Drum Roll: The Problem With Health Care Is...

The disconnect between the person purchasing and paying for the service and the person receiving the service.  This causes the most friction that piss people off (either against their insurance company or the government for not paying for something or limiting their flexibility).  But is also tends to drive costs up, as people who are ultimately driving most of the health care choices have zero interest in how much it costs.  Via John Stossel (and the Goldwater Institute)

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I wrote more on this issue here.

  • Ken

    I'm trying to remember in which book P.J. O'Rourke had his hierarchy of how much people care about cost and quality: you spending your money on you, you spending your money on someone else, you spending someone else's money on you, you spending someone else's money on someone else (O'Rourke says, as to the last category, "In which case, who gives a shit?")

  • GU

    I agree. A corollary is: Why don't doctors makes house calls anymore?

    The answer is the same. You aren't paying the doctor anymore, the insurance company is, so forget consumer satisfaction. The goal now is to navigate the insurance bureaucracy for as cheaply as possible.

  • Andrew

    Here's my honest question: are prices rising because people are paying less out of pocket, or are people responding to rising prices by getting better insurance?

    It seems to me that both factors could easily combine in a rather nasty positive feedback loop.

  • Tsk Tsk - there's quite of a bit of correlation there not due to causation. Medical costs have risen largely because of major advances in medical diagnosis and treatment.

    Also, insurance companies have found that even small copays make a big difference in utilization of minor care (which is consistent with the hypothesis to some extent). But a huge amount of health care is for "big things" and these are often priceless (your money or your life) and not as well compensated.

    A poster on volokh.com related having about $250,000 in direct costs for cancer chemotherapy, on top of the substantial amount his relatively good insurance paid. That guy had a big amount at stake, and still added a big amount to the spending.

    It ain't simple - sorta like Climate Change 😉

  • Russell

    I have this funny feeling that anyone who bought into Climate Change on it's graphs, which just as quickly dismiss this one as irrelevant.

    Surely part of prices rising relates to treatments that did not exist in the past. However, this doesn't necessarily mean much. Causation, correlation, yada-yada.

    I applaud you though. You are consistently hitting the nail on the head. The primary reason for cost expenses related to healthcare is people's complete disregard for cost, and expectation that they have some kind of "right" to health (combined with ZERO responsibility for taking care of themselves).

    What scares me about Obama (healthcare, and in general) is that I won't have any more of a "right" to anything. The only difference is that instead of *me* being the primary factor in how well I do, some government bureaucrat will be.

    Lives are not priceless. That is the most flawed mathematical assumption out there. Lives have a value, which we determine every day when we decide where to spend our medical research dollars.

  • Russ R.

    First minor point: If I were making this chart I'd reverse the scale on the x-axis. People don't intuitively follow a time series from right to left.

    Second, @ Russell:

    "Lives are not priceless... Lives have a value, which we determine every day when we decide where to spend our medical research dollars."

    I partly agree with you... lives have a value, which is finite. However, that value isn't determined by the allocation of government research grants. It's an intangible value, that can't be measured, calculated or otherwise detemined by bureaucrats.

    More importantly, not every life has the same value (which may be a heretical concept for some). While it may be difficult and unpleasant to accept, some lives are simply worth more than others.

    Like any other object, a human life has a subjective value... it's only worth what everyone else thinks it's worth. There are two parts to this subjective value... a non-rivalrous value, which can satisfy many parties simultaneously (e.g. a piece of art, GPS satellite, an inspirational leader, a blog writer, etc.), and a rivalrous value which can only satisfy one party to the exclusion of others (e.g. a steak, a car, an employee, a husband, etc.) Like any other obect, a human life's subjective value is the sum total of all non-rivalrous values, plus the single highest among each rivalrous value.

    However, unlike all other object, a human life also has an objective value. Unlike a stead, a car, or the Statue of Liberty, a human can value its own continued existence, and will make sacrifices to perpetuate it. The objective value of a human life, is the value (monetary or otherwise) that an individual is willing and able to sacrifice in order to preserve his or her life.

    The value of an individual human life is the combination of its objective value (how much the individual can and would sacrifice to stay alive), and its subjective value (how much others can and would sacrifice to keep the individual alive).

