Sunday, April 27, 2014

Efficient Markets: Medical

The ERJ family is a very heavy consumer of medical services.  It is not something I am bragging about.  It is simple the launching pad for this post.

How heavy?  We blew through our roughly $4000 deductible by mid-February.  That was all out-of-pocket so we were attempting to economize.  And we still burned money at the annualized rate of $32K/yr.

One of the things we have been introduced to are some alternative sources of medical services.  No, nothing metaphysical or  Just suppliers who have lumpy demand and can flex to provide services in their slow times.

I would love to report that I have had many informative conversations with the billing specialist at this medical provider.  The fact of the matter is that this woman does not return phone calls.  The only time I ever had her call back was after they lost our Social Security numbers.  She was soiling her shorts because they were in violation of multiple Government reporting protocols.  My strong impression based on her behaviors is that she is as baffled by the execution of the billing as everybody else.  She has no clue why some bills are discounted, some evaporate and some are sent to collections.  And the numbers dance from monthly invoice-to-monthly invoice as if they were Disney animates.

The wise and lovely Mrs ERJ decided that we will mail them a check for $50 every month to show good faith while their software give a credible imitation of a dog with dengue fever attempting to pass a peach pit.

How Markets Work

One of the enablers for markets to work efficiently is that the "list price" must be closely linked to the actual "transaction price".

Markets are efficient when the list (or asking) price has information embedded within it.  A very small bird flying over the punch bowl can pollute it to the point where it is unusable.  Likewise, a very small amount of chaos can pollute the information embedded within the pricing enough to destroy efficiency.

The Housing Market

Consider the housing market when times are good.  The typical seller will get three appraisals and pick a price that is ten percent higher than the mid-point between the two highest appraisals.  When times are good it is easy to compare prices because every seller inflates the price by a similar amount and leaves about the same amount of fluff that can be negotiated away.

Consider the housing market when times are bad.  Some sellers will follow the "old" rule or perhaps they put their house on the market when times were good and the list price is a legacy from that time.  Many other sellers will follow a process similar to the one described above but will add a cushion of 30%-to-40%.  Their logic is that gives them more room to make concessions, that the buyer can think they really beat the seller down...and the seller can still get an acceptable price.

The market becomes chaotic as the linkage between asking price and transaction price becomes less predictable.  It becomes impossible for shoppers to perform metric driven sorts to narrow the universe of choices.  A buyer cannot winnow through a thousand properties and select the 5 best alternatives for actual boots-on-the-ground visits.

The market for medical services is an order of magnitude more chaotic than the real estate market.


Gary is a professional landlord.  He self-insures and has a true Act-of-God deductible...something like $50K.  Gary needed new knees.  Gary naively assumed that he could shop for medical services the same way he could hire people to lay carpet, replace locks, etc.

He visited three local hospitals.  The bottom line was that all billing was done by computer systems.  All computer software is configured to be backward looking.  The sole purpose of the software is to generate bills to submit to insurance companies.

None of the hospitals could generate an estimate.  The function did not exist.  They could not even tell him the price of a single aspirin tablet.

Gary is a problem solving kind of guy.  He asked if they could supply him with the three most recent billings for the procedure with the names redacted.  The hospitals claimed doing so would violate HIPA and they refused.

And then the hospitals told him that the billings would be useless for his purpose anyway.  The billings against the insurance companies are a total fiction.  The actual reimbursement the hospital received was related to the billing in the most casual of ways.  The itemized reimbursement shared noun-names of services with the billing...and that is where the relationship ended.

High deductible insurance

One advantage of "high deductible insurance" is that it is more common for patients to be billed the actual insurance reimbursement rate.

It is to the insurance company's advantage to have the patient in the deductible period as long as possible.  They are raking in premiums during that time and not writing checks against those moneys.  The insurance companies now require that doctors bill insured patients the discount rate.  That increases the amount of time at the beginning of the year when the insurance companies have very positive cash flow.

My frustration is that the medical market will never be efficient as long as there is no linkage between the list price and the transaction price.  Gary's story tells us that a "list price" does not even exist for many procedures.

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