BY: BYRON MOORE, CFP®
posted April 23, 2018
Question: I was in the hospital recently and got my bill. It was unbelievable. Then I got something from the insurance company saying I didn’t have to pay that much. But I still have a very high deductible and a big co-pay. I don’t understand how the hospital says I owe one thing and the insurance company another. Who is right?
Answer: There is very little right about the process you’ve just experienced.
Imagine a world in which all the grocery stores were full of the best that money could buy (kind of like we have here in real life). The only thing these stores don’t have is a price tag. There are no price tags indicating how much any of the items in the store will cost you.
Also, you don’t really do any of the shopping yourself. In this imaginary world, you have a staff of professional shoppers who push your cart, determine your needs and select your groceries.
You might think these shoppers would just fill up your buggy with all sorts of things you don’t need, especially since neither you nor they can see any price tags.
Well, not to worry, because you won’t be paying the bill. Not directly anyway. You see, in this world, you pay a monthly “grocery insurance” premium, which covers all the groceries you buy per month over a certain “deductible” amount.
So you do pay directly for some of your groceries. But remember, you don’t get to see any of the price tags before you select those items. You are pretty dependent on the professional shoppers to help you know your shopping needs and select these items for you.
Then, about a month or two after you leave the grocery store, you get a bill in the mail from the store. $5000!?! What??? That can’t be right…
Thankfully, the following day you get a notice in the mail from Grocery Mutual, your grocery insurance company, that they have marked down the grocery store’s $5000 bill to $2200. Your grocery deductible is $500 and you are responsible to pay 20% of the remaining bill, or another $340. So you’ll be out $840 for your groceries and Grocery Mutual will pick up the remaining $1360.
So… is that a good deal?
The obvious answer is – you have no idea. And you cannot have any idea, because you do not know what anything costs.
Economists call this “price transparency,” or in the case of your hospital stay, a LACK of price transparency.
I think it is a fair statement that the United States has some of the best medical care in the world… and one of the worst ways to pay for it.
Economist Milton Friedman is famous for his observation that as the buyer, the consumer and the payer become more and more disconnected, things get more expensive and less efficient. He put it like this…
You can spend your own money on yourself. When you do that, you are more careful and try to get the most for your money.
You can spend your own money on someone else. You are still careful, though you may care less about the item purchased than what is cost you.
You can spend someone else’s money on yourself. In this situation, you don’t care about the cost and just try to get the most for yourself.
You can spend someone else’s money on someone else. In this situation, you have no incentive to be concerned about the cost or the product.
All of the above examples offered by Friedman assumed that the consumer had some level of price transparency. Imagine the confusion brought about if none of the above four could see what something cost before they bought it.
The way medical costs are paid for today removes the price tags when the product is being selected and encourages us to spend someone else’s money on ourselves. It discourages thrift, comparison shopping or any other normal, consumer behaviors operative in every other area of our economy.
We should all be rightly grateful for the medical advances that keep coming at such a wonderfully dizzying pace.
But I could wish for just one small thing to be added to all the advances…a price tag we could all read and use to comparison shop…before we make the purchase.
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