There are many reasons for the high cost of health care, but one reason is the current insurance payment system. Before diving into this issue, however, let’s discuss the way the general market works for all products and services.
The market drives the price of services or products. When there is a high demand for a product and/or a low supply, the price goes up. If there is a large supply of the product and/or a low demand, the price for that product goes down. We can wait for the right time to buy hoping for a better price, or we can buy now at the current price.

We also have the freedom to shop for the best price or value and decide on where we will buy the product or service. We can take our time and shop around for the best deal. We can negotiate with the seller. We can even wait for something to go on sale. The point is that we, as individuals, control what we buy, when we buy and at what price. This is what is great about the competitive market.

Health Insurance: Disparities of the Traditional Market

The health care market does not have the full benefits of the competitive market. The U.S. relies on a third-party payment system where individuals and employers purchase insurance for patients to receive health care services that are then paid for by insurance providers.

Over 85 percent of Americans are covered by individual or employer provided insurance. In addition, the U. S. government is the insurer (Medicare, Medicaid, veterans, military) for approximately 87 million people using funds from current workers’ payroll taxes to pay medical providers. The insurance companies or the government are the “middle man” which adds another layer of costs resulting in increased prices.

The purpose of insurance (both public and private) is to transfer catastrophic risks to an insurance company, which in turn spreads the costs of unexpected losses over a pool of individuals. The current insurance system covers much more than major medical or catastrophic (as was originally intended).

Automobile insurance is a good example of how insurance is supposed to work. Would you submit a claim for an oil change? Not likely. Why do we have automobile insurance? Of course the law requires us to carry a minimum amount, but for me, it also is to cover the cost of a replacement car if mine is totaled and to pay the expenses of the other party if necessary. The premiums that I pay are based upon the risk that I will have an accident spread over a pool of other insured people.

Let’s suppose that automobile insurance policies included routine maintenance. How would this affect our actions? Most people take their cars to repair shops they trust and question the price and the repairs. If automobile insurance paid the maintenance bills, we would probably take our cars to the most convenient shop and not be too concerned about the cost. Drivers would have no incentive to question the price or the effectiveness of the repairs. Shops would not need to be as competitive with other shops because they would know what insurance companies will pay. As a result, we would overspend on the cost of maintenance and pass the costs on to the insurance company which would spread the costs across the pool of insured drivers. This would result in a significant increase in insurance premiums and dropping of owners of automobiles that need more maintenance than others.

Health insurance covers much more than major or catastrophic medical services; it covers the basic and routine medical services. Basic and routine medical services account for a large number of the payouts by the insurance company. When the patient sees a provider for a basic appointment, the patient does not pay the entire amount (unless the deductable is not met) but may pay a set co-payment amount. If there is a deductible amount, the patient normally does not question the amount.

The insurance company costs and profit are spread across a pool of insured people (for private) or taxpayers (for public). These insurance company costs are estimated to increase the cost of health care by 30 to 35 percent.

Without the patient as the central point in the medical marketplace, the patient is not motivated to economize on medical care as they do in other markets. The patient or employer or the taxpayer pays a “middle man” to pay all of the patient’s medical expenses when the basic medical services could be budgeted and paid for by the patient. As a result, the extended use of insurance substantially increases the cost of health care.

By Jim Barfield
Jim Barfield is the president, CEO and co-owner of Luke & Associates, Inc. on Merritt Island. His company, founded in 2004, is a major provider of medical and clinical support services for the military. In addition, Luke provides advisory and assistance services in the fields of engineering, research, information systems and medical services.