Nathan Sass

After Obamacare – What the GOP Should Do Next

In 2012 Elections, Economics, Health Care Reform, Politics on March 30, 2012 at 6:00 AM

Assuming reports assuming that the decision of the US Supreme Court regarding Obamacare will result in the entire legislation being struck down are accurate, the question becomes “Now what?”.

The decision will probably be delivered in the summer of 2012, before the presidential elections, and while the GOP is still in control of the US House.

I believe the GOP will have a limited and important opportunity to frame the discussion on the issue of health care.  Up to now, the left has set the parameters of the debate, which of course benefitted their policy and political desires.

When the decision comes, the GOP should immediately start to solicit input from people outside the political sphere, with expertise in the health care sector of the economy, and this time actually listen.

The core problem surrounding health care costs has never been discussed.  All of the problems, and solutions, have dealt with the symptoms, and not the disease, to torture an analogy.

Everyone can agree that the cost of health care has increased far faster than inflation for a long time now.  Regardless of wider economic circumstances, prices rise usually in double digit percentages year to year.  THAT, and not access, mandates or insurance, is the issue that must be addressed.

The increases in costs have a painfully simple cause.  Almost no one pays for health care with what they perceive to be their own money.  Anytime you have an entire sector of the economy where people spend someone else’s money on things for themselves, price becomes an afterthought.

How many people make a choice of physician or treatment based even in any small part on the price paid?  In all reality, people choose a doctor based on almost everything BUT the rate that doctor charges – and they can because largely it doesn’t matter to  them since they aren’t really paying him or her anyway.

When you extrapolate this 300 million times, it becomes all but guaranteed that prices charged by the providers and producers (doctors, hospitals and drug companies among others) will rise high and fast.  They realize at some level that what they charge has little impact on their “sales”.

In the current 3rd party payer model, the insurance companies are saddled with the task of acting as an agent of the buyer (the insured person) as it relates to the prices paid for what is consumed.  The unfortunate truth is that insurance companies have very little actual market power to wield against producers/providers on the issue of price.

If an insurance company attempts to be very aggressive in driving down prices, the providers will simply refuse to be included in their networks.  If an insurance company loses too many providers, they cease to have a marketable insurance product.  Who would buy a policy from a company with a severely limited provider network?

So insurance companies do the best they can in their position to lower costs, while being careful not to lose too many providers.  They limit covered treatments (rationing), charge ever higher co-pays, require pre-authorizations for treatment, and attempt to drive as much activity into their best provider networks as they can (limiting patient choice).

They don’t do this to anger their members, or to make massive profits, but because that is the only thing they can do to keep claims costs as low as possible.

High claim costs mean high premiums.

High premiums mean fewer members.

Fewer members mean shrinking profits, falling stock prices, employee layoffs and eventually bankruptcy.

In simplest terms, the only way to control the costs of health care is to put people back into the position of spending their own money, but WITHOUT putting those same people at risk of financial ruin or severe illness and/or death in the process.

There actually have been attempts to do this by the insurance industry, with limited results.  The introduction of the Heath Savings Account (HSA) and Health Reserve Account (HRA) products was designed to require people to become aware of the costs of their consumption, and make choices based on price.  The “over the top” coverage using a traditional insurance model protected the members from large out of pocket expenses, while still making them think like consumers in any other sector of the economy.

The reason we did not see a significant impact on the rate of medical inflation after these products hit the marketplace is pretty simple to understand.  Only a small percentage of consumers were enrolled in such plans, and then those consumers only acted in a cost sensitive fashion until they reached the limit on the dollar amount of their HSA/HRA accounts.

This limited market force had no impact on the pricing decisions made by producers.  It did serve to limit consumption somewhat, but the real power of the consumer is to exert pressure on producers to lower price while improving quality.  We see that everywhere else in the economy, from consumer electronics to automobiles.

There is ample evidence that returning consumers to the role of “direct spenders” would produce very significant reductions in prices in the health care sector, without a risk of reduced quality.  All one needs to do is examine the price trends for similar products that have traditionally never been covered by health insurance.

By that I refer to things like Lasik eye surgery.  When Lasik first hit the market after FDA approval in 1995 it was a relatively expensive procedure, and only a limited few could afford it.  It was, and still is, totally outside the benefit boundaries of either health or vision insurance, which made it a 100% “out of pocket” expense.

LASIK prices, after rising for several years, seemed to stabilize from 2006 to 2010, as shown by these average LASIK costs charged at a single price — meaning no extra charges were added on for new technologies:

  • 2006: $1,950
  • 2007: $2,099
  • 2008: $2,105
  • 2009: $2,140
  • 2010: $2,150

In comparison, LASIK in 2002 cost $1,550-$1,600, and by October 2003 the price had risen to $1,710. At the end of 2004, the price was a little more than $1,800, and in 2005 it was $1,965. These averages take into account procedures performed at surgeon-owned laser centers, institutions and corporate laser centers.

Also, keep in mind that earlier prices do not reflect new technologies of wavefront analysis and laser-created flaps, which have been in widespread use only in recent years.

While the costs of Lasik has not gone down in actual dollars, the growth in price from 2002 to 2010 was only $500, or 23.25%.  Bear in mind that this 23.25% increase includes increased prices for newer, more advanced procedures.

According to’s inflation calculator, general inflation for the same period of 2002 to 2010 was 23.76%, meaning Lasik’s average price was actually slightly lower in inflation adjusted dollars after 8 years, even with newer, more advanced (and therefore higher priced) procedures included in the averages.

During the same period of 2000 to 2010, (a slightly longer, but comparable period) health care inflation was a staggering 48% according to Standard & Poor’s (source).

What this tells us is that prices for products covered by health insurance grew more than twice the rate as the rest of the economy over a 10 year period.  If that growth continues, soon health care will become the single most expensive thing a person buys, even more expensive than housing.

There can be little argument that the system requires massive reorganization to reverse these trends, but simply putting more people into the current “3rd party payer” insurance model will only compound the problems.  That will mean that even more people will be spending money that “isn’t theirs”, and likely totally disregarding the prices they are charged.

The only logical solution is to do the exact opposite of what we have today.  It may seem radical, but the total elimination of 3rd party payers – nationwide – whether they be they government entities or private companies, is the only way that consumers in large enough numbers can begin to become price aware and pressure producers to bring prices down to more affordable and reasonable levels.

The trick is to do this without making people feel exposed to financial or medical ruin in the process, and making the solution acceptable to a broad portion of the political spectrum, from the left to the right.  There are more than a few ways to accomplish this, (here is one example) but only if we can finally accept the premise that a 3rd party payer, even in a single payer government run model, cannot control prices as effectively as a free market can.

The question remains, will the GOP have the courage to even explore such a bold line of thinking, or will they play it safe once again and fiddle around on the margins by making tweaks to an already hopelessly flawed model?

I certainly hope they will, but it will take political courage to do so….and a realization that politicians are the least qualified people to design a solution that gets to the core cause of the problems we all face.


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