Reducing the Cost of Healthcare

The Tax bill passed in December eliminated the individual mandate requiring consumers to have health insurance or pay a tax penalty, starting in 2019. As healthy individuals drop their insurance, it is expected that premiums will rise by an average of 20% next year for individual plans on the insurance exchange. As prices rise, this creates a negative feedback loop where more healthy people cannot afford insurance, the insurance pool becomes worse for insurers, and premiums increase again.

As a result, more consumers are adopting higher deductibles and pay for more of their care out of pocket. Health Insurance will shift from being used for every appointment to being catastrophic coverage where you will only have claims in rare years. Think of your auto insurance – you don’t expect it to pay for oil changes, only when you have a wreck.

This will shift the burden of cost-savings to the consumer rather than the insurer. Unfortunately, doctors offices and hospitals are terrible at sharing price information with patients, so it’s extremely difficult to know how much something will cost at one office, let alone be able to determine if you could save money by going elsewhere.

Cost transparency is the only thing that is going to save our health system from continuing to escalate out of control. We have a fee for service system which encourages for-profit hospitals to charge as much as they can and to add on extra tests, services, and procedures to increase their bills. And it’s not easy being a doctor, where every patient wants a quick-fix (other than eat right, exercise, and take care of your body in advance). With the risk of malpractice claims, doctors order extra tests to cover themselves even if the actual need for those tests is small. That’s called “Defensive Medicine”, and it’s not about defending the patient.

At a conference I attended last week, a Doctor turned financial advisor presented information on how to save money on your health care. Here are nine tips:

1. In-Network. Don’t ask a doctor if they take your insurance, ask “Are you in my network?”. Write down who you spoke with and the date and time. Later, if you get a bill that shows out-of-network charges, you can contest that with the evidence of what you were told. In fact many doctors offices record their calls, and you can demand to listen to your call.

2. PPOs used to offer choice of going anywhere, but networks are often very narrow for small plans. A cheap plan usually means that very few doctors are in that network. You have to ask at each step. If you have a planned hospital procedure, get a signed estimate in advance, and write on your paperwork: “I will only allow in-network care.” Otherwise, you may find out that some of your care is out of network even when you are at an in-network hospital!

3. Balance Billing. If you are out of network, you may be billed for the difference between the in-network price and what the hospital wants to charge you. For example, in Texas, insurance will pay up to $12,668 for an Appendectomy, but the average hospital bill is $40,893. So when you get an outrageous bill, you can find out this information to negotiate a lower price. This information is published by the Texas Department of Insurance Healthcare Costs Guide.

4. If you go to an in-network hospital and receive charges from an out-of network provider for over $500, you have the right to seek Medical Bill Mediation again through the Texas Department of Insurance. They have been able to lower these bills in 90% of the cases submitted to the state.

5. Reduce unnecessary tests and medications. The vast majority of a doctor’s diagnosis comes through patient history and the physical examination. Doctors today have to see a large number of patients and are in a hurry, so they often default to ordering expensive tests to save time. Before going to an appointment, type up your symptoms, medical history, medications, and diet. Write down the questions you have. Print three copies. Mail one in advance. Give one copy to the receptionist when you arrive. And if the doctor walks in without it, give them the third copy.

If they want to order additional testing, ask: What do you hope to learn from this test? How will the results of this test change the approach to treatment? If they are going to prescribe medicine, ask how long you will take the medicine. What are the benefits, side effects, and risks? What alternatives (i.e. lifestyle) are there to this medicine?

6. Independent Practice or Hospital. Hospitals are buying up doctors offices in their area and raising prices. Where a doctor might charge $100 for an office visit, a hospital can charge $250. Ask if an office is an independent practice or part of a hospital.

7. Ask your pharmacist if there are generics or less expensive substitutes for your medicines. Doctors are not always aware of the price of the medicines they prescribe.

8. If you hit your deductible during the year, try to take advantage of the fact that insurance has kicked in. Fill your prescriptions in December for the year ahead. Complete any tests that you should have done. If you’ve put off knee surgery or other procedures, try to get those done as well.

9. If you have a High Deductible Health Plan, fund your Health Savings Account (HSA), so you can pay your co-pays, deductible, prescriptions, and other costs with pre-tax money. That’s like saving 12-37% on every dollar you spend.

If you don’t have an HSA, but your employer offers a Flexible Spending Account (FSA), that will also allow you to pay medical bills with pre-tax money. Just remember that unlike an HSA, FSA is use it or lose it – money not spent before December 31 is forfeited.

Healthcare costs have increased by 7.76% a year since 1970. The US spends about 19% our GDP on healthcare each year, significantly more than any other nation. Even countries which guarantee healthcare for everyone only spend 11-13% of their GDP. We have a broken system but seem unwilling to learn from what works in other parts of the world.

The trend will continue: to reduce insurance claims, more expenses will be shifted to the consumer. Capitalism works to bring down costs, but it requires that consumers have price transparency, something which doctors and hospitals have been unwilling to do. They should publish their prices and post prices on their website. Today, we have to ask and be our own advocate to keep healthcare costs down.

