Philadelphia Reflections

Streamline Health Insurance?

Let's review the logic. Mandatory health insurance was considered to be necessary because we wanted Universal health insurance. And we wanted universal insurance in order to extend health insurance to those who had pre-existing conditions. In a sense, we don't have a mandatory insurance problem, we have a pre-existing condition problem. Is there no other way to solve this?

Perhaps, and perhaps not; but let's take up this critical point at the end of the discussion. Right now, it is pretty clear that 10% is a pretty big price for someone else to pay your bills. Most of us would not pay so much to have someone buy our groceries, pay our utility bills, or put quarters into a parking meter for us. We very definitely would not pay such a fee to someone who proposed to do it with a system of three insurance policies (one for 80%, one for 20% copayment, and the third one for Major Medical policies for gaps in our policy coverage). Nor would we compensate a payment agent to pay for coverage which is riddled with cash demands for escalating deductibles and copayments, every time we go to the drugstore, to the accident room, to the doctor's office. Something surely is wrong when we surrender the convenience of third-party payment, pay heavily for this service anyway, and they are hounded and confused by a myriad of partial payment demands, or bewildered by undecipherable itemized bills with an astonishing total at the bottom -- but nevertheless marked "patient responsibility, zero". Something is very definitely wrong when hardly anyone can explain the payment system to us, and no one is willing to quote a price in advance of service. So, let's start by considering what would happen if we eliminated co-payments entirely, and confined deductibles to out-patient services.

In the past, it might have been theorized that prices would go up because patient participation puts a brake on prices. But now we would have to contend with the question, "How would you be able to tell the difference?" The patient in a hospital bed is incapable of haggling about prices, while the hospital is mostly reimbursed in an approximated lump sum, called the DRG (diagnosis-related group). Even those insurances which are reimbursed by items are subject to secret discount systems, which vary from 40% discounts for state Medicaid to overpayments of 30% of costs for private insurance, and up to 400% for payments by list price. This system led one very famous Philadelphia surgeon to growl, "The main purpose of having health insurance is to keep the hospital from fleecing you." The bad public relations of asking the public to endorse this summary would make the problems of changing the system seem minor. For public relations alone, the system must be made more transparent. Most hospital administrators would make the irrelevant response that, after it all shakes out, hospital inpatient care only generates about a 2% profit margin.

That may be true but fails to emphasize that emergency room services generate a 10-15% profit margin, and hospital out-patient and satellite clinics approach 30%. If you drive past a nearby hospital, you are very likely to see a construction crane in operation. But just take a guess in advance at what type of building is being built.

Since hospitals are obviously responding to prevailing profit margins, they would be wise to agree on negotiations with insurers based on audited profit margins, assigning the margin to individual departments to divide up after internal negotiation. For inpatients, a refined object of negotiation with insurers should be an agreement on the variation of reimbursement to be tolerated between insurers for substantially similar inpatients, essentially some variation of Diagnosis Related Groups. A later chapter discusses improvements needed for DRG determination. The central point is: no attempt should be made to bargain prices with a patient who is sick enough to require inpatient hospitalization.

For emergency room services , it is possible to imagine a sort of DRG, and if the patient subsequently requires hospitalization, that should be the ideal approach. However, most emergency patients are not admitted, and there are usually nearby competitors for them. Therefore, some sort of hybrid should be constructed, partly an Emergency DRG, but also modulated by comparison with neighborhood facilities.

For outpatients, competition should rule, and any insurance accommodation should reflect that fact. Ideally, small outpatient services should be cash transactions, but the trend lately is for increasingly expensive procedures to be performed in the outpatient area. The most suitable outpatient payment would be the option of using a Health Savings Account. Optional, because it is desirable to encourage those who are able to protect their HSAs for other uses, to be described in later chapters.

The ambulatory patient is fully capable of loud and insistent bargaining over prices, ultimately threatening to go elsewhere or just to refuse the pay the bill. In the last extremity of disagreement, the provider will be very glad to accept an HSA, so it serves as sort of a distorted re-insurance, and it is useful to have a central reporting mechanism to determine how the market is faring. Since everyone is now entitled to have an HSA, everyone should sign up for one. The uproar over the Electronic Exchanges has demonstrated that almost everyone is coming to the conclusion that high deductibles are desirable. The reasoning is not so self-apparent, but it is nevertheless also true, co/pay is something to be discouraged.

Originally published: Monday, January 27, 2014; most-recently modified: Wednesday, June 05, 2019