Last summer, my youngest son was on a church trip on the other side of the country, when he hurt his hand. A deep gash on his middle finger required immediate attention at a clinic in rural Virginia. A day after the injury my sister the doctor set up an appointment in Tidewater with a hand specialist, to assess the damage to the digit, and to determine whether something more than antibiotics and standard wound care were needed.

At the hand specialist, the first order of business was, of course, determining who should be billed how much for the visit. We were initially informed that the visit would cost $220. Then something noteworthy but predictable happened: the person in charge of our bill found out that we were not paying the bill out of pocket, but would instead be reimbursed by our insurance for out-of-network care. Once it was determined that the insurance company was paying, the bill increased from $220 to $380.

This is the difference that insurance coverage makes. My son’s care would have been no different in either scenario (the damage was light, and his hand has since fully healed), but the price charged was nearly 75% higher when an insurance company was footing the bill. Since I’m an economist, I’m not shocked by this – I’d be shocked if it didn’t happen. Nevertheless, we should not kid ourselves that these sorts of pricing games have no consequences for health care in the United States.

What accounts for the difference in price?  The $220 out-of-pocket price is the result of a self-contained exchange between two people: a doctor and a patient. Doctor delivers service, patient receives benefit; patient incurs cost, doctor gets the benefit. It is a local exchange: the doctor and patient in some sense are responsible each to the other for costs incurred and benefits delivered.

The $380 insurance-covered price is the result of an exchange between three people, or more precisely, between two people and an insurance institution (government or private). The doctor delivers care and the patient receives the benefit of care, but the patient does not pay the cost directly; the third party insurer pays the cost, and the patient pays indirectly, via a premium payment (often paid in part by his or her employer).

What is the result of this second arrangement?  The price charged does not bear any clear relationship to the underlying cost of the care, or at least the cost of the care when delivered in some productively efficient way.  In the insured transaction, neither doctor nor patient has any incentive to think the price too high, or has any incentive to see it lowered. The doctor is not interested in a low price, since a low price means less income, and he is not doing the patient any favors by lowering a price the patient does not pay anyway (tellingly, the doctor is more likely to reduce the price when facing a real person who must pay it out of pocket). The patient likewise is not thinking about cost; incurring the costs of shopping for or negotiating a lower price saves the insurance company money, not the patient.

This second scenario, in which prices for insurer-reimbursed care are significantly higher that prices for out-of-pocket care, is repeated millions of times a day, and adds significantly to U.S. health care costs. We patients do not bear the full brunt of these costs directly – at point of purchase – but we do incur them through much higher costs of health insurance. This is the real nub of the problem: people are priced out of health insurance by the high rates which are made necessary by third-party payment schemes.

Moreover, this system creates a convenient bad guy – the insurance companies.  Because only the health insurer experiences the direct cost of this current system (as the third party payer), it will get involved either through restrictions on care, through dragging its feet on reimbursement, or through limiting the amounts it will pay. For this the health insurer is vilified as heartless and profit-driven; this arrangement seems convenient for both doctor and patient, who are excused from having to face unpleasant facts about cost. This vilification is unfair, though: someone must care about whether costs are too high, and whether the benefits of care are justified. If the patient and doctor will not take costs seriously, the insurer will.

The inflation of health care costs by third-party payer schemes, and the resulting involvement of third-party payers (both private and state) in cost control and rationing, must be an important consideration in any real health care reform whose goal is to increase the freedom of patients and doctors to work with each other free of third-party interference. Of course, the highest cost health care needs – cancer treatment, major surgery, new and expensive drugs – are the real reason for health insurance, and will always require the involvement of a third party (the insurer). Nevertheless, many health care expenses are not of this nature—a $220 bill for a visit to a hand doctor, plus the cost of follow-up, is unwelcome, but will not break most households any more than a $220 auto repair bill does. Health care plans, like health savings accounts (high deductible, low premium plans), place more money directly under the control of consumers, and will result in more $220 bills and fewer $380 (and larger) bills. They also force doctors and patients to incorporate price into their interactions. This may seem an unwelcome intrusion of cost considerations into the putatively “sacred” doctor-patient relationship. The alternative is not a doctor-patient interaction free of outside interference, however; the alternative is the current system, in which insurance companies are part of care calculations from the beginning, and in which prices are higher, too.

