Health Care: Sticking it to the Healthy
Let’s, for the sake of argument, assume that HR 3200 is completely revenue neutral and that no one will be taxed a single extra penny, because, for the purposes of my discussion below, it doesn’t matter whether this is true or not. If you comment on this article and say anything about revenue neutrality or no increased taxes (on people making less than that magical number of $250K/year, of course), I will simply laugh at you for not reading the article and shouting out talking points.
It has been established that insurance companies struck a deal with Washington. The deal: You (Washington) force everyone to buy an insurance plan and we (the big bad insurance companies) will support a plan to insure people with preexisting conditions.
That sounds great, right? I mean, it’s just like auto insurance. The reason auto insurance is so cheap (I pay more for car insurance than I do for health insurance… so figure that one out for me) is that the auto insurance companies have a better risk pool because both good and bad drivers are forced to buy insurance.
You see, what would happen if not everyone were forced to buy auto insurance is that people who are not risk averse and feel that they are great drivers would buy either a watered-down policy or no policy at all. The bad drivers (knowing that they are bad drivers or otherwise accident prone) and the risk averse would pay a higher premium for better insurance. The insurance company would really have very little way to tell who was buying the better packages because he is just a bad driver and who is simply risk averse. This problem is known as adverse selection, which often occurs in situations where there is an asymmetry of information, meaning one or both parties have information that the other does not have.
Because of this problem of adverse selection, the insurance companies would charge a very large premium for the bad drivers (i.e. the policies with more coverage) and a very small premium for the good drivers (i.e. the policies with less coverage).
Now, when the government steps in and forces EVERYONE to buy a certain minimum level of coverage, what happens? Well, now the insurance companies know that some of the drivers are very good drivers who will rarely, if ever, make a claim, while some are the bad drivers who will constantly be making claims, probably in excess of the premiums they pay. But, because of the risk pooling now in effect, the insurance company can charge the bad drivers a smaller premium than before because the good drivers are making up the difference. In other words, the good drivers are subsidizing the bad drivers’ insurance premiums when they are forced to buy a minimum coverage in excess of what they would have without the law forcing the purchase of a minimum coverage policy.
This is great for bad drivers, and terrible for good drivers. Not only is it bad for good drivers because they pay more, but there are more bad drivers on the road because the good drivers are subsidizing their bad driving practices! And, on top of that, some of the good drivers who would have bought less expensive policies and then either not repaired minor cosmetic issues that are pricey to repair, or would have paid out of pocket because their plan didn’t cover it will start getting those repairs done, increasing both demand for and, therefore, cost of auto repairs.
Back to health care:
The health insurance lobby is not entirely stupid. They understand what’s at risk here. Either they cover preexisting conditions, or they face competition against a “public option” which will most certainly cover preexisting conditions at a fraction of the cost, being backed by the seemingly bottomless purse of the United States Treasury (ultimately, this is tax payers’ money… and mostly “rich” tax payers’ money). So, they cut a deal with Washington.
The health insurance companies know that if they can create a better risk pool by forcing young, healthy people into plans with certain “minimum standards”, then they can offer lower insurance premiums to older, sicker people and they can offer to cover preexisting conditions. The solution is clear: get into bed with Washington.
Just like auto insurance, this is great for those who will use their health insurance the most: the sick and the old. This is a terrible deal for those who wouldn’t typically use their health insurance all that much: the young and the healthy.
This is a massive transfer of cost from the sick to the healthy. And, because the healthy will be forced to buy more expensive policies, they will be more apt to use the policy, increasing the demand of and, therefore, the cost of health care.
It all sounds like a good deal to anyone with a heart. However, when you look at the unintended consequences, you have to ask yourself if it’s right. The people who will be disproportionately hurt by this deal are the young, healthy people in our economy. It will become more expensive to ensure low wage earners (who are typically younger, healthier workers), and it will cost those young people who are either unemployed or self-employed a considerable amount more money to buy health insurance, because they will be forced into buying more expensive coverage to meet minimum coverage standards.
Ultimately, this will cost young, healthy people their jobs as they become more expensive to insure. It will keep unemployment rates higher among the very people this bill is aimed to help: the poor (low income earners) and the unemployed.
For those of you who have preexisting conditions and think this is a great thing, I only ask that you say out loud what you are truly asking for: “I want to force healthy people to pay more money so that I can pay less. I want to take from the healthy for my benefit.” Don’t try to make this seem like some nobel purpose you are pursuing – some right to which all Americans are entitled. You are in this for yourself. You are as greedy as Bernie Madoff, but you are trying to use the government to force people to give to you, whereas Bernie Madoff just committed fraud. You both have the same end goal: more for yourself at the expense of others.
