When it comes to summing up many Americans’ thoughts on the issue of healthcare reform, Pink Floyd said it best: “How can you have any pudding if you don’t eat your meat?” Now, obviously, Pink Floyd didn’t have healthcare in mind when they said this back in 1979, but the fact that most Americans are under the impression you can’t have one without the other is prevalent in the healthcare discussion today. Ask anybody what the health industry’s shortcomings are, and regardless of whether they’re for or against Obamacare, the conversation undoubtedly turns toward the availability of health insurance. Over and over you hear that health costs are too unaffordable, and it’s the insurance market to blame. Why is that? Well, there’s a few different reasons for this, all of which revolve around oversights made at a basic level.
The most elementary of these mistakes is that, somewhere down the road, we’ve decided it’s okay to conflate the terms health care and health insurance. For most Americans not immersed in the details, this has made the discussion of solutions almost impossible. Although related, they are by no means interchangeable terms. Health care is the actual services provided by the hospital, doctors, etc. Health insurance, however, is a service of its own, designed to help pay for health services. Very often I hear people referring to one or the other in the wrong context, only further muddying the waters of the underlying problems in today’s system. Now that we’ve established the difference, we can go a little further into how each of these can be improved.
Let’s start with the insurance aspect. At its basic function, insurance is a transfer of risk between parties. By recognizing that we are exposed to certain risks and unforeseeable disasters, and that we cannot always incur their costs, a demand for different insurances came about. Through accurately calculating risk, companies can charge their customers installments to protect them from catastrophic loss. This concept is the same whether that risk involves your car, home, health, or even life. It is for that reason you can’t get a policy covering a fire on a house already ablaze, as it is no longer a transfer of risk, only a transfer of payer. Similarly, in health insurance, forcing an insurer to offer policies covering cancer to someone already diagnosed is not insuring them against risk. Missing that critical requirement distorts its entire function.
We recognize that our car insurance would go up if the company was forced to cover guarantees like oil changes and routine maintenance, yet, we act surprised when it happens to our health insurance. Changing the coverage from a risk to a guarantee raises the amount they must charge, while also offsetting the moral hazard now involved. If you knew your car was covered, how often would you take it into the shop for every little noise it made? On the other hand, how long would those of you who do your own maintenance continue to do so if you knew all of it was guaranteed under the car insurance you are forced to pay? I know what you’re thinking: “We wouldn’t need insurance for routine things if health care costs weren’t outrageous.” I agree, and to answer that we must move onto the distortions done in the health care market.
Just like with every other market, regulation slows progress, and when it comes to health care, there is no shortage of regulation. As of 2014, the number of regulations regarding just Medicare alone exceeded the entire 70,000 pages of the IRS tax code. How can a market expect to bring prices down for its consumers when three administrators are needed to ensure regulation compliance for every one doctor, not to mention that doctor spends 25% of his time just dealing with insurance companies on claims, billing, and authorizations. It’s hard to yell at pharmaceutical companies for overcharging when the average drug costs over 2 billion (yes, with a ‘b’) dollars to be brought to market due to FDA regulations. The FDA is just one of more than a dozen agencies now involved in creating compliance laws for the health care market. Add in all the licensing laws, and the fact that your education costs to get into a decent medical job is approaching a six-figure average, and it doesn’t take a rocket scientist to figure out why we need insurance to cover the cost of checkup. The insurance companies are just a business caught up within the regulation nets, trying to stay afloat. If we want our costs to come down in the health care market, our first order of business needs to be letting it perform as a market again, not pointing fingers at who raised prices first.
In order to solve that problem, we need to allow incentives. In any market, consumers and producers respond to incentives, and the easiest way to encourage them is through choice and competition. On the insurance side, allow people to choose their coverages, and allow insurers to offer what they want and compete with one another to bring prices down. On the care side, allow hospitals to compete through new methods of operating, much like Dr. Josh Umbehr, who figured out a way to run his practice like a gym membership, with a monthly subscription for health care; oftentimes, things like stiches and prescriptions are provided at no cost to his consumers, and yet, he still manages to undercut his competition.
On the pharmaceutical side, a great first step would be making the FDA approval of drugs to be optional. Allowing consumers the choice to try drugs that are well established in other markets, like Europe, while also bypassing a mountain of red tape, would allow them to gain prescriptions at a fraction of the price. These changes will also help the poorest groups the most, who are the hardest hit by marginal price increases caused by redundant regulations.
Am I saying that there are no companies out there involved in health care right now that are swindling their clients? Of course not, but when discussing solutions, whether it be from the Democrats or the Republicans, it’s naïve to allow your full attention to be drawn towards blaming the insurance and pharmaceutical companies, while completely ignoring the 100,000+ page elephant in the room, and the bureaucracy that drives it. Unless that perspective changes, don’t expect any revised health care plans coming out of Washington to do anything other than kick the can down the road another four years.
Thomas J. Eckert
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