Saturday, June 8, 2013

Why Healthcare Pricing is So Crazy In US And A Discussion Of Alternatives

We have learned that healthcare pricing in the US involves negotiations between individual insurance companies and healthcare providers.  Consequently, pricing for the same procedure varies substantially as a function of the negotiating power of the insurer.  Prices are also much higher for the same procedures in the US than they are in other countries because individual insurers lack the purchasing power of a single large insurer.  Individual insurers are poor agents for the employers who hire them to purchase healthcare.  The problem, however, reverts back to the employers who hire the insurers.  The employers benefit from the rise in healthcare prices because it helps them in the labor market and they pass the cost onto their employees.  The price that they pay for insurance reduces the cash compensation they provide to employees.  The cost of insurance for a typical family of four has increased from $10,000 to $22,000 per year while cash compensation for the median employee has been stagnant at between $50,000 and $60,000 per year.

One alternative for the current system is to copy the all-payer systems that prevail in Germany and Switzerland.  In those systems and association represents all of the employers in a region and it negotiates prices with a single provider association.  The prices of each procedure are standardized for a region and the prices are much lower than those in the US.

Another alternative is a reference price system.  The insurer would pay the lowest price charged in a region and the insured would pay the difference if a higher cost provider was selected.  This would result in a two tier pricing system in which the quality of the service was rationed by price.  Those with the ability to pay higher prices would receive higher quality services.  This is the more likely evolution of the US healthcare system since it is similar to the pricing of legal services and education in the US.  The ability to pay determines the quality of service provided in those systems.

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