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As a young and healthy individual similar to the ones you refer to I undoubtedly agree with the concepts you present here. I can’t remember the last time I needed any healthcare services and thus am glad I barely pay for the insurance for those services. The unintended consequences of such actions, the healthy subsidizing the sick, would go on just as you desrcibed and further, creating more of a healthcare crisis than now. With all this in mind though, do we agree that there are healthcare issues that need to be addressed? One of the main reasons for consumer bankruptcy has been healthcase expenses and I for one also don’t feel comfortable ignoring the sob-stories we do hear from those backing this healthcare plan and justifying it with these occurences. Is there anything that free-market concepts can do to resolve this issue or is the current state of healthcare insurance just that, the result of the free-market insurance business? Obviously forcing insurance companies to accept those with pre-existing conditions is ridiculous as there would be no need to have insurance until you actually needed it, but is there is resolution to this issue (with minimal government involvement of course), or do you think this is not an issue to begin with?
Brian,
You ask a good question, and I don’t think anyone who has any amount of compassion can hear those stories and not feel for the people involved.
The problem, as I see it, is that there is no free market for health care. Health care is a heavily regulated industry. Regulation always comes at a cost, because, at a minimum, someone has to spend some amount of time every day (or on a regular periodic basis) filling out forms and complying with regulation. We all see this with something as “simple” as taxation when we either spend hours filling out our 1040s, or pay someone to do it for us. And, just as there’s a risk of being audited when we file our tax returns, there are risks of audits and penalties associated with trying to comply with industry regulations, even if the company has only made a simple mistake. Regulation is not costless.
The free market does, however, pass those costs of regulation on to consumers. Laws requiring that hospitals serve anyone with the sniffles who shows up to a hospital, even if they can’t pay for services rendered to fix the sniffles, creates unpaid costs that must be covered by someone… and that “someone” is often the paying customers, much like we all pay for theft from retail stores where we shop. Imagine if Congress passed a law saying that retail stores couldn’t turn away anyone who needed clothes, and those who couldn’t afford clothes were allowed to just walk in and take clothes off the rack. Right now retail stores expect 2% of their product to be stolen – it’s built into their prices. What if 5%, 10%, or even 15% of clothes were stolen? Those of us who either could pay, or would find a way to pay, would ultimately suffer increased prices when we purchased clothes. By not allowing hospitals to deny care for anything – even non life threatening issues – we have essentially given people the right to walk in and take health care off the rack. We all pay for that.
And what about Medicare and Medicaid? As it turns out, Medicare and Medicaid don’t reimburse 100% of costs to doctors. The doctors are then forced to make those costs up elsewhere… paying consumers. As the Baby Boomers enter their late 60s, and with an aging population, more and more people are covered by Medicare. (Did you know that at age 65 – like it or not – Medicare becomes your primary insurer?)
How about the third-party payer problem? People with insurance (btw, this is MOST of the population… approx 85%) don’t care about how much things cost because they only pay a co-pay. The doctor says I need an MRI – great, sign me up; I’m not paying for it. I need some exotic new antibiotic and not penicillin? OK, whatever you say, doc; good thing my insurance policy has a prescription drug benefit. Part of the “problem” with health care is that everyone has insurance in the first place. More health insurance is not the solution to our problem; health insurance is the problem. And health insurance is not the problem because of those evil, greedy health insurance companies, but because of the perverse incentives we, as consumers, have when we are insured. We consume more health care than we otherwise would, and we become less active patients because we have less incentive to push back on the doctor in order to make sure we get appropriate care… after all, if the doctor screws up, we just go back because we’re not paying for it. This is a huge part of the problem.
So, how do you fix that problem? That’s a little trickier. You have to look at the history of health insurance. Why do employers provide health insurance? Doesn’t that seem odd? Most people probably don’t think it’s odd because that’s all you’ve ever known. But think of it in the context of what really makes sense. Why would employers provide health insurance? Why not just pay the employees more and let them decide what to do for health insurance… heck, if you were to pay many employees in cash what is spent on health insurance, the employees might buy a cheaper plan (like an HSA) and actually make money on the deal – they might be happier with that outcome. So why, then, does the employer decide that a certain part of salary is going to come in the form of health insurance?
