurance company would pay for all your meals! Go out to any restaurant, provide your food insurance information, and order w hat you like! Of course, you'd save a ton of money if you just paid the menu prices, but since your employer (and Obamacare) mandated that you buy a comprehensive food insurance policy, you might as well use it! Already this "free market" is looking a litt le worse for wear. Now let's look at the other side of the equation: the doctors. In the past decade, hospitals and clinics across the country have consolidated into a handful of huge corporate behemoths. In the last 6 years alone, the number of doctors employed by one of these "health systems" has increased from 25% (2012) to over 44% (Jan 2018). Doctors who work in these systems are kept entirely in the dark when it comes to money. They typically have no clue how much the hospital charges for each service; often, they don't even know what services the hospital is charging for! The process of a hospital requesting payment from your insurance company is dizzyingly complicated; that's why hospitals are consolidating in the first place—to manage the administrative burden of billing. So that's the state of the healthcare market: the two main players— doctors and patients—have no clue how much anything costs. Instead, they've both hired a third party—health insurance companies and huge corporate hospitals—to de cide prices on their behalf. This bizarre, anti-competitive scenario is why healthcare prices have been rising steadily for years. In principle, the negotiations between hospitals and insurance companies should eventually shake out a fair price. But that's not what happens. You see: insurance companies are regulated. They're only allowed to make a fixed profit margin. So if they bring in $1M in premiums, they're required to pay out at least $800k. So the only way for them to increase their profits is to increase the amount of money that flows through them. That's right: the insurance company would prefer to pay for more procedures and at higher prices, so next year it can legally increase its premiums and, by extension, its profits. What could go wrong? Answer: just about everything. The total amount spent on healthcare in America has increased by an average of 6.4% annually for the past two decades. That's faster than inflation AND average wages, so everyone in the country is spending a bigger and bigger chunk of their paycheck on healthcare. Fortunately there's a way to get off the runaway train that is American healthcare and enjoy fair prices for medical care! It's called direct primary care, and it's a totally new model for healthcare that throws useless middlemen out the window! How DPC Solves the Healthcare Crisis Healthcare in the United States is broken. Actually, "broken" doesn't quite capture it. It's a roiling cesspool of greed, perverse incentives, incompetence, and a lack of interest in providing great care to the people who need it. So let's get into it. Insurance Companies Insurance companies are widely blamed for causing the healthcare crisis. And yeah—they certainly deserve a big part of the blame. The whole point of insurance (of any kind) is to avoid a huge bill if something catastrophic happens. By paying a little bit of money on a regular basis, you avoid paying a lot of money when something really bad happens. If an insurance company is paying for something that is normal and routine, they're just a useless middleman. Over-Coverage Here's the thing: insurance companies have a fixed profit margin; they take a cut of all the money that flows through them. The only way for them to make more money is to process more dollars. So they started insuring things that didn't need to be insured. Would you use your car insurance to pay for an oil change? No—you only use it when you get in an accident. You pay for routine maintenance yourself. What if your car insurer offered to pay for your oil changes, but only if you go to High Price Lube and pay a pre-negotiated "discounted" rate of $200? This is how the system works in America; you use your health insurance for everything. Annual physicals? Pay with insuran ce. Routine blood tests? Pay with insurance. Putting a bandaid on a scratch? Pay with insurance. This is the madness of health insurance in America. The Seeds of Crisis In 1966, the American Medical Association published the first edition of the Current Procedural Terminology (CPT) manual. It assigned a short, standard numerical "CPT code" to every known medical procedure. The insurance industry loved it. By the 80s, Medicare and private insurance companies had deeply integrated CPT codes into their claims processing system. They were a convenient shorthand way to itemize all the services performed in a doctor visit. All hospitals and clinics had to use CPT codes in their insurance claims to get paid. And for a while, things were good. Everyone spoke the same language and the system was working. Gaming the System Then a terrible thing happened. Hospitals learned how to game the system. They started submitting itemized lists containing dozens of CPT codes, even for simple visits. They developed medical record software that was geared entirely towards maximizing revenues, instead of tracking medically relevant information. They started training their doctors to use certain "billable phrases" in their medical records. They started recommending MRIs and blood tests willy nilly, even if they weren't medically necessary. They started choosing a more lucrative surgery over a cheaper, safer option. The Rise of Administrators There are a thousand other ways hospitals have managed to “optimize” their insurance billing. There’s even an entire profession dedicated to the art of maximizing hospital revenue: “medical coder”. Of course, the insurance companies realized they were getting play ed. So they tried to fix their systems the only way they knew how: with more elaborate coding systems, more reporting requirements, and more paperwork. As the systems grew in complexity, hospitals started requiring more and more administrators to handle th e additional requirements. How many more? See for yourself. In the past 40 years, there has been a 32x increase in hospital administrators, compared to a 2.6x increase in the total number of doctors. That's not good. Hospital consolidation These days, it's so hard for a doctor to get reimbursed by an insurance company that many private practices and pharmacies are going out of business. Managing the complexity of the modern insurance system requires a huge, well -funded bureaucracy—something only big hospi tal systems can afford. This is the core driver behind "hospital consolidation", one of the most harmful healthcare trends of the past decade. Big corporate "health systems" have been buying clinics, private practices, and even other hospitals. By aggregat ing a bunch of facilities under one umbrella, hospitals can implement their billing practices more widely, steer patients towards facilities and specialists they control, and decrease operating costs. Increasing prices As these health systems grew to encom pass entire counties or states, they gained a huge advantage in negotiations with insurance companies. A fair market price for a knee replacement is about $30k; this covers the hospital’s cost of labor and materials plus a fair profit margin. If you get a knee replacement within a huge health system, they'll probably try to bill your insurance company over $100k. If the insurance company complaints, the hospital will offer them an amazing deal: a massive 50% discount! The insurance company happily agrees to pay $50k—but they’re still paying $20k more than the market price. Over time, prices drift upwards as insurance companies get accustomed to paying ever higher prices. In recent years, this phenomenon has reached the point of absurdity. Here are some examples of real medical bills (source): A $17 Tylenol pill in the hospital. A $98 ice pack applied during physical therapy. A $70 additional “mileage charge” for a 15-minute ambulance ride. A $10,000 “trauma team activation fee,” when a triage nurse summoned surgeons to the emergency room. A $1000 “rooming-in charge” to a mother who opted to keep her newborn in her room, rather than having him admitted to the new-born nursery. This is the largest contributor to the last 10 years of rising healthcare costs: huge, consolidated, corporate health systems continually charging more for the same services, because they can. The Victims of the Crisis That's the context of the current crisis.