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Posts Tagged ‘third party payer’

The invaluable Tim Carney of the Washington Examiner is an expert at exposing the corruption of big government, and his article about for-profit colleges and government-subsidized tuition shows that everybody involved in this fight is sleazy. Unfortunately, no matter who wins, the taxpayers lose. It’s also worth pointing out that the main effect of government-financed tuition payments and loans is to drive up the cost of college – another example of the third-party payer phenomenon.

Here are key passages from Tim’s column.

For a case study in the tawdry and twisted world of Washington policymaking and lobbying, you can’t do much better than the current fight over the subsidies and regulations for for-profit colleges. Behind every argument is an ulterior motive, around every corner is a conflict of interest, and in every pocket there is cash procured through government policy supposed to serve the public good.
…don’t confuse “for-profit” with “capitalist.” Without federal subsidies in the form of Pell grants and federal loan guarantees, the for-profits might not exist. At the very least, they would be much smaller. About 87 percent of the revenue at the biggest for-profits comes from federal taxpayers, according to the Chronicle of Higher Education. They belong to a class of company that I call Subsidy Sucklers.
Sen. Tom Harkin, D-Iowa, earlier this year declared war on the for-profits, ordering the Government Accountability Office to investigate these schools’ marketing techniques. The GAO produced a scathing condemnation.
…But a closer look revealed a murkier picture. The GAO last month corrected the paper, modifying 16 of the report’s 28 findings. At Education Week, Rick Hess wrote, “all 16 of the errors run in the same direction — casting for-profits in the worst possible light.” The credibility of Harkin’s star witness in his August hearing, Steven Eisman, was also called into question.
Eisman is a short-seller who reportedly stands to make big money if the stocks of for-profit colleges collapse. He also is a vocal lobbyist for new regulations that would cripple these colleges. The term for Eisman is Regulatory Robber Baron.
… Bill Clinton’s former special counsel Lanny Davis first flagged Eisman’s role in a Politico op-ed, and liberal ethics “watchdog” Melanie Sloan followed up, criticizing Harkin for allowing Eisman to testify, sparking the liberal American Prospect to ask in a headline, “Why Are Progressives Fighting Student Loan Reform?” The answer: money.
On September 17 — about three months after Davis’s op-ed — Davis registered as a lobbyist for the Coalition for Educational Success, a trade group of for-profit colleges. Then in November, Sloan announced she was joining Davis’s lobbying firm. Also lobbying for the for-profit colleges are six former Democratic congressmen and three former Republican lawmakers.
This tale has no good guys, but it does have a moral: When you inject government into an industry, you get some pretty unsavory results.
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The title of this post may be a slight exaggeration. I actually recommend you read the entire two-page paper by Devon Herrick of the National Center for Policy Analysis. But this chart from that study is an excellent visual display of what’s wrong with the health care system.

You can see that the price of medical care is rising twice as fast as inflation, but you can also see that prices for cosmetic services are rising only half as fast as the general price level. Why are general health care prices soaring, yet prices in one segment of the health care world are very stable (and actually falling relative to all other prices)? The answer is simple. As Devon writes:

A primary reason why health care costs are soaring is that most of the time when people enter the medical marketplace, they are spending someone else’s money. When patients pay their own medical bills, they are conservative consumers. Economic studies and common sense confirm that people are less likely to be prudent, careful shoppers if someone else is picking up the tab. Thus, the increase in spending has occurred because third parties – employers, insurance companies or government – pay almost all the bills.

Study this image for two minutes and contemplate the implications. After that, you’ll know more about healthcare economics than 98 percent of all politicians (though that’s not exactly a huge accomplishment).

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Here’s some horrifying news from the United Kingdom, where the government-run healthcare system allowed 239 patients to die of malnutrition in 2007. Another 8,000-plus entered the system for malnutrition and actually deteriorated.

In 2007, 239 patients died of malnutrition in British hospitals, the latest year for which figures are available. A wag might say it must be the English cuisine. But the real roots of this tragedy lie in Britain’s government-run medical system, which tells us something about what we might expect from ObamaCare in the years ahead. A British charity, Age U.K., has been seeking for years to raise awareness of the issue. Yet despite increases in screening, training and inspection programs, the problem has only gotten worse. The charity reports that in 2007-2008 148,946 Britons entered hospitals suffering from malnutrition and 157,175 left in that state, meaning that hospitals released 8,229 people worse-off nutritionally than when they entered. In 2008-2009, that figure was up to 10,443. The problem is not a lack of food. Hospital malnutrition mostly affects the elderly or otherwise frail, who often need individualized mealtime assistance. Spoon-feeding the elderly may not seem like the best use of a nurse’s time, but for some it may literally be a matter of life and death. Yet the constant scarcities created by government medicine, along with the never-ending drive to trim costs, has led the National Health Service to give nurses additional responsibilities and powers in recent years. Inevitably, this leaves them with less time to make sure patients are getting fed.

No system is perfect, so the point of this post is not to assert that there is something especially inhumane and/or incompetent about the British system. Instead, the real lesson is that doctors and hospitals generally try to please the people paying the bills. In government-run systems, that means appeasing politicians. This doesn’t preclude good patient care, but it does mean that other factors may have too much of an impact on decisions. In a market-based system, though, medical professionals have a greater incentive to focus on patients.
I should also say that this is not an endorsement of the American system, which also suffers from the third-party payer problem. In part, this is because of direct government financing, but also because of excessive use of insurance caused by government-created distortions.

