Dr. Costello’s “Best of Health” Quarterly · Vol. II, No. 2 · Summer, 1991

Dr. Costello’s Economic Law of Third Party Payers

The money involved in health care has drawn many schemers to leech off the doctor-patient relationship. One of the leeches, the third party payers, which include Medicare, Medicaid and all other commercial health care insurance companies, has grown so large that it is about to kill the patient and the doctor. How? Dr. Costello’s Economic Law of Third Party Payers.

When there is a third party paying for any service or product, the price goes out of sight.

Just to be more clear, the third party payer is not the traditional middle man or broker, who actually buys and sells the "goods" and participates in the risks of the market. A third party payer is an organization which has no risk. It takes in monies, keeps a cut and disburses the rest as needed.

Dr. Costello’s Economic Law of Third Party Payers defined explicitly is this: when the negotiation and payment for goods and services by the seller to the buyer is handled by a third party payer, with the following conditions in place, the price of the goods and services over time increase to bankrupt the system.

Conditions which facilitate this to occur are:

1) prices must not be known to the buyer,

2) there is collusion between and/or an absence of adequate competition between third party payers; and

3) government is directly involved in the market and not outside supervising.

Consequences of this law are:

1) the money involved draws people only interested in the money and power, not the service it is intended to provide;

2) the number of goods and services drawing on these funds expand;

3) the bureaucracy handling the money expands;

4) closer to the bankruptcy, the number of goods and services contract, because the bureaucracy expands itself and absorbs monies; and

5) taxes and/or premiums increase, not to pay for more goods or services, but to sustain the bureaucracy of the third party payers.

Look at the current problem with prescription drugs. In the last five years, the third party payers, have gotten into the market place offering to cover prescriptions with a $3.00 to $5.00 copay by the patient at the pharmacy counter. Over this time, the prices of medicines have skyrocketed, as a direct result of Dr. Costello’s Economic Law.

The price at the pharmacy counter has been distorted and is in the process of bankrupting the personal paying patients and eventually the whole market for prescription drugs. The government's response to this as a buyer of drugs for Medicaid and VA services has been to fix the pending "bankruptcy" for their programs and not the general public's by forcing the drug companies and pharmacies to lower prices to government programs by law, further distorting the real cost of medicines.

The real fix would be to outlaw insurance coverage for prescriptions on federal and private programs. Prices would then drop to their proper level.

Other examples can be thought of to bring the issue to life. What happens to the price of a car repair when it is to be paid for by auto insurance versus the individual?

In summary, in health care transactions, as in all economic transactions, to let the buyer directly negotiate with the seller is the most cost effective.