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Revising Obamacare: Fixing the Wrong Problem

9 Mar 2017  

This week politicians and lobbyists are debating the future of Obamacare. Republican lawmakers have proposed a revision that makes few people happy; Democrats are unanimously against it. Many Republicans don’t like it either. You can read more about it here.

A few days ago I had the opportunity to talk with Professor Craig Garthwaite, my Kellogg colleague,  about the developing situation. Craig is a healthcare economist and an expert on the financial tradeoffs involved in configuring a national healthcare system. He concisely summarized the situation and explained why finding a solution is so hard: there are many things in Obamacare that are working, and changing one thing has an impact on everything else.

The Basic Problem

You can sum up the problem like this: healthcare is expensive and use is uneven. Some people incur massive healthcare expenses in a given year. Most people have none.

Obamacare attempted to address this problem by forcing everyone to get insurance, so healthy people funded the cost of care for sick people. This seems unfair, but it isn’t. This is simply how insurance works. I pay car insurance every year and haven’t ever had a claim. I hope I will never file a claim, but I will also readily continue to pay for it.

The new version of Obamacare may eliminate the mandatory insurance provision. This is a popular concept, but it will probably make the entire system unworkable. And it notably doesn’t address the main problem, which is that healthcare is expensive for some.

The debate about Obamacare is focused on the wrong question. We should spend time thinking about how to change the cost of healthcare, not just how to pay for our expensive and unwieldy system. It is a bit like someone trying to figure out how to pay for an elegant wedding. The problem isn’t the source of funds; the problem is the expensive event.

How do we deal with healthcare costs while encouraging innovation and providing reasonable care for all? That is what we should be talking about.

One Idea

Here is one idea to consider. Why not require transparent pricing from healthcare providers?

At the moment, it is basically impossible to figure out what anything costs in healthcare. If you need a knee replacement, for example, good luck determining the price. Studies have shown that nobody in the healthcare system has any idea. The surgeon doesn’t know, the hospital doesn’t know, and the insurance company doesn’t know–which means it is impossible to make a smart financial decision.

In large part, pricing confusion is caused by insurance companies and hospitals. These players negotiate prices and discounts, so the actual list price is a fictional figure. Nobody pays it.

This is absurd.

The same dynamic exists with pharmaceutical pricing. What is the actual cost of Sovaldi? Nobody knows. The list price is rather meaningless given all the negotiated (and hidden) discounts.

Why not pass a law requiring flat and bundled pricing for the top 250 medical procedures? If you want a knee replacement, the cost will be x. All players would then pay the same price: the insurance company and an individual walking in with no insurance.

With transparent pricing, competition might increase. People may start to make healthcare decisions with the price in mind. Perhaps the knee replacement just isn’t worth it. Maybe I should have it done at my inexpensive local community hospital instead of the fancy downtown luxury establishment.

A shift like this could change the economics around healthcare in a fundamental way. Would it work? I don’t know. Debating this sort of idea would be a productive use of time.

For now, we get to watch politicians debate how to pay for the expensive wedding.

4 Responses

  1. emitahill says:

    If only they would pursue sensible solutions like the ones you recommend, but solving the problem really isn’t their goal. It’s getting rid of Obamacare and sending us back to the time before it when coverage was impossible for many categories of people short of paying for it privately by the rich. And the idea of cutting back on Medicaid and the people covered there is appalling.

  2. Tom Reeder says:

    Hi Tim-
    Thanks for bringing this area of runaway cost up for discussion. And, thanks Larry Robins for pulling in another runaway cost industry of our economy into the scope of the discussion.

    Like Larry, I believe decoupling the funding mechanism from the invisible hand of the consumer has been one of the key contributing issues. To extend the discussion, here is a simple logic for each industry (realizing many more facets):
    – Healthcare funding for most is a opaque benefit of employment. Not only do we not see the total cost (transparency), we only experience a fractional out-of-pocket expense. Linking this incremental cost with the emotion of health, and of course we want the best procedure, newest drugs- the best healthcare.
    – College educational funding is also opaque, with its grants, and government loans. Again, unclear costs and funding are mixed in with the emotional pressures of, in this case, competition for the best jobs, fuzzy paybacks for certain majors, and the fog of future out-of-pocket debt repayment. Like the “best healthcare” mindset, we cannot make a rational decision for determining what is in our economic self-interest.

    Just goes to show how complex these issues really are.

  3. Larry Robins says:

    I should clarify–the issue with the funding mechanism applies equally, not the transparency. We do know what college costs!

  4. Larry Robins says:

    Excellent idea that applies equally to the cost of a college education.

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