Posts tagged ‘Health care’

December 17, 2013

Spending other people’s money drives up prices

by Grace

Dr. Jeffrey A. Singer writes about “Health Care’s Third-Party Spending Trap”.

Contrary to “conventional wisdom,” health insurance—private or otherwise—does not make health care more affordable. The third party payment system is the principal force behind health care price inflation. This should come as no surprise.

Nobel-winning economist Milton Friedman, in his masterpiece “Free to Choose,” wrote of four ways to spend money:

Category I—You spend your money on something for yourself. Here you are very careful, because it is your money, and the good or service you are buying is for you.

Category II—You spend your money on something for someone else. Here you have the same incentive as in Category I to economize, but since you are buying something for someone else, you are not quite as meticulous when it comes to the purchase meeting the needs or values of the recipient.

Category III—You spend someone else’s money on something for yourself. Here you are not concerned about how much you spend, because it is not your money. But because you are spending on yourself, you make sure you are getting what you want.

Category IV—You spend someone else’s money on something for yet another person or persons. (This is what we ask our legislative representatives to do every day.) Here you are the least incentivized to economize, or to buy something that meets the needs or values of the recipient.

Healthcare prices are affected by Categories III and IV spending. 

Medicare, Medicaid, and private insurance are examples of Category IV.  Politicians and bureaucrats buy goods and services with other people’s money.

Meanwhile, when the third party payer is perceived as picking up most of the tab, then health care consumers and health care providers engage in Category III spending. Neither have an incentive to take cost into consideration.

Health insurance should not cover “routine, predictable events”.

This isn’t to say we don’t need health insurance. Health insurance that covers truly unforeseen, costly catastrophic occurrences makes sense for most people. As does life insurance, property and casualty insurance, and auto insurance. But health insurance that covers routine, predictable events isn’t really insurance. It’s prepaid health care. And it is driving up prices for everyone with everyone else’s money.

Policymakers need to understand that the key to “affordable health care” is not to increase the role of health insurance in peoples’ lives, but to diminish it. We need much less Category IV spending on health care, and much more of Category I.

Third-party payments are also a factor in higher education.

Higher education, which along with healthcare has experienced a recent history of soaring costs outpacing inflation”, also suffers from the inefficiencies of third-party payments.  The latest number I saw was that the average student at a private, nonprofit college only pays about 57% of the sticker price of her education.


Related:  Can young college graduates burdened by student loans be convinced to buy health insurance? (Cost of College)

November 2, 2012

‘Eds and Meds’ – Are soaring costs tied to third-party payments?

by Grace

Higher education and healthcare (Eds and Meds) are two areas of our economy that share a recent history of soaring costs outpacing inflation.  Another common feature of these two sectors is a high reliance on other people’s money.

Both sectors have consistently been creating new jobs.
As reported by Derek Thompson in The Atlantic, healthcare and education are the only major job sectors that have experienced net positive growth during the last five years, a period that started two years before the “Great Recession Trough”.

These soaring costs cannot be sustained.

If the health care cost crisis has long been known, the public is just waking up to the crisis in higher education costs.  Skyrocketing tuition has driven the cost of many colleges through the roof.  This traditionally didn’t bother students, who were assured that a college education the key to a good job that would easily allow loans to be repaid.  In a global age where even knowledge economy jobs are subject to offshore competition, and a recession that’s kept many young people — including many now deeply in debt — unemployed or underemployed.  There is now about $1 trillion of it outstanding, much of it non-dischargeable in bankruptcy….

Regardless of how it plays out, when you look at spending in aggregate in America, it’s clear increases in health care and higher education spending cannot keep increasing at current rates.  This means that it just isn’t possible for all the cities out there dreaming of eds and meds glory to realize their dream. America simply can’t afford it.

William Henderson, Indiana University law professor writing in The Legal Whiteboard, sees an opportunity for productivity gains.

There is an opportunity here.  I would be extremely bullish on innovations that produce productivity gains in the Eds and Meds sectors.  I recently listened to this HBR Ideocast discussion with Robert Kaplan, the Harvard Business School professor best know for developing the Balanced Scorecard.  Kaplan is now turning his considerable intellect toward the problem of cost-containment in healthcare.

What the key insight?  Measuring how much patient treatment actually costs–to date, there has been almost no sophisticated cost accounting in healthcare.  Most of the brainpower has gone to dealing with (and maximizing) third party reimbursements.  Under Kaplan’s system, fortunately, we can actually identify the points in the system that cost way too much and thus begin the reengineering process.

The same thing may soon be happening in higher ed.  Another Harvard Business School professor, Clayton Christiansen, who authored the renowned business book, The Innovator’s Dilemma, recently co-authored a letter that called for colleges and universities to quit chasing prestige and start focusing on innovations that improve educational quality without increasing price.  Remarkably, the letter was included in a mass mailing by the American Council of Trustees and Alumni — going to 13,000 trustees!  See Inside Higher Ed, Distruption’s Strange Bedfellow, July 12, 2102.  Another Insider Higher Ed story suggests that this may be the true faultline driving the University of Virginia controversy.  See Disruptive Innovation: Rhetoric or Reality?, June 26, 2012.

The world appears to be changing, even in Eds and Meds sector.

Related:  Does increasing federal aid cause college costs to rise? (Cost of College)

August 27, 2012

Tough choices – the political tug between funding healthcare and education

by Grace

Michael J. Petrilli lays out the options for choosing between healthcare or education spending.  The choices are easier if economic growth is robust.

You can either “ration” health care or you can “ration” education (and all other social spending). Take your pick.

The basic challenge—this is hardly news—is that America is aging and, as a result, is spending a lot of money on healthcare and retirement expenses. These expenses will go up and up in coming decades; they’re built into our demography. Unless economic growth can outpace the cost increase, however, that means less money for everything else—education included.

So let’s say you want to protect the education budget and other investments in the young—in the future. The first thing you need to do is constrain public outlays for the old—which mostly means holding the line on healthcare spending. And the second thing you need to do is encourage maximum economic growth. Get both of these things right and you avoid Armageddon.

Now hold on, you say, there are other options. You can go after the defense budget. You can raise taxes on the rich. That’s true, and these might help at the margins, at least for a while. But as the chart below shows, defense spending is hardly putting pressure on education spending—healthcare is. And as many economists will tell you, if you tax the rich too aggressively, you’ll drive down economic growth. You might slice the pie more evenly but a smaller pie means less for everyone. (And taxing the rich won’t raise nearly enough revenue, anyway.)

State spending for Medicaid vs. higher education costs

“The two biggest items of every state budget are Medicaid and education,” Senate Minority Leader Mitch McConnell, R-Ky., told IBD recently. “As the Medicaid mandate rises, the educational funding declines. That is passed on to universities and they raise tuition in order to make up for it.”

A report from the State Budget Crisis Task Force found that even before ObamaCare kicks in, Medicaid costs have been growing “faster than the economy” and “faster than state revenue.” As a result, Medicaid now consumes 24% of state funds, and its ongoing growth “can no longer be absorbed without significant cuts to other essential state programs like education.”
Think College Is Expensive Now? Wait Until ObamaCare (

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