Playing with House Money

Everyone’s familiar with the term “house money.” When you’re playing with house money, you’re gambling or spending money that’s not actually yours, so the perceived risk is lower than it would be if it were your money. Therefore, the care exercised in the use of those “house” funds is correspondingly low, sometimes to the point of being nonexistent.

Here’s a simple example: Let’s say you’ve just won the lottery. A $20 Quick Pick paid off with a $5000 winner. You’re understandably quite pleased and, feeling appropriately flush with your newfound wealth, you take a stroll through the high-priced mall downtown, with their fancy shops. Here, all manner of high-end expensive merchandise beckons -- fragrances, designer handbags and shoes, 50-year-old bottles of Scotch, and world-famous menswear. You’d probably never even contemplate buying this sort of merchandise with your own money, but it’s not “your” money, is it? It’s house money. $4980 of it, to be exact. So you treat yourself to suits, perfume, jewelry, and a bottle of rare spirits. Nice haul. And all for “free.”

Here’s the salient point: During this entire self-indulgent spree, it probably never occurred to you to see if that Prada bag or Johnny Walker Blue Label was offered by the high-end store at a competitive price. It didn’t matter if the bag priced by the store at $900 was available for $750 at the Outlet center. The reason it didn’t matter to you is because you were shopping with “house money.” Money that you didn’t think of as “yours.”

The healthcare market in America is mostly a “house money” situation. Patients and medical providers alike act as if neither party is really responsible for paying the actual cost of the procedure. It’s an almost unbelievable scenario where both the consumer (the patient) and the supplier (the doctor) have no real visibility or sensitivity to the cost of medical products and services. Healthcare is almost 1/6th of our entire economy and yet neither the supplier nor the consumer has a real stake in the paid-at-the-time-of-service cost. Beyond amazing.

A typical healthcare event goes something like this: an individual needs to see his primary care physician because of a sprained ankle or his yearly physical or a sore knee. He has employer-provided healthcare, and so he goes to his HMO, pays his $20 co-pay, sees the doctor, goes to the pharmacy, pays his $10 prescription co-pay and the entire episode is concluded. There is no visibility or consideration whatsoever by either the patient or the doctor as to the cost of the exam, the MRI, the x-rays, the EKG, the ultrasound, nothing.  The doctor says, “I’m ordering you some x-rays and also an MRI and I’ll give you a prescription for a pain killer,” and the patient simply says, “Okay, good.” He doesn’t say, “What’s that gonna run me?”

The cost is invisible, and the patient doesn’t even think of the cost his doctor charges vs. what the doctor down the street charges. Nor does Doctor Smith care what his MRI costs vs. Doctor Brown’s MRI. Both the patient and doctor are playing with house money, and as we’ve seen, that’s a very wasteful way to do things.

It would be far better for everyone if the healthcare market operated under the same rules of open-market forces that control the rest of our economy. Open-market competition forces providers to be more efficient, price-competitive, and technologically up-to-date, whether those providers are cell phone companies, supermarkets, car dealers -- or medical service providers.

In those medical areas that are almost entirely subject to free-market forces (like corrective eye surgery, cosmetic body-altering operations, dental cosmetic/implant procedures, etc., all of which are generally not covered by insurance and must therefore be paid in cash by the patient), prices have come down drastically and technology has greatly improved, as the various providers look to improve the value and quality of their offerings in their attempt to win new customers in a competitive market environment.

However, medical providers in traditional areas of healthcare have no particular incentive to present competitive pricing for their services, because no one is cross-shopping their product. That’s an incredible situation: Significant medical events like childbirth or major surgery are some of the most costly expenditures a person will ever make and yet the customer does no comparison shopping whatsoever. However, that same person will drive across town to save $1.00/pound on boneless pork chops.

There is no comparable segment of our economy where neither the supplier nor the consumer has any real visibility to costs, nor any real incentive for minimizing those costs. It’s an almost surreal situation.

What’s needed is a fundamental revision to this situation. Perhaps some variation of the concept of “medical savings accounts” can be expanded to the point where this is a very significant source of medical payments. If the individual is actually paying for much of their healthcare from their own personal account, then they’ll have a heightened incentive to apportion their limited resources most efficiently. For this to work, the individual must see and pay for the majority of their own medical costs, the same way they pay for their housing, food, clothing, entertainment, communications, transportation, etc.

Likewise, medical providers should have to compete with other providers, and be faced with the market-based incentives to deliver ever-improving medical technology at an ever-increasing value, in order to keep their existing “customers” and win additional market share.

The basic concept is solid: get a very significant portion of the cost-payment aspect of healthcare moved from an invisible insurance/government function to a highly-visible private function, operating according to the rules of a competitive open market. Once the individual sees that they must apportion their limited resources among highly-competitive providers -- providers who are frantically vying for the consumer’s dollars -- the entire system becomes more efficient, better valued and of higher quality.

Easier said than done, obviously. But you have to start by saying it.

