NCPA - National Center for Policy Analysis

A Simple Solution To Rising Health Care Costs

December 10, 1999

Today, most health care is paid for by third parties -- employers or government programs. Some experts say the third-party payer system is the root cause of medical cost inflation, since consumers have no incentive to shop for the best prices or limit their use of services to what is medically necessary, and few physicians compete in pricing their services.

However, an innovative new concept is cutting costs for some patients' care by half. The concept is known as "paying cash."

Cash is the basis for SimpleCare, begun in 1997 by two Seattle, Wash., physicians squeezed on payments by managed care companies to the point that their practice was losing money.

The doctors, Vern S. Cherewatenko and David McDonald, decided to substantially lower their fees if patients paid cash at the time of the visit. That would allow them to avoid managed care companies and lower their administrative costs.

Under managed care, if Dr. Cherewatenko spent 10 minutes treating an insured patient suffering a cold, the doctor's staff would submit a $79 bill to the patient's health maintenance organization.

  • The HMO would only pay $43 for that service -- but Cherewatenko incurred about $20 in administrative expenses to collect the HMO payment, so he would net $23.
  • However, his overhead cost for that patient is $30, so he actually lost $7.
  • Now, he charges a patient $35 instead of $79 if the patient pays by check or credit card, thus earning $5 instead of losing $7.

To promote SimpleCare nationwide, Cherewatenko started the American Association of Patients and Providers. Members of the group slash their regular fees from 30 percent to 50 percent.

Since 89 percent of health care costs are small claims under $2,000, SimpleCare could reduce the nation's health care bill if widely implemented.

Source: Tyler Chin, "Making Managed Care Simple," American Medical News, November 15, 1999.


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