NCPA - National Center for Policy Analysis

Health Care's Third-Party Spending Trap

December 17, 2013

Health insurance brings costs up, not down, says Jeffrey Singer, a general surgery doctor and Cato Institute scholar.

Many doctors routinely discount medical fees in exchange for direct, up-front payments from patients. Why? Because it can take several months for payments from insurance companies to be collected.

There is a big difference between "list prices" (those official prices that medical providers list as being the cost of their services, and which are used to negotiate with health insurance companies) and the prices that providers are willing to offer to uninsured, self-paying patients:

  • One of Singer's patients saved $17,000 by paying directly for his hernia operation rather than using his health insurance to do so.
  • The Surgery Center of Oklahoma in Oklahoma City offers a wide number of surgical services to the public for a small fraction of the price offered by similar facilities that use third-party payers. The Surgery Center of Oklahoma accepts no private insurance, Medicare or Medicaid.
  • Health providers are not losing money when they give discounts to patients who pay directly (otherwise, they wouldn't offer the services at those low prices).

It is the third-party payment system that causes prices to inflate. When you spend your own money, you are very careful in the amount that you spend. But when you are spending someone else's money, you have the least incentive to be economical or really look at the actual value of what it is you're paying for.

  • The government engages in this dynamic when it pays for Medicaid and Medicare services.
  • The same is true for private insurance. Private insurers lack the incentive to bargain for the best price possible -- they need only find a price that is "good enough." They will then pass on that price difference to customers, who pay for it in the form of premiums.

Health insurance is important, but using it for routine, predicable care rather than unforeseen and catastrophic occurrences is nothing more than prepaid health care, and it drives up prices for everybody in the system.

Source: Jeffrey A. Singer, "Health Care's Third-Party Spending Trap," Reason Magazine, December 10, 2013.


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