Healthcare Inflation

It seems likely that we have managed to create a healthcare system so economically perverse that economics may not have yet invented a concise description for it.

If the suppliers of health and medical goods and services were to operate in a competitive marketplace, they would be restrained from price increases by the rapid loss of market share to competitors .

If they were to operate under a condition of monopoly supply, they would be able to raise prices, but only to the point beyond which falling unit demand would outweigh increasing unit prices.

Incredibly, we have a system in which neither of these restraints on pricing is primary, but which instead both demands yet higher prices and yet still fails to benefit the suppliers.

As health insurance organizations, a combination of for-profit, non-profit, and government, increase their total share of the demand for particular healthcare goods and services, they collectively become the controlling force for pricing. Unless a supplier is willing and able to forgo the business represented by a given health insurance organization, it must enter into a contract agreement on the terms of supply for pricing and discounts.

When the total share of specific demand from health insurance organizations is relatively small, no particular problem exists as much of the supply of healthcare goods and services is amenable to successful price discrimination, benefitting both suppliers and consumers.

It is when the share of demand from healthcare insurance organizations starts to predominate that the non-insured consumers really start to be injured. To the extent that contract prices are effectively determined by a negotiated discount to uninsured prices, a point is reached where a supplier is forced to raise its uninsured prices in order to keep insured prices adequate for sustained operation, let alone generate a profit.

If the insured and uninsured markets were simply isolated, price-discriminated markets, then each would have its own independent prices, optimizing profit for each. When the markets are effectively tied together by the discounts, then the suppliers are forced to raise the uninsured market prices, possibly to and beyond the point at which the uninsured demand is effectively eliminated. This mechanism largely comes into play in the anticipatory pricing of new products, or in new negotiations with insurance organizations, but the result is qualitatively the same. That effect is that uninsured consumers are tossed over the side to enable the health insurance organizations to realize large negotiated rates of discount.

Since it is the uninsured prices that are most visible, it is likely that these are the numbers which are used to calculate healthcare inflation, even as they become less and less directly meaningful as healthcare organizations increasingly gobble up the supply of goods and services. In the long run, the discounts will come to naught as the discounted prices cannot be allowed to fall below supplier costs, and the uninsured prices will simply reflect whatever they have to be in order to enable the discounts.

It is almost certainly a question of when, not if, the whole system collapses, probably into a single-payer government system with rationing of goods and services of low quality and long delays the predominant features.

As a demonstration of this situation, consider the following :

When I went to a specialist medical provider for a third opinion, he billed my insurance company a total of $437 for a single visit. However, he expected, and was satisfied with an insurance company re-imbursement of $129. This is a discount rate so high that it wasn't worth the trouble for the insurance company to reject the claim, although it could have easily done so for a self-referred, out of network, visit.

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Note : Insurance premium up

Note : Insurance premium up 17% year/year.

Regards, Don