TAANSTAFL, or GETTING RICH BY PICKING MULTIPLE POCKETS
Mr. Dissociated and I are on Medicare. In addition, he has an HMO, and I have a state retiree supplemental policy. You'd think that would leave us pretty well-fixed on the medical front. Gee, all that insurance for nothing, and all that health care for nothing!
Uninsured friends of our are a bit envious, and I can't blame them.
But on the other hand....
Medicare is not "free." Part A is sort of free. It's built into the federal budget, and we pay for it with our taxes. Part B has a monthly premium, which goes up to $94.00 per month this year. For us, as for most people, it gets deducted from our Social Security benefits up front, so we never really see it and don't miss it. But it is nonetheless not free.
My husband's HMO isn't free either, though it comes with no separate premium. Instead, the HMO collects his medicare premium from medicare as their premium.
And my state retiree insurance, though it also has no separate premium, was also paid for, up front, in twenty-plus years of radically underpaid teaching as an adjunct in the state university and community college system.
Which is how a lot of people's "employer-paid" health insurance gets paid for--in lower wages for the employee. These days, "employer-paid" health insurance and related benefits comprise from 25% to 40% of the total wage-benefit package. Since there ain't no such thing as a free lunch, this means that the employee's actual paycheck is roughly 25 to 40% smaller than it would be without these benefits. (Well, not necessarily. Big Business is perfectly capable of pocketing some of the difference if it gets the chance.)
But, once the insurance policy or (more often) policies are purchased, that does not end the consumer's expenses. On the contrary, it's just the beginning.
In the early days of managed care and health insurance planning, policy makers worried that, if people didn't have to pay anything out of pocket for their health care, they might make frivolous decisions and waste precious health care resources. There are always, undoubtedly, people who figure that, if something appears to be "free", there is no reason not to throw it around with wild abandon. But nobody has ever established how many such wastrels there are, or how much they will actually waste. We just figure, perhaps as an outgrowth of our puritan heritage, that if we don't attach some kind of cost or unpleasantry to an apparently free good, it will be wasted and ultimately devoured completely. ("Give," as Ayn Rand so authoritatively pronounced, "is a four-letter word.") This was the origin of the co-pay. People who had already paid, directly or in the form of diminished wages, a monthly premium for managed care, were now required to pay an additional small but not insignificant sum out of pocket on every occasion on which they actually used what they had already paid for. In the beginning, it was often a dollar for doctor visits, or for filling a prescription. Not as a revenue-raising device, but just to make people conscious that their health care wasn't "free." These days, Mr. Dissociated's co-pays (for example) have risen to ten dollars for primary care visits, and thirty dollars for specialist visits. Co-pays for prescription medications can range from four dollars (Wal-Mart's current loss leader) to well above one hundred, based on various arcane formulas. These co-pays are now a significant revenue source for the health care provider.
Similarly, many health insurance policies carry a "deductible." That has nothing to do with income tax policy (more about that later.) It just means that the insurance you have already paid for doesn't cut in until you have spent a specified sum out of your own pocket for health care during a stated period, usually a year. The thinking behind the deductible is that people should expect to cover a certain amount of their own health care costs before dipping into the insurance benefits (which of course, they have already paid for. Forgive me for repeating this, but it's easy to forget.) The deductible was never calculated to be a nominal sum, unlike co-pays. It was intended to be what people should reasonably expect to pay out of pocket (on top of monthly premiums.)
An increasing number of people have started buying secondary insurance policies to cover the increasing out-of-pocket costs posed by deductibles and co-pays. This is especially true of people on Medicare, who buy "Medigap" policies for that purpose. Which is yet another set of premiums paid for up front by the consumer. Conceivably at some point a tertiary insurance market could open up to cover what the primary and secondary sources don't. And so on.
On top of all that, there are some other sources of payment for health care. The federal government pays 42% of all health care costs in the US, through Medicare, Medicaid, the VA, the Bureau of Indian Affairs, Champus/Tricare (for active duty military personnel and their families) and various programs to provide capital funding for hospitals, nursing homes, and medical schools. State and local governments pay for some hospital and clinic programs. In addition, various churches and other charitable organizations support hospitals and clinics, usually in conjunction with one or more governmental organizations. Ultimately, all of that money comes from the taxpayer, the individual donor, and the individual member of a church or other religious body in his or her capacity as donor. Supposedly, the ability of the various government and charitable agencies to consolidate all of these individual payments and use them to run the system results in economies of scale, so that the individual gets far more for his or her dollars than would have been possible if the money had all come directly out of millions of individual pockets to health care providers.
