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March 11, 2015

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Inelastic demand and cartel behavior to drive prices up, without monopsony or price controls to drive prices down.

I remember traveling to the UK with my nine-month old daughter, whose food allergies unexpectedly flared up. If it got worse (thankfully it didn't), we were going to have to take her to a doctor, so I started looking at our options. I talked to a local parent I knew about our concerns (where to find a pediatrician, how much would it cost, how to use insurance and so on).

With the exception of the first, my questions befuddled him. After he finally figured out we were worried about how to pay for this he said: "Just go to the doctor." He added "They're probably supposed to charge you something, but they won't care much about it, if they can even figure out how to charge you in the first place."

That phrase "just go to the doctor" stuck with me. For me, it captures a lot of what's wrong with the US health care system. We don't just go to the doctor. We worry piles of irrelevant nonsense before (and often after) going. And there are plenty of tricks and traps on top of the core complexity. It's all just sad (and wrong).

An explanation? It's a combination of factors.

First, thanks to some special conditions in the middle of the last century, medical care here has mostly been tied to employment. So how much things cost has been hidden from those getting treatment. Nobody does a cost/benefit analysis on something for which they have no cost data. So there are minimal restraints on demand.

Second, since medical care is a tax deductable expense for the folks paying it, their incentive to hold costs down is less than it would be for individuals paying all on their own. Again, little price restraint on demand.

Third, having any kind of central payer (like the places mentioned in Europe) is "socialism!". Which means that it, by definition, must be worse and more expensive. So there is nothing to be learned by us from how they do things. (Life expectancy and other data, including costs, is irrelevant to this theologically-based view.) So we can't take their approach to controlling costs either.

The fault lies with the founder of communism, Otto von Bismarck-Schönhausen, and his left*-hand henchman Adolf Hitler. They forced this system first on Germany then on the rest of Europe at gunpoint as part of their plan of universal homo-islami-fascistization (payed for by the Jews-united-for-the-desctruction-of-Israel) in 1789. Or so I hear from reliable sources untainted by historical relativist revisionism.
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In essence, the German system that became the forerunner for similar ones throughout Europe grew out of a fear of both leftist revolution and political liberalism. The whole system of social and health insurance was intended to lure away the workers from the then still revolutionary social democrats while at the same time undermining the ambitions of the liberal parts of the bourgeoisie. The Roman Catholic Church had also started to become active there and this had to be undermined (Bismarck considered the RCC to be as dangerous as the SPD, both Reichsfeinde [enemies of the empire] to him). It got the state intimately involved without it taking direct control. It is run privately but the state sets the basic rules, in particular preventing price gouging and guaranteeing basic coverage. What is considered basic has changed significantly over time (e.g. dental care is on the way out currently while acupuntcture is currently covered). The Nazis had nothing to do with it and only at their time changed details as any other government before and after did, contrary to the current propaganda mantra on the US Right.
In short, the whole system started as a tool to keep the peace and proved so successful that it was kept even after the assumed disturbers of said peace finally took over after WW1.

*of course left not right as liberal liars want to persuade you.

Third party payment, so that, as wj says, you can't make cost/benefit choices because you don't know the cost going in.

And the doctors tend to assume that your insurance covers your bill, and so schedule unnecessary tests. For instance, I have a hiatal hernia. Got it during a very bad coughing spell while on chemo, and it has never resolved. I know this for an absolute fact, saw it on an MRI, can feel my stomach popping through my diaphragm when I cough.

But my new doctor scheduled an upper GI tract x ray just to confirm it, anyway. Canceled it myself because I didn't want to pay for it.

And a problem which is unique to America at this point: Our society hasn't had any kind of 'reset' in at least 150 years. In some ways, America is like a computer which has been running for a very long time without being rebooted: Our 'OS' has accumulated an enormous load of malware, all the exploits are widely known, the hard drive is horribly fragmented, and so forth.

Few countries have this problem, as Europe got a reset as recently as WWII. And it messes up almost everything.

