Rent Seeking, Runaway Medical Costs, and the Middle-Class Squeeze

Source: The Commonwealth Fund

by James A. Bacon

Mirroring national trends, Virginia healthcare markets are severely out of whack. The main difference is that here in the Old Dominion, they’re even more out of whack than they are for the country as a whole. In 2018, total out-of-pocket medical insurance costs for Virginia employees (employee contribution to premiums + deductible) amounted to $8,143 — 10.2% more than the national average.

That’s on top of what employers pay. According to the latest data compiled by the Commonwealth Fund, employers on average contribute $6,635 for single coverage and $19, 512 for family coverage. Add up the employer and employee share, and the cost of family coverage is equivalent to about $13.30 per hour in earnings for a full-time employee.

These costs have rapidly outpaced the general cost of living. As a percentage of median income, out-of-pocket costs have increased from 6.9% of median income to 10.7%.

Out-of-control medical insurance costs constitute a crisis for Virginia’s middle class. While the public policy debate in Richmond has focused almost exclusively on how to extend insurance coverage to the poor and working poor in the form of Medicaid expansion and Obamacare, nothing more than lip service has been given to the crisis for people who pay their own way.

The issue of runaway medical costs provides a tremendous political opportunity for whomever who can seize it. On the national level, Democratic Party candidates like Elizabeth Warren and Bernie Sanders say the solution is “Medicare for All.” Unfortunately, their solutions would bankrupt the country without addressing underlying causes of medical cost inflation. President Trump is trying to bring more transparency to healthcare pricing in the hope that market forces will tame runaway costs. That’s a great idea, but it addresses only part of what ails the industry.

Virginia needs to act as well. Healthcare markets are primarily local in nature. Only a tiny percentage of people seek medical treatment outside their metropolitan area. State policies, state regulations, and local market forces drive health care costs, especially for the privately insured. Virginia lawmakers have totally and utterly failed to understand those cost drivers. Instead they have resorted to the simple-minded expedient of redistributing costs to politically favored constituencies — primarily from the middle class to the poor.

Here are some topics worth examining:

  • Cost shifting. Penetrate opaque hospital accounting to reveal the extent to which privately insured patients subsidize Medicare and Medicaid patients. We need to know how much wealth transfer is occurring behind the veil.
  • Hospital profits. While we’re delving into hospital finances, let’s examine the level of hospital profitability — with a special focus on nonprofit profits. How much are urban and suburban hospitals making? How much profit do they need to make to fulfill their tax-exempt purpose? What are they doing with their excess profits?
  • Insurance carrier profits. Don’t let the insurance companies off the hook. How much competition is there in Virginia health insurance markets? What barriers exist to prevent competitors — especially entrepreneurs with innovative business models — from entering the marketplace? To what degree does the cartel structure of the medical insurance industry drive up premiums?
  • Provider competition. How closed is Virginia’s healthcare industry to competition and innovation by entrepreneurs and out-of-state businesses? What barriers — such as Certificate of Public Need — exist to stifle market entry by competitors with lower-cost delivery models?
  • Occupational guilds. How restrictive are Virginia’s health care occupational licensing laws? To what extent do those laws limit entry and drive up wages for select occupations? To what extent does the trade unionization of medical professions restrict the introduction of productivity-enhancing work arrangements?

In the 2018-19 election cycle, the health care sector donated nearly $11.5 million in campaign contributions, more than any other industry grouping but real estate and retail. The donor lists is a who’s who of special interest groups that regularly seek government favor:

Hospitals/health systems — $2,235,000
Physicians — $2,143,000
Dentists –$1,208,000
Nursing homes — $860,000
HMOs & medical plans — $804,000
Pharmaceuticals — $644,000
Medical supplies — $609,000
Optometrists — $533,000
Mental health — $458,000
Opthalmologists — $274,999
Pharmacists — $254,000
Anesthesiologists — $248,000
Healthcare consultants — $248,000
Nurses — $189,000

The list goes on. Each and every one of these special interests wants something from state government. Sometimes the big “ask” comes out in the open, as it did in the Medicaid expansion debate when billions of dollars were at stake. Most of the time, the issues are too obscure for the media to report and too complex for the average person to comprehend or care about.

