Analysis Shows Consumer Involvement Key to Reducing Health Care Costs

The National Center for Policy Analysis takes a look at some medical figures which prove what simple economic principles already teach: market forces help keep consumer prices down.

The analysis done by NCPA looked at overall medical cost inflation and several subsets of health care costs from 1992 to 2008, and the findings were quite remarkable.

As anyone could probably already figure out, between private health insurance and all the government health care programs that have long been in existence (Medicare, Medicaid, SCHIP, etc.), few people pay for health care out of their own pocket.:

  • For every $1 worth of hospital care consumed, the patient pays only about three cents out of pocket, on the average; 97 cents is paid by a third party.
  • For every $1 worth of physician services consumed, the patient pays less than 10 cents out of pocket, on the average.
  • For the health care system as a whole, every time patients consume $1 in services, they pay only 12 cents out of pocket.

As anyone acquainted with market forces and human nature knows, this is ruinous to any hopes we might have of keeping prices down.  I was in the military under the military health care system (which is free for military personnel) for 10 years, and I lived in England under their socialist National Health Service for three years.  During that time, I saw many individuals use the “free” health care systems for things they wouldn’t even dream of, if they were paying for these services out of their own pocket.

For instance, I’ve told the story before how a friend of mine who got a cold would wait for a bus, ride that bus about 45 minutes or more to go to the “free” clinic where the doctor would look at him and say, “Yep, you have a cold” and give him some “free” cold medicine.  He would then wait for the bus again for another 45+ minute ride back home.  He had wasted several hours by the time the whole exercise was done in order to get his “free” medicine (that they taxpayers paid for). Me?  I’d walk 100 yards to the store and get basically the same cold medicine for $10 or less, having wasted only 15 minutes of my time.  I couldn’t count the times I’ve seen my friend’s actions played over and over by countless people in both the military and the British health care system.

This frivolous over-use of the health care system is part of what drives up the overall cost of health care in America (or any country, for that matter): it is utilized far more than it would be if the patient were paying for the exam, medicine, services, etc. out of their own pocket.

Market forces also dictate that the price of things can only go as high as the market will bear. In other words, you can’t charge more for something if people aren’t willing to pay more for something.  Having the government or an insurance company pay for our stuff insulates us from the rising cost of health care, so we are willing to “pay” more for “free” services that we would not be willing to pay for it if it was coming directly out of our pockets.

The NCPA analysis also found this to be true by looking at cosmetic surgery costs.  Unlike the bulk of health care, cosmetic surgery almost always comes out of the consumer’s pocket.  This is what NCPA found:

Since 1992, medical care prices have increased an average of 98 percent. The price of physician services rose by 74 percent. [See the figure.] The increase in the price of all goods, as measured by the consumer price index (CPI), was 53 percent. Yet, an index of cosmetic surgery prices only rose only about 21 percent. Thus, while the price of medical care generally rose almost twice as fast as the CPI, the price of cosmetic surgery went up less than half as much. Put another way, while the real price of health care paid for by third parties rose, the real price of self-pay medicine fell.

As the figure shows, during downturns in the economy consumers become more price sensitive and providers respond accordingly with more competitive prices. Notice this phenomenon did not occur for medical care or physician services.

Not a surprise here…unless you’re a socialist who’s still living in the utopian dreamland.

This is why moves to socialize our health care system–and ObamaCare is only a step in that direction are headed in exactly the wrong direction.  If we truly want to lower health care costs, both as a nation and for individuals, we must return to a free market model.  Greater consumer involvement in health care decision–including costs–is fundamental to getting health care costs under control.

Since Republicans only have control of the U.S. House and not the U.S. Senate, it is unlikely that there will be any significant move in the direction of America’s free market roots for the next two years. In the meantime, House Republicans can best help the American people and our health care system by defunding if not outright repealing the unconstitutional monstrosity commonly known as ObamaCare.

3 Responses to “Analysis Shows Consumer Involvement Key to Reducing Health Care Costs”

  1. Whenever government agencies look at the rising costs of healthcare, they look only at the provider side of the equation–cut reimbursement to hospitals, disallow services, slash payment to doctors, etc. Having worked in primary care for many years I have observed exactly the problem that is described here. Consumer behavior drives medical costs to a much greater degree than doctor’s fees, but governments are loathe to address that issue. It might cost a politician a vote or two if recipients of government largesse are asked to use healthcare responsibly (which should include a small co-pay in every case).

    I saw 31 patients in about eleven hours yesterday. Easily 50% could have been taken care of with a little common sense and patience and did not require a visit to the doctor. I try to educate patients about what they can do for themselves to avoid unnecessary visits to the doctor, but most don’t see it as a problem because it’s little or nothing out of their pockets.

    If we are to ever get medical costs under control it will require the re-introduction of market forces. The only alternative is to allow government bureaucrats to dictate what is and what’s not allowed and how much it will cost. This will not be a satisfactory remedy for patients or providers, besides which it would violate the word and spirit of the US Constitution.

  2. I’m always glad to hear a doctor’s side of the healthcare equation. And when you have one that actually understands economics, that’s a real plus.