  • morganovich

    john-

    i think you are just flat out wrong about advances in diagnosis and treatment being the drivers of price increases. in every other industry, advances in technology drive price down. yet here you claim it to be the opposite. sure, we can treat things we once could not, but we have also eliminated many big costs from the past. no one gets polio anymore. prevention is cheaper than treatment. new diagnostics save long term treatment. i just don't buy your argument. what evidence do you have to back it up?

    if you look at elective medical procedures (cosmetic, lasik, anti-snoring etc) they are all dropping in cost. they trend well below CPI. why do they behave differently that insured care? (the answer is: because they are payed for out of pocket) they have been subject to all the same advances as other medicine (and at a far more rapid pace). this makes your argument that new treatments and technologies are driving price increases look pretty flimsy.

    our current insurance/health care payor system has all the worst aspects of a prisoner's dilemma and a tragedy of the commons scenario. it almost cannot help but turn into a fiasco. and that chart is an absolutely classic demand curve. what should worry us is how far into the logarithmic portion we already are...

  • NormD

    John -

    Please name one "major advances in medical diagnosis and treatment." in the last five years that is deployed in sufficient numbers to drive overall costs up.

    I suspect that patients are paying less and less of treatment costs because the list price of the treatment has skyrocketed. I used to pay out-of-pocket for a office visit when it was $50. Then the cost went to $200 for the same service and I said forget this and made sure to use insurance.

  • Jim Collins

    You can add a few other factors into the mix. Defensive medicine is one, overuse of Emergency Rooms is another and Patients Rights legislation.

    Let me give an example.
    A while ago I cut my leg on a Saturday afternoon. I had to go to the Emergency Room for stitches (overuse of ER's). Before they could stitch my leg, I had to have an EKG and a heart sonogram (Defensive medicine), even though I had just had the tests, done at that same hospital, as part of a physical a week previously. When I asked the Doctor why he couldn't just view the information from the previous tests, he informed me that because of confidentiality rules he couldn't view that information because he didn't order the tests(Patient's rights legislation). He also told me not to worry about it because my insurance would cover it.
    All of this for 10 stitches, that my Doctor could have done in his office, if he was there.

    I'm not denying that my Doctor is entitled to his time off, but you would think that a practice with nine other doctors, could rotate office hours and be open on weekends. Oh wait, I'm back to defensive medicine again. If the weekend Doctor isn't my Doctor, the others would have to order their own tests.

  • the other coyote

    Speaking from personal experience:

    My great uncle got in a tractor accident (rolled one over) in 1958. In rural Iowa. He died. No helicopters, no trauma center, no trauma team. They gave him a bunch of painkillers at the local hospital and he died a couple hours later. Dad still gets kind of choked up about it.

    My family doesn't farm any more, but some of my dad's friends from growing up do. During spring planting, somebody dad knows was in a tractor accident. They flew him to Omaha via Careflight ($20,000, no kidding) and did MAJOR trauma surgery. Then some burn care/ skin grafts so he won't have the giant ugly scars that other farmers who've been burned have on their legs. The total bill was like $300,000.

    That's the difference between 1960 and now. My great uncle died, this other guy will be OK maybe even more than OK (they found some heart issues while they were in poking around and he's going to have bypass or a stent or something).

    And don't forget that "health care costs" includes EVERYTHING vaguely health related in America, from our splendidly clean private rooms (ever been to a hospital in India? Don't.), to acne treatments for teenagers (when I was a kid, you toughed it out with ivory soap and clearisel ... parents didn't spend thousands of dollars on acne treatments ...), to boob jobs (and I'll beat that dead horse one more time -- you can get major surgery in the form of a fine new set of ta-tas in Dallas for $10,000).

  • the other coyote

    To follow up from the previous comment, people just spend a lot more trying to fix stuff now that they used to just be resigned to. My parents are depression kids, and it's fascinating to hear them talk about how kids in their class used to just die. Babies would die. My parents are from rural areas, and frankly, if you got sick or hurt back in the '50's, you probably just died. Brain tumor? You died. Cancer? You died. You probably didn't even know what you had!

    And old people's lives have improved dramatically. joint replacements, great medicine, etc. Men used to just die when they were 60 or 65. Now there's old men at the senior center where my aunt hangs out. More old women, to be sure, but it's amazing they're around - and mobile - too. They didn't all die from childbirth or infections. Now they live long enough to get joint replacements.

