You’re Scheming On A Thing That’s Arbitrage
Tuesday, July 7 2009
Dr. Sandeep Jauhar writes about the business of doctoring in the New York Times…
I must admit that part of me wants to see doctors master the business side of our profession. When I hear about executives at health companies getting tens of millions of dollars in bonuses, I am nauseated by the blatant profiteering. As a loyal member of my guild, I want to see doctors exert more control over our financial house.
I hate insurance companies as much as anybody – grrrr! insurance companies – but Dr. Jauhar is wrong to call what they do “blatant profiteering”. Apt as that may sound, the phrase betrays an ignorance of the economics of health care that I find all too common among physicians.
The correct term is arbitrage. You can read all about it on Wikipedia, but it means the profits gained from a difference between two markets. If you can bridge the two markets, you can exploit the price difference to earn a profit – that’s arbitrage.
Insurance companies are a bridge between two markets: employers and providers. Employers, it turns out, are willing to pay a significant amount for the health care of their employers. Providers, it turns out, are willing to accept significantly less than employers are willing to pay. And the difference accrues to the insurance companies and their scandalously overpaid executives. This may seem like semantics, but it’s important to note that the system exists the way it does because our government has set up rules – especially the tax exemption for health care benefits – to make it work that way.
And part of the reason there is such a big difference between what employers pay and what doctors get is health benefits are tax exempt. Tax exemption for health care doesn’t mean taxpayers get to keep their money; it means they are required to spend it on health care, or surrender a portion to the government. And since so many people choose the former, tax exemption is in effect a government subsidy to the health care industry – of nearly $300 billion every year (pdf, p. 3). Compare that to annual farm subsidies at $25 billion.
But that’s not the whole problem; it’s not only that the potential for arbitrage exists, but that insurance companies are perfectly positioned to capture it. There are very few of them (at least for a large majority of the market), compared to the millions of employers and hundreds of thousands of providers in this country – so they face little real competition for their profits. Providers have a little traction in this environment, but employers – especially small ones – are increasingly dropping out.
The only way doctors are going to get more control over the business side is through a major regulatory change that severs the connection between employers, for-profit insurance, and health care. And you can’t just kick out the insurers; there has to be something to take their place that will do a better job. Whether he realizes it or not, Dr. Jauhar is advocating for something pretty close to single-payer care. Leave the insurance industry intact and in place, and there is literally no way to prevent them from siphoning off the money Dr. Jauhar thinks should go to physicians.
