This is a piece originally written by Rusty Scalpel for publication on another site. Readers of Free Market Physician will recognize common themes accompanied by statistics that have not previously been published on this site. In particular we would point out the author's finding that 24-38 cents of every dollar paid for doctor's visits with health insurance is consumed by the billing process. This number was arrived at through extrapolation of data in a well-known New England Journal of Medicine article. To the best of our knowledge, this figure is not published anywhere else on the Internet.
President Obama says it is time to escape the status quo of the United States health care system. He proposes mandates and funding to provide health insurance for all Americans. Although such a plan may appear reasonable, it will only perpetuate the high costs that now make health care unaffordable. A real solution to high prices is eliminating insurance companies from the doctor-patient relationship. Health care can be made affordable through patients' direct management of their health care expenditures and direct payment for health care services.
Health care plus insurance is more expensive than health care on its own. The price of a health insurance policy is the price of health care, plus the cost of the health insurance industry itself: underwriting, facilities, legal fees, and the salaries of over 469,000 insurance company employees and 881,000 insurance-related employees. Americans pay for these costs, plus the cost of their health care, every time they pay for their health insurance policy. Health insurance cannot make health care cheaper- it inherently adds to the cost.
A classic study published in the New England Journal of Medicine illustrates this point. It shows an average overhead for American health insurance companies of 11.7%, as of 1999. Add to this a very reasonable industry average profit margin of 3.4% and we see that about 15% of money paid to insurers never reaches health care providers. Americans paying for health care with comprehensive health insurance are only using their money at 85% of its potential.
However, this is not the end of money wasted through the use of health insurance. Those involved in health care are acutely aware of how much time and money is spent billing Medicare, Medicaid, and insurance to receive reimbursement for services provided. Many clinics hire as many employees for the billing department as they have doctors and nurses, who also spend significant time in billing. This raises overhead costs, which are passed on to patients.
Doctors offices have an average overhead of 26.9%, according to the NEJM article. Of course, not all of this overhead is due to billing. But the study indicates that a minimum of 10.8% is due to insurance billing. So between 11 and 27 cents of every dollar paid by insurance companies to doctors offices is consumed by the billing process.
A little multiplication (not addition) to combine these losses with the 15% insurance company losses reveals that for every dollar the insured patient spends on health care, only 62 to 76 cents will be applied to true health care costs. The rest is lost in the handoffs between the patient and the insurance company and between the insurance company and the doctor.
This is why President Obama's plan will perpetuate the status quo. It ensures that all Americans will continue to pay into a health care pot that will leak 24 to 38% of the water put into it. His proposed regulations on the industry will not help the situation, either. Profit margins are not high enough to sustain the losses the stick-it-to-the-industry regulations will inflict. The most likely outcome of his health care plan will be the sinking of the insurance industry, with every single American chained to the deck.
What then, is the solution to the status quo? Instead of moving toward a universally insured society, we should be moving to a sparsely insured society. Instead of mandating health insurance for all Americans, we should be liberating Americans to make their own health care decisions. We should allow them to decide whether or not they can afford the additional 24 to 38% they must pay to have health insurance services added to their health care.
Part of the solution requires a cultural shift. America must see health insurance for what it really is. Health insurance does not guarantee health, just as life insurance does not guarantee life. Health insurance is meant to protect finances against health expenditures that would cause a financial wipe out. Most consumers are looking for a plan to protect their finances from a major emergency. A catastrophic (high deductible) plan is what they need and can purchase for well under $100 a month.
Unfortunately, what most consumers purchase is comprehensive health insurance. This insurance costs hundreds of dollars a month. Instead of serving as a rainy-day account for emergencies, it becomes the account through which all health expenditures are paid. The insurance company determines a monthly payment that on average should cover all health expenses, plus operating costs. These plans are too expensive for most Americans. Instead of protecting finances from an emergency, comprehensive plans turn out to be a catastrophe all on their own.
Another part of the cultural shift involves health care providers. They too have fallen into the health insurance net. Involvement with insurance companies proves expensive and painful for them, just as it is for the patients. Not only must they participate in the costly and aggravating billing process, but insurance policies interfere with their treatment plans. Medication and treatment decisions are made not on the basis of patient need, but on the basis of insurance coverage.
The solution to patient problems was catastrophic insurance plans. The solution to doctors' headaches and additional expenses (which they must pass on to the patients) is fee-for-service, cash-only clinics. By eliminating third-party payers these clinics have incredible potential to save patients money. They bill patients directly at the time of service for services received. They restore the patient-doctor relationship. Doctors are able to prescribe and treat based on patients desires and ability to pay, not on insurance companies' payment plans.
Coupling catastrophic insurance plans with fee-for-service clinics can have profound financial effects for patients. Imagine if instead of paying into a comprehensive insurance plan every month, patients paid for catastrophic plans and then deposited the remainder of what would have gone into the comprehensive plan into a savings account. This account could be used to cover routine medical needs and cover the deductible should a true catastrophe occur. The money stays in patients' bank accounts instead of becoming part of the operating budget of the insurance company. Patients earn interest on the account and are actually able to maintain the assets in their accounts from year to year.
Not only are Americans free to grow richer by managing their own medical expenses, but they empower themselves in their relationships with health care providers. They now have bargaining leverage as individuals or groups because they, not insurance companies, are the payers. In addition, instead of getting every possible procedure after a deductible has been met, they become conservative spenders. They analyze whether a service has value to them and spend accordingly. They ration their own health care based on their needs instead of allowing insurance or government to do it for them.
In short, we turn patients into consumers. They are not beggars or government dependents to be seen at the leisure and pity of physicians, politicians and third-party payers. They are empowered American consumers. They are free men and women, masters of their own lives and their own property. Such liberty is not status quo. It is an American phenomenon and America's legacy. Let's not forfeit that legacy for President Obama's status quo government-controlled health insurance.