As an EU resident visiting family in rural Pennsylvania last summer, I needed medical attention after a small piece of tree lodged in my eye. It was deemed not urgent but "go have that looked at", and I went to a Patients First clinic in my town. I suppose I was "uninsured" as they had no way of recognizing my European insurance. But I was seen by a doctor, treated (slight lacerations), and got a prescription for antibiotics, and that visit (including follow-up) cost me less than $200. I was happy to find this chain-clinic filling a need for the people who would otherwise be sitting in a hospital emergency room. My only disappointment was that, presented with the receipt, my European Krankenkasse would only reimburse me 14 euros. But still, it could have been much worse. I realize this may be a rare good story about US medical care.

To ask the question in, perhaps, a more narrow way:

How is the delivery of health care, as an economic good, structured in Germany as compared to the US, that allows them to only charge 140 Euros for a non-trivial ER visit?

So, the history and cultural differences are all relevant and interesting, but how do those show up in the implementation of how medical goods and services are delivered?

What do the *do* differently?

I'm curious about Marcellina's experience, because it seems so at odds with the norm here. Glad your eye was OK!

Brett and wj, I'm not sure that 3rd party payer per se explains it, because it seems like 3rd party payment is also the model in Germany (and most of the EU).

That is, if the norm is to "just go to the doctor", as Ravi says, having to first carefully consider if your problem is truly doctor-worthy or not doesn't seem to be a factor.

Unnecessary tests and procedures may be.

How does health care work in Germany?
Who pays, who decides what is necessary and what is not, how are doctors and other providers compensated?

Etcetera.

How is it different than here?

"How is the delivery of health care, as an economic good, structured in Germany as compared to the US, that allows them to only charge 140 Euros for a non-trivial ER visit?"

For one thing, we have a law here, don't know about Germany, which mandates that emergency rooms MUST treat, at least to the point of stabilizing, without regard to ability to pay. So a lot of people are treating the emergency room as their free primary physician.

On the other end, insurance companies have a lot of negotiating power, to avoid paying more than marginal costs.

So the shortfall ends up being made up by people who don't have insurance, but do have ability to pay. They really get screwed over.

There are a lot of factors. The health insurers are legally connected and e.g. have to pay into a fund from which those insurers that have to take anyone get compensated for their disadvantage. So to be extremly selective in the customers (e.g. taking only the healthy young) does pay less. Efficient managing, keeping the overhead low will yield more return on investment. Insurers tend to be medium sized and large companies have their own insurance system. I know of no mega-corp abusing a local monopoly on health insurance. There is a mix of regulations about necessity and reimbursement that has a discouraging effect on e.g doing that extra x-ray (there is still some abuse through the backdoor). There are very strict legal limits on malpractice damages money, i.e. you may get the incompetent doctor in jail but not millions for yourself. Many hospitals are either state-run or run by companies wholly owned by the state (wich is a difference), lowering the pure profit motive.
I would think the mentality of the health system in general is more care than profit centered than in the US. The absence of crippling student loans may play a part too. If you are on the dole*, basic health insurance is automatically covered, so 'too poor to be insured' rarely applies.
I know there are other factors but these are the ones coming immediately to mind.

*with yet no liftime limits just sanctions, if you can work but are not looking for a job (which the agency will check on a regular base).

I'm not sure if this is the same thing, but Ezra Klein did a country by country survey of health care systems and I think this American prospect article was based on that

http://prospect.org/article/health-nations

though I thought he talked about Japan. Googling turns up this

http://healthcare-economist.com/tag/health-care-around-the-world/

But it is not the posts that I remember.

