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The Redistributions and Distortions of the Health Care Market

A while back I talked about the health care and health insurance market and how it is the result of tremendous government regulation.  There are portions that involve competition, but they are limited by a variety of matters, including large distortions from licensing, regulation, tax exclusions, and government provided health care.

The matters are so complicated, it is hard to get a handle on it.  The transfers and redistributions are significant and hard to follow.  But it is worthwhile just attempting to describe some basic aspects of this sector.

One take on what is happening is the following story.  It is my sense that this is accurate, but perhaps some people in the know will disagree with it.

We start with Medicare and Medicaid.  These are government operated programs of health services for the elderly and the poor respectively, but it is recognized that they pay low reimbursements, especially to hospitals, with some claiming that they reimburse less than their costs.  As a result of the low reimbursements, hospitals end up charging less to Medicare and Medicaid, but attempt to make up the difference by charging even higher rates from private employer provided health insurance.

This will increase the costs of employer provided health insurance, redistributing income from employers and workers to the government and those on Medicare/Medicaid.  Employer provided health insurance also redistributes in another way.  It charges young and old workers (and healthy and poor workers) the same amount, even though their expected costs are quite different.  The high costs paid by employers on behalf of their younger workers, however, are compensated by another redistribution – the fact that employer provided health insurance is excluded from income taxation.  The redistributions appear endless, going to taxpayers from employers and then back from taxpayers to employers.  What could possibly justify this craziness?

If hospitals and doctors charge employer provided health insurers higher rates to compensate for the low rates paid by Medicare/Medicaid, why do these insurers pay those rates?  Wouldn’t competition lead them to refuse to pay excessive rates?  This is a good question.  The answer appears to have its source in limits on competition and regulation.  Regulation has reduced the number of health insurers, so that they may be able to make excess profits.  Consequently, they can still make money even if they are overcharged by providers.  In addition, it may be that state regulators will be displeased if the insurers do not help out the hospitals and other providers, and the state regulators may reward these insurers in other ways for providing the assistance to providers.

These aspects of the health insurance sector all existed prior to Obamacare.  Obamacare may have changed some things, but it generally just increased the amounts of the redistributions.  For example, the health insurance exchanges have involved redistributions from taxpayers to people with lower incomes and from taxpayers to insurers (through payments that appear to have been made illegally to insurers).

Reader Discussion

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on August 22, 2017 at 10:32:32 am

" In addition, it may be that state regulators will be displeased if the insurers do not help out the hospitals and other providers, and the state regulators may reward these insurers in other ways for providing the assistance to providers."

I doubt it's the limits on insurers; rather it's the heavy regulation of providers. EMTALA means emergency rooms must accept and stabilize many patients regardless of their ability to pay. Certificates of necessity ensure that facilities unburdened by those costs and mandates can't open to compete with full-service hospitals, and then undercut them.

Also, when talking about the rates for young vs. old employees, remember who is making the decisions - the older employees in management. Keep in mind that an employer is paying based on the experience of its pool in the past; unlike someone buying in the individual market. The employers where I have had the best health insurance have been those where management had some expensive health issues.

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Doug Wenzel
on August 23, 2017 at 18:28:34 pm

And just for the record:

That $35,000 medical bill that your provider "provides" to you is NOT what the insurer pays. It is quite a bit less. The only one who would be *asked* to pay that is the poor bugger with no insurance at all.

One other little tidbit:

Medical diagnostics: Federal regulations permit (indeed, encourage) a "hospital" facility to charge a "facilty fee" when a diagnostic imaging procedure is performed at its facility. This is quite a substantial add-on (thousands of dollars).

Anyone interested should try a non-hospital diagnostic service. An MRI for example may be had for as low as $900 vs a $4500 - $5000 charge. Funny things is, YOUR co-pay ends up being the same.

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gabe
on August 23, 2017 at 18:48:22 pm

Gabe: Yes, both of the facts that you point out are important and represent other redistributions/distortions of the system.

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Mike Rappaport
on August 23, 2017 at 20:04:00 pm

Some doctors, such as dentists, don't take patients who will use Medicare or Medicaid. It is a boon to those dentists, but a loss to the other dentists. The nice dentists who are in it to help people end up with disproportionately greater losses because they have to take up the slack. That is another distortion.

Then there is the difference between PPO and standard plans, in which the PPO plans have tax deductible discounts and regular plans don't, which is a savings that can be passed along to the patient. So there is more (apparent) distortion through the tax code.

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Scott Amorian
on August 26, 2017 at 09:07:19 am

Had an MRl done in Australia. The cost: $225. Had one done here. The cost: $170 out of pocket, and about $700 covered by the insurer.

Here's how it works: Docs chip in to buy an MRl machine, and over-prescribe MRls to make more money. And the insurers pay it because they get a percentage of the take. No one writing checks has an incentive to control costs.

Socialized medicine works because someone has an incentive to control costs. The free market can't work on account of the staggering barriers to entry.