    Coyote made a good point about disposable income as well. When you've got more money, you're willing to spend it on laser treatment for acne, a new nose, new joints for grandma, saving a baby who, in 1960, couldn't be saved.

  • morganovich

    other coyote-

    but consider all the costs that are gone as well. polio wards are closed. thyphoid? think of all the long term diseases than can be treated using simple antibiotics. this stuff nets out to a cost savings.

    other countries have had medical advances too (life flights etc). but their costs are not growing at anything like the rate of ours.

    why not?

    the price of boob jobs grows more slowly than CPI. why should the price of an x-ray grow more rapidly if not for massive overuse? it's boob jobs that are holding medical inflation down, not driving it up.

    and regarding this life flight case: if the victim had had to pay 25% or 50% of the costs, do you think he would have made different decisions as to what care he consumed?

    we'd all like to come home from the airport in limousines, but most of us take a cab or a shuttle. we choose a service that we feel provides the right mix of service for cost. on the company tab, perhaps we do use the car service even though we would not pay for it ourselves. it's easy to go for "best available" when you are spending someone else's money. but when it comes out of YOUR pocket, suddenly you shop around. you negotiate much harder buying your own car than you do selecting a company car for your use.

    sure, correlation is not causality, but that's an awfully tight looking demand curve to dismiss.

  • me
  • Tim

    How could you really quantify any relationship between medical cost and anything? You run into difficulty establishing a causal relationship. That being said, I'd like to see the relationship between medical costs versus number of liability lawsuits filed, average liability settlement, or cost of malpractice insurance. The driver of defensive medicine, and expensive tests, is providing a defense against suit. Can a relationship be established between the two? Another y-axis to plot against liability measures would be the number of doctors who left their practice "early".

    Just to note, the current thinking is that a "committee of experts" would establish standards of care, but there's no liability caps or limits. How is this going to affect supply? I'm guessing the answer is "It's not gonna help."

    To answer Morganovich's question "[R]egarding this life flight case: if the victim had had to pay 25% or 50% of the costs, do you think he would have made different decisions as to what care he consumed?" I'd ask "How much would *you* spend not to die?"

  • Mark

    But it is the "tractor accident" incidents that health insurance is supposed to cover. The problem with our current funding system is that using the word "insurance" is a misnomer. Instead of insuring us against major costs, we have developed the attitude that "health insurance" is a 3rd party funding mechanism that is supposed to pay all of our medical costs (for free!!!).

    If we developed a market were health insurance became insurance again costs and cost increases in the future would look much different.

  • morganovich

    tim-

    that's an over-simplification. would i pay for the flight, probably. would i then spend $200k do skin grafts to remove scars, maybe not. (i am also likely in a very different income bracket to this farmer)

    the $300k was not required to save his life. most of it was cosmetic. skin graft surgery is incredibly expensive and repetitive. would he have made the same decisions about some scars if he was paying?

    turning people loose in an all you can eat buffet and then being surprised when they eat a lot is just plain stupid. further, preventing insurers from putting limits on coverage and adjusting prices due to risk factors is just plain insane.

    have a couple of car accidents or a DUI and see what happens to your auto insurance. but go the the ER for every hangnail and what happens to your healthcare premium? nada. by law. is it any surprise that a system like that gets abused?

  • morganovich

    the other point is this: why is a life flight $20k? i have chartered helicopters for a helluva lot less money than that. for $20k you can easily go coast to coast on a net jet. the reason is that the providers are not forced to compete on price. they know insurers will HAVE to pay. so they just crank the rates and let the patients select the service.

    if life flights were actually exposed to pricing pressure because the users paid, they'd be much cheaper. that's the whole point here. insulating the purchase decision from facing the actual cost (at least directly) takes away any market disciple and you get ludicrous mispricing and inefficiency. why are hospital rooms 10X the price of the Ritz Carleton? same issue. the people in them aren't paying. why are business class seats on airplanes 3-5X the cost of coach? same reason. ditto hotel room service and all manner or other services that are used primarily by the business traveler. if you can isolate the decision maker from the payor, no one bothers to price shop.

