Health Care Economics III

Why does everything cost so much? In the Time article, there are a dozen examples of things that are overpriced like an acetaminophen tablet for $1.50 or a troponin blood test for $200 when Medicare would pay $14. The article discusses a "chargemaster," a comprehensive list of all the services and products a hospital might provide and the charge that would be billed. The article then notes that this charge has very little to do with the cost of the service or product to the hospital; they appear to be arbitrarily high values.

The problem, I think, is that hospitals and insurance companies approach the table with an attitude like haggling.

This is the Flowing Hair dollar, the first dollar coin issued by the U.S. government, minted between 1794 and 1795. Before it was sold two months ago, no one knew its actual monetary worth, and so something like haggling makes sense. The seller starts high and the buyer starts low. The coin ended up selling for over $10 million.

Unfortunately, this seems to be the attitude hospitals take when negotiating with insurers. If you mark up the cost of an X-ray or rituximab or crutches by ten-fold, then giving a 60% discount to an insurer is not that bad of a deal. Bargaining (or haggling) allows price discrimination, where a seller (hospital) can raise its price with a buyer that is more eager (an insurer with a healthier population or a clientele of high end businesses). But this leaves one person out: the individual who needs emergency care and has no bargaining power whatsoever.

This is why in the Time article hospitals say, "Very few people pay the chargemaster prices" yet the uninsured or underinsured individuals needing care receive a bill way higher than what would be sent to an insurance company. It also creates this paradox where those who can afford it the least (the uninsured or underinsured) are charged the most for health care. It also explains why many policymakers and physicians advocate for universal health care - so that no one gets into the bind that victims find themselves in the Time article.

I personally don't think costs are driven up substantially by "free care" we give. The fact that county safety net hospitals care for illegal immigrants, the homeless, the jobless, the uninsured does cost-shift prices to the insured and those who can pay, but I can't imagine it would drive up cost anywhere close to the discrepancy between the chargemaster and the cost to a hospital.

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