Tuesday, April 03, 2007

Why is health care so expensive in the US?

Often the debate about reducing the cost of health care in the US focuses on tort reform, as to reduce the costs of doctors and hospitals. This has however always seemed wrong to me, as the malpractice suits costs very little compared to the total costs (as Dwight Meredith made clear in this old post at PLA), and the insurance amounts for something like 3% of the doctors' total costs. In other words, while malpractice suits and malpractice insurance costs might have an effect on the total health care costs, they are obviously insignificant compared to other factors.

Now I see that the PNC Financial Group has made a survey of health care in the US, which shows that health care administration consumes nearly one-third of health care costs. And it according to the hospitals and insurance companies.

The press release is a little unclear if we are talking total health care costs, or just private expenditures on health care. However, if we consider that in 2003, the US spent $5771 per capita on health care, that would mean that up towards $1900 was used on administration. Or in total numbers - the US health care costs totalled $1.7 trillion in 2003, which means that about $0.6 trillion was spent on adminstration.

Or if we look at private expenditure, which accounts for 55.4% of the total health care expenditure, it would mean that private citizens (and their insurance companies) used approximately $0.3 trillion on adminstration. Much of this adminstration was caused by the insurance companies, which leads to the hospitals having to increase their prices, to cover it, which leads to higher insurance prices.

The survey also had some other results.

- Hospital executives reported that one in five claims submitted, on average, is delayed or denied and 96 percent of all claims must be submitted more than once.
- Hospitals that do not use electronic billing or claims submission processes reported, on average, resubmitting a claim 11 times or more, or nearly four times more than those hospitals using electronic processes.
- Insurance executives surveyed said they go back to hospitals two times, on average, to get all the information needed to pay a claim.
- Nearly a quarter of consumers reported having had a legitimate claim denied by their health plan; one in five ultimately paid the claim out of their own pocket.


The US system is ineffective, and this increases the costs. On top of that, the insurance companies have a track record of denying legitimate claims and dumping customers who might cost money.

BTW all of this sums up why I think Edwards idea of a insurance based universal health care is flawed. To make affordable universal health care in the US, something must be done about the administrative overhead that the insurance companies add.

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10 Comments:

Anonymous SLC said...

The difficulty in assigning the fraction of medical costs due to malpractice litigation is that most estimates only include the direct costs of malpractice insurance and legal costs of litigation. It is very difficult to estimate the indirect costs such as physicians over prescribing diagnostic tests as a defense against such possible litigation. However, it is quite possible that much of the administrative costs that Mr. Wager talks about in this comment derives from the malpractice issue, that is, the job of many of these administrators is really to set up defenses against such litigation.

April 03, 2007 4:05 PM  
Blogger Kristjan Wager said...

Actually, given the issues that the survey uncovered, it seems likely that much of the adminsitrative overhead is due to the insurance companies being overcautious in not having to pay undue amounts.

Look at the numbers I quoted. 96% of all claims have to be resubmitted. 96%. On average, having to resubmit claims 11 times or more if not using certain systems. Insurance companies having to go back twice to get all the information needed.

It all adds up to a serious breakdown in communications between the insurance companies and the health care providers.
I can't imagine how that can be related to defense against litigation.

Having said that, I won't deny that the threat of malpractice lawsuits can have negative effects on costs, but caps on payments in malpractice lawsuits haven't reduced neither malpractice insurance costs nor general health care costs in the states where they have been introduced.

April 03, 2007 5:16 PM  
Blogger Kristjan Wager said...

In other words, what I am trying to say, is that there might be many good reasons for a tort reform in the US (it's not an issue I'm aprticularly well informed about), but saving money on health care doesn't seem to be one.

April 03, 2007 5:19 PM  
Blogger Kaethe said...

The cost of malpractice is a hot topic, although completely pointless. Insurance companies like to tout the high cost of malpractice suits, but without any evidence to support it. There's been a fair amount of documentation over the years that Insurance Premiums Not Influenced by Patient Lawsuits; Doctor Malpractice Payouts to Victims Have Significantly Declined, and related research demonstrating that juries rarely find against doctors except in the most egregious cases of malpractice where there is clear injury.

No, it isn't at all possible that "the job of many of these administrators is really to set up defences against such litigation." It sounds good, but there is nothing to support it beyond its appeal. It's also easy to demonstrate that it isn't true: look at any state that has recently passed "tort reform" and observe how insurance prices haven't dropped even when the insurance companies have three times the reserves of cash on hand.

April 05, 2007 6:09 PM  
Blogger Trinifar said...

I understand private insurance when the insurance policy is taken out to insure against some special event -- for instance theft from an art museum or a particular business plan.

I do not understand the case for private insurance to mitigate against the need for a minimum level of health care. Everyone needs it. The portion of the population involved is 100% of the total. That is precisely the case when the government should step in.

If some people want extra special insurance that's fine. But everyone needs the minimum and it is the best interest of everyone that everyone gets it.

The current insurance industry in the USA is a scam.

April 07, 2007 8:59 AM  
Blogger Paulos said...

I actually used to work for an insurance company and what they decided to pay seemed like magic. Always undercutting and paying different for the same service for different providers it didn't seem to me like there was much of a standard.

May 06, 2008 6:29 PM  
Blogger Dallas Health said...

What are the various types of health insurance programmes that are available to me, and which is best suited to suit the needs of my family and myself? How do I choose the ideal health care plan? What are the major points that one needs to bear in mind while buying Health Care Insurance Policy? http://natural-health-care-information.blogspot.com

July 17, 2008 2:44 PM  
Blogger Yisrael said...

There really needs to be a food insurance company. Most people need it and it would be nice if it could be ensured. In fact, I think that 100% of the population needs a minimum level of food. The current food distribution system in the United States is a scam. Restaurants get to arbitrarily determine the cost of the food they distribute based on their percieved quality of their own food, grocery stores have varying prices, soup kitchens provide poor quality food only...

November 19, 2009 5:26 PM  
Blogger Yisrael said...

There really needs to be a food insurance company. Most people need it and it would be nice if it could be ensured. In fact, I think that 100% of the population needs a minimum level of food. The current food distribution system in the United States is a scam. Restaurants get to arbitrarily determine the cost of the food they distribute based on their percieved quality of their own food, grocery stores have varying prices, soup kitchens provide poor quality food only...

November 19, 2009 5:26 PM  
Anonymous Anonymous said...

i like this post.

January 20, 2012 9:36 AM  

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