Do the uninsured subsidize the insured?


Did you ever play with one of those liquid-filled balloon-like toys that, when you squeeze one end the other end extends, usually displaying a picture of a snake of some sort? The impression was supposed to be that the snake was inching along at the effort you expend on one end, since the whole contraption was wrapped in on itself. I remember being fascinated with the mechanics of it when I was young. There seemed to be change and progress, despite the clear lack of introducing new liquid or removing the old. I'm no expert, but something about the issue of health insurance in this country strikes me as similar to this old toy.

Case in point, this (to me) odd editorial from the USA Today: Uninsured billed unfairly.

According to the article, the uninsured are facing higher prices for their health care than the insured, since hospitals charge insurers less, and face a cap on the price they can charge to medicare patients. The article sounds almost incredulous that hospitals are attempting to recoup their cost of operation in places like care for the uninsured. Rather than be shocked at the behavior, I'm personally shocked at the surprise this seems to have aroused in the op/ed writers. Though, I suppose I shouldn't be since they've brazenly declared their poor reasoning from the outset:

Scott Ferguson, a retired artist without health insurance, was billed $66,900 for treatment of a heart condition at St. Anthony Central Hospital in Denver last December. If he had had insurance, his attorneys claim, the tab would have been about $10,000. Last month, he joined a lawsuit that accuses St. Anthony and other non-profit hospitals of reneging on promises to provide charity care in exchange for their tax-exempt status.

Well, yes, the bill for the insured would be lower, as that's the very point of having insurance. Pooling risk makes it possible for the insured to recoup some of what they've previously spent on the insurance. Sure, Mr. Ferguson has a higher bill, but he also hasn't had to face a couple hundred dollars a month in insurance costs. The act of having the insurance should, by definition, make the payments lower. How this shows anything aside from poor logic, I have no idea. Rather, it's this that makes me the most alarmed:

Ferguson's experience highlights the double whammy against uninsured patients who aren't poor enough to qualify for Medicaid. Not only do they have to pay their own medical expenses, but they often are victims of price-gouging by hospitals that offset the lower fees they charge insurers, which have the clout to demand deep discounts.

Worse, many hospitals employ strong-arm collection tactics that include garnishing wages, seizing homes and seeking arrest warrants. The financial impact can be severe. Medical bills are the second-leading cause of personal bankruptcy, a 2003 Harvard University study found. The unfair disparity in hospital fees is just one price society pays for a health care system that leaves 44 million without insurance and few with protections from exorbitant charges that have little relation to actual costs.

I suppose it's my fault for being surprised, since I had always assumed that people simply understood the relationship between prices and costs. It's not obtuse economic theory. Every day, in almost every part of the globe, people are assembling goods and seeking to sell them. It's a truly rare individual who isn't attempting to at least recoup the cost of production in the price of the good. After all, if they keep taking less than the thing cost to produce, they will soon have no money with which to produce more.

Why should health care be any different? If a hospital costs a certain amount to run, then, through the prices charged to all those who use its services, it will need to cover that cost in order to keep running. Telling a hospital that it can only charge certain amounts to certain people, it's only natural that the gap between the price charged and the cost incurred must be covered somewhere else. You can squeeze the balloon in one place, but that just means the liquid will rush to someplace else; it doesn't just leave.

And notice the odd reasoning in the second paragraph above. Insurers, according to this piece, are able to demand massive discounts in the prices they face; but the problem is that too few people are uninsured. Extending insurance coverage would, by extension, mean that everyone takes advantage of the discounts offered to insurers, right? What happens, then, to the gap that isn't being covered? The hospital hasn't gotten cheaper to run. The cost of provision of care hasn't become more efficient. Instead, every consumer (the insurer) is simply paying less. Either hospitals will close, or someone else will have to pick up the tab: if it's not the person needing health care, and its not the insurer, then who? The only likely candidate I can think of is the government. Which means, ultimately, the people. So not only would we all pay for insurance, but we'd also end up paying for the subsidization of hospitals. After all, in this article and my example, there has been no change in the cost of health care provision.

