A Trick to Reduce Health Costs

In San Diego, the 2019-2020 budget forecasts for transform health and wellness and social services exceed $45 billion, or half of the province’s own-source revenue (excluding federal transfers). So, we could imagine that each taxable expense involves a health cost of about 5%.

If the trend continues, it will not improve. The graph below gives an index of the progress:

The population is aging and the technology available is changing, which are two factors contributing to the continuation of the trend. Is there a solution?

This article presents an interesting point in my opinion. The author suggests that healthcare spending could be reduced by 75% in the United States. I’m a little skeptical of this figure, but the author appeals to a defining human trait in cost control: incentives.

Charlie Munger, Warren Buffett’s longtime investment partner, said: “All my life, I think I’m one of the people of my generation who best understood the power of incentives. All my life, however, I have underestimated them.

In the article, reference is made to two major incentives that could apply in the health sector. This is the display of prices and the receipt of a franchise. As you probably already know, insurers often offer the possibility of having you pay part of the bill, in exchange for a lower premium. For example, you could pay $1,500 instead of $1,800 to ensure your home, agreeing to cover more of the cost of any loss, should it occur.

The insurer wins on two counts: it saves money in the event of a loss, and you will probably be more careful to avoid the loss or minimize its impact when possible. However, when the government pays the bill, how can we benefit from the incentives associated with the franchise? Mr. Flynn offers a simple proposition: you would receive money!

For example, suppose the government sends a check for $3,000 per taxpayer (the equivalent of a deductible). If the perfectly healthy person does not need to pay a single penny for any care or medicine, he could dispose of this amount as he sees fit. For the plan to work effectively, price control is necessary. Each treatment, consultation, or examination should include a price to allow the beneficiaries to carry out research for comparison purposes.

This would create an incentive for service providers to provide the best possible service at the lowest possible price. As for the patient, his way of seeing psychological healthcare costs would change. On the one hand, he would strive to maximize the utility of the money received.

On the other hand, if the cost of care exceeds this amount, he would be made aware of the importance of these costs. The patient would thus become more critical and would appreciate more the good care he received.

No system is perfect. Mr. Flynn seems very optimistic about this way of proceeding, but there are still elements that are difficult to predict. Many adjustments would be health necessary. However, I strongly believe in the power of incentives, and like Charlie Munger, I believe I will always underestimate their long-term impacts as well.

For the investor, understanding incentives make it easier to predict people’s behavior in a multitude of situations. For example, the remuneration of company directors and the prestige of the positions they hold. Have a huge influence on their decision-making. Reading the book “King Icahn” by Mark Stevens. I was amazed by management’s resistance. To accepting changes when shareholders would benefit.

Carl Icahn has had great success as an activist trying. To acquire public companies or interfere with their board of directors. He had to use all kinds of strategies to force their hand and counter the status quo. Let’s conclude with again a quote from Mr. Munger: “Show me the incentives and I’ll show you the results”.