  • macquechoux

    There are many reasons for increases of medical expenses as some have pointed out. I guarantee you that if the insured does not feel any financial pain cost will go up. To wit: Several years ago my wife to be decided she had the flu and asked me to look up nearby walk in clinics as her doctor did not have office hours on Saturday. I did so and found two close by. She said take me to A rather than B and I said, "Wait a minute, A is $135 and B is only $85." Her reply was A was newer, in a little better part of town and her insurance paid 100% anyway. She now as a high deductible policy and Health Saving Account; now she pays attention to things like that.

    Example two: The cost of radiation therapy was quoted at $23,000 in my hometown as opposed to just a bit over $21,000 25 miles away.(This was 12 years ago, God only knows what it would cost now.) When I pointed this out and told them as sick as my wife was we would travel the distance the price was adjusted and the co-pay was dropped. It makes a difference when you have your money in the game.

  • Tim

    The life flight is US$20k because you just aren't hiring a helicopter; you are hiring a flying ambulance, with a medically trained flight crew.

    The same is true with hospital rooms. They're more than just rooms; they come with a full compliment of medical services and service providers.

    Which brings up the other point. Price to the user is the only cost recovery mechanism that medical care has. How much of that cost goes to fund the administrative overhead?

    As to skin grafts - it just isn't to remove scars. In fact, it doesn't do that good of a job of scar removal/prevention. Skin grafts are to keep your insides, well, inside; prevent infection and speed healing. You can suffer loss of mobility from poorly healed burns, so it isn't just a matter of "scars aren't that bad...."

    Of course, all that being said, would market pricing help keep costs down? Maybe; but there are other actions that need to be explored, too.

  • NormD

    The other coyote-

    Air ambulances and burn wards and skin grafts and stents and infant intensive care have been around for like 30 years. You are wrong that these explain the rise in healthcare cost between 1960 and now - they explain the rise in health spending between 1960 and 1985. How do you explain the last 20 years?

    Does anyone know were one can get hard facts on health spending over the years? How much of the healthcare dollar goes to primary care? Air ambulances? Specialists? Operations? Which operations? Surgeons? Hospital stays? Nursing care at home? Drugs? Last 3 months of life? Its really impossible to rationally analyze why we overspend without knowing where the dollars are going. Everything is just so many anecdotes. If for example, 70% of healthcare dollars are spent on heroic efforts in the last 3 months of life, then all the free choice, insurance exchanges, healthy living, smoking cessation, single payer or whatever in the world is going to do nothing.

  • Tim

    The life flight is US$20k because you just aren't hiring a helicopter; you are hiring a flying ambulance, with a medically trained flight crew.

    The same is true with hospital rooms. They're more than just rooms; they come with a full compliment of medical services and service providers.

    Which brings up the other point. Price to the user is the only cost recovery mechanism that medical care has. How much of that cost goes to fund the administrative overhead?

    As to skin grafts - it just isn't to remove scars. In fact, it doesn't do that good of a job of scar removal/prevention. Skin grafts are to keep your insides, well, inside; prevent infection and speed healing. You can suffer loss of mobility from poorly healed burns, so it isn't just a matter of "scars aren't that bad...."

    Of course, all that being said, would market pricing help keep costs down? Maybe; but there are other actions that need to be explored, too.
    Sorry, forgot to add great post! Can't wait to see your next post!

  • MJ

    If the chart is correct, is technology really exogenous?

  • tomw

    Well, certainly it is a good idea to cap doctors' salaries and reimbursement payments for Medicare.

    Not.

    Students will follow the money. We have more lawyers and stockbrokers than engineers and scientists of any sort for a reason. The job marketplace sent a message, and they listened. Computer science can be done remotely from Peshawar, as can radiology diagnosis.
    Clinton paid to reduce the number of student slots at some schools of medicine. Thank him when you are refused access to care by practices that don't want to donate their time to Medicare. Thank Bawney and the congress morons that think they know how to run the world better than the rest of us.
    I for one am disgusted beyond my ability to put it into words.
    tom