In this massive, never-ending game of rent seeking, who represents the patients’ interests? No one. No one at all.

It’s about time that someone did.

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17 responses to “Rent Seeking, Runaway Medical Costs, and the Middle-Class Squeeze

  1. In the corrupt world of unlimited campaign contributions in Virginia only the interests of the special interests are represented. All the plantation elite excuse making and Virginia Way hallucinating won’t change the fact that money talks. And unlimited money talks unlimitedly loud.

    Campaign financing reform. Now.

  2. Campaign reform will help for lots of things! But there is more to this health issue.

    First, I disagree that providing everyone with healthcare would bankrupt the country. Only 2 countries in the world don’t and we are one of those two. That said, I believe the Dems will adopt the position that Medicare for anyone who so chooses will be the election campaign position. The cost will be covered as the taxes on rich and businesses are adjusted, either raised or loopholes eliminated.

    The additional healthcare issue with rising costs lies with what has happened to medicine itself, driven by Big Pharma. I have spoken before about the Functional Medicine movement. Functional medicine physicians apply a new model that focuses on treating your body as a whole system, treats the causes, not only the symptoms, and sees the body as a whole organism rather than simply a collection of organs. This emerging model of diagnosis and treatment better matches the need to especially improve the management and prevention of chronic diseases.

    “Functional medicine has been described as pseudoscience, quackery, and at its essence a rebranding of complementary and alternative medicine, but Functional Medicine is moving forward in places like the Cleveland Clinic and GW. Most importantly its different approach to chronic diseases like diabetes has shown good results …
    • “Under the conventional system, practitioners wait until people have full-blown type 2 diabetes before initiating treatment. Little is done to alter the course of the disease in the prediabetic stage when the body is more responsive to diet and lifestyle changes.
    • The drugs used to treat type 2 diabetes have serious side effects. Sulfonylureas, biguanides, thiazolidinediones, and meglitinides are just a few of the classes of medications used to treat type 2 diabetes. They are associated with liver and kidney dysfunction, nausea, fatigue, dizziness, rashes, weight gain, and hypoglycemia (low blood sugar).
    • The conventional diet guidelines for diabetics are outdated. The American Diabetes Association’s dietary guidelines for type 2 diabetes have long promoted a relatively high intake of carbohydrates while demonizing dietary fats. Yet abundant research indicates that this dietary approach not only doesn’t work for type 2 diabetes but may actually make the condition worse.”

    Research “indicates that a digital health coaching program can prevent the development of type 2 diabetes by facilitating weight loss and increasing physical activity, while mitigating healthcare costs.” https://chriskresser.com/functional-medicine-and-diabetes-how-to-treat-the-root-cause/

    AND all seems like this approach will make life better for lots of people as well as cheaper without all that medication and the extensive problems they cause ….

  3. The salaries paid to doctors certainly are a factor in the cost of medical care. (Disclosure: My daughter is a pediatrician. She works part-time, while home schooling her three children.) The basic law of supply and demand helps drive up the cost of doctors. I frequently hear of the shortage of doctors, or, at least, the impending shortage. What is the feasibility of increasing the capacity of the Commonwealth’s four publicly-supported medical schools so as to train more doctors, especially general practitioners? Increasing the capacity would not be a short-term solution (it takes four years of medical school plus at least three years of residency). But, it would be a start.

  4. Drugs and medical apparatus should be sold at the lowest price the same company, including affiliates, sell them in any OECD nation. The idea that United States should fund all research & development is crap. If the sales to the EU or Japan, for example, are worth so much to your company, you should be made to sell domestically at the same price you sell in the EU or in Japan.

