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Tuesday
Sep182012

The Inexplicable American Consumer Is Putting The Screws To Health-Care Expenses

There has been anecdotal evidence. But now The Wall Street Journal in its story about GE’s quandary confirmed it: the toughest creature out there that no one has been able to subdue yet, the inexplicable American consumer, is apparently accomplishing a miracle: putting the screws to runaway health-care costs. One of their targets: over-used, over-hyped medical services, such as MRIs and CT scans—an industry bubble that has been ballooning by the double digits for decades. Motive? Profit.

It may be early for a victory lap: critics contend that “the health-care system is still overrun by unnecessary imaging at prices that are much higher than in other countries,” the Journal writes. “A study by the International Federation of Health Plans found that US fees for an MRI were about 80% higher than Germany’s.”

American health care costs are beyond legendary. Employer plans that cover a family of four are expected to break the sound barrier of $20,000 this year, up 7% from 2011, and up 117% from ten years ago. The country is spending $2.6 trillion on health care a year, or 17.9% of GDP! Yet, in terms of life expectancy, these expenditures don’t add up. Depending on who is counting, the US ranks somewhere between 38th and 51st place. On the latter list, US life expectancy of 78.49 years is almost 11 years lower than Monaco’s.

The Journal describes the inherent conflict between GE’s health-care division, which generates $18 billion in revenues by selling MRI machines, CT scanners, and the like, and the health insurance program for its employees, which costs $2.5 billion. While the health-care division wanted to sell as many imaging devices as possible, cost cutters wanted to contain the spiraling health-care costs. The cost cutters won—and introduced high-deductible health plans. After two years, the use of imaging technologies dropped by as much as 25%.

Other large corporations are implementing similar plans. In my experience, high-deductible plans have become nearly standard in small companies—to combat skyrocketing costs. What they have accomplished in the process, without planning it, is introduce a new watchdog into the equation, and not any old watchdog, but the sharpest one out there: consumers motivated by profit.

Many companies offer options, where the employee portion for family coverage may drop from, say, $1,200 per month for a classic plan to $600 per month for a high-deductible plan with a maximum out of pocket of $4,000. People do the math. They’d save $600 per month, or $7,200 per year. Any expenses would be capped at $4,000. Savings: $3,200. Plus any out-of-pocket expenses they would have to pay under the traditional plan. These plans qualify for Health Savings Accounts—and contributions to them are deductible from federal income taxes (but not from California income taxes!!!).

For healthy people, a high-deductible plan with an HSA account is financial nirvana. For people with chronic illnesses that are expensive to treat, such a plan may be less advantageous, but may still be a good deal (check your numbers carefully!). It’s a tough plan for those who don’t have the discipline to put aside the monthly savings so that they can pay their big deductible down the road. But it’s a fiasco for those who can barely pay their premiums and have nothing left to put aside—a growing part of the population [read.... The Pauperization of America].

While it’s still nearly impossible to get accurate pricing in advance of medical treatments—and thus price competition remains illusory—it is possible to question the need for certain procedures. Insurance companies who are trying to deny coverage for procedures they deem unnecessary can get into hot water. For them, the path of least resistance is to pay, and then raise premiums. But when a consumer, motivated by profit and a desire to stay healthy, deems a procedure unnecessary, it’s a different story. Suddenly, the profit motive of the industry smacks into the profit motive of the consumer. Rudiments of checks and balances!

Those are personal decisions. But consumers are motivated to think about them and empowered to make them—rather than handing the entire process over to the industry. And when the toughest creature out there has a major medical event that fulfills the deductible, he or she can spend the rest of the year catching up with accumulated elective procedures:  cataract surgery, hip replacement, brain transplant.... For free.

It has had an impact. In 2012, plans with deductibles of $1,000 or more made up only 19% of employee-sponsored health plans, according to the Journal. But the radiology industry is now contemplating stagnation: demand by privately insured patients (rather than those covered by Medicare) declined by 5.4% in 2010. And GE saved 15%.

The cellphone in your pocket is NASA-smart. Yet it costs just a couple of hundred dollars. So why is it that rising technical capabilities lead to drastically falling prices everywhere, except in your medical bill? The answer may surprise you. Read....  “Why Your Health Care Is So Darn Expensive,” by Alex Daley and Doug Hornig.

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Reader Comments (2)

As we see real income growth going to something around zero we very likely will see 2 major trends in employee remuneration.
1. First a pressure by middle classes that pay a lot of the taxes (much more in Europe than the US, where otherwise it would not be possible to generate so much tax revenue) will force tax rates down. Imho probably a somewhat deferred effect first they will be presented a major part of the overspending bill, subsequently when confronted with lower real income with their barganing power will force governments to get spending down.
2. A lot of wages costs in especially larger firms is in secundary stuff. Car, healthinsurance, pensions to name a few. We likely will see more choice in that so you want a 1500 USD a month car or a 750 USD plus 750 USD more wages. Or like here with healthinsurance. This could be part of the silver bullet. Effectively let people see how much things cost and at the end of the day they have to pay for themselves. Give them the opportunity to make choices and a lot of them will go for the cheap variety. If you are entitled to AAA stuff and donot have to pay a dollar for it you will take it, if one way or another you will have to pay for it things change. Probably at least half of the people in schemes now would go for 'European' healthcare and the cash.
September 18, 2012 | Unregistered CommenterRik
Why don't proponents of single payer healthcare simply set up a non-profit health insurance company. With lower costs (no profit margin) it would automatically pull in more and more pools of people and either bankrupt for-profit companies or at least force their pricing model down. Is this a naiive plan, somehow?
September 19, 2012 | Unregistered Commenterhidflect

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