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John Goodman of the NCPA has a great article about how the current healthcare system is heavily distorted by government policies that result in people making decision with other people’s money (or at least what they perceive as other people’s money). The excerpt below is a good summary of John’s key points, but I’ll add a couple of rhetorical questions. What do you think would happen if government created a tax break that made it attractive to expand auto insurance to cover the cost of oil changes and trips to the gas station? Would that make that market more efficient or less efficient? Would Jiffy Lube and Sunoco charge higher prices or lower prices? What would happen to administrative costs?

Almost everyone believes there is an enormous amount of waste and inefficiency in health care. But why is that? In a normal market, wherever there is waste, entrepreneurs are likely to be in hot pursuit — figuring out ways to profit from its elimination by cost-reducing, quality-enhancing innovations. Why isn’t this happening in health care?

As it turns out, there is a lot of innovation here. But all too often, it’s the wrong kind.

There has been an enormous amount of innovation in the medical marketplace regarding the organization and financing of care. And wherever health insurers are paying the bills (almost 90 percent of the market) it has been of two forms: (1) helping the supply side of the market maximize against third-party reimbursement formulas, or (2) helping the third-party payers minimize what they pay out. Of course, these developments have only a tangential relationship to the quality of care patients receive or its efficient delivery.

The tiny sliver of the market (less than 10 percent) where patients pay out of pocket has also been teeming with entrepreneurial activity.  In this area, however, the entrepreneurs have been lowering cost and raising quality — what most of us wish would happen everywhere else.

…Wherever there is third-party payment, the goal of innovation is to produce more products that qualify for reimbursement, even if the effects on patient outcomes are only marginal. Wherever there is no third-party reimbursement, innovators are focused on ways to lower cost and raise quality.

Take cosmetic surgery. Over the past two decades there has been an enormous amount of innovation in the field — all of the cost-lowering, quality-raising variety. That explains why the volume of cosmetic surgeries grew six-fold over the past 20 years, while the real price declined by more than one-third. Similarly, there has been remarkable innovation in LASIK surgery — another area where third-party payers are not. Yet the real price of LASIK surgery has declined by 25 percent over the past decade.

The same principle can be seen at work in the international marketplace. For example, India has a potentially huge market for medical care. But 80 percent of health care spending in that country is private and there is very little health insurance. So some of the companies that make expensive technology for the developed world are now finding ways to produce the same services for a fraction of the price.

GE Healthcare, for example, has introduced a portable electrocardiogram machine into the Indian market that will perform the heart exam for 20 cents (compared to a normal price of $50). Siemens (another maker of high-end, expensive equipment) has built mobile diagnostics units for the Indian market with X-ray, ultrasound and pathology systems.

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Free markets are characterized by voluntary exchange between buyers and sellers. Mapping that relationship is absurdly simply, as this image indicates.

Indeed, the only reason I even bothered to include that image was for purposes of comparison. Here is a new flowchart prepared for the Joint Economic Committee showing the healthcare system under Obamacare.It’s worth noting, by the way, that the system already was a disaster even before Obamacare was enacted. In the health care sector, free markets are only allowed to operate in very rare cases, such as cosmetic surgery, laser eye surgery, and (for better or worse) abortion. The rest of the sector was heavily distorted by government intervention. Obamacare simply makes a bad situation worse.

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A major problem with America’s healthcare system, both before and after Obamacare, is the fact that consumers very rarely spend their own money when obtaining healthcare. Known as third-party payer, this problem exists in part because government directly finances almost 50 percent of healthcare expenditures. But even a majority of supposedly private healthcare spending is financed by employer-provided policies that are heavily distorted by a preference in the tax code that encourages insurance payments even for routine expenses. According to government data, only 12 percent of healthcare costs are financed directly by consumers. And since consumers almost always are buying healthcare with somebody else’s money, it should come as no surprise that this system results in rising costs and inefficiency. This is why repealing Obamacare is just the first step that is needed if policymakers genuinely want to restore a free market healthcare system (all of which is explained in this 4-minute video).

Unfortunately, many people think that market forces don’t work in the healthcare system and that costs will always rise faster than prices for other goods and services. There are a few examples showing that this is not true, and proponents of liberalization usually cite cosmetic surgery and laser-eye surgery as examples of treatments that generally are financed by out-of-pocket payments. Not surprisingly, prices for these treatments have been quite stable – particularly when increases in quality are added to the equation.

I just ran across another example, and this one could be important since it may resonate with those who normally are very suspicious of free markets. As the chart from the Alan Guttmacher Institute shows, the price of an abortion has been remarkably stable over the past 20-plus years. Let’s connect the dots to make everything clear. Abortions generally are financed by out-of-pocket payments. People therefore have an incentive to shop carefully and get good value since they are spending their own money. And because market forces are allowed, the cost of abortions is stable. The logical conclusion to draw from this, of course, is that allowing market forces for other medical services will generate the same positive results in terms of cost and efficiency.


None of this analysis, by the way, implies that abortion is good or bad, or that it should be legal or illegal. The only lesson to be learned is that market forces control costs and promote efficiency and that more government spending and intervention exacerbate the third-party payer crisis.

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Eline van den Broek probably is not happy today since she was in South Africa watching her team lose a high-scoring battle with Spain, but she should be very proud of the new video she narrated that urges the repeal of Obamacare – and also points out some of the other reforms that are needed to restore markets to the US healthcare system.

Her comments on how the American healthcare system was a mess even before Obamacare are particularly important.

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