Health insurance can make health care more expensive

We all know healthcare is expensive. The question is why is it expensive? The typical answer is that it is all down to “greedy” insurance companies, drug companies, and even doctors. One of my favorite economics aphorisms is that blaming greed for high prices is like blaming gravity for plane crashes. The fact that, as a whole, individuals and companies always try to do what’s in their best interest isn’t very instructive. We need to look at the rules of the game in order to figure out why things end up the way they have. The current state of health insurance actually encourages people to spend much more than necessary. That in turn leads to higher costs for healthcare. As weird as it sounds, health insurance as it is currently thought of may be contributing to one of the biggest problems of health care, the cost. Here are three examples from my own life.

I had just moved back to the States and was trying to get to the bottom of what was wrong with me. I had gotten an insurance plan but it didn’t cover pre-existing conditions. When my doctor told me I needed an MRI, I was shocked at what they cost. The hospital told me that it would cost $2500. Of that, I guess that insurance companies would probably pay $1200-$1500 because of pre negotiated rates. I found what is essentially Priceline for MRIs and was able to get the MRI done for $650. That’s less than what the insurance company would have paid and probably less than what my deductible would have been as well. By being forced to look for a deal far less money was spent than usual. 

I take a pill twice a day that helps me walk better. The active ingredient has been known for many years and is available through a compounding pharmacy. I would have to take 4-5 a day and a month’s worth of pills would run me around $40-$50. A company saw these results and made a timed release version so you only have to take two a day. My insurance pays $2200 a month for those pills. My copay? $30. Why does the company charge so much for those pills? Because they can. How can they? They were given a monopoly on the sale of the pills for 15 years because they jumped through the hoops and paid the costs of getting FDA approval. So I pay less, take the pill less often, and $2150 more a month is spent than necessary. 

I take a medication once a month that is supposed to stop the progression of MS. It’s expensive, my insurance pays $7200 a month for it. The company that makes it offers a copay assistance program. They pay the copay and I pay nothing out of pocket. They were having some trouble getting it set up through my insurance company though. They informed me that if they couldn’t get it sorted out I would qualify for the free medication program. I really wanted the copay assistance instead. Why? Because my maximum out of pocket expenses per year is $5000. With the copay assistance, the drug company would pay all of my out of pocket expenses for the year. They essentially put $5k in my pocket but it is the most expensive option in the end. 

The way health insurance is set up, we are incentivized to game the system, sometimes without us even being aware that we’re doing it. The thing is, right now nobody that has health insurance knows or cares what drugs and procedures cost. Doctors don’t either. Price awareness and the necessity of comparing prices brings discipline to markets. That discipline is what keeps prices down. If we’re not going to do single payer healthcare, and I don’t think that’s likely, we need to overhaul the incentives that people face if we want to get the prices down. What might that look like? I’ll dive into that in the next post.