Local Culture
Local Culture
Local Culture
Local Culture


  1. Two years ago I relocated to rural NH. Suffering from a pre-move bout of Lyme Disease, I sought a consult with a nearby MD who specializes in the disease. The secretary asked if I had insurance and when I replied that I have Medicare she informed me that the doctor did not accept Medicare. I responded that I would happily self-pay, to which she replied that that was “illegal” (in that I’m covered by Medicare). How is that a health “benefit”?

  2. It is interesting that Mr. Yuengert finds no occasion to mention the other, and truly major, factor in health-care pricing–that there is no competition among providers.

    When, for example, was the last time you saw a commercial for a local health-care center where the pitch was, “We heal you cheaper!”?

    When was the last time–injured in the finger, say, or feeling chest pains–you shopped around from one medical center to another, looking for the best deal?

    Until you have that, you have a thoroughly unnatural “market” for health care, and worrying about anything else is irrelevant.

    And no, there will never be a truly free market in health care, so people had better start looking at other alternatives. What we have now is unsustainable.

    There are some examples we could learn from, across the border or the pond, but as long as there are people pin their sense of American specialness on truculently refusing to learn from those examples, we’ll be stuck right where we are, with Mr. Yuengert (or his insurance company) subsidizing (through higher costs) those many families who can’t afford a $220.00 bill, but who nevertheless show up in the emergency rooms.

  3. My experience with medical billing has been entirely different. Following a surgery a few years ago, each of my bills detailed the “sticker” price (i.e. what I would have been billed had I not had insurance) and the amount that was accepted as payment-in-full from my insurance company. The latter was about 60% of the former. The same is true of my GP’s office: my copay + the insurance payment is about 65% of the published price for a doctor’s visit.

  4. Three interesting comments. There is obviously much more going on in our Rube-Goldberg health care system; 900 words is not nearly enough to get started. To the usual anomalies about price (the ‘sticker’ price being higher than the Medicare price, for example), my response is “how do you know it is the sticker price?” Just because the medical provider said so? Real prices are those at which business is actually conducted, and the prices on a medical provider’s pricing sheet are not necessarily real. Some people may pay those prices, but these prices are not set in stone (think of the retail store that offers “$50” savings on something which is never sold for the sticker price). Patients paying out-of-pocket, or with medical savings accounts, often get discounts, sometimes substantial.
    To John Haas’s observation that there should be more competition, I agree. However, there is a sort of competition now, but it is between insurance companies, employers, and hospitals. The only people not competing are the insured. We end up passive observers of the institutions doing the competing. If more of the choices were placed in the hands of the insured, with the dollars and responsibility this entails, you might see more price competition directed at them.
    To Rita Thieme, I can only offer sympathy. Medicare prices are set by the Feds, and when the Feds set prices, to charge something else is a crime. The market has little to do with the price or the doctor’s decision to work with you.

  5. Health insurance is just another symptom of the desire to get something for nothing. The goal of health insurance as practiced in these United States is to try to get more in ‘care’ than you pay for in premiums. This means that the young and healthy who bet in this casino subsidize the old and sick. And of course the house takes it cut off the top before anyone gets the ‘care.’ It’s a racket.

  6. Phil: Here’s a thought–that bill you saw was primarily designed to keep the sucker happy. And who is the sucker? Well, if you have to ask…

  7. John Haas is largely right, and it opens up a related problem. Competition in pricing will bring some transparency, or at least comparative information, to the pricing structure. Patients have no idea why fixing a finger costs $220. David Goldhill’s interesting “Catastrophic Care” and Marty Makary’s “Unaccountable” both demonstrate that providers themselves have really little idea of what health care costs are and have no incentive to justify their pricing structures. Likewise, consumers are completely sheltered from the pricing structure and have neither the incentive (under a third payer system) nor the wherewithal to negotiate prices. As a result, there is no health care market in any meaningful sense.