How does the health care industry deal with this multiplicity of revenue sources, all ultimately coming out of my pocket and yours?
Well, imagine that you are running a service plan for consumers. Say, you provide school books and other basic reading materials for children. You start out just getting paid a monthly book club fee directly by the children's parents.
Since you are in business to make money, you raise the book club fee every so often, until people start dropping out of the club. You calculate the break-even point, where you are getting maximum revenue despite the dropouts, and that's your efficient market price. It may rise with inflation, or sink with lowered costs, but only within limits.
But the kids don't seem to value the books, and often tear them up or lose them. So you institute a 25-cent co-pay, so the kids will take the program more seriously. Maybe you even refund it when the book comes back in good shape.
As time goes on, you discover that most kids have their own allowances, and are actually willling to invest some of their own money in the program. So you stop refunding the co-pays. Then you raise them, bit by bit, until the kids start dropping out of the program, or borrow fewer books. You calculate that break-even point, and you have another efficient market price.
So now you're getting the monthly book club fee from the parents, and the co-pay from the kids, both at the maximum market price.
But you find out that there are families that can't afford the efficient market price, who would gladly become your customers if they could afford it. So you write a grant proposal for the US Department of Education, explaining how many more families you could serve if you only had some extra money. You luck out on your first try, and get your grant. Of course, that grant is paid for by the US taxpayer, including the families you are already serving, and the new ones you can now afford to serve. For those new families, you can offer a lower monthly book club fee, or maybe no fee at all at the start, and a lower, or refundable, co-pay for the children, or maybe none at all at the start. Over the years, however, you will try raising the "reduced"monthly fee, and the "reduced" co-pay a little at a time, until you run into more dropouts, telling you you have once again found the efficient market price for this particular segment of the market.
But next year, your costs have gone up a bit. So you re-apply for the grant, asking for a bit more money, both for the expenses and families already funded, and for some new aspect of the program or a new set of families or a new type of media. What you end up getting is more than you got last year but less than you asked for this year. Which tells you that you have tapped out the US Department of Education source--found another efficient market price--and need to look elsewhere for more funds.
So you write another grant application, this time to a private foundation, asking for funding to provide kids with educational computer software. Again you luck out, and get what you asked for. Next year, you re-apply, and get exactly what you got this year. Which tells you you need another source of revenue. Note that the private foundation gets a large portion of its revenue by virtue of being tax-exempt (see, I told you I'd get back to IRS.) The foundation pays no taxes, and the donors to it pay no taxes on their contributions to it. Which means that the rest of us taxpayers, including the families who benefit from the program, have to pay more taxes.
Anybody who has ever worked in the non-profit sector can tell you that this elegant choreography can and often does go on for years. The more sources of revenue you can find, and dip further into until you find the market limit for each in turn, the more money you make for providing more or less the same service to more or less the same people.
Uninsured friends of our are a bit envious, and I can't blame them.
But on the other hand....
Medicare is not "free." Part A is sort of free. It's built into the federal budget, and we pay for it with our taxes. Part B has a monthly premium, which goes up to $94.00 per month this year. For us, as for most people, it gets deducted from our Social Security benefits up front, so we never really see it and don't miss it. But it is nonetheless not free.
My husband's HMO isn't free either, though it comes with no separate premium. Instead, the HMO collects his medicare premium from medicare as their premium.
And my state retiree insurance, though it also has no separate premium, was also paid for, up front, in twenty-plus years of radically underpaid teaching as an adjunct in the state university and community college system.
Which is how a lot of people's "employer-paid" health insurance gets paid for--in lower wages for the employee. These days, "employer-paid" health insurance and related benefits comprise from 25% to 40% of the total wage-benefit package. Since there ain't no such thing as a free lunch, this means that the employee's actual paycheck is roughly 25 to 40% smaller than it would be without these benefits. (Well, not necessarily. Big Business is perfectly capable of pocketing some of the difference if it gets the chance.)
But, once the insurance policy or (more often) policies are purchased, that does not end the consumer's expenses. On the contrary, it's just the beginning.
