It’s Third-Party Payers, Stupid

How can you write an entire column about waste in health care and never mention why there is waste? Uwe Reinhardt shows he’s up to the task at The New York Times economics blog. Maybe it’s that bottle of champagne he mentioned the other day.

Are there huge administrative costs in the market for cosmetic surgery? Not that I’m aware of. How about Lasik surgery? What about walk in clinics? Domestic medical tourism? I don’t think so.

Even with third-party payers, waste suddenly vanishes if they empower patients and get out of the way. It took all of two years for WellPoint’s cost of joint replacements at out-of-network California hospitals to almost match the in-network cost after WellPoint made patients responsible for the extra payments.

Think about that. WellPoint didn’t have to negotiate a fee with anyone. No arguing or hassling over the charge for an aspirin — or any other charge. Just patients explaining to the admissions office that they only had so much money to spend. (That’s almost as effective as global budgets and price controls without all of the unintended bad consequences!)

Is there waste in the Canadian health care system? Of course there is. It’s in the form of delayed surgeries. Cancelled surgeries. Even unnecessary surgeries. The cost of that kind of waste typically eludes the accountants however. That’s because the cost is born by the patients.

Comments (25)

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  1. Crawford says:

    It makes no sense that we are adding more third-party influence (Obamacare) when healthcare already has so many inefficiencies in place.

  2. JoeMac says:


    What is stopping any private health insurer from offering plans without third party payment and based on the casualty model? Why aren’t they doing it RIGHT NOW?

  3. JD says:

    “Even with third-party payers, waste suddenly vanishes if they empower patients and get out of the way. It took all of two years for WellPoint’s cost of joint replacements at out-of-network California hospitals to almost match the in-network cost after WellPoint made patients responsible for the extra payments.”

    This is important evidence that needs to be promoted.

  4. Ken says:

    Right on.

  5. Milton Recht says:

    Medicine’s current organizational state is a successful and logical response to its business environment. Like all businesses with little economic business risk and high regulatory involvement, medicine is unconcerned with costs and much more concern with process than outcome.

    How many physician practices go out of business or into bankruptcy! How many people have to choose between spending money on a doctor visit or spending it for something else when 3rd party employer or government insurance will pay the medical bills?

    Increase competition, allow medical business failures, remove guaranteed sources of revenue, relax government regulatory and licensing of doctors and hospitals to remove the cartel and guild aspects of medicine and put more of the purse strings directly into the consumers hands and US medicine will transform into a better managed, more efficient, lower cost, higher quality service with more focus on outcomes and less on process.

    In a competitive environment, medicine will also differentiate the market place of consumers to satisfy lower income and higher income patients through number of available physicians, wait times, plushness of the offices, location, convenience of hours, etc.

  6. Bob Hertz says:

    Good post, but I need to add one item:

    Joint Replacements are scheduled weeks in advance. This gives time for the insurer to let the patient know just how tiered or reference pricing will work.

    A non-small percentage of health care costs come from heart surgeries that are not postponable and horrific crippling accidents, etc. Some method must be found to limit those costs also.

    Otherwise, hospitals will price gouge where they still can.

  7. Larry Gagnon says:

    I have come to believe (as a result of personal experience) that many medical tests are ordered by doctors because it costs them nothing and benefits them by reducing exposure to civil suits.

    Our medical services delivery system is permeated with examples of beneficiaries not responsible for costs. This paradigm inevitably “encourages” waste.

    I suggest a secondary option for patients willing to waive their right to sue in exchange for lower out-of-pocket costs.

  8. Bob Hertz says:

    Larry, you are correct about unneeded tests, but there will have to be some bitter legal disputes before we get them under control.

    Picture a situation where a doctor feels he needs to perform a test, but the insurer refuses to pay for it.

    The patient decides that the test is not worth the money.

    What does the doctor do? I guess he could ask the patient to waive his right to sue if he later gets a cancer that could have been caught by the test.

    This is no way to run a health care system… destroys the patient doctor relationship.

    The solution was proposed years ago by George Halvorson and others…..which is that all patients should be in an HMO type plan where a minimum number of tests are covered without dispute.

    That is far from happening.

    • Larry Gagnon says:

      Bob: I see your point, but I suggest a paradigm where the patient waives ALL rights to sue the doctor BEFORE the very first consult. What I would really like to see is the evolution of a type of doctor that cannot be sued. A patient can then choose to see a doctor who need not worry about lawsuits. (If patient unwilling to pay for procedure not covered by health insurance, that is patient’s decision/burden/benefit/prerogative. It certainly should not be doctor’s burden.) I would like the opportunity to pay lower premiums (& possibly co-pays) and limit myself to seeking help from such doctors. I am (& I believe we as a society are) over-insured. Every time I buy an appliance, rent a condo, rent a car, etc., etc., I am offered an insurance policy. On a related topic, our civil “justice” system is silly.

  9. Sean Parnell says:

    You can also look at cash-only medical practices here in the U.S. Here’s a doctor in Texas that basically charges $30 for almost every visit:

    Getting third-party payers out of healthcare, at least primary care, would represent a significant savings AND lead to better access to care.

    Sean Parnell

  10. Bob Hertz says:

    Thanks Sean. Is there really medical tourism for heart procedures? Seems awfully important to be with one’s own cardiologist at a time like that.

    I will do some research on the emergency care issue. I sense you are incorrect but I will find some numbers.

  11. Bob Hertz says:

    OK Sean here is my pitch.

    According to Reid Abelson in the NY Times, 5-20-13, over half the hospital admissions come through the Emergency departments.

    In a 2003 study by AHRQ, the most common causes for emergency admissions include:

    congestive heart failure
    Chest pain
    heart attack
    hip fractures
    bleeding ulcers
    mood disorders
    serious infections

    This was over 8 million admissions in 2003. Probably more admissions today.

    None of these conditions lend themselves to negotiation or medical tourism.

    Their gross cost I suspect is more like 15-20% of our overall health spending.

  12. Ian Random says:

    I’m suffering from the enhanced benefits that BO gave me. Every year my monthly premium went up $10, this year it went up $150 for the same benefits. I just don’t see the point of insurance anymore. Why do I have to pay for maintenance on a Ferrari, when I drive a Chevy?