    Continue to look at what medical functions can be performed by non-physicians. And why doesn’t our attorney general go after restrictive licensing?

    Keep everyone’s hands off my health insurance. It’s part of compensation. It’s a property right that the government should not touch. Just ask government employees when someone proposes tightening their health insurance.

    While my wife and I are over 65, we don’t have Medicare, except for the mandatory Part A. Every pre-retirement seminar my wife attended and every financial advisor I’ve spoken with have advised federal retirees (my wife) to stick with the federal employee health plan over Medicare. (I pay her for one-half of her premiums.) I see no reason why I should be worse off so that the fr****** Democrats can buy votes. The idea that the rich will pay for Medicare for all is simply wrong, unless we are going to reduce compensation for everyone in health care substantially and ration care.

    Of course the Democrats won’t offer a no-fault medical malpractice plan like Virginia has for defects connected with delivery that could reduce medical costs from unnecessary. But then, that might eliminate one of their big sources of campaign funds.

  5. What entitles anyone to insurance ? Doesn’t the insurance company have the right to deny selling you insurance if it considers you a bad risk?

    If you REALLY want to make insurance more “market-based” in the land of capitalism (THE USA) – then why not let insurance companies decide who they will cover and for how much rather than the government force the insurance companies to not only sell it to you but for no more than other employees pay?

    We play this game that health insurance is a “benefit” from your employer. It is not. It’s there only because the government subsidizes it AND REQUIRES the insurance company to offer it to every employee at the same price regardless of whether they have diabetes or other serious and costly health problem.

    We don’t want to do what every other developed country on the earth does – we pretend we can do it another way – and we can’t. We have an uber dysfunctional system despite all our talk about fixing it – for decades and we just refuse to face the reality that what we are doing is not working.

    The folks that are lucky enough to have employer-provided – don’t care if others do not have it – until of course the costs of their own insurance go up because others who don’t have it – still go to hospitals who shift that cost to people who do have insurance.

    • Larry, private health insurance is market based. Companies, nonprofits and governments that offer it to their employees negotiate agreements with insurance companies, either to provide specified benefits under certain terms and at specified prices, or when the former are self-insured, to administer the coverage under specified terms and for specified prices. That’s a market transaction.

      Further, companies, nonprofits and governments that offer coverage to employees make that coverage available to employees and offerees do so to attract high-quality employees. That is a market transaction.

      Yes, there are regulations governing employer health insurance just like there are wage and hour regulations, OSHA regulations and equal employment regulations. By your logic, payment of overtime after 40 hours of work in a week to a covered employee is a government benefit and not the payment of wages by the employer. It’s not and neither is heath coverage.

      FDR started the push to employer-provided health coverage during WWII wage and price controls when the feds decided these benefits could be given to employees tax free and exempt from wage and price controls. What do you think would happen to Senators and Representatives who proposed to tax those benefits?

      If people don’t like the system, move to Canada or some other place that has universal coverage. But how come all these people are trying to get to the United States well knowing they won’t have universal coverage? How many are leaving places that have universal coverage?

      To get universal coverage, we would need massive tax increases, limits on medical personnel and facilities, and limits on procedures.

      • I have a different question? What would happen to Senators and Representatives who had to give up their insurance which I understand is actually the best coverage in the country?

        • Good question. But as good as the federal program is (and it’s darn good), I had better when I worked for a company from the late 70s to the late 90s. Fulltime employees did not have to pay a premium. It was part of their compensation.

          When I left in 1997, as part of a company downsizing, I was eligible for health insurance when I turned 65. But those market conditions, which some believe don’t exist, were such that the company canceled my eligibility and for all others not yet receiving a pension. Mine was deferred. So no free health care insurance. Somehow that seems like the market in action.

          • Well, I have looked further and see that the government healthcare has been different since the ACA was passed. It is all pretty complicated but the change has left the Congress with coverage that isn’t quite as ‘sweet’ as their famed earlier coverage.

