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Problem: Over Reliance on Third Party Payments

There is a problem with Health Care within the United States but it has nothing to do with the quality of care provided. The care provided by the United States Health Care system is the best in the world, unsurpassed by any other system in any other country. What’s “broken” is the manner by which it’s delivered, having been convoluted by governmental intervention resulting in increased costs and limited choices.

The great majority of health care is paid for by third parties meaning somebody other than the patient is paying for the care provided. The concept of employer paid health insurance blossomed during WW II when the government imposed strict wage controls. Employers were “allowed” by the government to offer health insurance to their employees as a means of bypassing these controls and attracting quality employees. Since then, the government has continued to encourage employer provided insurance by providing the employer with a significant tax deduction whereas a privately purchased policy receives none.(1)

Care for the indigent and illegal immigrants, is also paid for by a third party, the taxpayers.
Extensive third party payments disrupt the natural price and quality controls inherent in a free market economy in that there’s no incentive for consumers to monitor costs. When consumers purchase goods and services from of their own earnings they’re conscious of trying to get the greatest value for the lowest cost. It doesn’t matter if it is a high or low ticket item.

Take for example milk- a small ticket item – not very expensive: In my community, milk normally costs about $3.79 per gallon. We drink a lot of milk. Since I’m paying for each gallon, I try to find the best deal. I’m aware that my local store occasionally sells milk on sale for as low as $1.68/gallon. I’m also aware of several non-local stores which regularly sell it for about $2.19/gallon. Lastly I’m aware of a local gas station which sells milk for $2.75/gallon. When I buy milk, I try to maximize the power of my buying dollar by purchasing from the location which best balances price with convenience.

A car, as a second example, is considered a high ticket item – expensive for most people. When purchasing themselves, people again try to get the highest value for the lowest cost. To do so they might look at different manufactures or dealers; evaluate the warranties provided; decide whether to buy new or used; check if they are eligible for employee pricing; inquire if prior model year vehicles available; or re-evaluate if they really need to replace their current vehicle. After completing this process, consumers purchase the product best meeting their needs.

These free market shopping habits, multiplied millions of times over, encourage the availability of quality products at reasonable process. Yet, health care payments by third parties completely eliminate any incentive for consumers to monitor the purchasing power of their health care dollars.

Nobody is suggesting that emergency care be delayed until the cheapest physician is discovered, but if consumers had an incentive to control the cost of non-emergency, discretionary, products and services, the associated cost could be dramatically reduced.

When a third party purchases goods or services such as prescription drugs, mobility equipment, out-patient care, preventative care, counseling, etc, on behalf of others, there is no incentive to scrutinize costs. For example, a low price generic drug will have the exact same effect as the corresponding brand drug, but within a third party paid plan, the consumer will never insist on the lower cost drug. They’re not directly paying for it and take whatever their given without questioning costs. Free market cost control has been eliminated from the health care marketplace.

Third party payments, especially when paid by government, encourage fraud. Although the great majority of health care providers are honest, a significant number work at gaming the system. It is estimated that the government pays $55 billion per year in fraudulent Medicare and Medicaid claims.(2) For Example: The government receives invoices for goods and services. The invoice is hopefully reviewed for reasonability, and then paid. A fraudulent provider can easily add non-performed services to a submitted invoice and be reimbursed for services not performed. If individuals are responsible for paying for their own services, then services invoiced would be better scrutinized making it harder to fraudulently bill for non-performed services.

Obamacare does nothing to address the third party payment problem but only makes it worse by greatly enlarging third party payments by government. Anyone not enrolled in authorized private insurance program will be forced into a government run insurance program. Remember: every social program the government has ever tried to implement has been a dismal failure – Social Security, Medicare, Medicaid, Education, and now health care. All these programs are bankrupt, and most have cost overruns close to 10 times greater than their original estimates.

Any modification to the heath care system must remove government interference and reinstate free market cost controls.

Peter Konetchy

September 25, 2010

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(1) Assume both the employer and employee pay a 30% federal tax rate. Also assume that a family health care insurance policy costs $12,000/year. The out of pocket cost for the employer is $8,400 ($12,000 – $3,600 tax deduction). The out of pocket cost for the private purchase of this policy the full $12,000.
(2) Reported by Alison Young, USA TODAY, 9-20-2010: Peter Budetti, director of the new anti-fraud office at the federal Centers for Medicare & Medicaid Services.

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