Crisis of the Overinsured: They Pay Up to Twice as Much for Hospital Services

In Michael E. Porter & Elizabeth Olmstead Teisberg's Redefining Health Care, they note that major health plans succeed by exploiting a competely artificial economy of scale. Because of the tax-code, American workers are compelled to accept health "benefits" from their employers instead of taking their health-care dollars to buy health insurance that serves their families' needs. (I'm using more libertarian language than Porter & Teisberg do.)

This artificial, perverse, government-created, economy of scale leads health plans to structure their products for groups whose members are unrelated except for the fact that they work for the same employer. Successful health plans exploit the lower distribution costs of selling to groups. Unfortunately, this has absolutely no relationship with providing good health care.
For example, if I have an inguinal hernia that requires surgery to repair it, the fact that I work for a small-group employer in California is irrelevent to the surgery I need. If I worked for a jumbo, ERISA-regulated employer like, e.g., Cisco Systems, my medical need would not differ, but I might have access to a completely different network of providers from which to choose a surgeon and hospital.

Furthermore, because a third-party payer has inserted itself in the provider-payment relationship, costs go up. Worse, patients do not know how much their procedures cost because they are merely line-items in monstrous contracts negotiated by providers and health plans. When doctors or hospitals claim that they cannot tell how much a procedure costs, they are telling the truth. This is because neither the plan nor the provider really care about your specific procedure. They care about payment for the entire portfolio of procedures done over a month, quarter, or year. The provider tries to be as creative with the "coding" of his claims as possible, in order to meet or beat a revenue target from each payer. The payer, in turn, looks for variance in the claims submitted that can justify a query and re-pricing the claims downward.

This is changing with the rise of medical tourism within the U.S. Brokers are arranging fixed-price surgeries for self-insured and uninsured parties. At least one health insurer, Wellpoint, has gotten on board. Why would it take such a step, which appears to challenge a key element of its competitive advantage?

With bundled prices agreed (and paid) before the surgery, costs are 30% to 50% less than under contracted-network pricing.

One of the major, unfounded, criticisms of consumer-driven health care is that it cannot drive down costs because only 10% of the population accounts for 70% of health costs. Once patients have met their deductible, they no longer care what procedures cost. (See, e.g. Timothy Stoltzfus Jost, pp. xi, 136.)

Innovations like "domestic medical tourism" debunk that charge utterly.