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LawDog
on August 26, 2017 at 09:10:40 am

The most important distortion in the market is the natural barriers to entry. You can't wake up on Tuesday and decide you want to be a doctor, and hang out your shingle on Thursday.

Whereas l am a philosophical libertarian, l have abandoned the irrational belief in the Market Fairy that afflicts so many of my fellow-travelers.

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LawDog
on August 26, 2017 at 09:24:34 am

MR: "There are portions that involve competition, but they are limited by a variety of matters, including large distortions from licensing, regulation, tax exclusions, and government provided health care."

You should probably stick with what you know. Most lawyers aren't numbers guys, and unless your better half is in medicine, you probably don't know much. Wish you would stop worshiping at the altar of the Market Fairy.

To give you a banal example, Viagra will cost you about $35 a pill at your local pharmacy. But as you are probably also aware--you can't walk the streets there without learning!--you can buy the same drug in Tijuana for $5 a pill.

Why the insane markup, you ask? Because Cory Booker (D-NJ) and Cory Gardner (R-CO) both take bribes from Big Pharma.

How do you eliminate this grotesque disparity? By slapping a 100% excise tax on the excess of what they charge at wholesale here over what they charge there. ln short, you approximate a free market through tax policy.

l mean, why should we subsidize health care in Mexico and Canada?

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LawDog
on August 29, 2017 at 07:43:35 am

'Law Dog' said; 'Socialized medicine works because someone has an incentive to control costs. The free market can’t work on account of the staggering barriers to entry."

The article outlines the immense failure of redistributive socialized medicine. It's a failure everywhere it's been tried, resulting in long waits, severely rationed care, and increased euthanasia.
Removal of the government from medicine would allow doctors to be directly responsible to their patients, and more sensitive to their ability to pay. The impulse and duty to charity, that used to be common, would return. Nothing kills (our need for) love of neighbor better than government "care".

--Wm. F. Brown MD
Forest, VA

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William Brown
on August 29, 2017 at 11:02:03 am

Other docs tell me the exact opposite, and the accumulated worldwide data is conclusive. l'm a numbers guy, and can't argue with the numbers.

l have a friend who is battling Stage lV lung cancer. lt should have been caught far earlier, but she and her husband were among the many victims of the Republican cratering of the economy (Sen. Byron Dorgan predicted it to the year!), and when you barely have enough money for rent and are living on ramen, a visit to the doc is a luxury. Her blood is on YOUR hands.

And of course, her insurance company has been balking at paying for the drugs she needs, where time is of the essence. That is the stark reality of the ghoulish system you fervently defend. And hers is not the only example of the tragedies it precipitates:

"Years ago, before Tom and I got together, I had a boyfriend named Mark. I had met him in Vegas when he came to visit his brother. They had recently lost their Mother - in a backhanded way, to some terminal disease (I think it was cancer but my memory is foggy).
Why do I say a backhanded way.? Because, when she discovered she was ill, she got all her affairs in order, laid plastic on the floor, called 911 to come pick up the body and shot herself.

She didn't want the meager nest egg she had built up to go to doctors and treatments etc. She wanted that to go to her children.

Mark never really recovered from that. He liked having the money but not how he got it. It tore him up so badly that eventually he followed in her footsteps and took his own life at 37 years old.

For the first time ever, though, I feel a sense of empathy for his mother. We try to work our whole lives to save for our kids, to save for retirement, to be independent. Only to have one major illness take it all away. Even WITH insurance, it's hard. Without? Ouch.

Tom and I were just digging out of all our medical debt (13 surgeries for me over the first ten years of our marriage - the first three of those not covered by insurance) when the downturn hit. It's taken forever to even begin to bounce back from that. - and just when we started to, boom! Here comes cancer!!

My hubby has worked his ass off the last twenty one years (and yes, I did too until the downturn made it impossible for a recovered drug addict with a conviction on her record to get a decent job). He will have a pension he PAID FOR and he can still work for some time. For what.. to pay all of my medical bills that insurance doesn't cover and watch me die slowly and in pain because our insurance keeps denying new treatment plans? To pay to keep us in a hotel because we can't even find an apartment to rent on the ground floor somewhere and the places with an elevator cost too much?

At what point do you say ENOUGH ALREADY and pull the trigger?

No, folks, regardless of what you think, this isn't about the healthcare debate. How you fall on it is your problem. This is me, screaming, wondering what the fuck Tom or I ever did to anyone to deserve this shit. And me, feeling empathy for a woman that opted out of putting her kids through this."

The prescription is nationalized health care. Granted, it may not be perfect, but nothing is as fucked up as what you try desperately to defend.

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LawDog
on August 29, 2017 at 12:39:34 pm

I don't defend our system. Read what I said.

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William Brown
on August 29, 2017 at 19:48:22 pm

Read what you wrote, Doc. Also, between the lines. Your "prescription" will only make matters worse.

The free market doesn't work here.

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LawDog
on October 14, 2017 at 08:25:04 am

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Lawyers Planet | The Redistributions and Distortions of the Healthcare Market

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.