I tend to think that the US problem is because post WWII, there was no push to provide national healthcare as there seemed to have been in every other of the the WWII combatant nations. This allowed doctors to become too highly valued in market terms. Not that I want to tell a doctor who is about to treat me that he or she is 'too highly valued', but for the US
Seven of the 10 best-paying jobs are in the healthcare industry and require completion of a secondary degree. Surgeon, the highest paid career with an average annual salary of $233,150, can require more than a decade of preparation, from undergraduate studies through medical school and the completion of a residency program. General practice physicians, who average $187,200 in annual salary, must also complete similar requirements.
http://www.careercast.com/jobs-rated/best-paying-jobs-2014

on the other hand, in the UK, medical practitioners were 11th, with an average £69,463, which, given the cost of living and the tax rate, puts them substantially below US physicians.
http://www.thisismoney.co.uk/money/news/article-2868911/Best-paid-UK-jobs-2014-Compare-pay-national-average.html

This link has monthly salaries in constant US dollars
http://www.worldsalaries.org/generalphysician.shtml

and US physicians make almost half again as much as the next country on the list. Of course, the cost of a medical education means that doctors have to make that much to make it worth their while to get the MD.


There's quite a problem with doctors benefiting from a legally enforced guild system. Most of what doctors do can easily be done by people with much, much less training, but not legally.

In fact, there have been some recent cases where companies tried to offer medical test results direct to the people undergoing the tests, and doctors' groups took legal action to block it.

Kind of like lawyers in that respect. Not so much doing something worth a lot of money, as protected from competition.

Russell,

Did you read this article?

http://www.theatlantic.com/business/archive/2014/07/why-do-other-rich-nations-spend-so-much-less-on-healthcare/374576/

Not a bad intro.

So the shortfall ends up being made up by people who don't have insurance, but do have ability to pay. They really get screwed over.

I think this is part of it, and I think the 'screwing over' has more to do with unpublished chargemasters than treating people for free (treating people for free obviously costs ERs, but its not that much of their overall budget on average).

When I had my appendix out as emergency surgery, I had insurance, but ended up at an out of system hospital. The hospital sent me a bill for 27,000 (it's been a few years, so the numbers aren't exact). The insurance followed up with a letter basically saying the appendectomy was worth 11,000, and that's what they would pay.

The hospital responded that 11,000 was ridiculous, it was emergency surgery, but 21,000 would be a fair amount. Insurance griped but ended up paying 19,000, and I had to cover around 2K out of pocket.

Again, the numbers could be off by a little, it's been awhile. Pretty much the only number I remember clearly was the 2K.

I find myself wondering what it actually cost to do the appendectomy. I mean, in theory, both the hospital and the insurance company should have a pretty good idea of what these things cost...but their initial pitches were off by a factor of 2 or so. Someone was trying to gouge someone, and honestly I can't tell you who. Or if the final price was fair.

There's quite a problem with doctors benefiting from a legally enforced guild system. Most of what doctors do can easily be done by people with much, much less training, but not legally.

Is this different in other countries?

On our honeymoon in Greece, almost 20 year ago, my wife got pretty sick. We went to the local hospital in the small city on Crete where we were staying.

No one asked us for anything. They saw her, wrote her a couple scripts, and we left. I don't even know if they asked anything other than her first name. There was no bill, nor any discussion of payment whatsoever.

Just another anecdote...

(Incidentally, we're friends with a retired couple who went on one of those Rhine cruises fairly recently. I wonder if it was the same one ... the cruise, I mean - not the couple.)

There are a lot of US-Americans-only river cruises in Germany (and Central Europe) these days. The riverships are designed with (rich) US-American customers in mind and cruises on them can only be booked from within the US. I recently had the opportunity to get a guided tour of one of the German shipyards building the craft. I got the impression this kind of tourists has a lot of habits in common with the aristocrats of old. Maybe the blue sea cruise ships getting overrun by commoners these days made it necessary to switch to the rivers to maintain the exclusivity.

Caveat: I do not mean to imply that this is typical for all US tourists to our parts but I was unpleasantly surprised to hear about this specific phenomenon.

Yah, I hear all these ads for "Viking River Cruises", but they never say ANYTHING about raiding, and pillaging and burning, and stuff like that.

False advertising, 'tis so.

