Third Party Payers Make Things Much, Much Worse

By Kevin Freeman
December 07, 2019Dec 07, 2019

My friend John Mauldin has a great "Thoughts From the Frontline" out today, titled Inflationary Angst. He makes some strong points and shares a powerful chart.

Here are some of John's opening comments:

The Fed operates under a legal mandate from Congress. Its monetary policy role is "to promote maximum employment, stable prices and moderate long-term interest rates."

So how is it doing?

Long-term rates are certainly moderate. Employment is historically high, though wages and job quality aren't always great.

As for that "stable prices" part… it depends on what you are buying. As you see below, for many goods the price is nowhere near "stable." Unfortunately, if you are in the bottom 60–70% of the income brackets, these are some of the things you buy the most.

Source: Sebastian Sienkiewicz

The Fed believes that 2% annual inflation equals "stable prices." Yet that small amount adds up over time—to almost 50% in 20 years. Which is about where CPI lands in this 20-year chart, so the Fed is succeeding by that yardstick.

Think about that for a second. The Fed defines "stable prices" as a 2% average. And then another government agency tries to measure those prices, often using "Hedonic Quality Adjustment" to account for changes due to innovation or completely new products. So, because the car you are buying has new features, they conclude it's not more expensive. Does that match your experience? Thought so…

Now I noticed something about the chart John shared. If you look at the price increases over the past twenty years, the items that went up the most are those where the government is most involved. And, the ones where prices were stable or went down? These are areas with less government involvement.

Remember how we were all told that Obamacare would bring medical costs down? They promised to lower our healthcare premiums. Well, look what happened. Premiums have skyrocketed along with healthcare costs. And remember that the government took over student loans for college in 2010? The Obama administration promised that this would help, not hurt the ability for young people to afford college. So, how's that working for us?

So, what is the difference between skyrocketing healthcare and college costs and stable or falling computer software and TV's? It boils down to two key areas:

  1. Competition
  2. Government involvement

The following PagerU video from another friend, former Congressman Bob McEwen offers the best explanation of what is happening:

The chart from John Mauldin's Thoughts From the Frontline really demonstrates Bob McEwen's point. It's most obvious in regard to healthcare as Bob explains. But think about it. It also applies to college costs. When the government took over student loans, it worsened the economics. But they were already bad. Loans are made with little regard as to payback potential. Massive guaranteed student loan programs have made prospective college attendees less price sensitive. So what if college costs go up by an additional $2,000 per semester? You just take a larger loan. And the nature of the loan program ensures that you can borrow the same for a high-paying engineering degree as for a degree in Eastern European Romance Literature from the 14th Century. The massive infusion of government money has tremendously skewed the cost curve for both healthcare and higher education.

From the American Institute for Economic Research:

"Yet with few exceptions, such as Hillsdale College, almost all educational institutions depend on broad financial government support. The many overt and hidden subsidies — such as federal student loans, a wide gamut of tax allowances, and research grants — make the "private universities" de facto public institutions.

Because of the quasi-monopolistic position of the public educational institutions, the offers from private suppliers are crowded out. The private supply shrinks, although it would be better and cheaper than the public provision. Education suffers from the same dilemma as state-run health care: the potential for cost saving remains unfulfilled since no incentives for efficiency exist. In order to get the subsidies and the other benefits from government, the universities must adhere to specific bureaucratic rules. Such governmental criteria also apply to the research output and provoke indirect state control and outright corruption.

The problem with the modern educational system is that it has fallen under the authority of the state. Therefore, the system has become more bureaucratic and authoritarian and less scholarly and educational."

There is some good news, at least in healthcare. The Trump administration is mandating price transparency. From the HHS website:

Trump Administration Announces Historic Price Transparency Requirements to Increase Competition and Lower Healthcare Costs for All Americans

Two regulations advance the Trump Administration's commitment to increasing price transparency

As directed by President Trump's Executive Order on Improving Price and Quality Transparency in American Healthcare, today the Department of Health and Human Services is announcing that the Centers for Medicare & Medicaid Services (CMS) is issuing two rules that take historic steps to increase price transparency to empower patients and increase competition among all hospitals, group health plans and health insurance issuers in the individual and group markets. One of the rules is the Calendar Year (CY) 2020 Outpatient Prospective Payment System (OPPS) & Ambulatory Surgical Center (ASC) Price Transparency Requirements for Hospitals to Make Standard Charges Public Final Rule. The second rule is the Transparency in Coverage Proposed Rule. Both the final and proposed rules require that pricing information be made publicly available.

"President Trump has promised American patients ‘A+' healthcare transparency, but right now our system probably deserves an F on transparency. President Trump is going to change that, with what will be revolutionary changes for our healthcare system," said HHS Secretary Alex Azar. "Today's transparency announcement may be a more significant change to American healthcare markets than any other single thing we've done, by shining light on the costs of our shadowy system and finally putting the American patient in control."

Consistent with the Executive Order on price and quality transparency, the Trump Administration is taking action toward making sure that insured and uninsured Americans alike have the information necessary to get an accurate estimate of the cost of the healthcare services they are seeking before they receive care.

