Here is Cameron Kaplan in the Wall Street Journal.
Mr. Kaplan, an economist, is an assistant professor of medicine at the University of Southern California’s Keck School of Medicine.Questions to ask yourself.
Why such inefficiency?
Is it due to inefficiency or someone taking advantage of the system for gain?
Is anything ever "free"? If not who bears the cost and who benefits?
What role does separating decision making from consequences play?
What is likely to provide the most overall benefit most of the time - imposing the preferences of a few or allowing individual preferences to shape decisions?
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My 4-year-old daughter’s preschool requires weekly Covid testing. We were told not to worry about the cost—the tests are free. On a recent Sunday my family got tested at a pop-up tent outside a gasoline station. The sign on the tent advertised “free Covid testing.”
I didn’t pay for these tests, but they aren’t free. The cost is billed to my health insurance. A few days ago, I received a routine letter from my insurance company summarizing what it paid: $1,140 a month for my daughter’s weekly PCR test. That comes to about $285 per test, 20 times the cost of an at-home rapid test.
Policy makers at both the state and federal levels have opted to finance Covid testing through private health insurance. A California law enacted in November requires insurers to pay for Covid testing without copayments from patients. Insurers must reimburse testing providers, even out-of-network ones, and the state places no restriction on the amount reimbursed.
This gives providers unchecked power to set prices, inflating the societal cost of testing as a tool for controlling the pandemic. Insurance companies will inevitably pass the costs on to policyholders through either higher premiums or reduced benefits.
Let’s revisit the $1,140 per month for testing at my daughter’s preschool. On an annual basis, that would add up to $13,860—a sum that comes close to the $14,974 average yearly expenditure per student in California public schools.
The heart of the problem is that Covid testing isn’t simply a medical service. Regular testing is primarily for the community’s benefit. Policy makers encouraged testing by making it free for individuals, but leaving insurers to pick up the tab established an inefficient system with hidden costs that are likely to haunt us for years to come.
A far better approach would have been for the government to foot the bill for testing. Larger organizations have been able to negotiate lower prices. Last fall the Los Angeles Unified School District provided an estimated nine million Covid tests for students and staff. The price tag was high: $350 million. But that’s $39 a test, or about one-seventh of what my insurer is paying for my daughter.
Like other aspects of healthcare, the current system is also inequitable. Since private insurers are paying more for testing, those pop-up tents on the corner are likely to locate in more-affluent neighborhoods, while testing remains less accessible in lower-income areas.
Another option would be setting a maximum allowable price for Covid testing. Medicare pays up to $100, substantially lower than what some providers charge private insurers. Applying this limit more broadly might be the simplest path, given the way our system has developed. Economists typically don’t advocate price controls, but they can be a viable alternative when markets are already distorted.
Our preschool, the government, and perhaps even those administering the tests are trying to do the right thing. But forcing insurance companies to pay up to 20 times the retail rate for tests creates a sizable moral hazard problem and misallocation of resources that should not be ignored.
I didn’t pay for these tests, but they aren’t free. The cost is billed to my health insurance. A few days ago, I received a routine letter from my insurance company summarizing what it paid: $1,140 a month for my daughter’s weekly PCR test. That comes to about $285 per test, 20 times the cost of an at-home rapid test.
Policy makers at both the state and federal levels have opted to finance Covid testing through private health insurance. A California law enacted in November requires insurers to pay for Covid testing without copayments from patients. Insurers must reimburse testing providers, even out-of-network ones, and the state places no restriction on the amount reimbursed.
This gives providers unchecked power to set prices, inflating the societal cost of testing as a tool for controlling the pandemic. Insurance companies will inevitably pass the costs on to policyholders through either higher premiums or reduced benefits.
Let’s revisit the $1,140 per month for testing at my daughter’s preschool. On an annual basis, that would add up to $13,860—a sum that comes close to the $14,974 average yearly expenditure per student in California public schools.
The heart of the problem is that Covid testing isn’t simply a medical service. Regular testing is primarily for the community’s benefit. Policy makers encouraged testing by making it free for individuals, but leaving insurers to pick up the tab established an inefficient system with hidden costs that are likely to haunt us for years to come.
A far better approach would have been for the government to foot the bill for testing. Larger organizations have been able to negotiate lower prices. Last fall the Los Angeles Unified School District provided an estimated nine million Covid tests for students and staff. The price tag was high: $350 million. But that’s $39 a test, or about one-seventh of what my insurer is paying for my daughter.
Like other aspects of healthcare, the current system is also inequitable. Since private insurers are paying more for testing, those pop-up tents on the corner are likely to locate in more-affluent neighborhoods, while testing remains less accessible in lower-income areas.
Another option would be setting a maximum allowable price for Covid testing. Medicare pays up to $100, substantially lower than what some providers charge private insurers. Applying this limit more broadly might be the simplest path, given the way our system has developed. Economists typically don’t advocate price controls, but they can be a viable alternative when markets are already distorted.
Our preschool, the government, and perhaps even those administering the tests are trying to do the right thing. But forcing insurance companies to pay up to 20 times the retail rate for tests creates a sizable moral hazard problem and misallocation of resources that should not be ignored.
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