In the early days of managed care and health insurance planning, policy makers worried that, if people didn't have to pay anything out of pocket for their health care, they might make frivolous decisions and waste precious health care resources. There are always, undoubtedly, people who figure that, if something appears to be "free", there is no reason not to throw it around with wild abandon. But nobody has ever established how many such wastrels there are, or how much they will actually waste. We just figure, perhaps as an outgrowth of our puritan heritage, that if we don't attach some kind of cost or unpleasantry to an apparently free good, it will be wasted and ultimately devoured completely. ("Give," as Ayn Rand so authoritatively pronounced, "is a four-letter word.") This was the origin of the co-pay. People who had already paid, directly or in the form of diminished wages, a monthly premium for managed care, were now required to pay an additional small but not insignificant sum out of pocket on every occasion on which they actually used what they had already paid for. In the beginning, it was often a dollar for doctor visits, or for filling a prescription. Not as a revenue-raising device, but just to make people conscious that their health care wasn't "free." These days, Mr. Dissociated's co-pays (for example) have risen to ten dollars for primary care visits, and thirty dollars for specialist visits. Co-pays for prescription medications can range from four dollars (Wal-Mart's current loss leader) to well above one hundred, based on various arcane formulas. These co-pays are now a significant revenue source for the health care provider.
Similarly, many health insurance policies carry a "deductible." That has nothing to do with income tax policy (more about that later.) It just means that the insurance you have already paid for doesn't cut in until you have spent a specified sum out of your own pocket for health care during a stated period, usually a year. The thinking behind the deductible is that people should expect to cover a certain amount of their own health care costs before dipping into the insurance benefits (which of course, they have already paid for. Forgive me for repeating this, but it's easy to forget.) The deductible was never calculated to be a nominal sum, unlike co-pays. It was intended to be what people should reasonably expect to pay out of pocket (on top of monthly premiums.)
An increasing number of people have started buying secondary insurance policies to cover the increasing out-of-pocket costs posed by deductibles and co-pays. This is especially true of people on Medicare, who buy "Medigap" policies for that purpose. Which is yet another set of premiums paid for up front by the consumer. Conceivably at some point a tertiary insurance market could open up to cover what the primary and secondary sources don't. And so on.
On top of all that, there are some other sources of payment for health care. The federal government pays 42% of all health care costs in the US, through Medicare, Medicaid, the VA, the Bureau of Indian Affairs, Champus/Tricare (for active duty military personnel and their families) and various programs to provide capital funding for hospitals, nursing homes, and medical schools. State and local governments pay for some hospital and clinic programs. In addition, various churches and other charitable organizations support hospitals and clinics, usually in conjunction with one or more governmental organizations. Ultimately, all of that money comes from the taxpayer, the individual donor, and the individual member of a church or other religious body in his or her capacity as donor. Supposedly, the ability of the various government and charitable agencies to consolidate all of these individual payments and use them to run the system results in economies of scale, so that the individual gets far more for his or her dollars than would have been possible if the money had all come directly out of millions of individual pockets to health care providers.
How does the health care industry deal with this multiplicity of revenue sources, all ultimately coming out of my pocket and yours?
Well, imagine that you are running a service plan for consumers. Say, you provide school books and other basic reading materials for children. You start out just getting paid a monthly book club fee directly by the children's parents.
Since you are in business to make money, you raise the book club fee every so often, until people start dropping out of the club. You calculate the break-even point, where you are getting maximum revenue despite the dropouts, and that's your efficient market price. It may rise with inflation, or sink with lowered costs, but only within limits.
But the kids don't seem to value the books, and often tear them up or lose them. So you institute a 25-cent co-pay, so the kids will take the program more seriously. Maybe you even refund it when the book comes back in good shape.
As time goes on, you discover that most kids have their own allowances, and are actually willling to invest some of their own money in the program. So you stop refunding the co-pays. Then you raise them, bit by bit, until the kids start dropping out of the program, or borrow fewer books. You calculate that break-even point, and you have another efficient market price.
So now you're getting the monthly book club fee from the parents, and the co-pay from the kids, both at the maximum market price.
But you find out that there are families that can't afford the efficient market price, who would gladly become your customers if they could afford it. So you write a grant proposal for the US Department of Education, explaining how many more families you could serve if you only had some extra money. You luck out on your first try, and get your grant. Of course, that grant is paid for by the US taxpayer, including the families you are already serving, and the new ones you can now afford to serve. For those new families, you can offer a lower monthly book club fee, or maybe no fee at all at the start, and a lower, or refundable, co-pay for the children, or maybe none at all at the start. Over the years, however, you will try raising the "reduced"monthly fee, and the "reduced" co-pay a little at a time, until you run into more dropouts, telling you you have once again found the efficient market price for this particular segment of the market.
