Third-Party Payer Hurts American Healthcare

I’ve shared many videos (here, here, here, here, here, and here) explaining how government has made America’s health system expensive and inefficient. I especially recommend my 2019 speech to the European Resource Bank.

Now let’s add this video to our collection.

One lesson to take from all these videos is that the main problem with America’s health care system is multiple forms of government intervention (Medicare, Medicaid, the tax code’s healthcare exclusion, etc).

And the main symptom of all that intervention is pervasive “third-party payer,” which is the term for a system where people buy goods and services with other people’s money.

And guess what happens when people go shopping with other people’s money?

Mark Perry of the American Enterprise Institute explains that third-party payer leads to higher costs.

One of the reasons that the costs of medical care services in the US have increased more than twice as much as general consumer prices since 1998 is that a large and increasing share of medical costs are paid by third parties (private health insurance, Medicare, Medicaid, Department of Veterans Affairs, etc.) and only a small and shrinking percentage of health care costs are paid out-of-pocket by consumers. …It’s no big surprise that overall health care costs have continued to rise over time as the share of third-party payments has risen to almost 90% and the out-of-pocket share approaches 10%. Consumers of health care have significantly reduced incentives to monitor prices and be cost-conscious buyers of medical and hospital services when they pay only about $1 out of every $10 spent themselves, and the incentives of medical care providers to hold costs down are greatly reduced knowing that their customers aren’t paying out-of-pocket and aren’t price sensitive.

The best part of his article is when he compares cosmetic medical care to regular medical care to show how market forces – when allowed – lead to lower costs in the health sector.

Cosmetic procedures, unlike most medical services, are not usually covered by insurance. Patients typically paying 100% out-of-pocket for elective cosmetic procedures are cost-conscious and have strong incentives to shop around and compare prices at the dozens of competing providers in any large city. Providers operate in a very competitive market with transparent pricing and therefore have incentives to provide cosmetic procedures at competitive prices. Those providers are also less burdened and encumbered by the bureaucratic paperwork that is typically involved with the provision of most standard medical care with third-party payments. Because of the price transparency and market competition that characterizes the market for cosmetic procedures, the prices of most cosmetic procedures have fallen in real terms.

Here’s Mark’s chart showing how costs have changed over the past 20 years.

Pay special attention to the bottom right, where I’ve highlighted in red  how competition and markets have lowered relative prices for cosmetic care – which starkly contrasts with the health sectors where government plays a dominant role.

Singapore seems to have the most-market-oriented system in the world.

In a column for the Wall Street Journal, George Shultz and Vidar Jorgensen explain that the system is successful because people spend their own money.

If the U.S. wants lower costs, better outcomes, faster innovation and universal access, it should look to the country that has the closest thing to a functioning health-care market: Singapore. The city-state spends only 5% of GDP on medical care but has considerably better health outcomes than the U.S. …What does Singapore do that’s so effective? …All health-care providers in Singapore must post their prices and outcomes so buyers can judge the cost and quality. …Singaporeans are required to fund HSAs through a system called MediSave and to purchase catastrophic health insurance. As a result, patients spend their own money on health care and get to pocket any savings. …The combination of transparency and financial incentives has led to price and quality competition so intense that health-care costs are 75% lower in Singapore than in the U.S. …Singapore’s system of health-care finance shouldn’t seem foreign to Americans, nor should we doubt that it could work here. The U.S. has already seen that the combination of competition and price transparency can be successful: Witness the falling prices for Lasik and cosmetic surgery, which aren’t covered by insurance.

My modest contribution to this discussion is to share this OECD data showing that almost all other member nations are better than the United States on this issue.

No wonder heathcare is more expensive in the United States.

P.S. There’s also more government spending on healthcare in the United States, per capita, than there is in almost every other nation.

P.P.S. Government-created third-party payer also has led to higher costs and widespread inefficiency in higher education.