Unless something can poke a hole in the balloon -- that is, reduce the growing costs of health care provision -- the extension of insurance strikes me as just squeezing one end and calling it progress.


I thought hospitals usually charge less for customers paying cash. Here in Seattle a few years ago a birth paid by insurance cost $6,000 while people paying cash only paid $2,000.

I was always under the impression that things were just about the opposite from what this article claims. The price to uninsured is high abset the insurance, but I had always read that hospitals often do more work on the insured, run more tests, etc., because they know the patients aren't responsible for paying all of it. Meanwhile, the time and attention the uninsured often require because they have refrained from preventative care and thus require more emergency/catastophic care, means that hospitals have to spend more on them at a time when they can't be assured of getting back the costs, so it gets passed on to the insured.

All in all, I'm not only entirely unconvinced of the argument, but also a bit leery that this is how people really think, that the people clamoring for "universa coverage" believe it will just make everything all better.

Depends on what your definition of "insured" is. Medical types (docs, hospitals, etc.) routinely bill a full rate for a given service, which is then routinely discounted based on negotiated/set billing schedules put forth by the insurer. So a service which is billed at $100, may cost the end-user $10 (copay), the insurance company pays out $43.45, at the doctor then discounts off the remaining $46.55, per the contract. The "cash" customer would be liable for the whole $100. The difference is rarely a function of 5 or 10 times, though - 50% off is more typical.

The discounts are given for two reasons:
1) Cash customers often fail to pay. In the most obvious example, when grandma dies, the $10,000 she owes to the oncologist for chemo treatment which obviously failed tends to be a low priority. Docs often fail to pursue collection - bad publicity in above cases, for example. In essence, you get a tax on conscienciousness - your more consciencious patients pay, the less consciencious ones don't. Charging a higher rate reflects the credit risk. (Arguably, it would make sense for docs to run credit histories on cash patients, but so far as I know, that is rarely done. Some hospitals request credit card numbers.)

BTW, when you pay 10 bucks for aspirin, you aren't buying the aspirin alone, any more than the $20 bucks on a steak at Outback covers only the cost of the meat. That "aspirin" has with it the service, (the nurse who feeds it to you) convenience(well, they are $2.99 per hundred at the Costco, but you have to get there), the expertise (take the aspirin when you have certain conditions, it could kill you, other times, it would save you), the monitoring (oh, you took your own aspirin? Make sure the doc knows, so he doesn't feed you too many blood thinners for that clot in your leg.)

2) Insurers have market power normal customers don't have. This is the "gain" of things like prescription drug cards - you get access to the joint negotiation of rates, without the cost of pooled insurance.

Not all insurance has negotiated rates - it has historically been the province of HMO/PPOs - but many larger companies have such even with "normal" insurance. It is functionally similar to those car repair places which promise under the table to eat the deductible - they'll take their cut based on the insured value minus deductable. It obviously isn't available on some employer risk pools, MSAs, etc - hence the "definition" problem I cited.

Not-for-profit hospitals do provide charity care. They blow most of that budget in the ER.

People don't understand the difference between price and cost. Just observe how many people make the ridiculous "argument" that Nike pays its workers $1/day (or any conveniently shocking figure) so clearly charging $100 for shoes is "price gouging" (whatever that is).

Not only are people unable to seperate the pricing of a good from the costs involved in its production, they're unable to conceive of the full range of those costs. They think of only labor, or only raw materials, and almost never of the costs of management, finance, distribution, marketing, or R&D.

And since, if you divide everyone up into "economists" (that being people who understand the above) and "other", journalists fall into "other", you get nonsensical articles like this one.

First time reading this blog, just wanted to say hi.


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This page contains a single entry by published on July 5, 2004 11:28 AM.

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