    One of Hayek’s key insights, and I think he was right about this, was that prices are carriers of information. When you mess with the price structure you distort the information needed to make a market run well and contribute to social well-being.

    Mr. Haas is right that we have no functioning health care free market, and despite reforms that could be proposed to that end, I doubt we are likely to get one. More likely is some sort of imitation of the Canadian model, but skepticism of that model is no mere “truculence.” There are trade-offs involved in all these systems, and there are certainly trade-offs involved in adapting some sort of comparative form (keep in mind the Canadian system is highly decentralized and involves far fewer consumers, and the governments in question have far different budgetary issues). Both Canadians and Brits have become increasingly dissatisfied with their systems and there are significant problems with both systems. We can learn from them, but Americans typically are interested in different sorts of trade-offs than are Canadians. If you’re going to change the health care economy, you have to change the cultural expectations underlying it.

  8. “Americans typically are interested in different sorts of trade-offs than are Canadians.”

    I’m not sure that’s entirely true–or perhaps, I’m not sure it’s as true as people often assume. When polled about whether they like the idea of “universal payer,” Americans approve. When asked about the constituent parts of Obamacare, they approve (mandate excepted, of course).

    If you say “Obamacare,” however, they disapprove. Why so? Well, take a look at the new Koch brothers’ ad: “Can I really trust the folks in Washington with my family’s healthcare?” Interesting question. Perhaps we should ask her what she thinks when she turns 65 . . .

    Now, if you’d said “Americas insurance company executives typically are interested in different sorts of trade-offs . . .” I think you’d be right on the mark.

    • I spend a lot of time with Canadians, and I assure you they, in general, approach government and health care trade-offs differently than Americans do. That has little to do with how things get paid for, or any ideas about insurance companies – which, shockingly, seek to make a profit.

      And I find it hard to believe you’re dusting off polls on this one. The Obama administration doesn’t know what’s in Obamacare. The average American sure as hell doesn’t, and the question about a universal payer is way too abstract. In my judgment the ACA is an indefensible piece of legislation at so many levels, not least because it seeks to get young people to carry the costs for elderly ones. But that’s not really the point here, and saying that doesn’t imply a defense of the system that was in place. That system also was largely indefensible, as demonstrated in the classic study “Battery-powered Health Insurance.”

      What sorts of trade-offs, then, are we talking about? Rationing. Doctor access. Speed of treatment. Ability to pay for services out of pocket (Slate had an article on this recently). Flexibility in coverage. Equity. Cost efficiency. And so on, but you’re not going to get all those things. Canadians are more willing to accept long waits and rationing of care than are Americans. Americans are more willing to accept inequity and bloated costs than are Canadians. And I can tell you this: Canadians love preaching to Americans about how much better America would be if it would just be more like Canada. Their smug self-righteousness can make American jingoism seem innocent by comparison.

  9. Exactly how long would you have allowed your sister to shop for the lowest price or best bargain in treating your son? That is the key problem in using a market model for health care; the patient’s alternatives do not include refusing to buy anything, unless the patient is willing to be maimed for life, be in serious pain, or die. Economists can’t put a value on “not dying right this minute,” so that cost never gets considered.

  10. To increase the availability of health care and decrease the cost, the supply must be increased. There must be more doctors, more nurses, more medical equipment and more medicine.

    Regarding the first necessity, more doctors, let’s talk about what it takes to become a medical doctor in America these days. Twelve years of intensive school and training, at a personal cost of roughly a quarter-million dollars or more to the student, and to what end? To become a state functionary working 100 hours a week at an often grim and grisly job, held hostage to the campaign promises of career lawyers to an increasingly ignorant, indolent, self-entitled, and just plain fat and lazy American public?

    The health care problem in America is directly tied to the education problem. The fact that nobody bothered to mention this during the farcical charade of non-debate leading to the implementation of the inarguably grotesque “Affordable Care Act” speaks volumes about the intellectual paucity and institutional rot that are concomitantly consuming the entire country.