  • morganovich

    at the risk of getting overly bogged down in an example about which neither of us has a great deal of data, i get what a life flight is tim. if you are telling me that an hour or two of flight time for a chopper and two paramedics (or likely a para and and EMT)is $20k, then i suspect your sense of costs is way out of line. i guarantee that it could easily be provided at half that cost if there were any kind of competitive process. 2 hours X 2 pilots + 2 emt at $400/hr per = $3200. (and EMTs are not paid even 1/4 of that, i'm just being incredibly generous) no way a chopper uses over $1000/hr in op costs. (you can charter a mid sized gulfstream jet (crew included) for $2k/hr)so: $5200 total. so where is the rest of this cost coming from? add in $1000 in chopper wear and tear and $500 in insurance and you still can't get close to $10k, much less 20. i suspect that you may just be so accustomed to these things being monstrously expensive that you have not really peeled it apart and asked where these costs could possibly be coming from. don't even get me started on a $5k/night hospital room. i'd love to see the cost on that defended.

    for all we know, it may well have been overkill to use a helicopter at all. perhaps it was needed to save the guy's life. i don't know (and neither do you as it's not our story). might an ambulance ride have been enough? if the issue is just one of being in pain for an extra 2 hours, would you pay $20k out of pocket vs $2k for an ambulance ride? (and for that matter, why is a short ambulance ride $2-3k? that is so far off the cost to provide the service that it's astounding) obviously, if it's someone else's money, sure, ride the chopper. but if it were yours, would you spend it? i've certainly seen some heli flights from ski areas that were just convenience issues as opposed to in an way medically necessary.

    the point is not to beat this example to death. sure, there are times when expensive medical care will and ought to be used, no question about it. but at the margin, most people would take an hour or 2 of pain to save 18 grand. however, they will only do this if it's their money. on someone else's tab, why take the pain?

    regarding skin grafts, that happens to be something i know a great deal about as i used to have a large investment in a burn treatment biotech. maybe 20% of treatment cost is medically necessary. it's the cosmetic part that's long and really expensive. i'm just going by the story we were told, but he said the grafts were used cosmetically. and again, regardless of this specific incident, at the margin you might make a different decision as to what "good enough" is if it were your money vs someone else's. back your car into a pole, and you might just choose to have the dent beaten out, but if someone else hits you and you can bill their insurance, well hell, maybe you need a whole new bumper and a paint job...

    clearly this is not the ONLY problem in healthcare. needing to make up for the costs of treating the indigent is an issue as well. tort liability is a tremendous issue. but the fact that users don't face the costs themselves (or can at least spread them across all insurance payors creating a tragedy of the commons on top of a prisoner's dilemma) the linkage between copay % and cost increases is far too tight to be a coincidence.

    however, i'd love to know what happened in the mid 80's that drove such a short term spike (just before the 1986 datapoint). was some kind of price cap removed? that's an awfully abrupt step function.

  • Tim

    A couple of costs to figure in for the medical helicopter. First, as I mentioned, the administrative cost. Second, somewhere you have to recover the standby time and cost. When your chartered Gulfstream isn't being used by you; it's hired out to somebody else. When nobody is being air evaced to a level 1 trauma center; the helicopter, and it's crew, is idle.

    Quick google search yielded a flight nurse salary range or $44-60k. A flight EMT is ~35k. The pilot salary is $44k - $85k. So, figure on $130k-$175k of salary on board; plus the amortized cost of the aircraft

    http://findarticles.com/p/articles/mi_m3257/is_8_56/ai_90317287/pg_4/ shows what Medicare pays. "For ground ambulance services, the loaded mileage rate for beneficiaries picked up in an urban area is $5.47 per mile. For their rural counterparts, Medicare pays an additional 50 percent, or $8.21 per mile, for each of the first 17 miles, an additional 25 percent, or $6.84 per mile, for miles 18 through 50, and the urban rate for all additional miles. For air ambulance services, the urban mileage rate per loaded mile is $6.57 for FW aircraft and $17.51 for RW aircraft trips. For rural air mileage, an additional 50 percent is paid for every loaded mile, or $9.86 for FW aircraft and $26.27 for RW aircraft trips."

    Also, medical transport doesn't bill for the trip to the scene; or the deadhead leg back to base, so that mileage and hourly rate needs to be recovered on the paying leg.

    Another quick search turned up this: http://publicsafety.com/article/article.jsp?id=2029&siteSection=1

    "There certainly is a role for helicopters in EMS, but we have them in the wrong places. The majority of the fleet is parked atop hospitals in urban centers where ground transport takes only minutes. They need to be positioned where they will benefit the people who need them the most--those who live in rural settings. That is, they need to be closest to the hospitals and trauma scenes where they can potentially make a difference. The literature certainly supports the role of helicopter transport of critical patients in the rural setting."