Rick Scott thinks that the way we do things here in the Good Ol' USA is just fine. His Board of Directors like it as well. In fact, all of the C level executives in his company like it. His gardeners and household staff thinks it's fine too.

You are the only one who thinks it's a problem

What does what Rick Scott thinks have to do with this post?

What does what Rick Scott thinks have to do with this post?

A quick glance at his bio should tell you. He made millions in the health care biz.

My parents had taken a European river cruise and it was not a "rich people's" cruise, so they are not all the same.
Russell, I don't know what else to tell you. If I'd needed x-rays, would I have been sent to the hospital and billed considerably more? Did this clinic get to write off something as if I had been uninsured (because I think that's what I was to them, my Austrian SV card meant nothing). No idea. My mom and I both had feared the bill woul be higher and were relieved when it wasn't. I hope there are more places like this around.

"Is this different in other countries?"

I honestly have no idea. I'm familar with the health care system in the US, and in the Philippines. It's certainly not the case there, as I learned when my son got a bad case of "Montezuma's revenge" while visiting his nani and tati with his mother.

russell, "Patients First" seems to be a chain of storefront-type primary care clinics, stretching from VA to NJ.

They probably have a niche because the normal insurance/MD/hospital triangle has jacked up prices so much...I know that "Patients First" is not the only outfit in eastern PA that does this, so it may also be a matter of state regs: that in some states RNs are allowed to do more of the work, independently.

You could ask Rick Scott, but he would invoke the Fifth:

http://postonpolitics.blog.palmbeachpost.com/2014/10/06/former-scott-accountant-claims-governor-deeply-involved-in-hospital-wrongdoing/

He's also not a scientist, as he repeats ad nauseum.

Don't say climate change, either.

Say sociopath.

We could ask what Rick Scott thinks, but he would take the Fifth:

http://postonpolitics.blog.palmbeachpost.com/2014/10/06/former-scott-accountant-claims-governor-deeply-involved-in-hospital-wrongdoing/

And don't let me hear any of you uttering the words "climate change".

As he repeats ad nauseum, he is not a scientist.

He's a professional sociopath.

To follow up on Hartmut's explanations - here in Germany, most people do have health insurance and consider it the natural state of existence. Only when I started to read American novels and later blogs, I finally realised that in the United States, this is not true at all.
Basically, the low cost for the treatment of Russel's former brother-in-law is due to a federal German regulation called GOÄ (Gebührenordnung für Ärzte), which specifies the cost of each individual step in healthcare (e.g. x-ray, infusion, whatever), with a multiplier for complications. So it would have been a similar amount in all German hospitals. But if it had been serious, and if there had been medications, surgery or whatever, the price would have risen substantially. Here, it is very much recommended that everyone takes a special insurance for vacations outside of Germany, where the German Krankenkasse will not cover the cost. If you do not spend more than 30 days per year outside of Germany, that one is available at less than 20 Euro / year and usually covers emergency treatment abroad and transportation back home.
And for Brett - no, those in the semi-state "Gesetzliche Krankenkasse" never see the cost for their visits in hospitals or at the doctor for treatments legally to be paid by health insurance, except for 10 Euro / day co-pay in hospital and 3-10 Euro co-pay for individual packages of medication (with a cap of some low percentage of annual available income). But, contrary to what I heard in some discussions in the US, you always have the option to pay yourself for any treatment not on the list of your health insurer, and your doctor will have to disclose the complete cost before you sign the treatment plan.
That is not to say that we do not have our own uninsured - homeless people or illegals and a few others.

The hospital sent me a bill for 27,000...
That's just a ridiculous price for an appendectomy. The cost to the NHS is something like $3000. The cost in the UK if you go private is maybe $5000 (better food, thicker carpets, less waiting for stuff...). With everything medical costing more in the US, the actual cost to a hospital there would be something like $10k.

This video is instructive.

A quick glance at his bio should tell you. He made millions in the health care biz.

I'm not unaware of that.

Scott's wealth is not even a drop in the bucket, as concerns russell's anecdote.

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