Expanding Health Insurance Doesn’t Address Real Problem: High costs

Since the enactment of the Affordable Care Act (ACA), there has been overwhelming analysis on the impact of the new law, much of it on the cost to small business and families. Conventional wisdom behind the law says that millions of uninsured Americans cannot access health care because it is too expensive. The knee-jerk reaction to this by policymakers was to cover more people with insurance, hence, ACA. The problem is that this ignores one of the main reasons why prices are high. Expanding health insurance to more patients exposes them to inflated prices caused by today’s convoluted health insurance system. Even if expanding insurance worked exactly as envisioned, it is unlikely to reduce costs.  

Before a patient even uses insurance, a complex negotiation between the insurer and the doctor or hospital over services and prices has already taken place. The result of these negotiations is that the health care provider sends out massively inflated one-price-fits-all bills to everyone, but each insurance company pays a different amount for the same procedure. The bill might say $50,000, but maybe only $10,000 will be paid by an insurance company. This is why a single piece of gauze might be billed at $30; the hospital never expected to receive the full price, but they could expect to receive $10 or $15, depending on which insurer is paying.

These negotiations are actually one of the reasons provider networks exist. Doctors and hospitals within a network negotiate with the insurance company for what will be paid for each service. Out-of-network doctors and hospitals, however, haven’t pre-negotiated for their services, so when the insurance company receives the $30 bill for the gauze, they can’t just write a check for $15. They must negotiate after the fact to reduce costs, but what they pay will rarely be as low as pre-negotiated rates. Those without insurance are stuck with the full cost of the bill. If they do manage to negotiate, they’re even worse off than insurance companies operating out-of network; their negotiated rate will never be as low as it could have been.

While insurers do get lower prices than individuals, they are still paying $10 or $15 for a 99 cent piece of gauze. Even factoring in the doctor’s time and expenses, that is a huge markup and it is even worse for larger procedures like CT scans where a test which costs less than $500 is billed at $5,000 or more. Even though the actual costs are largely hidden from the majority of patients who are using insurance, they will feel the marked-up prices through higher premiums, larger deductibles, or larger out of network expenses. Without set and visible pricing, there is no patient pressure to keep prices low. This is why prices for procedures not covered by insurance – such as Lasik surgery – have remained relatively steady. Focusing solely on expanding insurance is a flawed method of reform; it guarantees that everyone will be subject to inflated prices.

Instead of expanding insurance, reform should focus on how insurance is used. Just as auto insurance covers a crash but not regular maintenance, so too should health insurance be used to cover only emergencies and major unexpected health incidents. Long term illness and major surgeries are the threats against which individuals should insure themselves, not routine physicals. Patients in this system would cover a greater share of the costs. This would mean that not only are they more active and engaged, but they also would have greater incentives to seek out the best quality care at the lowest prices.  This price-conscious mindset from patients would force doctors and hospitals to compete for their business. Conceivably, the result of this competition would be clear and distinct prices and lower costs.

Hidden prices in the healthcare system are a direct result of many flawed government policies which both incentivized and subsidized the usage of health insurance. The result is the codependent beliefs that all health care is expensive and that health insurance is necessary for everything. It is time for these myths to be dispelled. High costs in healthcare are a serious problem, but simply expanding insurance is like treating the symptom but not the disease.

Rick Barton is a Policy Analyst and Research Fellow with the Charles Koch Institute. He specializes in Health Policy.

This post originally appeared on EconomicFreedom.org, a project of the Charles Koch Institute. The Institute republished it here on July 31, 2015.

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