Insurance companies, which have finally figured out that effective doctors save money, are putting information about quality online (quality being defined the way insurance companies want to define it). But insurance companies can only work off the data they themselves have. If your doctor has not seen many patients covered by your own insurance company, that company won’t be able to tell you much.
But where things get truly murky is on the price side, where insurers and providers collude to keep the public in the dark. This is abetted by the politicians, few of whom even know how health care works since modern politicians seem to take pride in being as ignorant as their constituents. To cut through some of this, I am going to look only at hospitals, but what I say about them will apply to all other providers of medical services to a greater or lesser degree.
The first thing you need to know is that at a basic “payer” level (payers being those who pay the providers), Medicare pays between 93 and 98 percent of costs, Medicaid usually pays less than that, and “charity consumers” pay nothing at all. Hospitals lose money on all of this business and these three payers usually provide far more than half of a hospital’s total business. Hospitals make up the shortfall, plus their profits (or “profits” in the case of not-for-profits) by overcharging people who have commercial insurance, including the people who buy their insurance on an Obamacare exchange. You may have already known this. What you may not have known is that commercially insured patients pay, on average, about 145 percent of their costs. As a rule, the larger the hospital the higher the percentage, with the highest percentages going to university/research hospitals and the most aggressive national chains.
So let’s say that both you and your neighbor, who have the same insurance company, need a bypass. You both go to the “good” hospital. The “good” hospital can charge higher prices. Let’s pretend that they can charge 5 percent more than that 145 percent of costs, which means that they are going to charge you and your neighbor 150 percent of costs. This means that between you and your neighbor you are really paying for three and not two bypass surgeries. A third person has been inserted into the transaction. In a truly free market, this would never happen: you or your insurer would pay only for your bypass surgery, I or my insurer would pay only for mine, and the person who couldn’t pay the full price for his wouldn’t get one. And even if he did get one, for free or at a discount, his surgery would have no effect on the price we paid for ours.
This separation of consumer from price would be bad enough without other hidden subsidies as well. These are things you may be paying for that you don’t know about and that therefore do not enter into your purchasing decision. While that 145 percent of cost figure is buried in your hospital cost, these other things are buried in your insurance costs.
Insurance is about spreading risks. Apart from a small group of libertarians who would like to go back to the Golden Age of the market in the 1930s, when one could pay maternity costs directly to the doctor with a chicken and bushel of carrots, almost no one wants to go back to pre-insurance days because almost no one could ever put away enough money to cover a quadruple bypass in cash.
You know that you are going to have to pay for someone else’s expensive cancer treatment and that’s fine because they may have to pay for yours someday. But what you don’t know is that the cost differences between hospitals are huge and vary from service to service. If someone covered by your insurance company goes to Mayo Clinic for their surgery while you would go to your local hospital for yours, you have to cover the difference between what your hospital would charge and what Mayo would charge. In other words, you are subsidizing the other person’s choice of hospital as well as their basic treatment. Since your insurer has to pay for any network provider a member wishes to use, your personal attempt as a consumer to find a cheaper service has no effect at all on the total price of what you are paying for.
Therein lies the secret of why there are narrow networks. Insurance companies can’t control who goes to which in-network hospital. So in addition to having to deal with the risks of people being treated at all, they have to deal with the risks of where people are being treated. This risk has been aggravated by the fact that hospitals are monopolizing, with big expensive ones buying smaller cheaper ones. What you may not know is that when a big expensive hospital buys a smaller, less expensive one, they apply their big-hospital expensive contract rates to the acquired hospital, and against the laws of the free market you now have to pay a lot more for no other reason than that your old hospital had a name change. There comes a point where the subsidy paid for the people using a particular hospital becomes a premium price burden for everyone else, and the only way that an insurer can deal with it is to knock the expensive hospital out of the network.
In a normal free market, the cheaper something is, the more it is consumed. But in health care the true prices are hidden. Big hospitals can advertise more and install expensive medical innovations like the bowls of apples that appeared in all the clinical waiting rooms at my local hospital after it was purchased by a big university hospital. In the health-care market, the more expensive something is, the more it’s consumed. And why not? The price is hidden and so is the subsidy. But this is at the root of why our medical costs keep rising so much.
The reason your co-pays and out-of-pocket expenses are going up is to try to offset premium increases. It’s not the insurance company that wants to keep your premiums down. It’s your own company. They’re also the ones cutting your overall benefits—not to keep your premiums down but to keep their premiums down. Higher out-of-pocket costs also make people think twice before going to the doctor in the first place. After the Great Recession, when people became very worried about the cash they had been able to hold on to, utilization rates for medical services fell. Yet there wasn’t a mass extinction caused by all those sore throats people were now treating at home. There are some who therefore think that reducing benefits as a whole (something they push under the code name “flexibility”) will be a good and harmless thing. But the benefits they want to kill are not the “I’ve got the flu” kind, but the “I’ve got cancer kind,” since the latter is what really drives prices up.