There are a couple of reasons: 1) tax avoidance (not tax evasion – which is illegal – but tax avoidance); 2) government intervention. I think #1 is self evident, so I’m going to focus on #2. Back under the reign of FDR, the government thought it was a great idea to put a cap on executive pay. The free market disagreed, and found a way around that legislation. Crafty companies (probably with the help of crafty lawyers) discovered that they could pay executives right up to the limit of the salary cap, but then offer “benefits”, which were not included in compensation figures for the salary cap, on top of the compensation that was considered for the salary cap. In essence, these companies knew they were paying their executives more than the salary cap, but they were doing it in a way that got around the salary cap. The free market devised a solution to government intervention.
Eventually, unions got bent out of shape over the fact that executives were given these benefits that the employees were not. Companies ultimately caved to union demands, and gave health insurance benefits to the broad based employee population. Today, almost all employees are offered benefits. Make no mistake about it, companies consider health insurance costs when deciding pay structure (i.e. employees ARE paying for health insurance with lower salaries), but the companies offer health insurance nonetheless because it’s become expected practice.
Believe it or not – and this is one of the few instances where you’ll see me advocate a tax – I believe that treating health insurance like income (because, in point of fact it is income to the employee) will start to resolve the third-party payer problem. Employees will start to demand that the company stop offering gold-plated packages in favor of HSA plans. The whole administration of health insurance would become so cumbersome for employers (because employees would now fight over health insurance plans just like they fight over compensation) that employers would ultimately drop the program and say, “Screw this, here’s the money we spent on your health care benefits. You go figure it out on your own.”
There are a lot of reasons that costs are increasing exponentially. A lot of those reasons you can link directly to government intervention. Some of them can be linked to simple market forces – for example, advances in technology that allow doctors to perform major surgeries with machines that enable great precision, and a few smaller-than-a-dime sized scars. Doctors, scientists, and engineers in the United States have an incentive to create innovative technologies and drugs, and to study a single, specialized disease so that they can cure things that were heretofore thought to be incurable because someone is willing to pay them big bucks for those breakthroughs. Isn’t it great that we have our best and brightest working so that Magic Johnson can subsidize breakthrough research until it becomes cheaper and more widely available? Isn’t it great that we can get an appendectomy that leaves 3 tiny scars, instead of the large scars that people used to have on their sides? I, for one, love living where I know some of the brightest people in our country are working to help me live a better, longer life.
We’d all be a lot better off if we just got government the heck out of the health care industry altogether. Look at the problems the government has caused already!
I unfortunately just finished spending about 10 minutes typing a nice follow-up to your most recent post but because I incorrectly entered the CAPTCHA code it was all the lost. So due to my frustration, here is a paraphrasing of what went down….
I basically wanted to compare the banking industry to the healthcare industry and how either because of their massive size or the dire need of their services people seem to forget that both industries are indeed intended to be profitable businesses. People get upset with interest rates they are charged but forget that a bank extending you credit is a privilege not a right, and thus you have agreed to their terms by accepting their financing. Furthermore paying the interest that we do when we take out credit allows banks to loan money to entreprenuers who could start a new business and employ x amount of people. To me this is similar to the healthcare industry and how the routine payment of premiums can generate the captial needed to continue innovation and keep the breakthroughs that you were mentioning progressing.
So I agree with your synopsis and as you stated it is good to live knowing that the brighest people are working to increase the quality of our life; versus Russia which I believe has a male life expectancy of 59.
I have a very radical solution to health care. Forbid health insurance at all, and limit the amount of profit pharma and the medical industry can take. If you eliminated health insurance, no one would be able to afford health care at all, so prices will have to come down. Much of the cost of health care is industry profits, no matter how much they try to scapegoat lifestyle and obesity.
I am not suggesting doctors would not be paid well. Instead of subsidizing the bankers, perhaps credit could be extended to patients with manageable low interest payments to pay off their medical bills. (Consumers seem to love debt anyway, instead of paying every month for big screen t.v.s and other crap, they can pay their health insurance bills.) Doctors should be fairly compensated but they don’t need to be greedy either. If medicine was not seen as a path to riches, maybe only those really committed would go into it. We also need more medical schools to allow more who want to become doctors to be able to. If you think that will water down doctor quality, all I can say is Pharma influences medical school from day one. Students are taught how to push pills and maximize Pharma’s profit anyway. The quality of medicine in this country already suffers, we just don’t know it because we are too busy feeling guilty about our faulty “lifestyles.”
