FEBRUARY 9, 2015 – It’s understandable that so many people automatically assume that health insurance provides a benefit. After all, we’ve been conditioned for so long to think that insurance, through some arrangement with our employer, is actually picking up the tab. If that’s true, why not go with the steak instead of the chicken, and for that matter, why not throw in dessert?
For anyone who thinks we haven’t been acting like perfect healthcare consumers for the last 30 years, you may want a refresher on basic economics, and go ahead and start with the free-rider problem. Despite the fact that as consumers we frequently behave irrationally, the truth is that we’ve been behaving exactly as expected. Which is to say that, as consumers, when we’re not bearing the direct brunt of the cost of a good or service, not only will we consume freely, but frequently to the point of excess.
The “consumerization” of healthcare is ultimately the realignment, or rationalization, of the insurance market – and no, it’s not attributable to Obamacare. Employers, who have historically been paying for the majority of our healthcare risk, have simply had enough of 10% annual premium increases. As a result, beginning about a decade ago, more and more employers sought to cap their exposure, which ultimately lead to the emergence and, more recently, explosion of high-deductible (HDHP), or consumer-directed (CDHP), health plans.
And, what a concept – that insurance should primarily cover the exposure related to high-risk, catastrophic events, such as a trip to the emergency room or a cancer diagnosis. In other words, insurance should act like… well, insurance.
High-deductible plans create such a risk vehicle. With these plans, the policy-holder is responsible for a large deductible, say $5,000. This means that during the calendar year, the consumer is paying 100% of the first $5,000 of their healthcare expenses. Once the deductible is met, the policy-holder is typically responsible for a coinsurance amount, say 20%, of all expenditures until their maximum-out-of-pocket amount is met, maybe $10,000. After which, all allowable health expenditures are the responsibility of the insurance company.
The vast majority of Americans under these plans should have no expectation of hitting their deductible, let alone their max-out-of-pocket. In fact, “hitting” the deductible for the average American also means destroying savings, and potential bankruptcy.
The insurance exists merely to cover us in an unlikely, but possible, catastrophic event. Free-market proponents and supporters of alternative care models, like concierge medicine and direct primary care, have long made the analogy to car insurance, pointing out that we have auto insurance to cover us in the event of a collision, not to cover the cost of routine maintenance, like oil changes.
Under HDHPs, we no longer get the equivalent of unlimited $10 or $20 trips to Jiffy Lube. We’re now responsible for the full amount of the visit, and it’s coming directly out of our wallets.
Nevertheless, most people are conditioned to assume that there’s a benefit of dropping the insurance card down at the check-in counter. And why not? After all, a quick glance at the typical explanation of benefits (EOB) [you know, that letter you get from your insurance company after you visit a doctor that’s not really a bill, but sort of feels like one?] shows you an incredible “discount” that your insurance company is offering on what the doctor or hospital is otherwise charging.
The truth is that “discount” is actually a 30-200% premium over fair market price.
Here’s how it works:
To start with, by using your HDHP, you are choosing to limit your choice of physicians to those in your health plan’s narrow network.
When you go to your appointment, the doctor can’t tell you how much the visit will cost, because he doesn’t know. The exact amount is based on what he eventually bills and what his contracted rates are with your insurance company.
Because you are on an HDHP, you leave the visit, paying nothing – not even the $20 copay of yesteryear.
In about a week, you should receive an EOB from your insurance company telling how much your doctor billed – let’s say $200, and how your insurance company “re-priced” the claim to account for your “discount” (the actual contracted rate between the insurance company and your doctor) – bringing the total amount owed to $140 (woohoo! $60 savings!). Assuming you have not met your deductible, the insurance company pays nothing and notifies you and your doctor that you are responsible for the full $140.
Beginning about 15 to 30 days out from your visit, the bill from your doctor finally arrives. It shows that you owe $140, and asks you to please remit payment. If you’re like most people, you won’t. The doctor’s office will keep sending you a statement every month. Somewhere between month 3 and 6, either you will need to go back to see your doctor again for something else – at which time the office will shake you down for it – or, you simply relent and pay the poor guy. 60-80% of people won’t do either – visit or relent.
As a result, the worth of this visit to the doctor is about $38 in net present value, or cash in-hand today. We derive this from multiplying the $140 by a 30% probability of collection (we split the difference of 20-40%), and by discounting the cost of collection attempts (printing and postage) along with the time-value of money. In fact, $38 is pretty generous – especially because I’m not factoring in the ridiculous amount of overhead needed to support the whole billing and collection process.
How much do you think the doctor would have accepted at the time of check-in if you had paid in cash and he didn’t have to deal with insurance and patient collections at all?
As much as I would prefer to compare this to an actual fair market price, no such thing currently exists because we don’t have a free-market setting prices (not yet anyway). So, if you want to know what the doctor would have been willing to take, just look at his same-day cash fee schedule. I’ve never met a medical practice that doesn’t have one. It’s not something they typically advertise, and historically it is reserved for uninsured patients.
If you don’t have access to it, a good rule of thumb for the cash price of services is right around what Medicare reimburses. This is pretty convenient, because another good rule of thumb is that your doctor is charging 200% of the Medicare reimbursement rate. Therefore, for this $200 visit, the doctor should have been glad, nay ecstatic, to take $100 up front.
In other words, assuming you are one of the courteous people who pay their doctor bills promptly, using your insurance resulted in you paying $140 instead of $100. And, in exchange for this premium, you were rewarded with a limited choice of providers, and total uncertainty surrounding the cost of your care.
The physician – and many have been trapped on the hamster wheel of insurance so long they have trouble recognizing this – by accepting your insurance, effectively took $38 (and a growing ulcer) instead of a hastle-free Benjamin.
The cost of involving insurance in routine transactions – again, I’m not talking about high-risk environments (which is a conversation for another day) – is staggering. If we continue with the car insurance analogy, given the fact that our insurance has nothing to do with the servicing and maintenance of our car, would we let them dictate where we take our car to be serviced and how much we pay? That’s absurd, but it’s precisely what’s happening when we use our HDHP for routine care.
If HDHPs continue on their current trajectory, and assuming our consumer “street-smarts” eventually kick-in, it wouldn’t surprise me if 50-70% of all ambulatory care were procured on a cash-basis within the next 3-5 years. And while I’ve had a number of people dismiss this notion outright, the good folks at Walgreens, CVS, and most recently Wal-Mart (on a redux), cannot open clinics fast enough to satisfy demand.
The next time you see your doctor, do both of you a favor and tell him to put his cash-prices right out front in flashing neon lights.