  11. “Canadians are more willing to accept long waits and rationing of care than are Americans. Americans are more willing to accept inequity and bloated costs than are Canadians.”


    We’ll see which model is more sustainable soon enough.

  12. Bryan, read The Washington Monthly’s article “First, Teach No Harm.” It discusses this problem in detail.

  13. Bubba is exactly right. I can see the NYT headline now: Study Finds 90% of People on Insurance Pay More Than They Collect. It would be a national scandal.

    One of the biggest problems, which oddly never came up during the phony “debate” on Obamacare, is that “insurance” is used for everything, right down to yearly doctor visits. The illogic should be apparent, but I guess the schools aren’t what they used to be.

    When asked about the constituent parts of Obamacare, they approve (mandate excepted, of course).

    Well then they aren’t really in favor of any of that stuff, given that the mandate is the proposed method by which all of it is to be paid for. I’m totally in favor of everyone never having to pay for medical care. I’m also totally in favor of a leprechaun giving me a giant pot of gold right now. These notions are equally sensible.

  14. “Well then they aren’t really in favor of any of that stuff, given that the mandate is the proposed method by which all of it is to be paid for.”

    I suspect they understand that, Matt, or most of them do, or could be made to. Perhaps we could send Bill Frist out to explain it to them?

    “Frist: An Individual Mandate for Health Insurance Would Benefit All”

    My guess is they simply don’t like being told they have to purchase insurance–in the same way they’d rather not pay taxes, or wear seatbelts, or have their prostate checked–and so register that dislike by disapproving.

  15. Karen, thanks so much for referring me to that article. It was very informative and enlightening.

    The article is well-researched, balanced, and non-political, but let me do what I do best and inject a little polemic into it. These quotes jumped out at me:

    “By 1985, none other than then Senator Dan Quayle was penning an article for the policy journal Health Affairs calling for Medicare to stop subsidizing residency programs that didn’t send at least 70 percent of their graduates into primary care. By 1989, the Institute of Medicine was weighing in, saying that graduate medical education programs were too concentrated in hospitals and were failing to provide proper training for primary care physicians…..

    By 1997, Congress basically threw up its hands and reached for the only politically available lever it had to reduce the growing expense of subsidizing residency programs. Unable to find the votes to hold existing programs accountable for their use of public funds, it simply froze the number of resident slots it would finance. This was a crude measure….. After some sixteen years of this, you would think that we might do better, or at least that the public would wake up to the problem.”

    But of course the public is very much awake to the problem, despite ongoing efforts by the corporate media and political power establishment to keep us anesthetized to it. Because it’s the exact same problem found everywhere in America, from Hollywood to Washington DC: money talks, while working poor and middle-class suckers can walk, or better yet, just curl up and die already.

    I saw Mr Quayle just last year, while I was working my minimum-wage and benefit-less job. He’s looking well. I wonder how Candice Bergen is doing. No doubt she’s still an active and enthusiastic champion for working, single mothers across America. I’m sure she’s got her Hillary PAC donation check just signed and ready for delivery.

    God bless the champions of the working poor in Washington DC and Hollywood.

  16. My guess is they simply don’t like being told they have to purchase insurance–in the same way they’d rather not pay taxes, or wear seatbelts, or have their prostate checked–and so register that dislike by disapproving.

    The point though is that these poll questions that separate out all of the costs and benefits are useless for actually understanding anything. I might be in favor of having a cookie, but if I’m not in favor of paying a dollar for one (assuming cookies cost a dollar) then my preference to have one is meaningless. It’s clear by now that people are not in favor of the benefits of Obamacare when the price of them is the mandate to buy insurance. It should be immediately repealed (Yeah I know, I laughed too).

  17. Is the real reason why the doctors office charged more money for care because they could? Is the reason that the insurance company will pay up? NO. It’s a well known fact that insurance companies NEVER pay what is billed to them. Insurance only pays what they think the services rendered are worth.

    So if the doctors office in VA sent a bill to the insurance comapany for 220.00, they would only recieve 70-80 percent of that bill. Thus, the doctor’s office artificially inflates their costs to insurance comapanies. This insures they recieve enough money to cover their cost, hopefully close to what a patient would have paid in cash.

