Why are Health Care Costs So High - and Growing

The real problem is that our health care delivery system is based on a model that makes no economic sense. The system is broken and needs to be redesigned. The current debate seems to assume this is a fight between the free market and socialism. Although there are people who would like us to go one way or the other, our current system is neither.

Our current health system is not that old. It started during World War II when wages were frozen. Employers, looking for new ways to attract workers, came up with the idea of providing health insurance. Thus began employer based health insurance, which is how most Americans get their insurance.

In most economic transactions in America, there is a consumer and a provider of the product/service. If the consumer doesn't like the product quality or price, they go to another provider. Providers keep their quality and prices competitive to keep their customers.

In health care, patients are the consumers, but they don't pay for the service and rarely even know the price. They don't have sufficient knowledge to evaluate the quality of the service - and even if they did, they have limited choices in providers.

Doctors are the providers of the service, but they don't get to set the price, and the price is not determined by any measure of quality, but rather of quantity.

In our crazy health care system, neither the consumers (patients) or providers (doctors) have anything to do with setting the price.

Instead, the insurance companies serve as the providers, and the employers serve as the consumers. They are the ones operating in the free market, and neither has any interest in what's happening to patients or doctors.

Employers and insurance companies are both motivated by the bottom line - their profits and stock prices. So employers try to spend as little as possible on insurance. Insurance companies make their product as cheap as needed to get the business of the employer.

Employers upset with health care costs shop around until they find a lower cost insurer and/or increase the share paid by their employees. If they're too small to be able to negotiate a good deal with insurers, they may just quit offering insurance. But whatever they pay is totally deductible from their taxes.

Insurance companies keep their prices as low as needed to keep their customers, the employers. Then in order to make a profit, they just reduce their costs. They do this in many different ways. They lower their payments to doctors, they reduce procedures they reimburse, they increase the paperwork needed to get reimbursement to discourage use, etc.

Doctors find their payment for procedures reduced, and their overhead increased through hiring more staff to process the paperwork. Therefore, they must perform more procedures just to keep even, which reduces time spent with patients. Doctors also (consciously or not) perform procedures that pay more.

There are other complicating factors. Drug companies and for profit hospitals that are also operating under the profit motive. Nonprofit hospitals are more like doctors. Then there all those individuals with individual or small group policies that just buy whatever they can afford, regardless of their health needs. All the uninsured, growing daily, also affect the market. Medicare and Medicaid are another different problem.

It is easy to see that our accidental health care delivery system is totally dysfunctional. If we want to ever bring health costs under control, we have to change the system to recognize real incentives that work - and it must be done now!

If we don't change it now while we have the opportunity, our country will shortly be bankrupted by totally unnecessary health care costs. We could have a fair, cost effective system, but that would require the Republicans to enter into a discussion and debate of real issues. Unfortunately, most Republicans in Congress are more interested in defeating Obama than they are in the economic well being of their country or the health of its citizens. Very sad.

In my next post, I'll discuss elements of reform that could be agreed upon.