"Under the status quo, healthcare prices are about as clear as mud to patients," said CMS Administrator Seema Verma. "Thanks to President Trump's vision and leadership, we are throwing open the shutters and bringing to light the price of care for American consumers. Kept secret, these prices are simply dollar amounts on a ledger; disclosed, they deliver fuel to the engines of competition among hospitals and insurers. This final rule and the proposed rule will bring forward the transparency we need to finally begin reducing the overall healthcare costs. Today's rules usher in a new era that upends the status quo to empower patients and put them first."

In response to the Executive Order, the Department of Health and Human Services, the Department of Labor, and the Department of the Treasury (collectively, the Departments) are issuing a proposed rule, "Transparency in Coverage" that would require most employer-based group health plans and health insurance issuers offering group and individual coverage to disclose price and cost-sharing information to participants, beneficiaries, and enrollees up front. With this information, patients will have accurate estimates of any out-of-pocket costs they must pay to meet their plan's deductible, co-pay, or co-insurance requirements.  This will make previously unavailable price information accessible to patients and other stakeholders in a standardized way, allowing for easy comparisons.

If finalized, the proposed Transparency in Coverage rule would require health plans to:

  • Give consumers real-time, personalized access to cost-sharing information, including an estimate of their cost-sharing liability for all covered healthcare items and services, through an online tool that most group health plans and health insurance issuers would be required to make available to all of their members, and in paper form, at the consumer's request. This requirement would empower consumers to shop and compare costs between specific providers before receiving care.
  • Disclose on a public website their negotiated rates for in-network providers and allowed amounts paid for out-of-network providers. Making this information available to the public is intended to drive innovation, support informed, price-conscious decision-making, and promote competition in the healthcare industry. Making this information public directly helps the consumer, but, more importantly, creates new opportunities for researchers, employers and other developers to build new tools to help consumers.

The proposed rule would also encourage health insurance issuers to offer new or different plan designs that incentivize consumers to shop for services from lower-cost, higher-value providers by allowing issuers to take credit for "shared savings" payments in their medical loss ratio (MLR) calculations.

In addition, the Administration is finalizing a rule that will require hospitals to provide patients with clear, accessible information about their "standard charges" for the items and services they provide, including through the use of standardized data elements, making it easier to shop and compare across hospitals, as well as mitigating surprises. The final rule will require hospitals to make their standard charges public in two ways beginning in 2021:

  • Comprehensive Machine-Readable File: Hospitals will be required to make public all hospital standard charges (including the gross charges, payer-specific negotiated charges, the amount the hospital is willing to accept in cash from a patient, and the minimum and maximum negotiated charges) for all items and services on the Internet in a single data file that can be read by other computer systems. The file must include additional information such as common billing or accounting codes used by the hospital (such as Healthcare Common Procedure Coding System (HCPCS) codes) and a description of the item or service to provide common elements for consumers to compare standard charges from hospital to hospital.
  • Display of Shoppable Services in a Consumer-Friendly Manner: Hospitals will be required to make public payer-specific negotiated charges, the amount the hospital is willing to accept in cash from a patient for an item or service, and the minimum and maximum negotiated charges for 300 common shoppable services in a manner that is consumer-friendly and update the information at least annually.
    • Shoppable services are services that can be scheduled by a healthcare consumer in advance such as x-rays, outpatient visits, imaging and laboratory tests or bundled services like a cesarean delivery, including pre- and post-delivery care.
    • The requirements for the consumer-friendly file are that the information must be made public in a prominent location online that is easily accessible, without barriers, and it must also be searchable. Item and service descriptions must be in ‘plain language' and the shoppable service charges must be displayed and grouped with charges for any ancillary services the hospital customarily provides with the primary shoppable service.

In order to ensure that hospitals comply with the requirements, the final rule provides CMS with new enforcement tools including monitoring, auditing, corrective action plans, and the ability to impose civil monetary penalties of $300 per day. In response to public comments, CMS is finalizing that the effective date of the final rule will be January 1, 2021 to ensure that hospitals have the time to be compliant with these policies.

For a fact sheet on the Calendar Year (CY) 2020 Outpatient Prospective Payment System (OPPS) & Ambulatory Surgical Center (ASC) Price Transparency Requirements for Hospitals to Make Standard Charges Public final rule (CMS-1717-F2), please visit:

For a fact sheet on the Transparency in Coverage Proposed Rule (CMS-9915-P), please visit:

The final rule (CMS-1717-F2) can be viewed here – PDF

The proposed rule (CMS‑9915‑P) can be viewed here – PDF

Hopefully, these efforts will bear fruit. The more price transparency, the greater the competition. the greater the competition, the better the containment of costs.

Over the past two decades, the government has waged a type of economic warfare against you by mucking up your healthcare and education. Remember the wisdom of President Reagan in regard to the "Nine Most Terrifying Words in the English Language."

Hopefully the Trump Administration's efforts to require price transparency will restore some of the free market competition that government interference eliminated. We need to support this effort along with continuing regulatory reform. Let's also encourage the Trump team to tackle college costs with free-market reforms. We should oppose the "free college" push by all means necessary.