cannedjam

Which is more important, lowering the price of health care, or increasing the number of insured? The question is important because the answers can be mutually exclusive.

If everyone is insured, yet have little personal stake in funding the system (i.e. small co-pays or very low deductibles), prices can and will increase decidedly. When someone else is picking up the tab there is little incentive to seek out the lowest cost options. Efficiency takes a back seat to indulgence, and over consumption becomes the norm.

If you have a rich uncle and he is treating you to dinner, there is way more of a chance of you ordering the $50 lobster and $9 baked potato, than there would be if you were going Dutch. If your rich uncle is paying for your health care, there is way more of a chance of you getting a gamut of unnecessary and costly tests, than there would be if you were flipping the bill.

With the current insurance model, and even more so with the one proposed by Obama, patients and even doctors have little knowledge of what procedures cost. You pay your $15 dollar co-pay no matter if you come out of the office with some aspirin, or if you had a full body MRI and heart bypass surgery. When no one cares about cost, the only one left to reign in the spending is the insurance company themselves, who as a result are perceived to be heartless and without compassion.

If we used this logic in other industries, costs would be so astronomically high that our economy would come to a halt. Imagine if everyone had retail insurance and all clothing only cost $15 no matter the brand or quality. Everyone would be shopping exclusively at Brooks Brothers and Coach, people would be hoarding merchandise making it more scarce, and prices would sky rocket for the insurer.

In fact, the only sectors in the medical industry that are seeing higher quality at lower prices are in the elected fields. Lasik eye surgery and plastic surgery procedures continue to improve while prices continue to decline. These are also the only two sectors of the industry that fall outside of the grasp of the insurance model, and as a result are exposed to open pricing and competition. If you ask someone how much their corrective eye surgery cost they can tell you without skipping a beat, try getting an answer from them as to how much their last family doctor visit cost their insurance company. This is proof that a greater share of the responsibility on the patient leads to competition, which leads to greater efficiencies and lower aggregate costs for everyone.

In addition to a lack of shared responsibility, other cost increasing inefficiencies exist in the system. Cookie cutter pricing, known as “community rating” (as opposed to “experience rating”), mandates that everyone pays the same premiums regardless of expected cost. This is imposed out of “fairness”, however, it allows for an obese smoker who ignores his diabetes to pay the same in premiums as a healthy marathon runner who eats a balanced diet. There are no incentives for living a healthy life, and as a result the system inadvertently subsidizes unhealthy and costly behavior. With “community rating” men and women must be treated the same, even though women visit the doctor and utilize the health care system significantly more than men (I don’t hear much outcry over the fact that men pay higher auto insurance premiums than women). Someone who is 300lbs overweight cannot be denied coverage, and in addition is allowed to pay the same price as a 110lb yoga instructor.

When you don’t allow an insurance company to assess risks and assign costs appropriately, the least risky among us must pick up the tab. Fair? I am pretty sure someone would complain if the village drunk was allowed to pay the same amount for car insurance as everyone else.

As a result of these regulations, the perception of health insurance as a product, shifts to health insurance as a right, and once the core principles are abandoned, we are left with government subsidized health charity, operating under the guise of “insurance”.

This system can achieve universal coverage, but at what cost? It rewards unhealthy lifestyles and fosters preventable diseases, punishes the least risky among us, takes personal responsibility out of the equation, significantly increases price, and installs a huge government apparatus that is so cumbersome and bloated that it would be virtually impossible to reverse.

Off the top of my head I can think of a few easy, cost effective ways, using free market ideals to achieve systematic efficiency, and healthier Americans (without abandoning what makes us great as a nation);

1) Tax free health savings plans
2) Higher deductibles with lower premiums
3) Increasing competition by allowing out of state health insurance

These three things would be a good start.

JAM Economics, Politics Health Care