    I guess my point here is that, in some cases, expensive medical care is necessary to save lives; and that drives up costs. But expecting to keep costs down by increasing out-of-pocket expenses can be suboptimal; as in this example that we are beating to death. Are medivacs medically necessary? Yes. Is the median household income high enough to support them where they are medically necessary? Probably not.

    I look at this, somewhat, with a Demingesque view. People want to do the right thing in their job, and they will, if given the correct tools. So, absent any evidence to the contrary; I'm going to assume that correct decision was made at the time, with the information at hand. If we don't like the decision; we need to get more, or better, tools.

  • Tim

    A few datapoints:

    Salaries for a medical helicopter crew: Pilot $44-85k, EMT ~$35k, Flight Nurse $40-60k. The aircraft itself is between $1m-5m new. (basic Google search)

    http://findarticles.com/p/articles/mi_m3257/is_8_56/ai_90317287/pg_4/ turned up the medicare reimbursement rate:
    "For ground ambulance services, the loaded mileage rate for beneficiaries picked up in an urban area is $5.47 per mile. For their rural counterparts, Medicare pays an additional 50 percent, or $8.21 per mile, for each of the first 17 miles, an additional 25 percent, or $6.84 per mile, for miles 18 through 50, and the urban rate for all additional miles. For air ambulance services, the urban mileage rate per loaded mile is $6.57 for FW aircraft and $17.51 for RW aircraft trips. For rural air mileage, an additional 50 percent is paid for every loaded mile, or $9.86 for FW aircraft and $26.27 for RW aircraft trips." It also pointed out that medical transport doesn't bill for mileage to get on scene, or the deadhead leg to get back to base.

    Typical costs for ground transport are around $1k. Figure three EMTs; plus the amortized cost of the vehicle, and keep in mind that they can only bill for loaded miles.

    There's some literature that indicates air transport is medically necessary for rural service to level 1 trauma centers; but that ground transportation is faster for intraurban transport. Which brings the point that if out-of-pocket costs were increased for air transport; where it is most effective, it would be priced out of reach.

    I take the Demingesque approach here. People want to make the right decisions. When the outcome isn't optimal, that's because they lack the tools or training.

  • morganovich

    if you can get a $1000 trip in an ambulance, you are certainly not in the bay area. when one of my teammates went down in a bike crash, just the transit bill (all of 10 miles) was $2500. medicare rates are much lower than what private insurance pays. this is precisely why so many doctors and even hospitals have stopped taking it. (and those that do need to make up the lost money from those who do pay in precisely the same way that increased scholarships drive up university prices)

    i still have no idea how you get to $20k from your numbers for a heli-flight though. your numbers make the cost look even lower than mine. assume a $5 million chopper with a 25 year life span. that straight lines to $200k/year amortization. add in the full salaries of all the professionals you cite. 2emt's, a nurse, 2 pilots = 70+50+120k= 240k. so, pre flight and maintenance you're at about $450k/year.

    i would argue that if you are not using a helicopter at least once per work day, they it's likely that you have too many helicopters. so let's call it 250 trips a year. that works out to a crew and equipment cost of per trip of $1800. add in $1000 in fuel (very generous assumption), $500 in maintenance and $500 in insurance (both also absurdly generous numbers) and you hit $3800 in costs. double it to get a 50% profit margin and you still can't get anywhere near near $10k.

    cut the trips down to twice a week and you still only hit $6k in costs per flight.

    to get to $10k in costs, you need to be using the helicopter once a week, which, to my mind, is simply ridiculous for a $5 million piece of equipment and five trained professionals. at a certain point, the cost of a potential safety net simply exceeds it's value. we'd all be safer if we had an ambulance follow us around all the time, but few of us are willing to pay for it.

    sure, helicopters can save lives in rural areas, but if insurance were provided in that area that was $200/mo for basic insurance but no helicopter coverage or $300 month with helicopter coverage, i'd be very interested to see which people selected.

    the point here is not whether helicopters save lives. i'm sure that they do. all else equal, we'd love to have access to them. the question is, how many people would, and both user and payor choose such a service if they were the ones billed. how many would choose cheaper insurance with a helicopter exclusion?

    can you really be arguing with the premise that people choose to consume more at an all you can eat buffet than a la carte?

    if so, how do you explain the very clear correlation between decreases in percentage copay outlay and inflation in the price of medical services particularly when, over the same time period, for pay medical services (like cosmetic surgery) have seen their prices grow so much more slowly and, in many cases (like lasik) decline substantially?

