Obamacare Will Give Consumers the Wrong Information

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The federal government is working hard to educate consumers about the nutritional content and health dangers hidden in your favorite foods. Restaurants increasingly are being forced to provide their customers with information on calories, sodium, sugar, and other information on nutrition and ingredients. Such disclosures have long been required of packaged food sold to consumers and now it is coming to restaurants. The government hopes that this information will improve the choices consumers make and we will end up healthier.

The federal government is also working hard to expand health insurance to cover more people. As part of the Affordable Care Act (also known as Obamacare), the government is requiring more information be provided to consumers. Unfortunately, it is the wrong information.

Insurance companies are now required to report the percent of premiums spent on actual healthcare and on efforts to improve patient health. The insurance companies must ensure that spending is at least 80 to 85 percent of collected premiums to prove they are not wasting our premiums on overhead, executive salaries and the like. After all, it is important that consumers have information about the cost structure of their insurance companies, right?

Actually, no.

What other business has to disclose the breakdown of where your dollar goes when you buy something from it? The gas station doesn't tell you what percent of the price of gas goes to pay for the actual gasoline, versus the pumps, the land the station sits on, the state taxes, profit, federal taxes, the credit card processors, and the local taxes. The supermarket does not tell you how much of your grocery bill goes to overhead: rent for the store, the lights, the store manager, the checkout scanner, etc.

If you buy a new item of clothing at a department store, the cost of the clothes is likely only one half of your purchase price. Yet, the government does not seem to have a problem with that business model. Pepsi spends only a little more than 40 percent of your beverage and snack food money on the cost of making the actual drinks and snacks, packaging, and then transporting them to a store near you. Over half your money goes to what the government would call overhead.

Worse, it apparently has not occurred to the government that insurance companies can easily meet the mandated percentage simply by raising premiums and paying doctors and hospitals more. They can keep the same dollar amount in overhead and satisfy the law, but health care spending will rise. While the government has not realized this, I bet the insurance companies have.

Now, if the Affordable Care Act wanted to provide consumers with helpful information, there are some businesses they might want to look at: hospitals and doctors. I don't mean that hospitals and doctors should have to provide us a cost breakdown. We have no need for that information. However, perhaps it would be a good idea if hospitals and doctors had to tell us their prices.

What other good or service do we buy without knowing the price (or having an easy way to compare the prices at different providers?

Doctors and hospitals will tell you that their prices are complicated because they are rarely paid the prices they charge for their services. Instead, the insurance companies have an (often pre-negotiated) amount that they pay. However, in general, the insurance companies know what they are going to pay and probably most doctors and hospitals know what they can expect to receive. The only person in the dark is the patient.

Medicare just released information it collected on what different hospitals charged for the same services. The variation across hospitals is amazing, even within small areas (such as a single city), areas small enough that a patient could easily switch to a less expensive hospital if they had access to price information. Doctors are no different; prices differ by doctor and the amount doctors get paid differs considerably depending on the insurance that the patient has (or does not have).

While this disconnect between the prices doctors and hospitals pretend to charge and the amounts that they actually get paid is a complicating factor, it is not insurmountable to the federal government.

The government could require the creation of a database such that a person can input a doctor or hospital name, their insurance information, and a medical service (say, an MRI of an injured knee) and receive back a price. Insurance companies have this information. If the federal government established the standard for the information formatting and the software for the system, it would not be that difficult for insurance companies to link their computer systems with a central government one that could store and disseminate this information.

Learning the percentage of my insurance premiums spent directly on healthcare may be politically useful to the president, but is not economically informative. However, it would be useful if I could compare prices for an MRI between the three providers in my town. Instead of mandating disclosures for political shaming, the government could mandate disclosure of information that actually helps consumers make medical choices that save money.

If doctors and hospitals knew their prices were being publicized and that people could easily compare those prices, I suspect that prices for their services would decline. As proof, we can look at elective plastic surgery procedures. The prices of these medical procedures have been either dropping or increasing at less than the rate of inflation. This is a sharp contrast to medical procedures that usually involve insurance companies so that the patients do not feel the need to check prices. Those procedures have been rising in cost significantly faster than inflation.

The Affordable Care Act places demands for information on insurance companies because the law is really designed to redistribute income and benefits, not to lower the cost of medical care. If the federal government really wanted to lower the total amount spent on medical care a better approach would be to add price transparency to the medical marketplace.

If consumers could compare prices on the internet, they would probably make better choices. If doctors and hospitals knew consumers were going to compare prices, the prices offered would likely improve. If more information in the hands of consumers is better in the restaurant industry, it should also be better in the health care sector.

 

Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch

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