Why do doctors stick with the health care system?

In response to yesterday's post on John McCain's sort-of, not-quite rejection of a government-designed health-care system, a reader writes to ask me:

If they are so dissatisfied with the current state of medical insurance, why aren't more doctors operating outside of the insurance industry by providing good care for a reasonable cost and completely boycotting medical insurance?

That's a good question, since the current system is a disaster and proposals put forward by the leading presidential candidates promise to enhance the worst aspects of what's already in place. To quote a Forbes column by Yaron Brook recommended to me by the same reader:

But by the time Medicare and Medicaid were enacted in 1965, this view of health care as an economic product--for which each individual must assume responsibility--had given way to a view of health care as a "right," an unearned "entitlement," to be provided at others' expense.

This entitlement mentality fueled the rise of our current third-party-payer system, a blend of government programs, such as Medicare and Medicaid, together with government-controlled employer-based health insurance (itself spawned by perverse tax incentives during the wage and price controls of World War II).

Today, what we have is not a system grounded in American individualism, but a collectivist system that aims to relieve the individual of the "burden" of paying for his own health care by coercively imposing its costs on his neighbors. For every dollar's worth of hospital care a patient consumes, that patient pays only about 3 cents out-of-pocket; the rest is paid by third-party coverage. And for the health care system as a whole, patients pay only about 14%.

The result of shifting the responsibility for health care costs away from the individuals who accrue them was an explosion in spending.

This is exactly right. The dominant means of paying for health care in the United States has little to do with the discipline and consumer feedback of the free market. Prices for procedures and visits are set not according to supply and demand in the local market, but according to insurance company compensation and the mysteries of medical coding. Each procedure must be coded at the highest justifiable level -- too low and you're giving services away, too high and you're flirting with fraud. The charges for each code are then set at a level above expected insurance company (including Medicare and Medicaid) compensation. To maximize compensation, medical practices charge at a level well above what the companies are actually willing to compensate. If a practice is being compensated equivalent to its charges, the assumption is that the office is charging too little.

Smart cash-paying patients who know to ask at well-run practices will often find an entirely separate and unadvertised price list that bears little resemblance to what insurance companies are charged. That is, it's a lot lower. These separate price lists for cash-paying customers have been adopted at a very few medical practices as the only price lists. Practices that use SimpleCare charge patients directly and don't deal with insurance companies or government programs at all, although patients are free to submit their bills to insurers for reimbursement.

How much lower are these cash prices? SimpleCare providers are reported to charge 30% to 50% less than competitors who work through the traditional insurance schemes. And that's with much less effort and expense in collecting payments.

All right. So the system of codes and insurers as it now exists is arcane, difficult to navigate and drives up costs. So, as my reader asks, "why aren't more doctors operating outside of the insurance industry by providing good care for a reasonable cost and completely boycotting medical insurance?"

The fact is, doctors are some of the least business savvy people I've ever met. Most will admit that, too. Medical school teaches them how to save lives, but not how to run an office. Unfamiliar with alternatives, physicians go with what they know, which is the system in place. Successful practices almost always rely on practice managers who are trained in the arcane art of extracting money from insurance companies and the government. They have conferences, newsletters and mailing lists devoted to proper coding and price-setting. Practice managers are highly skilled at running medical practices under the current system and only under the current system.

And once physicians who've opened their own practices find themselves bringing in more money than they put out in expenses, they have little incentive to start jiggering with the business model. Shifting gears would involve putting profitability on the line for the hope of reestablishing profitability under a different (if more sensible) business model -- all the while swimming upstream against the prevailing assumption, so well described by Yaron Brook, that health care is a "right" that should be free. Switching to a pay-as-you-go model requires getting patients who balk at coughing up $20 for a co-pay to pay the full (but discounted off of current prices) cost of their health care.

That's one of the maddening things about medicine. People who drive to the office in a new truck with a carton of cigarettes in the back and who just spent a couple of hundred bucks to get their dogs de-wormed will bitch about handing over $20 for a co-pay. People don't mind paying the veterinarian, but that greedy doctor ...

The prevailing entitlement attitude toward medicine is another big barrier toward changing to a more market-oriented model that would lower costs.

And, of course, since most health care consumers pay little or none of the actual cost of the services they consume, there's a strong incentive among an expensive subset of patients to demand ever-more tests, more medication, more visits and more specialized treatments that drive up costs overall for the whole system.

There are health-care providers who do use a market model, though. If you're a fan of alternative medicine, chances are that your homeopath or naturopath, right after a monologue about the evils of profit-driven mainstream medicine, will guide you to the counter where you're expected to pay, in full, for all services rendered that day.