  • Tim

    I think your costs are very low. I've seen references that total hours for a medical helicopter pilot is ~200 hrs/year. There's typically two crews, but figure only 40% is billable (loaded). So, you have ~160 hrs that you can bill.

    Here's what I could find on costs:
    - Crew 480k (two crews. They typically operate 7 on/7 off or 5 on/5 off.)
    - 360k for craft (5m /25yrs @ 5% APR) (You were assuming that you pay cash?)
    - 28ga/hr * 400 hrs @ $4.50 = 50k
    - insurance ~ @ 5% hull value = 250k See http://www.findaircraft.com/services/insurance/questions.html, which show ~1% hull value rates. You probably won't be able to get a quote from Geico. However, you pay a premium because of the usage. And take a look at accident rates.
    - maintenance ~ 2-3xfuel cost = 150k (http://www.faqs.org/faqs/aviation/faq/section-13.html) which is probably low.

    So, with a bit of rounding, (figure registration costs, inspections, etc.) the helicopter costs $1.5m/year to operate, which works out to (rounding) ~9k/hr. (assuming 160 billable hours)

    Now, we haven't added in any medical consumables yet; and I'm sure I'm very much lowballing the permitting and paperwork costs. I also doubt that, even with the low flight hours, the aircraft is amortized over 25 years. (12.5 years gives you ~$540k/year @5% apr) We've also omitted things like shore power and we are assuming that there's no dedicated ground support staff. Does that get another 10k/hr? Maybe. A 12.5 year amortization at @ 5% APR gives you around $12.5k/hr loaded rate with 160 billable hours.

    Of course, the point of this math is that the cost per hour goes down with higher utilization. With that 12.5 year amortization; doubling your billable hours gets you to ~$6k/hr.

    I guess I am fundamentally arguing with the premise that people eat more at a buffet than at a la carte. Or, more fundamentally, I don't think the analogy maps directly to this situation. First off, in exigent circumstances; the decision may not be up to the consumer. As I mentioned before -- the first responders are; absent any other evidence, making the best care decision with the information that they have on hand. And that belief factors in defensive medicine later on in the care chain -- because the patient isn't the only party involved in treatment (risk management, etc.)

    As for the cost chart at the top of the page, correlation does not equal causation. Perhaps the cost of medical care has simply grown at a higher rate than copays. This would be true as high capital cost diagnostic equipment came on line with no appreciable increase in copay cost. (For example, the first CT scanners were installed in the early 1970s. The first MRIs were in the late 1970s. Gamma knives, etc. etc. etc.) And, like our helicopter example, they only earn money when somebody is actually using them; so high cost and low utilization rate makes for expensive bills.

    Or, consider that many unionized public service employees still have *no* copays; maybe the basis of %age cash outlay is distorted. And when you factor in the growth of government sector unionization, that distortion gets worse.

    Is there cost competition for purely elective procedures like cosmetic surgery and lasik? Yes, but that's not the only explanation. Technology has advanced lasik, and driven down capital cost of equipment. Figure something like Moore's Law in operation there. (Besides, many vision plans cover Lasik, including mine.) Most cosmetic procedures have moved from hospital settings to outpatient clinics; holding down costs. And many less-trained medical professionals (non-surgeons) are certified to perform cosmetic surgery. "Otolaryngologists (Ear Nose and Throat specialists) perform nose surgery, hair transplant surgery, and facial plastic surgery; ophthalmologist (eye specialists) do eyelid surgery; and specially trained dermatologists do dermabrasion, laser skin surgery, and more recently, liposuction." http://www.plasticsurgerydoctors.com/plasticsurgeryboardcertification.html

