Reasons for high and rising healthcare costs in the US is presented in lay language in a 53 page special Report in Time for March 4th, 2013, pp.18-55. Examples, and there are many, include a patient at the Seton Medical Center in Daly City, California who was charged $18 each for 88 diabetes-test strips that Amazon sells in boxes of 50 for $27.85, or 6 cents each. A 64 year old patient went to the emergency room at the Stamford Conn. hospital and received a blood test (Troponin 1) for a cost of $199.50. If she had been 65 she would have qualified for government insurance, Medicare, which would have paid Stamford $13.94 for the test.
While Time gave this topic mass market coverage, the writings of Professor Uwe E. Reinhardt as reported in the New York Times for March 29th, 2013 provide more detailed analysis going back to 2000.
Canadians are told by others, and some believe that we have one of the best healthcare systems in the world. Do we and should we worry that we too are paying too much? Following is a first small step to answer this question for which there should be numerical answers. In a qualitative sense, some argue that the Canadian system is barbaric when you describe how some patients are treated.
Are individuals being overcharged in Canada in a similar way to the US, even though Canada’s per capita healthcare costs are well below those in the US, as is the case for other OECD countries? The answer has to compare how healthcare costs are calculated and covered, and where costs may be too high. In Canada, as in other OECD countries, there are three sources of payment,
– by governments
– by individuals covered by private insurance
– by individuals being self-insured and paying out of personal funds.
In the US, all three sources of funding exist with the charge for a given treatment depending on who is paying for it and the actual payment depending on how forceful the patient-consumer is.
In Canada, about 70% of overall healthcare costs are covered by a government plan and 30% by private insurance and cash (or self insurance). It is a mixed public-private system, although often described wrongly as a government system along the lines of the UK National Health Service. Canadians therefore pay taxes to fund the government system, premiums to pay for private health insurance and cash for self-insurance.
Follow the money
Using Ontario as an example, the provincial government through OHIP covers some but not all medical expenditures. Private insurance, if purchased by an employer or individual employee may cover some costs, while cash provides any balance owing. The Ontario provincial government pays for hospitalization and some other medical costs, but not for drugs consumed outside the hospital, and not for dental care, or for eye glasses. For hearing aids, OHIP pays $500 per ear with the balance paid by private insurance or cash. Why drugs, eyes, ears, and teeth are not considered part of general healthcare while noses, toenails and other appendages are is a mystery to me.
The price-cost reasonableness of healthcare funded by the Ontario government depends on the efficiency with which the covered hospital and non-hospital services are provided. It is not a competitive market but comparisons can be made with other provincial healthcare services. The payer is the government funded by the taxpayers, some of whom receive the health services. Taxpayers depend on the government negotiating a good deal on their behalf with healthcare providers such as doctors and hospitals.
For privately insured claims, the terms and conditions of the policy and the coverage provided are crucial and often not fully understood until a claim is made. The policy will have an annual premium cost which the individual and/or employer pays, but the amount paid out for a claim depends on the nature of the illness and the detailed wording of the policy. For example, the policy may have an upper limit for the amount to be paid out for a particular ailment, or an amount depending on whether it is a pre-existing illness, or a geographic limit depending on where the illness occurs. Insurance companies may arrange to fly patients back to Canada rather than be treated abroad so that they can be deposited into the provincial healthcare system.
When buying a private policy or accepting one from an employer as part of a benefits package, the individual does not know how much will be reimbursed until a particular situation arises, and has no idea whether the amount charged is reasonable or not. Thus the value of the private policy is largely unknown until a claim is made and the insurer responds to it. Some information may be gleaned by canvassing those, colleagues or others, who have a similar policy.
In the US case examined in Time magazine (March 6, 2013), the hospitals engage in price discrimination. They charge different prices for different patients for the same treatment depending on who is paying the bill. For a US patient covered by government funded Medicare and Medicaid, the hospital charges a much lower rate than for a patient covered by private insurance or a self-insured patient paying cash – see above example.
What the paying patients don’t realize is that the bill presented by the hospital is the asking price for the services provided and is subject to negotiation. In many countries, but not Canada and the US, it would be recognized that the price for any good or service is an asking price where the buyer is expected to bargain, so the seller starts high. Hospitals do that in the US, probably not in Canada.
The reason the supplier, namely the doctor and hospital, get away with this is because the services are often purchased under conditions of immediate need, where the patient is in distress, and is not in a position to bargain. The hospitals are large and permanent, and the consumers (patients) are small without the knowledge of what treatment is needed. The nature of the transaction is such that patients are often not in a position to discuss costs and shop around for alternative suppliers, as they might for hiring someone to cut their hair or complete a tax return. The conditions of the transaction give market power to the supplier.
How does this apply in Ontario? OHIP is a large buyer and assuming it works efficiently it has the potential market power to reimburse reasonable prices from hospitals, doctors and other suppliers of healthcare goods and services, similar to the way Medicare and Medicaid reimburses healthcare providers in the US. It is difficult to assess OHIP’s prowess as a negotiator. Some cross-provincial and cross country comparisons should be possible.
Conditions and payments made under private health insurance programs are more difficult to evaluate, because the policy holder does not know how the insurance company gets the information to decide how much to reimburse for each particular medical condition covered, which becomes the basis for the premium charged to the consumer. Also for a particular illness the insurance may put an upper limit on the amount which can be paid out. This provides a safety valve for the insurance company. If they also do not cover preexisting conditions, another safety valve exists, especially with an ageing population where more things become pre-existing with time.
There are all sorts of tales of people making claims on private health insurers and having difficulty in collecting, especially in the case of claims outside of the country. When travelers depart Canada, they have only a rough idea of whether a claim will be reimbursed by whom and for how much when a particular illness arises.
An actual example in Ontario
Consider the case of coverage for hearing aids in Ontario. The audiologist quotes $5000.00 for hearing aids in both ears. OHIP provides reimbursement of $500.00 per ear leaving a balance of $4000.00 to be paid. When submitted to the private insurer, the policy coverage is for 80% of “eligible expense”, where “The eligible expense is limited to customary charges. Customary charges are determined by any professional fee guides and average costs in your area.” The eligible expense in the relevant area in this case is $3000.00, not the $4000.00 remaining after the $1000.00 OHIP reimbursement. Reimbursement is 80% or $2400.00. In this case, the government pays $1000.00, private insurance $2400.00 and the individual via self insurance $1600.00. Note, the individual pays in three ways, as taxpayer, as purchaser of private health insurance, and with cash.
In order to be an informed consumer, it is necessary to get the necessary quote and then take it to different hearing aid suppliers to find one who offers the customary or near customary charge in the area. If they all charge $5000.00, then there may be price fixing, or you may believe it is a competitive market where all charge the same price. If all follow the professional fee guide, then the profession is aiding the provision of identical quotes and the government is assisting the suppression of competition.
(In a future posting, an attempt will be made to get quotes for the case cited above, which the author accepted showing that he was not an effective consumer. But consider how a person might behave if the condition was for a far more serious condition and there was no time to get quotes.)