    It’s a broken system, but the fixes are very difficult from all perspectives. The above article misrepresents a problem and still manages to provide no solution.

  18. One of the real genius aspects of the Canadian approach to health care is not only that it removes the private insurance companies for the most part, but places the costs and benefit choices close to home. For the most part the provinces not only run their own systems but make make all substantive decisions (federal standards are low enough that every province well exceeds them). Most provinces further subdivide to regional medical authorities, allowing real local governance over this issue.

    What this means is that because the people collectively and locally negotiate health care, the costs are contained, so well in fact that Canada has a significantly lower per capital public sector spending in health care than we do in the US. If they had our population, they would spend about what we spend on Medicare and Medicaid alone.

    The real tragedy in the US is that we are given a choice between systems dominated by large, centralized government programs (Medicare for All) and systems dominated by large,powerful businesses (PPACA). For all the rhetoric on the right about single payer being too socialist, Canada’s health care approach would be considered far right-wing to Democrats. We are doomed in this regard to ever-escallating prices because the beneficiaries of that system control the proposals we see.

  19. I mostly disagree with the implication that insurance companies “care about whether costs are too high, and whether the benefits of care are justified.” With regards to any individual bill, sure, insurance companies want to keep things under control, but in the bigger picture insurance companies are not going to benefit from a limited, cost-conscious medical system; rather, they have strong incentives to enlarge the system, get more dollars flowing through the system, and see their customers more dependent on medicine.

  20. All over the map, aren’t we?

    Bubba: the young and healthy tend to become the old and sick, unless they die young in a catastrophic accident, likely lingering for days in expensive trauma centers. The cheapskates who want to know “Why do I have to pay for health insurance?” will be the first ones to the emergency room at age 67 DEMANDING the finest treatment and RIGHT NOW and don’t TALK to me about paying the bill, can’t you see I NEED treatment? I do favor an “opt-out” which would state “I have chosen to forego health insurance. I give any ambulance called in any emergency affecting me to leave me lying on the ground untreated, permission to any hospital to kick me to the curb, permission to any doctor to deny me treatment, for as long as I live, or until I have been paying in at least ten years.”

    Its true that “customary and usual” fees charges to insurance companies are artificially inflated so that net receipts will be a reasonable amount, given that insurance companies are so sure there is “waste and fraud” to root out that they WILL NOT pay any customary and usual fee, no matter how reasonable, without bargaining it down. I’ve been uninsured the past four years. My dentist charges me about half way between his posted fees and what the insurance company would have paid him. I had to see a doctor last December, and the office has a discounted rate from “customary and usual” for uninsured patients, disguised as a credit for immediate cash payment — of course they wouldn’t have seen me without immediate cash payment (duh-uh).

    I favor exactly what Andrew proposes: a high deductible, low premiums, a health savings account, and I’ll pay out of pocket for the small stuff. Premiums have to cover the costs of whatever is free, even if the insurance companies are altruistic non-profits. There is some math to be done about whether the insurance companies pay out more in treatment costs for people who don’t have a physical check-up and battery of lab tests (and how often), or skip the rather expensive decennial colonoscopy, etc. So a package might be structured that “if we cover this for free, we can actually keep premiums lower than if we didn’t, because we’d pay more for late-stage treatment.” Still the total premiums have to equal or exceed total expenditures.

    The original notion of EMPLOYER-paid health benefits was simple: every means should be used to divert a greater portion of revenues from investors to the people who do the real work. Nothing wrong with that per se. Many of us, even today, aren’t PAID enough in WAGES to afford the cost of health insurance premiums. I’d rather see the minimum wage at $15 an hour and let people buy their own, but how soon will that happen? (And then there would be the question of “risk groups.” I looked into individual health insurance, but they group “risk” by zip code, and I live within a mile or two of lots of people who run up costs at emergency rooms on a daily basis, so my premium would be based on “high risk” even though I’ve never been in a hospital in my life, and wouldn’t go in for a check-up more often than once in two to five years.)