  • morganovich

    your entire helicopter cost argument differs from mine in two major ways: you assume 160 hours instead of 250 and you assume 12.5 years, which is a ludicrously short lifespan for a 5 million dollar aircraft. more than half of the military helicopters are over 20 years old, and those have been much harder used than the life-copters. aircraft last a really long time. there are 40 year old commercial airliners still in service. use 250 and you numbers get you to $6k. use a 25 year life, and it's $3k. (and this can really change if you buy a $3million copter instead of $5mn)

    this is a key issue. frankly, i think 250 uses a year are too few. that's 5 times a week. if it gets less use than that, then there are probably too many helicopters. (also: medical consumables costs will be billed separately, just like an ambulance ride or ER visit)

    even assuming you are correct and these flight do cost 20k that makes my point even more effectively: it's not a sensible cost. sorry, i know some bad things will happen, but it's just too expensive. cut the number of helicopters and let response time go up by 30 mins. most people would wait 30 minuets to save $5-10k of their own money. the reasont they choose not to is that IT IS NOT THEIR MONEY YOU ARE SPENDING.

    if you don't thing medical professionals over treat, over prescribe, and over test (while overcharging for each) because they know you don;t care what it costs, you've never tried to pay for you care in cash. like coyote, i run a high deductible plan and pay most of my expenses in cash. i'm young, healthy, and find it cheaper. ask you doctor what a test costs next time he requests one. bet you 3:1 he doesn't know and will be totally surprised when you ask.

    how can a market in which consumers can't see prices possibly be efficient? medical services work like those traditional restaurant menus where your date gets one with no prices. she couldn't economize if she wanted to (as she has no information) and if she knows you are paying, may have no incentive either.

    i'm really baffled how you can think that not facing the costs yourself might alter you consumption decisions, particularly in light of the very clear correlation in the graph.

  • Tim

    The 160 billable flight hours is pretty reasonable. That works out to ~400 total flight hours a year; which is around 200 hrs per crew. You are counting *trips* -- assume 1.5hrs round trip (45 min loaded), and you get 375 flight hours.

    And, I didn't assume that the craft would be used for only 12.5 years; but paid for over 12.5 years.

    But, my more fundamental points:

    - The patient isn't always making their care decisions, and absent a DNR/Medical Power of Attorney, first responders and follow-on care have an ethical responsibility to select the *best* standard of care possible; regardless of cost; if the patient cannot make their own decisions.

    - The patient isn't the only party in determining care choices. Medical tests and treatments are often required or strongly encouraged by other parties. And in some cases to protect against suit, and in others to rule in or out other conditions, which could be potentially more expensive to treat later. It is the ethical responsibility of the care providers to suggest the standard of care for any treatment. That's why there is a standard of care. Its the best practice that balances risks, costs, and long-term prognosis.

    Case in point: post-delivery standard of care includes a hearing screening. The thinking is that early detection of hearing issues allows for cheaper treatment and a better long-term prognosis than late detection. The same applies for ABG/lead screen at age 2.

    The number of standard-of-care screenings, tests, and treatments increase as you get older. Case in point: "Podiatric visits should occur at least every 60 days for patients at high risk of developing foot disorders and yearly for other elderly patients. Elderly patients with any risk factor for foot problems should have their toenails trimmed by the podiatrist rather than doing it themselves" (from http://www.merck.com/mkgr/mmg/sec7/ch56/ch56a.jsp) The point is to catch potential problems early, where they can be better managed; than late, where it becomes a potential crisis.

    - Technology may not always reduce cost if it improves standard-of-care. A simple example here is sphygmomanometers. Which is cheaper, a manual sphygmomanometer and stethoscope; or an automated digital sphygmomanometer? Which has better accuracy and precision? (Which selection better insulates the care provider against charges misdiagnosis?)

    - Lastly, there is a correlation in the graph; but I think you are begging the question. You are assuming that the proportion of medical costs to overall costs have grown *because* people are paying less out of pocket, and not any other factor -- such as improved standards of care, new diagnostic tools and techniques, liability, government regulation, and artificial scarcity. When in fact, it is just as possible that all of these other factors have driven up the proportion; and people have responded by obtaining better coverage that limits their out-of-pocket expenses. Think of it less as insurance, and more as purchasing an extended warranty for your body. And that's why I think the medical helicopter argument is so relevant. It is an example of improved standard of care that wasn't widely available in the late 1970s.