House money

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Filed Under General on Apr 1 

Everyone’s familiar with the term “house money,” right? 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 was your money. Therefore, the care exercised in the use of those “house” funds is correspondingly low, almost to the point of being non-existent.

Here’s a simple example: Let’s say you’ve just gone to a casino and won $5000 at the roulette table from an original wager of $20. You’re understandably quite pleased and, feeling appropriately flushed with your new-found wealth, you take a stroll down the high-priced aisle of the gift shops right around the corner from the casino hall. 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 from this exercise: During this entire self-indulgent spree, it never occurred to you to see if that Prada bag or Johnny Walker Blue Label was being offered by the casino’s gift mall at a competitive price. It didn’t matter if the bag offered by the casino for $900 was available for $750 somewhere else. 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.”

There are two incredibly important parallels to the house money analogy in our economy today: One is taxes collected by the Government, whether local, State or Federal. When politicians collect taxes, they don’t spend that money as if it were their own. They generally don’t pay as close attention to the costs of a given project, generally don’t exercise the same degree of due diligence as to the legitimacy of the bid as they would if it were their own personal money, for an automotive purchase or major home-improvement project. Taxes are the Government-equivalent of house money. It’s free. That bridge is a concrete-and-steel analog to a casino-offered Prada bag. Sure—give it a scenic pedestrian walkway. It’s not our money.

This is a major reason why raising taxes is inherently unproductive and leads to a less-efficient economy. The economy has a given “x” amount of money in it at any one time (that’s the money supply you hear so much about). That ‘x’ is divided up between private spending and Government (Public) spending. The more that’s in private hands, the farther and more efficiently it goes. $5000/month in a family’s hands goes to rent, utilities, seeking out the best buys on groceries, clothes, the best deal on cell phone plans, the best deal on car repairs, etc. The competition for that family’s $5000 makes the entire supply chain more competitive and efficient, to everyone’s benefit.

Unfortunately, that $5000 in the Government’s hands buys a hammer for the Pentagon. Or two.

It’s the same $5000. Where do you want to see it—in private hands or in Government hands? How will its expenditure benefit our economy the most?

The second parallel to the house money analogy is in health care. Only in this instance, the roles are somewhat reversed—it’s the private individual who acts as if they’re playing with house money, because the private individual usually has no real visibility to the cost of their medical care, and therefore they don’t shop around for the best value.

The typical process is something like this: Person A needs to see their primary because of a sprained ankle or their yearly physical or a sore knee. They have employer-provided health care, and so go to their HMO, pay their $10 co-pay, see the doctor, go to the pharmacy, pay their $5 prescription co-pay and the entire event is concluded. There is no visibility whatsoever to the patient as to the cost of the exam, the MRI, the x-rays, the EKG, nothing. It’s invisible, and the patient doesn’t even think of the cost their doctor charges for a yearly EKG vs. what the doctor down the street charges. The patient is playing with house money, and as we’ve seen, that’s a very wasteful way to do things.

However, 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.

What’s needed is a fundamental revision in the manner in which individuals have visibility to medical costs and the source that provides the payment of those costs. “Invisible” medical payments by insurance companies need to be eliminated. The individual needs to see and pay for all their own medical costs, the same way they pay for their housing, food, clothing, entertainment, communications, transportation, etc.

The concept of “Medical savings accounts” needs to be expanded to the point where this is essentially the only manner in which medical payments are made. Some might call this self-insuring; call it whatever you like. In MA, a typical mid-level family plan from a good provider is about $3000/month. This is usually split 75-25% between the employer and the employee. But the employee has no visibility to the fact that their employer is paying them an additional $27,000 per year in medical benefits above and beyond their salary. All they know is that they “get benefits,” and they don’t have any particular incentive to seek the best value in medical care, because it’s not “their” money. It’s house money.

Likewise, medical providers have no particular incentive to present competitive pricing for their services, because no one is cross-shopping their product.

Fundamentally changing this paradigm is the key to solving the problem of ever-increasing medical care costs. Introduce the aspect of cost visibility—and thus the preservation of limited resources—to the consumer, and introduce the aspect of open-market competition—and thus, offering a better service/product in an effort to win “market share”—to the medical provider.

The details can be worked out by people smarter than me. Perhaps those details might include the personal ownership and transportability of their own medical accounts, regardless of which employer(s) contributed to it, the ability of the individual to determine how much of their own money per year they’d like to contribute to such an account (a la a 401k) in addition to the employer’s contribution. To minimize fraud (now there’s an amusingly naïve concept) and prevent tax-free medical savings accounts from being used to buy expensive cars or illicit drugs, perhaps the account numbers of medical checking accounts could be keyed into a national database of medical providers with valid “medical account numbers,” so the only thing a medical check can be used for is to pay an authorized medical provider. Will enterprising dishonest individuals find ways around that? Of course. As I said, smarter people than me will work out the details.

But the basic concept is as solid as concrete: get the entire medical cost-payment aspect moved from an invisible/government function to a highly-visible/private function, which operates according to the rules of a competitive open market. Once the individual apportions their limited resources among highly competitive providers, the entire system becomes more efficient, better valued, and of higher quality.

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