          • If you become unemployed and don’t receive a pension – you no longer are eligible for employer-provided insurance either.

            That’s not the “market”. That the difference between employer-provided which is regulated by the govt to REQUIRE that all employees be eligible AND that they all pay the same premium regardless of their health status. That’s not “market”.

            If you get released – then you are in the “market” – until you get to be 65 – when once again – you are “eligible” only because the government will insure you. If it were not for the Govt, and you were 65 and had to shop the “market” for insurance, no insurance company would cover you or if they did it would cost you thousands of dollars per month – THAT’s THE MARKET.

            The Market will not insure you unless you are mostly young and healthy – as you get older and start encountering health issues -no insurance company wants you. The only reason they insure you is because the govt requires them to if they are employer-provide or Medicare.

            Folks should not delude themselves into thinking that Employer-provided is an “arrangement” between the employer and the insurance company. The “arrangement” is that if the employer offers that insurance – the Govt REQUIRES all employees to be offered insurance AND that ALL of them get the same premium. That’s the Govt – not the “market”.

      • re: ” To get universal coverage, we would need massive tax increases, limits on medical personnel and facilities, and limits on procedures.”

        Then how come all the other developed countries in the world have it – and it costs 1/2 what we pay right now – and they all have longer life expectancy than us?

        The “massive tax increase” is a canard that is simply not true – it’s put out by those who are opposed to universal coverage – which would do away with all the dysfunctional things we currently have including cost-shifting.

        There is no “market” for employer-provided. All employees are protected from what the insurance company would do if they could and they actually DO for true “market” insurance that individuals have to buy.

  6. re: ” Larry, private health insurance is market based. Companies, nonprofits and governments that offer it to their employees negotiate agreements with insurance companies, either to provide specified benefits under certain terms and at specified prices, or when the former are self-insured, to administer the coverage under specified terms and for specified prices. That’s a market transaction.”

    Not really TMT – you’re ignoring the rest.

    1. – The cost of the insurance is subsidized by the Federal and State governments UNLIKE true market insurance that other folks without employer-provided buy.

    In other words the Govt subsidizes employer-provided but not true market insurance for individuals.

    2. – If an employer offers health insurance, by law it MUST offer it to ALL employees at the SAME premium cost – UNLIKE true market insurance where the insurance company can refuse coverage to individuals with pre-existing conditions and/or charge much higher rates for some folks than others – higher deductibles, lower caps, etc – none of which can the employer-provided insurance companies do to individuals in group coverage. The same price, deductibles, caps, etc have to be for any employee – regardless of their health status.

    So employer-provided is NOT a true market-based insurance.

    If it WERE – there would be NO government subsidy AND the insurance company would be free to set prices on a per individual basis and those with health conditions would have to pay more and those in good health and younger – much less.

    If employer-provided health insurance was like true market insurance, there would be no guaranteed coverage at the same price for everyone.

    The bad part about this is that people’s ignorance of these facts leads them to believe that they “deserve” the employer-provided as an “earned benefit” but those others who also have jobs but with companies that do not offer EP – they “deserve” to not have it because they apparently were not “good enough” to get a job with “real” benefits.

    The truth is that it’s the govt that makes EP available but only some companies have business models that allow it – and of course – that includes all taxpayer-support govt – Federal, State and Local.

    If we had a fair and equitable system – EVERYONE would have to play by the SAME rules no matter where you worked.

    We are the ONLY country on the planet that does health insurance this way and it contributes to why our costs are so much higher than all other countries – AND at the same time we rank near LAST in life expectancy of all developed countries.

    We need to recognize the truth here. That’s the problem. We “pretend” – the folks that do have access to EP think it’s an “earned” benefit instead of a govt-favored entitlement.

