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Cost sharing


supercat

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Imagine that a restaurant were to announce to 100 diners--all strangers--that they would be splitting the tab. If a diner wanted to buy a $50 glass of wine, it would only cost him $0.50; on the other hand, it would also cost the other 99 diners $0.50. If the diner decided instead to have a $2 soda or a $5 glass of wine, he (and everyone else) would pay $0.02 or $0.05, respectively. What would people under such circumstances end up ordering, and what would they pay for it?

 

Many people would dislike being in that situation, particularly with strangers. While some groups of coworkers will routinely agree to split restaurant checks without niggling over whether everyone's food cost the same, they generally don't want to be seen as unfair by their fellow workers. They will thus either seek to avoid spending substantially more than everyone else, or else offer to pick up a larger share of the total tab. In a group of strangers, however, such pressures will often not apply. If it seems as though many diners are going to have to pay $10 for other people's wine, they'll likely order wines costing around that much themselves, thus pushing the total up higher.

 

Given a choice, most people would rather dine in a restaurant which allowed them to simply pay for their own meals, than dine in one in which they are required to pay for everyone else's. While there are some all-you-can-eat smorgasbord restaurants, the variety and quality of food is nowhere near what could be found at many pay-for-what-you-eat ones, and for good reason. Customers who are allowed to select expensive food and drink without having to pay for it are apt to do so, even if they wouldn't be willing to pay for the cost of such food and drink themselves.

 

On the other hand, if some restauranteurs could get the government to require all restaurants to engage in "cost sharing", they'd make out like bandits. They'd be free to put whatever expensive and profitable items on the menu they wanted, secure in the knowledge that some people would buy them and everyone would have to pay for them. At first they might be limited by some restaurants' ability to limit their selections to only cheap ones, but if they could convince the government to require that all restaurants carry expensive foods and beverages, they'd be rolling in gold.

 

A couple more observations: (1) customers of a cost-sharing business will often find the price to be much greater than what they would want to pay for the goods or services they expect to receive; (2) the quality of goods and services will often be higher than what customers would have wanted to pay for.

 

Presently, much of what is called "health insurance" is in large measure really cost sharing. A single-payer health system would represent an even more severe form of cost sharing. Fundamentally the only way to get prices under control without restricting people's choices is going to be to increase the extent to which people pay for their own choices. Otherwise prices are guaranteed to increase exponentially until there is no choice but to ration services; rationing services will limit prices, but the variety of affordable choices will be far below what it would have been without cost sharing.

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It's the difference between a system without feedback, a system with negative feedback, and a system with positive feedback.

 

Some healthcare cost problems can probably be kept under control with a system of co-payment (negative feedback). However, that only addresses the consumer side of the equation. The producer side has some very ugly positive feedback. Hospitals, doctors & medical drug & equipment companies all make more money based upon the number of consumers (patients) they have. So they are therefore motivated to increase the number of consumers (and how much those consumers spend), which therefore increases the total cost to the group. Co-payment will provide some negative feedback, but that will only slow the growth slightly - because the producers can easily influence the consumers. (If your doctor says you need to see a specialist, or have some tests, or take some drugs, are you going to say no or know about lower cost alternatives?)

 

The only way to change the producer's behaviour is to make it either more profitable to sell less, or much less profitable to sell more. And the only party who can do that is the other side of the co-payment - Medicare/Medicade & the insurance companies.

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(SuperCat note--accidentally hit edit)

 

Another issue with the differences between health care and cost-sharing restaurants is that at a restaurant you'll probably opt to eat better just because you can.

 

(SuperCat paraphrase)People aren't likely to get a kidney transplant just because everybody else is getting one. They'll get it because they need it.

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If your analogy is right, then I wonder why the current US health system is the most expensive and still rather ineffcient (also this)compared to other developed countries which are able to offer heath care for ALL their citizens and have a cost-sharing system.

 

People don't get severely ill deliberately, but by bad luck. A civilized society should not spit those, who are already hit by fate.

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I saw Sick Around the World on PBS a while ago, it was very enlightening.

 

I definitely agree something needs to be done here, but I did pick up on a couple things - the cost controls were causing problems for their health care providers (such as hospitals operating in the red). Another was drug companies in those countries were doing OK because they could make profits elsewhere - if the USA revamps our system then funding for research may become an issue.

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If your analogy is right, then I wonder why the current US health system is the most expensive and still rather ineffcient (also this)compared to other developed countries which are able to offer heath care for ALL their citizens and have a cost-sharing system.

 

It's possible for a government-run system to cut costs in the short term by capping doctors' pay at a level high enough that someone who has medical training may as well remain a doctor rather than abandon his field, but at a level below that required to attract people into the field. This will work "nicely" as long as the existing supply of doctors holds out. Once too many doctors retire, however, the systems start to have severe problems.

 

In England, elderly people are denied certain types of treatments because they're not "cost-effective". Realistically, there is no way that all such treatments could be provided to everyone, but that does not mean they should be denied even to people who would have the means to pay for them and who would rather spend their own money on treatment than on something else or leave it to their heirs. How would you suggest treatments should be prioritized?

 

People don't get severely ill deliberately, but by bad luck. A civilized society should not spit those, who are already hit by fate.

 

Indeed. Too bad there isn't any real insurance available to cover conditions which take more than a year to treat. That's a subject of a future entry.

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Another issue with the differences between health care and cost-sharing restaurants is that at a restaurant you'll probably opt to eat better just because you can.

 

Suppose one has a painful condition and a choice of treatments; one costs $100 and the other costs $10,000. The $10,000 treatment will cure all the pain perfectly (but will cost $10,000). The $100 treatment will do a pretty good job, but not a perfect one. Suppose the $100 treatment would be good enough that a Given a choice between (a) receiving the $100 treatment plus $5,000 cash, or (b) receiving the $10,000 treatment and no cash, a person would take the cheaper treatment plus the cash. Would there be any logical reason why such a person should be given the more expensive treatment? On the other hand, is there any reason to expect that someone who wasn't affected financially by his treatment choice wouldn't pick the more expensive one?

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People don't get severely ill deliberately, but by bad luck. A civilized society should not spit those, who are already hit by fate.
People may not get ill deliberately, but what about those that choose to partake in risky behavior like smoking, excessive drinking, or other things that can lead to costly, life threatening diseases. Should someone that lives a "clean" life (and therefore has a lower average medical cost) be forced to pay for someone that chooses not to?
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