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Mailbag: Healthcare costs should be borne by users

November 04, 2013

"Make no mistake: The cost of our healthcare is a threat to our economy. It's an escalating burden on our families and businesses. It's a ticking time bomb for the federal budget. And it is unsustainable for the United States of America."

This was spoken by President Obama on June 15, 2009, at the annual conference of the American Medical Assn., and he was right on. The healthcare system of the United States is broken.

The big question is why?

A big contributor to the problem is that most medical services are paid for by parties other than the individual receiving care. A solution is keeping payments for services as closely connected as possible to the person receiving the medical attention. People are always more careful when spending their own money than someone else's.

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Years ago, I worked for a company where part of my compensation was dependent on the expenses I incurred. I received 10% of the net proceeds my sales activities generated. Net proceeds were computed after business costs were taken into account. The lower my expenses, the greater my income. The intention was to create an incentive to increase revenue and lower costs.

Another way to look at it is like this: Every dollar in expenses I incurred left me with a dime less in income. Some of the expenses were not discretionary: A certain amount was apportioned for company overhead — recurring items like phone, auto and things of that nature.

Some things, however, were discretionary and a reverse incentive appeared here. A business is left with a dollar less in income for every dollar in expenses, whereas I lost only 10 cents. The discretionary stuff is where the fun happened.

Entertainment was a big part of gaining and maintaining: dinners, golf, trips. Certainly they were necessary and an important part of the business, but the reverse incentive affected my decision-making at the margin. I sometimes spent far more money than I needed to because 90% of the money wasn't mine.

One dinner with two clients cost more than $700. And yes, it was awesome. The perverse incentive? It cost me $70. If I had instead taken the two guys to an inexpensive place and spent $120, that would have reduced my income for the month by $12.

Spending an additional $580 cost me $58. Was it worth it? You betcha.

Would I have spent $700 of my own dollars to eat dinner with those two? Not a chance. We would've gone to a cheapie burger joint and the cost would've been about $12.

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