Thursday, April 1, 2010

What if there were no 3rd party payers?

Recently I have had some interesting exchanges with a few docs on various topics. A composite theme of these conversations are the bad aspects of third party payment (anyone other than the patient paying is third party, whether Medicare, private insurance, Medicaid, etc.). A couple of docs have said we would be better off with no third party payers. Leaving aside the fact that you would expect insurance to develop anytime there was a risky situation of note (uncertain probability of a bad thing happening, with the cost of the bad thing being potentially catastrophic), what would happen if we had no third party insurance, focusing on the market for physician services?

Revenue flows to doctors would decline. There is a tremendous moral hazard effect of having third party insurance, especially as insurance has morphed away from indemnity style coverage toward fixed co-pays. Moral hazard is typically viewed as only bad, but in another sense the degree to which it is good or bad depends on how much extra health is purchased/produced by the extra care. But, bottom line is that with no insurance, revenue flows to doctors would be lower.

Expenses of doctors would decline. If there were no third party insurers, then a doctor practice would have lower administrative costs because they wouldn't have to deal with billing/collecting from insurance companies. They would have to deal with billing/collecting from patients, and doctors would have to determine policies. If people had to pay in full up front, docs would provide less care, but would have no billing/collecting headaches. At the other end of the spectrum, if docs set up payment plans and the like with patients, then you would have more administrative costs; not as compared to today, most likely, but as compared to only treating when payment is made up front.

The effect of a world without insurance on net income to physicians is ambiguous. Revenue would be lower, but so too would be the cost of doing business, with the net impact being unclear. My hunch is that the net income to doctors as a class/group of people would be lessened, but there would likely be tremendous distributional impacts across specialities and across geographical locations. There would likely be tremendous competition among docs to be the providers for persons with means, and for certain specialities and providers of care that was not understood to be discretionary. Other docs would probably be very lonely.

What would the impact be on patients and health? This really depends on how much health care currently provided is unproductive in the sense that it produces no benefit....with benefit defined as a longevity extension and/or improvement of quality of life however measured or defined. And further it depends on whether the reduction in the aggregate amount of care provided would occur solely or mostly in the non productive health spending. If you look at the aggregation of health spending in the U.S. in a year, you find that 50% of the population consumes only 3.2% of the total health spending (2006 figure). So, for half the peoople in a given year, having no insurance would have very little impact. [Of course, over the course of your life, almost no one remains in the low spending group for their entire life, since everyone dies and most are sick before doing so]. At the other end of the spectrum, 1% of the population uses 21.2% of the total spending, so the impact on this group would be profound, and they would certainly use less care than they would with third party insurance. It is hard to imagine that this group would not be harmed, but that is still ambiguous and depends upon what proportion of the care they receive is productive, in whatever way you want to define that term. And 1 in 10 people use around two-thirds of the total health spending in a given year, so the large impacts on patients, in a given year, would be highly focused on a relatively small group of people, who would disproportionately be elderly.

The effect on total health spending? We would spend much, much less on health care than we currently do if we had no third party insurance. In the 1930s the U.S. spent about 2% of GDP on health care, and health insurance was quite rare. Today it is over 17%. Also rare in the 1930s were therapies that clearly extended life span and improved quality of life. As these developed, so too did the drive to expand insurance. And vice-versa, almost certainly when thinking about things from an innovation standpoint. Replaying the 1970s-90s without Medicare (about 6 in 10 elderly were uninsured in 1964; the market had decided) would undoubtedly have seen much lower rates of heart revascularization and the innovation of same, for example.

It is unimaginable that we have no third party insurance. However, the thought experiment of no third party payment is useful to imagine how things would be different without insurance, and to set the problems of the current system in context of the (different) problems we might have with no health insurance.

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