    We might also look into a modern variation on the ancient Chinese system of paying the doctor a monthly stipend to keep the patient healthy, and cutting off payment when the patient is sick, until the doctor gets them well again. It couldn’t be quite like that in a capitalist money economy, but doctors have a lot of fixed costs they try to amortize across fees for service. Maybe each of 1000 patents pays the doc $50 a month, for which they get a check-up every three years, appointments up to a reasonable limit when they need to have some acute episode checked out, and pay additional for lab tests, while insurance covers more substantial “procedures.”

  21. “And I can tell you this: Canadians love preaching to Americans about how much better America would be if it would just be more like Canada. Their smug self-righteousness can make American jingoism seem innocent by comparison.” -Jeffrey Polet

    As a Canadian I want to respond to this in so many ways. First of all, yes, their might be some of us who can be smugly self-righteous about our country. What country doesn’t possess such citizens? Why bother to include such a statement?

    Over the years I have noticed how often you suggest how much you know about Canada (and have Canadian ancestors), and then follow this assertion with a dismissal or criticism of some aspect of Canadian policy or character that some Americans admire. It’s as if you think because you have a Canadian cousin we will all be daft enough to believe you are objective and authoritative on all things Canadian. I’m not buying it. It’s as if you can’t bear to admit any kind of superiority to Americans in any way, and use your judgement to qualify your own arrogance and American jingoism. Either that or your Canadian relatives are a real bunch of jerks.

    As a Canadian I think our health care system is excellent, despite its inevitable flaws. Is it “sustainable”? No modern economy is sustainable and will be able to sustain the current standards of its systems. But I, like most Canadians, think it is superior to the American health care system. Does that make us smug? I don’t think so. We just think it works better than yours does, as I am certain that there are many American systems and policies superior to our own.

    Imagine if you cut your military budget in half. You have the wealth and economic power to put together a health care system that would put the world to shame.

  22. Phil has brought up something important. The Insurance companies do pay less than the standard rate. They don’t always pay what they are billed. They have lists of rates they will pay for various services and pay that rate, not what is billed. You can see this in the statement from the insurance company.

    Andy noted something important as well. Doctors are often willing to give the uninsured a discount on the pricing. The doctor in the article may have been giving you a discounted rate because they thought you didn’t have insurance, and when they realized you had insurance they billed the standard rate (which the insurance company didn’t necessarily pay). …but then who knows, and that is the problem.

    The main point of the article is however spot on. The person receiving the service and the person providing the service are no longer dealing with one another. Third party payers make things more expensive for a variety of reasons, but not just because doctors are soaking the insurance companies. The people who really get soaked are those who are uninsured and pay full price, or those who have minimal insurance that doesn’t cover anything. The latter pay the full sticker price, AND insurance premiums.

  23. I believe Siarlys Jenkins is on to something: ” Maybe each of 1000 patents pays the doc $50 a month, for which they get a check-up every three years, appointments up to a reasonable limit when they need to have some acute episode checked out, and pay additional for lab tests, while insurance covers more substantial “procedures.” In the 19th and early 20th centuries immigrant societies particularly in NYC hired physicians specifically to meet the general practice needs of their communities – the communal organization dues paid for the physician’s salary as well as various other benefits…perhaps we need to resurrect more community based support functions?

  24. I just noticed an article reporting that the premiums for individual health insurance are going to drop about 50 percent in New York, as a result of the competition induced by the Affordable Care Act. Its early to say we know for sure, but if this happens, it will justify this particular government intervention.

    I just went back and looked at Jeffrey Polet’s question about why fixing a finger costs $220. I had an operation on my finger during the three years I was insured, and when the bill arrived, I wrote back to ask how they came up with the sum billed. It wasn’t a nice round number, it was something like $4,837. Since I was paying about 20 percent of that, I wanted to know. The question went all the way to the CFO of the hospital, and he couldn’t even tell me with any precision. He just said it “included” a variety of services, including the chair where I regained consciousness, the kleenex near at hand… They need to be able to tell us how they arrived at their stated charges.

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