Health care Reform and 3rd Party Payer System

A third party payer system is when the consumer is actually not the person directly paying for what they are consuming. The system works like this: You the consumer give your money monthly to someone else (like an insurance company) then you go shopping for something (like health care). You and the vendor come to an agreement on what you are going to get and the third party - the insurance company - actually pays the expense.

Imagine that you walk into a hardware store to buy a hammer. First thing you do is go see your home maintenance manager. He asks you why you are there. You explain to him that you need a hammer to drive some nails into a board, showing him pictures of the board to prove you are in need. He says fine and gives you a referral to see the hammer specialist.

You walk over to the hammer specialist with your referral slip. He shows you a selection of two hammers with wooden handles. You have a problem with that because wooden handles destroy trees which harms the environment and you want a hammer with a handle made from a new environmentally friendly material. The hammer specialist explains to you that your hardware insurance only covers the wooden hammer because there is a state law that requires all insurance companies to cover wooden handled hammers but not others.

In the end since the insurance company will cover the hammer with the wooden handle you take it and leave the store happy. You don't have to pay anything. It wasn't exactly what you wanted but the insurance covered it and you had no out of pocket expense. You also feel a small sense of satisfaction that the hardware insurance you have been required to carry by law finally got used.

You will never know actually how much was charged to the insurance for that hammer unless you put some effort into finding out. As a matter of fact you aren't even really sure how much you pay for hardware insurance monthly because it is a combination of payroll deduction subsidized by money you pay out in income tax and a series of other taxes you don't realize you are paying.

Through some inspection you discover that the hardware vendor charged $200 for the hammer and the insurance paid $75 for a hammer that normally would cost $10. The real cost to you was about $150 but because the costs are hidden from you through taxes you don't see this.

Another thing you are unaware of is that because there are a few centralized third party payers in the hardware world it is easier to regulate the market through legislation. Large companies in the market are able to lobby legislatures and other influential politicians to get them to make it law that their products have to be covered by the insurance companies. This is a great way for them to control the consumer who is being forced to pay into the insurance system.

The above ridiculous example is how health care works under the current third party payer system with the exception that, at least for now, we are not required to carry health insurance by law. But state governments and the federal government do use their authority as law makers to require insurance cover certain health care products and services. The consumer routinely does not pay directly for service or even know really how much it costs.

I guess it could be a solution to have the government further regulate health care. However what we really want is a system that gives the best health care possible in the most fair and efficient system. A suggestion is actually to create more of a free market system with the elimination of the third party paying system. I am proposing some regulation which would be to outlaw third party paying systems due to their lack of transparency to the consumer and great propensity for limiting competition. Instead one takes out fixed amounts of insurance to secure themselves in the case of illness. You can insure yourself for $20K worth of benefits if you contract cancer. If you get cancer the insurance company pays you $20k and it is up to you to spend it as you see fit. Now hospitals and care givers and others in the health care industry have to compete for your business.

One thing that is not given enough attention in the health care debate is why are costs so high. In any other industry competition results in better products, better service and lower costs. This is not happening with health care because the health care market is not a free market where suppliers and vendors need to respond to consumers. President Obama made an excellent point that the incentives inherent in our current system are mixed up. The solution is to put the consumer back into control by removing the practice of third party paying.

Healthcare Reform

Health care is an interesting debate. The question is that in this country is government regulated healthcare a good idea.

First thing is that it has to be stated that we currently DO have government regulated health care. For instance state governments have passed laws telling insurance companies what care they have to cover. As it turns out this actually makes the situation worse:

In some states, regulations make it impossible for individuals to purchase a low-cost plan that would provide only catastrophic coverage. In other cases, the benefit mandates and insurance rules might raise premiums to the point that insurance is prohibitively expensive for many people.

from an article The Effect of State Regulations on Health Insurance Premiums: A Revised Analysis. Interesting to note of course is that insurance companies are mandated to cover expensive medical treatments and drugs but none of the less expensive preventative measures. I am not saying it is the case in this country that powerful pharmaceutical and medical lobbies find it convenient and extremely profitable to be able to get state legislatures to force insurance companies to cover their drugs and treatments. I am not saying that...

So it should be clear that the current unworkable system is not a free market system - it is a government regulated system and that regulation can certainly be used by vested interests.

Health care is further complicated by the quantity of inaccuracies and unknowns in the field. A stunning fact is that 20% or more of sick people can be cured by a placebo. As a matter of fact an article in the Washington Post, re-published here, showed that a sugar pill is more effective than anti-depressants in managing depression! Here is another interesting fact:

America's healthcare-system-induced deaths are the third leading cause of death in the U.S., after heart disease and cancer.

The full article on that can be found here.

Given that we spend 15% of our GDP on health care vs. 8% to 10% in other countries considered healthier than ours it certainly doesn't appear that under the current system the money is being well spent.

So something is definitely crooked in the American health care system. I think one way a difference could be made would be to ensure that there is no mis-representation going on with our health care providers. We spend 1.5 to 2 times the amount of our GDP on healthcare than other countries that have lower mortality rates than we do?!?! Do you think there is some fraud in the system that when gotten rid of could lower our costs? Perhaps expensive less effective treatments are being marketed/lobbied for like crazy over less expensive more effective treatments. To wit - recently a court ordered a mother to have her son undergo chemo-therapy. Expensive and extremely doubtful in efficacy.

So the next thing we look for is who benefits from a wealthy country in poor health that spends 15% of its GDP on health care? Don't strain yourself too much on that one. The U.S. is home to more than half of the top 12 pharmaceutical companies and easily has the most pharmaceutical companies of any country. Make no mistake that they make a lot of money off of the current system.

It is also interesting that currently the debate is not about the cost vs. benefits of the treatments we are spending so much money on - it is about lowering the cost to the consumer for insurance coverage. What?!?! Anyone else thinking cart before the horse? Lowering the soaring cost of health care is not about lowering the insurance costs - those will go lower if the cost of the underlying care they have to cover goes down. That would happen freely competing market for health care - one we do not have. Some treatments have the advantage of the government making it the law that they have to be covered.

So trying to address the problem with a national healthcare program in a country with such a powerful pharmaceutical and medical lobby is folly. In the end we will end up paying as much or more of our production toward healthcare forcibly via taxes. This is in fact a dream for wealthy companies with powerful lobbies.

Another aspect is making the consumer accountable for their health care. Currently most consumers don't even know how much their healthcare costs them. "The insurance takes care of it." This is a terrible system - the doctor responsible for making you healthy doesn't even work for you. They work for the insurance company - after all it is the insurance that will in the end pay them. In turn the insurance company is told who and what to cover by state legislatures.

A better solution is a free market system where you can purchase dollar amount coverage for protection against getting certain illnesses. For instance you could purchase $20K in coverage in case you get cancer. If you get cancer your insurance company gives you $20K. It is now yours to spend on whatever treatment you choose to pay for.

Obama made a very intelligent statement - we have to change the incentive in health care. Now the incentive factually is that a person gets an illness that doesn't kill them but requires continuous treatment. With the above system which is more consumer based, treatments with higher success rates for curing what ails you will win out. After all you have $20K to deal with your cancer. You will seek out and spend it on the most effective treatment.

Read more on this type of solution...