Everyone’s familiar with the term “house money.” When you’re playing with house money, you’re gambling or spending money that’s not actually yours, so the perceived risk is lower than it would be if it were your money. Therefore, the care exercised in the use of those “house” funds is correspondingly low, sometimes to the point of being nonexistent.

Here’s a simple example: Let’s say you’ve just won the lottery. A $20 Quick Pick paid off with a $5000 winner. You’re understandably quite pleased and, feeling appropriately flush with your newfound wealth, you take a stroll through the high-priced mall downtown, with their fancy shops. Here, all manner of high-end expensive merchandise beckons -- fragrances, designer handbags and shoes, 50-year-old bottles of Scotch, and world-famous menswear. You’d probably never even contemplate buying this sort of merchandise with your own money, but it’s not “your” money, is it? It’s house money. $4980 of it, to be exact. So you treat yourself to suits, perfume, jewelry, and a bottle of rare spirits. Nice haul. And all for “free.”

Here’s the salient point: During this entire self-indulgent spree, it probably never occurred to you to see if that Prada bag or Johnny Walker Blue Label was offered by the high-end store at a competitive price. It didn’t matter if the bag priced by the store at $900 was available for $750 at the Outlet center. The reason it didn’t matter to you is because you were shopping with “house money.” Money that you didn’t think of as “yours.”

The healthcare market in America is mostly a “house money” situation. Patients and medical providers alike act as if neither party is really responsible for paying the actual cost of the procedure. It’s an almost unbelievable scenario where both the consumer (the patient) and the supplier (the doctor) have no real visibility or sensitivity to the cost of medical products and services. Healthcare is almost 1/6th of our entire economy and yet neither the supplier nor the consumer has a real stake in the paid-at-the-time-of-service cost. Beyond amazing.

A typical healthcare event goes something like this: an individual needs to see his primary care physician because of a sprained ankle or his yearly physical or a sore knee. He has employer-provided healthcare, and so he goes to his HMO, pays his $20 co-pay, sees the doctor, goes to the pharmacy, pays his $10 prescription co-pay and the entire episode is concluded. There is no visibility or consideration whatsoever by either the patient or the doctor as to the cost of the exam, the MRI, the x-rays, the EKG, the ultrasound, nothing.  The doctor says, “I’m ordering you some x-rays and also an MRI and I’ll give you a prescription for a pain killer,” and the patient simply says, “Okay, good.” He doesn’t say, “What’s that gonna run me?”

The cost is invisible, and the patient doesn’t even think of the cost his doctor charges vs. what the doctor down the street charges. Nor does Doctor Smith care what his MRI costs vs. Doctor Brown’s MRI. Both the patient and doctor are playing with house money, and as we’ve seen, that’s a very wasteful way to do things.

It would be far better for everyone if the healthcare market operated under the same rules of open-market forces that control the rest of our economy. Open-market competition forces providers to be more efficient, price-competitive, and technologically up-to-date, whether those providers are cell phone companies, supermarkets, car dealers -- or medical service providers.

In those medical areas that are almost entirely subject to free-market forces (like corrective eye surgery, cosmetic body-altering operations, dental cosmetic/implant procedures, etc., all of which are generally not covered by insurance and must therefore be paid in cash by the patient), prices have come down drastically and technology has greatly improved, as the various providers look to improve the value and quality of their offerings in their attempt to win new customers in a competitive market environment.

However, medical providers in traditional areas of healthcare have no particular incentive to present competitive pricing for their services, because no one is cross-shopping their product. That’s an incredible situation: Significant medical events like childbirth or major surgery are some of the most costly expenditures a person will ever make and yet the customer does no comparison shopping whatsoever. However, that same person will drive across town to save $1.00/pound on boneless pork chops.

There is no comparable segment of our economy where neither the supplier nor the consumer has any real visibility to costs, nor any real incentive for minimizing those costs. It’s an almost surreal situation.

What’s needed is a fundamental revision to this situation. Perhaps some variation of the concept of “medical savings accounts” can be expanded to the point where this is a very significant source of medical payments. If the individual is actually paying for much of their healthcare from their own personal account, then they’ll have a heightened incentive to apportion their limited resources most efficiently. For this to work, the individual must see and pay for the majority of their own medical costs, the same way they pay for their housing, food, clothing, entertainment, communications, transportation, etc.

Likewise, medical providers should have to compete with other providers, and be faced with the market-based incentives to deliver ever-improving medical technology at an ever-increasing value, in order to keep their existing “customers” and win additional market share.

The basic concept is solid: get a very significant portion of the cost-payment aspect of healthcare moved from an invisible insurance/government function to a highly-visible private function, operating according to the rules of a competitive open market. Once the individual sees that they must apportion their limited resources among highly-competitive providers -- providers who are frantically vying for the consumer’s dollars -- the entire system becomes more efficient, better valued and of higher quality.

Easier said than done, obviously. But you have to start by saying it.