In the aftermath of the senseless murder of the CEO of UnitedHealthcare, responsible commentators were quick to condemn the act.
“Murder is bad, and so are murderers,” wrote the liberal economist Paul Krugman. “Neither should be celebrated.” But then Krugman went on to offer an admittedly “somewhat … caricatured” view of U.S. health care: “It’s a system in which taxpayers bear the cost of major medical care, but this taxpayer money flows through private companies that take a cut, spend a lot on administration, and do their best to deny care to people who need it.”
What service do private insurers provide in return for the fees they collect? Americans, Krugman wrote, “may not realize the extent to which they are exposing themselves to the delay-and-deny strategy private insurers often use to avoid paying for care.”
Krugman has been an advocate of single-payer health insurance, using Canada as a model to be emulated. In Canada, there are no health insurance companies. When Canadians get health care, the cost is paid by the government.
If Canadians can get by without health insurance companies, could something like that work in the United States? Not in a way people would find desirable.
There are three problems with the doctor-patient relationship in all developed countries — regardless of the way the payment system is organized.
First, when a third party is paying the bill, neither the doctor nor the patient has any incentive to apply the kind of cost/benefit analysis that is normal in the purchase of any other good or service. In considering whether to obtain an expensive test (an MRI scan, e.g.), the incentive is to consider only the benefit. Since cost is irrelevant to the patient, a tiny benefit — no matter what the cost — is viewed as desirable.
Second, in a fee-for-service arrangement, the more services doctors perform, the higher their incomes. So, just as patients have an incentive to over-consume, doctors have an incentive to over-provide.
Third, there is malpractice liability, which is especially a problem in the U.S. A doctor who orders an unnecessary MRI scan faces no real penalty. But no matter how improbable, there is always a chance that a scan not ordered will fail to detect a problem that grows worse over time. Our legal system, therefore, provides incentives for too many tests and too many procedures, compared to a system in which costs would have to be justified by comparable benefits.
These three perverse incentives make medical care unreasonably expensive with higher premiums and higher taxes.
Canada Rations Care
Canada checks these incentives by limiting resources. The typical Canadian general practitioner, for example, does not have radiology equipment and must send patients to a hospital for simple x-rays. The hospitals, in turn, operate under global budgets that limit spending, no matter what the level of demand.
Canada ranks 25th of 29 countries on the number of MRI scanners per person. As a result, the wait for a scan is almost three months, and the wait until final treatment is more than six months. The government has decided to prevent overuse of MRI scanners by severely restricting the number of scanners that are available.
Canada’s system of limiting health care resources and forcing doctors to ration care has many undesirable characteristics. The system favors high-income over low-income patients. It favors white patients over racial minorities. It favors city dwellers over rural residents. It favors the politically connected over those without connections.
Arguably, there is more inequality in access to health care in Canada than there is in the United States.
Does rationing care force doctors to be more efficient? Studies by the RAND Corporation found that this isn’t so. In Canada and Britain, scholars found just as much unnecessary care (as a percent of the total) as they found in the United States.
Fraud is an acute problem in government-administered programs. In Medicare and Medicaid fraud is estimated to consume at least $100 billion a year.
Hospital upcoding (claiming a higher level of patient severity in order to obtain a higher insurance payment) is another problem. One study estimates that increased upcoding (relative to a decade earlier) was associated with $14.6 billion in hospital payments.
Although doctors are the biggest critics of claim denials, hospitals are by far a bigger problem.
Suppose a patient’s condition is stabilized in an ER. Then the medically correct procedure is usually to send the patient home and let further care be outpatient. Yet some hospitals will keep the patient for a night or two and try to bill an insurer for that cost.
Suppose a patient’s condition warrants keeping the patient in an “observation bed” for a night or two. Some hospitals will treat the patient as a full admission instead and try to bill the insurer at a much higher rate.
These are just two of hundreds of ways some hospitals try to add unnecessary costs to our health care system. When insurers deny these claims they are performing a check on price gouging.
The Role of Preauthorization
An important tool private insurers use to avoid unnecessary spending and inappropriate care is to require preauthorization for a particular drug, therapy, or procedure. Doctors tend to regard these procedures as burdensome and irksome. Yet only 7.4% of requests by patients in Medicare Advantage and Medicaid managed care plans are denied. Moreover, in the vast majority of appeals (83.2%), the initial denials are overturned.
Doctors are using AI to file their appeals, which greatly reduces the time to file and increases the success rate.
Overall, our health insurance system can be improved, and scholars associated with the Goodman Institute have proposed many ways to do that. But we cannot have a system that works well without companies that perform the functions health insurers are performing today.
The public seems to understand this. Despite occasional complaints, more than two-thirds of Americans rate their health insurance as “good’ or “excellent.” And that holds for all kinds of insurance: employer plans, (Obamacare) marketplace plans, Medicare, and even Medicaid.
Even among people who say they are not in good health (and who, presumably, need medical care), a substantial majority give positive ratings to their health plans. Only a tiny percent rate their insurance as “poor.”
