How $15 co-pays destroyed the health care system

I’m struggling with the headline since I know health care has not been destroyed by low co-pays, but those gold-plated plans with $15 co-pays to go see a doctor and $25 for an emergency room visit have destroyed our perception of value when it comes to health care.

My perception of value theory evolved in high school when I signed up for classes and had to buy the books at the school store. I can’t remember how much those books cost, but I paid part of the tab, and the books – some used – were mine. If I lost or destroyed the book, I was expected to buy a replacement.

If you compared the condition of my books to the books public school kids had, the difference was clear. Public school students were provided books free of charge and many of those books were a mess. If a student lost a book, he or she would just grab another off the classroom bookshelf. There was no perception of value.

You can use this comparison with public education, government subsidized housing, the treatment of rental cars, government subsidized retraining programs, and yes, the health care system.

When you are invested in something – in other words you own it – you tend to treat it better because your own money is at work. When you buy a product you pay what you determine is a fair price for that product. If you buy a new iPhone for $199, both you and Apple got something out of the deal. If you want an iPhone but are not willing to pay $199, you have determined it’s not worth it.

Now let’s move to health care. First, remember the demand for a free (or virtually free) product or service is unlimited. Oprah found that out when she provided free chicken coupons last spring, and when it only costs $10 to go see your doctor the price (virtually free) increases demand for the service.

Since most Americans are on, or have once been on a health insurance plan that offered dirt cheap co-payments for doctor visits and prescription medication, our perception of value of the service has been completely warped. Most people have no idea what it really costs to go see their physician when they have a cold, to them, it costs $15 or whatever the dirt cheap co-pay is.

You don’t really think it only costs $15 to go see your doctor do you? So, who is picking up the rest of the tab? As it turns out, our own out-of-pocket payments, as a share of total health care spending, has dropped considerably in the past 50 years. The government and insurance companies are paying a much higher share. From Investor’s Business Daily.

The accompanying chart [click to enlarge] shows why we have a health care cost problem. Patients have little direct connection in paying for their care. Their role has fallen significantly. Meanwhile, the government’s involvement has grown, as has that of the insurance industry.

Because so many Americans rely on an insurance policy or a government program to pay their health care bills, the internal governors that temper the rest of their purchases are turned off. When a visit to the doctor’s office or a diagnostic test costs them a mere $10 or $20 co-payment out of pocket — or there is no charge at all — cost has little impact on their decision to see a doctor.

So what’s the solution? First, you know I’m convinced the federal involvement will – and currently does – make the problem much worse so let’s get the federal government completely out of health care. (Yes, I know … it will take years).

Second, the introduction of health savings accounts (HSAs) and flexible spending accounts (FSAs) was a step in the right direction. Although not perfect, these programs bring the consumer closer to the transaction side of the equation and put health care dollars directly into the hands of the consumer. You make the decision as to where you will spend that money and how much you are willing to pay.

These programs even feature free (no co-pay) annual check-ups which in no way helps the perception of value, but the idea was used to help sell the idea.

So how good can a HSA or FSA be? A good example is cataract surgery. If you were able to shop around and get pricing for cataract surgery, and easily find out the quality ratings of the doctors who provide the service in your area, do you think the cost of cataract surgery would go up or come down? The price would come down of course, because the end consumer – you – are taking an active interest in the service, quality and cost!

Unfortunately, the proposed legislation in Congress puts more distance between you and the true cost for medical services. This fact alone – more dependence on the federal government – will guarantee Americans will line up in droves for their free chicken.

6 replies
  1. Cicely
    Cicely says:

    I just received this e-mail from CT Citizens for Immigration Control: 


    January 16th appears to be an excellent day for Tea Party supporters, Pro Life, Senior Citizens and other to protest against the massive invasion of personal liberty with a socialized medical scheme.  CT Patriots will meet on Jan 4 at Denny's, West Haven, 6:30PM to plan.


  2. Erik Blazynski
    Erik Blazynski says:

    I appreciate the intelligence and lack of partisanship in this post.

    I have been saying this all along. A good analogy would be that if your employer gave you food insurance, and you need only pay a $20 co pay and you could buy what you want for the week. Hot dogs would not likely exist, filet mignon and lobster would be in high demand and thus the price would be justifiably inflated. The problem with health care is that everyone is spending someone else's money.  In the food analogy you solve the inefficient market problem by ending the subsidy, suddenly the market operates efficiently, as it does today.  So people should stop using the stupid car insurance analogy and adopt this one. It is an example of market efficiency, NOT insurance.

    So if you follow the analogy you will see that government subsidy will NOT fix the problem, it is exactly the opposite thing that will fix the problem. They should be requiring higher co-pays and greater participation. There is no price discovery in the current process if you ask how much it costs to fix a broken arm they can not and will not tell you. If you knew you might suck it up and go to a different hospital to save a thousand dollars.

  3. Dimsdale
    Dimsdale says:

    You tapped into some of the fundamental problems that makes communism unworkable: you don't own anything or have a very small stake in its success (nobody ever washed a rented car); secondly, if you think it is free, you tend to hoard.  It is wired into our brains; third, 5 year plans or 50 year plans notwithstanding, government can't run anything (see social "security").  They can create infrastructure, but they can't maintain it; fourth, politicians are idiots, and nepotism exacerbates the problem (see Patrick Kennedy).


    Why are we repeating the mistakes of others with the expectation that we will be able to do it better, in the face of human nature?

  4. sammy22
    sammy22 says:

    If politicians are idiots, than what difference does it make if they are Democrats, Republicans, Conservatives, Libertarian or even Communists? So countries like ours are run by idiots?

  5. Dimsdale
    Dimsdale says:

    As events are proving, Democrats are more idiotic than other politicians.  Any party, given sufficient majorities, abuses the power.  Absolute power corrupting absolutely.  The Democrats, unfortunately, have shown themselves to be head and shoulder above the more common political criminal class, but demonstrably ignoring public sentiment or input, and ramming through programs based on their ideologies.  Particularly disgusting is the way they are attempting to bind future Congresses with their current excesses.


    The Democrats are bordering on tyrannical rule, which is masked only by their hypocrisy, corruption and opacity in their backroom conniving.

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