  7. Great article and the summation at the end is excellent. It needs to go national.

  8. Rent-seeking Bacon runs
    Same post over and over again. Hey guy! We het it. Ok?

  9. “Keith Smith: So, a $100,000 bill, the hospital collects $13,000. They claim that they lost $87,000. This $87,000 loss maintains the fiction of their not-for-profit status, but it also provides the basis for a kickback the federal government sends to this hospital in the form of what’s called Disproportionate Share Hospital payments.”

    “Smith: I mean, why would an insurance company agree to play along with this hospital? Well, the insurance company actually wants an inflated charge because then, for employers they work with, they can show that the savings that dealing with that particular insurance company generates is very, very large”

    Article at Reason.com:
    https://reason.com/2019/11/20/democrats-overwhelmingly-vote-to-give-trumps-people-more-spying-power/

    • TooManyTaxes: Your example – “So, a $100,000 bill, the hospital collects $13,000 (for what amounts to a legitimate claim for services worth $10, 000. if paid by patient, allows hospital to falsely claim) … they lost $87,000. This $87,000 loss maintains the fiction of their not-for-profit status, but it also provides the basis for a kickback the federal government sends a very one in the form of what’s called Disproportionate Share Hospital payments.”

      This is why I called this Obamacare system a racket using bribery earlier here on BR, See
      https://www.baconsrebellion.com/wp/the-bureaucratic-nightmare-of-hospital-billing/

      Then your quote from Commentary article goes on:

      “Smith: I mean, why would an insurance company agree to play along with this hospital? Well, the insurance company actually wants a (false) inflated charge because then, for employers they work with, they can show that the savings that dealing with that particular insurance company generates is very, very large.”

      So in practical affect, everyone, the hospital, insurers, doctors, universities with hospitals, etc. are in on a huge scam, and work that scam for all it is worth. Thus our elite have become a small greedy oligarchy of liars and scam artists, ripping off patients, and taxpayers for the enrichment of the elites with the active encouragement of their governments and those who run that government, all in on the scam.

      And you know what, sometimes the sucker patients (sick American citizens), getting that hugely inflated bogus bill actually pay it out of ignorance when they have no legal obligation to. I have been so charged several times, refused to pay, and never heard from hospital again. Am I a minority? Do the hospitals or health service providers, take claim the loss as well as take the patients money? In this cesspool business culture of ours I would not be surprised.

      • Per my comment above, now yet again there sure proof that there always are honest and moral people in this world, those who take personal stands based on right and wrong, even at the University of Virginia. We are on a roll now, even at UVA.

        For example, this from today’s Daily Progress:

        “Prominent doctors at the UVa Medical Center are expressing public outrage at their employer’s practices to collect unpaid medical debt from its patients.

        A Kaiser Health News report in September showed UVa sued 36,000 patients over six years for more than $100 million, seizing wages and savings and pushing families into bankruptcy.

        Like many physicians who work at U.S. medical centers, the UVa doctors said they had little idea how aggressively the hospital where they practice was billing and pursuing their patients for payment.

        Although the health system has announced some interim measures to scale back collections practices, some of the system’s most senior physicians are now calling for UVa to stop suing its patients altogether. And they are urging the pursuit of an “immediate solution” to address the national epidemic of health care debt.

        “We were appalled by the revelations of the aggressive, pitiless billing and collections practices” at UVa, Dr. Scott Heysell and two other senior staff members wrote in a letter to KHN published Saturday. “We felt betrayed,” they wrote, “and we had, by extension, betrayed those who had relied on us.”

        Heysell, an infectious-disease specialist and associate professor at UVa School of Medicine, and his co-authors echoed other UVa researchers and clinicians contacted by a reporter who said they were surprised and dismayed by the health system’s practices.

        UVa initially defended its practices, pointing to the Virginia Debt Collection Act of 1988, which requires state agencies to “aggressively collect” money owed…” End Quote.

        For more of this fine article see:
        https://www.dailyprogress.com/news/uva/uva-doctors-decry-aggressive-billing-practices-by-their-own-hospital/

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