So you’re a doctor with your own practice. Congratulations! Time for you to treat some patients and pay down some of that student loan debt.
To make things easier, let’s suppose you are a dermatologist. You perform a very standard set of procedures with a very low rate of complications. In other words, for any procedure you perform on a patient, you have a pretty good idea of how much time it will take and how much medical equipment you are going to use.
After looking at your cost of living, the rent you pay for your office space, and the wages you pay your staff, you decide that you will perform an excision of a sebacious cyst for $1,000 (note: I’m completely making this number up. I have no idea what the procedure actually costs).
Well, that’s what you would charge somebody without insurance, anyway. The truth is the vast majority of your patients will actually have insurance which means when they need tohave a cyst excised, you are going to get your money from the insurance company, not from your patient.
So in comes Xantar Insurance and they make you an offer: whenever you perform a sebacious cyst excision on one of their members, Xantar will pay you $850. Why would you take this offer? Xantar tells you that they are a pretty big insurance group with thousands of members. On average, 100 of their members need to have a sebacious cyst excised every year. What Xantar is offering you is a discount in exchange for greater volume. After thinking about it, you might decide this is a fair deal and sign a contract. You are now a covered provider under Xantar Insurance.
The thing is Xantar probably isn’t the only insurance company in town. Maybe there’s another insurance company (let’s call it FFFreak Insurance) whose members only requires 70 excisions per year, but they’ll pay you $900 per procedure. You might be happy to accept that, too.
So now you are a dermatologist with three separate price points for the same procedure:
- Members of Xantar Insurance can get their cyst excised for $850
- Members of FFFreak Insurance will cost $900
- People without insurance will have to pay $1,000
(By the way, remember that insurance companies are facing their own economic calculations which I described in Part 1)
We haven’t even gotten into public insurance programs like Medicare, Medicaid, and CHIP. All of them also pay different rates to doctors than private insurance. And remember, out of all these groups, only people without insurance actually know what a procedure costs. People who have insurance will pay a co-pay or some amount under a deductible and have the insurance company pay the rest—they have no idea what the procedure really costs.
This doesn’t just make the healthcare system very complicated. It also means that healthcare cannot function as a market. One of the first things people learn in Econ 101 is that a market only works when there’s price transparency and information symmetry (i.e. the price of everything must be clear, and everybody in the market must have the same information). Both of these are not true when it comes to paying doctors.
You can call up a retailer and ask what the price of a TV is, but you can’t call up a hospital and ask what the cost of an angiogram is. And that’s why in the American healthcare system, “Let the free market sort it out” will never work. Health care is not a functioning market in the first place.