These ideas may sound silly to some, but I haven’t heard better ones. Certainly not the current plan, not single payer where Uncle Same sticks his nose in our health care decisions, and most certainly NOT the system we have now where the primary motive is greed and the patient is the ultimate stooge.
FatNSassy,
I agree with some of what you say, but I don’t understand why we’d have to intervene in the market and forbid health insurance. Health insurance, itself, is not necessarily the problem. The problem is the system by which we get health insurance, which is a market solution to government intervention in the first place. Intervening to forbid health insurance will simply cause more market distortions.
I also don’t understand why we wouldn’t want people to go into medicine thinking they’ll make a killing. Isn’t that what we want? The best and brightest minds going into medicine so that they can do the very best they can to make the most money they can? Because, by making a lot of money, they help a lot of people.
And, btw, just as a point of fact, much of the cost of health care is not industry profits, that’s simply not true.
I agree with your analysis. That by requiring insurance to cover everyone, the cost of health care is shifted from the healthy to the infirm; if you are healthy you loose; if you are unhealthy, you win. This is obvious to anyone with an IQ greater than a box of rocks. There is no disputing it. Is also nicely sidesteps the real issue: should we allow the infirm and indigent to go without care?
It is an ugly question that is seldom brought up in debate. It makes people uncomfortable. If you believe those who can’t pay for their medical treatment should be denied care, as to avoid transferring the financial liability to the healthy, I am all ears. It may be a reasonable argument, although I’m not going to make it for you.
If we chose to save the lives of those unable to pay, the cost of their treatment will be born by the paying customers, insurance or no, one way or another. If the hospital is unable to recover the costs, they will pass the costs onto those with money and/or insurance. If this does not happen, then the hospital will go bankrupt.
This is present day reality. The cost of health care for the poor and infirm is subsidized by those who can pay. This will continue to be reality as long as we are unwilling to allow these people to die. There is no avoiding this. If we don’t want to pay for this, these people MUST be allowed to go without treatment. You can’t have it both ways.
Should the young and healthy be made to carry health insurance? Sometimes the young and healthy are unlucky. If a medical emergency arises, which carries a substantial financial liability, say in the neighborhood of $100K+, and this young and previously healthy individual is unable to pay, the cost will be born by those unfortunate enough to have invested in health insurance. Thus allowing people to go without coverage, no matter how healthy, shifts the cost of their risk onto someone else. If we don’t allow those unable to pay to go untreated, then everyone able to contribute should have to contribute something.
As an aside, if you don’t like the idea of compulsory contributions, then perhaps a waiver should be made available. If you take the waiver and require medical care, for which you can not pay, then no service for you, even if it results in your demise.
How should contributions be apportioned if everyone is to be covered? Obviously you can’t demand more than a person could reasonably pay, so ability to pay would have to be factored in. This may be unfair to the wealthy, but it is necessary if we choose to treat those unable to pay.
What about weighting risk factors, such as age or prior health history? This sounds good in principal, but there is a strong correlation between high risk and inability to pay; the elderly live on a very limited income and those who are chronically ill are not (as a general rule) bringing home the big bucks. Scratch that idea and return to ability to pay.
What about lifestyle risk? Should smokers, the obese, etc., have to pay more? This can be argued one way or the other, but I personally would not like to see either the government or the health insurance industry making moral judgments along these lines.
How do we minimize the costs? By providing preventative care. It is either that or we can wait until the show up at the ER, as happens now. The net cost of care would be much lower if these people were treated before they reached this point. Preventative care is a win-win. It costs less than what we have now and more people can be saved.
All of this implies some form of universal health coverage, if we are unwilling to turn away those unable to pay and we wish to bring the costs under control. That is not to say that I am endorsing the Obama(TM) health plan, which is a steaming pile written by industry lobbyists.
You are obviously both intelligent and well informed, but if you want to argue your point, then you should take it to its logical conclusion: If those unable to pay for their medical treatment are not to be subsidized by the healthy and/or those with the money, then these people must be denied treatment. Are you willing to go there? If not, we are left with socialized medicine of one sort or another.
Just keep in mind that when the govt runs healthcare there will be NO competition. Malpractice suits? Forget it..can’t sue the goven. Huge revenue for the feds. Healthcare will be dispensed like water…drip, drip. Rationing. We’ll tax the health benifits of the private sector at 8%. The employer will say he can’t afford it and tell the employees to go get the “public”(govt) option. Obama hasn’t mention where the doctors(who will have their income reduced) will come from to treat the additional 50 million patients. Not to mention up to 30 million will be illegal aliens. Hell of a deal