Health care, insurances and making economic sense

Originally posted as a comment in Finland for Thought.

A system of health care paid by insurance (of whatever form) and provided by private hospitals looks attractive on the surface but isn’t really a good system.

Look at the economic dynamic of the system. The insurance (if comprehensive) will essentially pay for any operation that the physician at the scene deems necessary. Is it in the physician’s interest to use that tab as efficiently as possible? No, in fact, it is the opposite: it is in their best interest to find as many reasons to bill as much as they can. This is a road to disaster.

Of course, you can balance this system by introducing insurance investigators who examine bills and determine if they are legit. To do the job properly, they need to be qualified physicians, and they need to have access to all the data that the physician at the scene had. Essentially, these investigators would be doing the job all over again, except never seeing the patient.

Result: the money you save from preventing fraudulent billing is spent in maintaining a paraller physician workforce. Why not let the “investigators” be the healers, and cut the private hospital out of it altogether? These physicians would have budgetary responsibility on what they spend, and thus they only do what they need to do.

Oops. Looks like we just transformed the “market-based” health care system into a state-operated, “socialized” system.

9 thoughts on “Health care, insurances and making economic sense”

  1. But doesn’t the physician on the scene in a socialist system equally find it in his interest to bill as much as he can? Don’t socialist systems also therefore evolve systems to investigate the necessity of operations and limit the amount to be paid?

    In Canada, where we do have a socialist medical system (in fact private hospitals are almost completely forbidden), the cost keeps going up and up every year, to the point that it now consumes about half of provincial budgets. Everything else that the provincial governments are supposed to do: education, training, transportation, etc. is squeezed to provide more money for health care. The government does try to control the costs by rationing health-care, resulting in multi-year waiting lists for non-essential surgery such as knee replacements.

    Socialist health care is no panacea.

  2. Note the difference between “socialized” and “socialist”. While I accept socialization where it makes sense, I do not, in general,subscribe to a socialist ideology.

    Yes, the costs keep going up, but are you sure that it isn’t legitimate (ie caused by an increase in the actual need for medical care — in most developed countries, the baby boomers are aging and need more health care than before)?

    On the economic dynamic: unless the public hospitals have instituted “merit pay” with “merit” being defined as the number or cost of medical procedures performed, then no, it is not in the doctor’s interests to inflate the bill. To the contrary, if they are faced with too small budgets, they are under pressure to do too little!

    (There is no panacea, socialist or otherwise.)

  3. The Canadian system is different from the Finnish (and most other European) one because it indeed almost completely forbids private hospitals. In Finland about 30% of health services is private – although heavily subsidized. This guaranteens that there is competition between the two sectors, in particular the private sector can’t let its costs rise when there is a competitor whose billing is often nominal. The public sector is, on the other hand, often underfunded – as are most public services – and thus it must be very efficient, provided that the employees are motivated enough. There are some signs that the “traditionally” high morals of the employees is crumpling, though, in particular among the nurses. It’s the politicians’ task to see the signs and answer the problem. Luckily enough the private sector is taking some of the pressure off the public health care.

    Anyway, why isn’t the market mechanism working in health care but is in, say, car repairs? Why are car insurances paid by owners and not tax payers. Why don’t we have a comprehensive system of insurance inspectors checking that the cars are not “over-repaired”. I think your argument leaves out the crucial question of why the dynamics within health care is so different from many other services.

  4. I think you misunderstand how the US health insurance system works as even most Americans who use said insurance know all the nuances therein. There are HMOs and group plans and a whole slew of variations but what it boils down to is that the hospitals and the doctors want to get paid and in order to get paid they have to follow the strict guidelines by the insurance policy as to what will and what will not be paid for. Generally, insurance companies will give a list of ICD-9 codes and what they will pay ( http://en.wikipedia.org/wiki/List_of_ICD-9_codes ) for them. This is why women who give birth often don’t spend more than one night in the hospital and, in general, patients are moved out of the hospital rooms as quickly as possible; to cut costs and meet the insurance company’s limit. There are also quite a few things, e.g. ‘experimental’ procedures and others, that some insurance plans just will not cover.

    Medicare, the public health for the poor in the US, on the other had, is rife with fraud and budget overruns. Since it is a government agency and not a business, it has little interest to run a tight ship and it shows.

    In the US, the private sector is far more efficient.

  5. Anonymous,

    First, US Medicare is a government-operated insurance system, not a government-operated heath care system.

    Second, according to the World Health Organization (WHO), the United States spent about 2.5 times as much per capita on health care (both private and public sectors combined) in 2003 as Finland, while Finland outperformed the USA in health care in a 2000 WHO study (31th vs 37th).

  6. Ok. Well how ’bout we cut the middle man and the private investigator is also the one who does the healing? If this system where the insurance provider and the physician are a different entity is so inefficcient, then surely the market is going to address this problem by creating insurance companies who also provide the medical care the insurance is for. Why big goverment would be more efficient than private enterprise?

  7. It is an interesting question why this hasn’t happened in free-market conditions. I don’t have an answer.

    However, the system you outline sounds to me like a socialized medicine system, only there’s no democratic control, and the doctors and other officials aren’t subject to public official laws (including criminal penalties for abuse of office and neglect of official duty etc). Once you fix these, it turns into a proper socialized system. Of course, in the system you outline, there’s the possiblity of having competing systems, but the market would be extremely opaque and thus not really competitive.

  8. Well would you argue that the insurance business in general is very opaque and not really competitive? I don’t really see why it would be any different from for example “home insurance”. Why wouldn’t there be competition just as in any other brand of insurance and private medical care? I don’t also but that it would be opaque? Why? You could propably visit the hospitals before hand, see survival rates for procedures see nosocomial infection percentages, sample the food provided and most importantly see which medical conditions are included in the insurance and which you have to pay for yourself. I’m sure there is a meaningfull differentation in the preferences of consumers as to which conditions they want to be paid by the insurance.

    Obviously anyone is subjected to the laws no matter if they work in public hospitals or private ones. I don’t really see the point about democratic control. Insurance companies are not under democratic control either and neither are retailers or any private enterpise. It doesn’t mean that they are somehow above the law. Obviously the insurance companies are bound by whatever they have agreed with the insurance buyers. The companies are subjected to criminal penalties for breach of contract. In a private medical care system the customer has more power. The consumer can choose the service provider and opt for another one if she/he feels dissatisfied. (A wholly easier thing to do than to try to extract medical care from a public system if the care is not fortcomming.)

    How is a system socialized where people pay for what they want and feel they need? Do you think that home, accident or sport injury insurance is socialized as well?

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