Reducing the Costs of Healthcare

We may soon see the repeal or defunding of the Affordable Care Act (ACA or “Obamacare”). No matter your political perspective, there is no doubt that rising costs of health care are a significant financial problem for many American families. These costs threaten our ability to save and accumulate, as well as to secure our retirement. In our financial plans, we calculate a higher rate of inflation for health care costs than other living expenses, but cost increases for those using individual plans on the ACA exchange have grown much faster than the overall 5-6% rate nationwide.

As a society, we are going to need to curb these costs while making sure all Americans have access to care. What concerns me today is that the new administration is pushing forward with the repeal while replacement plans remain vague and uncertain. We know what they are against, but what is the best solution?

Here’s a Financial Planner’s perspective on how America might reduce the cost of healthcare. My hope is that we can have a more educated and thoughtful conversation about this complex subject.

1) Covering Pre-existing Conditions
Requiring insurance companies to accept new participants and cover their “pre-existing conditions” is a fair and compassionate move from a consumer protection standpoint. But it’s a major change to the insurance model.

It means that insurers have to worry about self-selection bias, where people who are sick will sign up, but people who are healthy decide to forgo coverage. The more insurance premiums go up, the more self-selection occurs. That’s why the ACA included a provision to penalize people who do not have coverage, to create a financial incentive for everyone to participate.

The penalty is 2.5% of your income, with a floor of $695 and a ceiling of $2,085 per adult for 2016 and 2017. The ACA forces a painful decision between paying a penalty versus spending thousands more on coverage that has a high deductible and may offer little benefit unless you have a catastrophic illness or injury.

Unfortunately, requiring insurance companies to accept pre-existing conditions is like requiring auto insurers to cover your car after you’ve already had an accident. To afford covering pre-existing conditions, we need all Americans to participate in health insurance and not let healthy folks opt out. That’s why covering pre-existing conditions combined with rising costs is causing self-selection: people who are healthy are choosing to forgo coverage or cannot afford it.

Similarly, allowing young adults to stay on their parent’s coverage through age 26 under the ACA sounded like a great idea to keep those children insured. Unfortunately, it removed healthy young people from the pool, which made costs more expensive for everyone else who needed coverage through the exchange.

In this regards, the ACA coverage of pre-existing conditions has increased costs more than anticipated. Maybe the best solution would be a single-payer, government health plan, like in many European countries. Our tendency is to reject these plans out of hand, but maybe we should look more carefully at their costs, benefits, and features. We cannot afford to think we have nothing to learn from the rest of developed world.

2) Cost of insurance versus healthcare
Insurance companies have a mandate legally requiring a large, fixed percentage of their premiums go directly to medical costs and not to overhead. Insurance premiums have not been rising because of greedy insurance companies making profits. In fact, the opposite, companies are leaving the ACA exchange after losing tens or hundreds of millions of dollars. Insurance costs are going up because the costs of healthcare are skyrocketing.

What we need to be doing is looking at ways to reduce healthcare costs; insurance just passes through those costs to consumers. The US spends 50% to 100% more than other developed countries per person. We spent 17.8% of GDP on healthcare in 2015, the highest in the world. Universal healthcare programs in Europe, Canada, and elsewhere costs much less, no more than 10-11% of GDP.

Why do we spend so much on healthcare in the US?

  • US patients may pay 3-4 times as much for medicines than in Mexico or Canada. This is frequently for drugs that were invented or manufactured in the US. We need to examine why the free market isn’t pushing those costs down.
  • The threat of lawsuits, and magnitude of awards, hurts Americans two ways. Directly, the cost of malpractice insurance is ultimately passed on to consumers. Indirectly, doctors may order additional tests, procedures, or medications that may be unnecessary or more costly than other alternatives, because of the threat of malpractice, rather than medical need.
  • To some extent, private insurance subsidizes hospitals who receive low reimbursements from Medicare and from uninsured patients who do not pay. Your insurance company is likely paying a hospital much more than they would receive from Medicare. Many public hospitals, like Parkland in Dallas, serve the 15% of Americans who are uninsured. And when the uninsured have a $50,000 hospital bill, that amount will seldom be collected.
  • Patients often do not have any incentive to reduce costs or share in expenses. Once your deductible and out-of-pocket is met, for example, the patient’s cost of a $15,000 procedure is the same as a $50,000 procedure. Which procedure is a doctor or hospital more likely to recommend if you have good insurance?
  • We spend a significant amount of our Medicare and Medicaid budget on caring for people in their last 3-6 months. Dying is a natural process, but modern medicine often assumes we should prolong life for as long as possible regardless of the quality of that life. I am glad that we do not tie end-of-life decisions to cost, but perhaps it would be both sensible and compassionate to focus on comfort rather heroic procedures for an elderly patient with significant health issues. Being hooked up to machines and tubes may keep you alive, but it is not the same as living.
  • Many health issues such as heart disease, blood pressure, and diabetes are exacerbated by the obesity problem in the US. An education on smarter food choices and more exercise should start at an early age. Prevention is less expensive.

We cannot expect the cost of health insurance to decrease unless we address the cost of healthcare. We need to encourage everyone to have health insurance coverage, because the very nature of insurance is spreading out risks so that the pooled money covers claims for those who need it. We are keeping our fingers crossed that whatever plan Washington develops, more people can be insured and that we look long-term to keep healthcare costs better under control.