But next year, your costs have gone up a bit. So you re-apply for the grant, asking for a bit more money, both for the expenses and families already funded, and for some new aspect of the program or a new set of families or a new type of media. What you end up getting is more than you got last year but less than you asked for this year. Which tells you that you have tapped out the US Department of Education source--found another efficient market price--and need to look elsewhere for more funds.
So you write another grant application, this time to a private foundation, asking for funding to provide kids with educational computer software. Again you luck out, and get what you asked for. Next year, you re-apply, and get exactly what you got this year. Which tells you you need another source of revenue. Note that the private foundation gets a large portion of its revenue by virtue of being tax-exempt (see, I told you I'd get back to IRS.) The foundation pays no taxes, and the donors to it pay no taxes on their contributions to it. Which means that the rest of us taxpayers, including the families who benefit from the program, have to pay more taxes.
Anybody who has ever worked in the non-profit sector can tell you that this elegant choreography can and often does go on for years. The more sources of revenue you can find, and dip further into until you find the market limit for each in turn, the more money you make for providing more or less the same service to more or less the same people.
So that's how the health care system functions, and malfunctions. There are two possible ways out of it. One is to put all of the responsibility for finding, and paying for, health care directly on the shoulders of the consumer, and then subsidize him/her to the extent necessary to purchase an appropriate level of care. The consumer decides when a particular provider or course of treatment is "too expensive," given his or her total resources. A health care provider may not agree with the consumer's choice of when to stop. Indeed, the consumer may choose to avoid apparently expensive preventive care, and thereby incur even heavier treatment expenses later for a once-avoidable problem. The health care industry has brought these difficulties on itself by not giving the consumer a realistic cost-benefit analysis when asked for it.
But the real problem, from an economic point of view, is that the subsidy received by the consumer is likely to result in a price increase of at least the same size from the health care industry, leaving the consumer to pay almost exactly what s/he had been paying before the subsidy. The most stellar example is the fact that the average American Medicare recipient is now paying slightly more for medical care out of pocket, both in absolute dollars adjusted for inflation, and in the proportion of his/her total income, as the average senior paid out of pocket for medical care before Medicare was instituted. Essentially, we have poured large amounts of water into the sand, and it is as dry as ever. Even if we reduce the number of income streams for medical care to two (Medicare and patient out-of-pocket), each will still be maximized, and the patient will be no better off than before.
The other alternative is what its supporters call single payer. The taxpayer pays into the system, and government pays out what it defines as a reasonable sum for the various goods and services provided to the patient. There is only one stream of income. When the health care provider raises its prices beyond what the single payer deems reasonable, the single payer will take its business elsewhere. The provider will find its market-efficient price for that single payer, and get paid that much and no more. This minimizes the money spent on health care per unit of service, and thereby reduces the enormous burden health care currently imposes on the American economy. But....
Now we run into the problem common to all third-party payer systems: when the ultimate receiver of the goods and services in question does not decide what is to be paid for those goods and services, he has no incentive to minimize what is paid for them (much less to refuse to pay for really bad service), and no effective way to transmit his valuation of the goods and services received. At the same time, the provider of the goods and services has no incentive to please the receiver or keep its prices within his means. Third-party payment without price controls inevitably leads to hyper-inflation. It has, clearly, happened in health care, and it has happened in higher education. If the third party refuses to pay more than its means allow and forbids the provider to dun the recipient, the providers may drag their feet, or flee the system (or in some cases the profession or the country) rather than accept what they see as sub-market conditions. (They may define "sub-market" as either "less than the cost to me of providing the goods and services plus a profit sufficient to maintain an appropriate professional lifestyle", or "less than I could get from the same patients on the black market", that is, willing patients buying what willing providers will sell at a market-efficient price, off the books.) We see such scenarios in many countries with single-payer systems or price controls.
Steering between these two extreme problems, a health care economy can approach perfection, but can never achieve it. The best possible system would have to include:
1) the fewest possible income streams
2) maximum possible input from patients and providers, and
3)the fewest possible middle-people.
At the moment, of course, we seem to be heading in precisely the opposite direction on all three counts. Any bright ideas?
posted by WiredSisters at 12:32 PM
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