This is a topic I have covered before, but I think it bears repeating. Now that Democrats have regained control of the House of Representatives, it is certain that they will begin to chime on about one of their top priorities at the moment – Medicare for All. It’s been a talking point for them, and it’s their way of marketing and rebranding a single payer healthcare system. They believe that by attaching the branding to something people believe already works, that it will sell the idea of socializing all of healthcare.
Already, Medicare is well on it’s way of not being able to support itself very soon. Many estimates show that nationalizing the healthcare system (Medicare for All) would cost upwards of $3 trillion. It’s easy enough for Democrats and socialists to wave a magic wand and pretend that if we just tax “the rich” more we can afford it, but the fact is that you can’t tax the rich enough to pay for this. Not to mention, if we are really talking about defining “the rich”, then everyone in the US needs to consider themselves a target. The vast majority of us are rich here in the US.
To be fair, the costs of health insurance is extremely high by most standards. It was already high when Obama took office and Democrats had their way a few years ago with the Affordable Care Act that made it even more expensive, possibly with the goal of making private insurance so unaffordable that people would be more swayed by Medicare for All. But, the single greatest factor of what makes health insurance most expensive is the manner in which Americans view health insurance.
Health insurance is the only form of insurance in the US where people view it as a means of paying regular billing and for costs of every day expenditures. It’s a little bit like if you expected your car insurance to pay for your gasoline and oil changes. Insurance is intended to transfer the risk of a major financial hardship onto another party for a fee. Everyday type expenditures aren’t real risks of financial hardship. They are virtual certainties. We expect our health insurance to pay for a routine visit to the doctor for the flu, but we don’t expect our home owners policy to pay when we change an air filter.
We have made our health insurance plans into very expensive billing services that we use to take care of all our healthcare billing and payment. Every time you insert a bureaucracy of people into the mix, things cost more money. It costs more to have people manage these expenses for you, and it costs doctors more to deal with the insurance companies. If you were to hire someone to pay all your household bills every month and to verify all the charges, you would have to compensate them to do all that, and it would be expensive to do so. The same goes for your healthcare costs.
Not only is it expensive to pay people to manage every day sorts of costs for you, but it also, in the way we currently manage our health insurance, interjects a third party that is unable to shop our healthcare for us to get the best price for the services rendered. Most people would be incensed in their health insurance company asked them to go to another doctor or a different healthcare facility in order to get less expensive treatment. We’ve maintained the service shopping within our healthcare arrangements but have removed the shopping for price. This has caused health insurance companies to be handcuffed to paying higher prices when we no longer really care what those prices are. We shop for great care but supply little market pressures to pricing, because we do not pay prices directly and demand the insurance companies pay for services wherever we choose. Coinsurance is a partial answer, but often times it is not enough of a motivator, especially when the out of pocket max that is mandated by the government is reached. This means that the most expensive procedures are the ones that receive the least amount of pricing pressure.
Pre-existing conditions have always been a sticking point, and it’s something that the majority of people don’t want to lose coverage on if there is a repeal of the ACA. The problem with it is that this is something that also falls outside of what insurance is intended to do. Insurance is intended to guard against risk. A preexisting condition is no longer a risk. it’s a certainty. If your house in on fire and you ask me to insure it for you as we watch it burn, why on earth would I agree to take on the responsibility of rebuilding your home for you if you pay me less than 10% of the cost? It doesn’t make any sense. While it may seem unfair and discriminatory, that’s just not what insurance is and it isn’t how insurance functions properly.
The problem of preexisting conditions can only be fixed by separating our health insurance from our employers. If you lose your coverage when you leave your employer, then when you adopt new insurance at the next employer, it is very easy to have some sort of preexisting condition. However, if your coverage stays with you no matter where you work, no pre-existing conditions ever occur unless you voluntarily change insurance companies.
The other item which skyrockets the cost of health insurance is that the ACA qualifies the majority of Americans to receive a subsidy for the cost of their health insurance. In fact, many people making even as much as $100,000 per year can qualify for subsidies. The subsidies are quite significant, often times covering most or all of the premiums. If the government throws out money, prices tend to adjust upwards. There is less incentive for people to price shop. It’s just like the rising costs of education that are driven by a constant influx of government money into higher education. In any economy, when more money is injected into a market, the prices tend to go up. It might feel good to pay less for your health insurance, but you are still paying for it with your tax dollars, and at a much higher rate than if you had shopped for it yourself.
The only way for the costs of health insurance to go down is to interject free market forces into every aspect. Many people are not aware of a type of health insurance known as an “indemnity plan.” These plans are not sold on the healthcare marketplace with subsidies, and when they are sold through employers, it is most typically done in a fashion where the employee purchases it as a voluntary benefit. The employer is not required to pay a portion of the premiums, but there are benefits for both employer and employee, because it is a pretax payroll deduction where both employer and employee save taxes. The employee can also keep the plan when he/she leaves.
Rather than paying whatever rates are set by doctors and hospitals at their varying prices, indemnity plans pay on a set fee basis – usually based on the exact fee schedule used by Medicare, but often paying more than Medicare. By doing this, actuaries working for the insurance company are much better able to predict the costs and risks, thus decreasing premiums. It also allows the insured to shop for his care. If you know the exact amount of flat fee your insurance company is going to pay for your procedure, then you combine the service level you want with the price you are willing to pay and you go shopping. It brings about the sorts of market pressures that are typical in a free economy that maximizes pricing and service efficiencies, driving down the costs of health insurance dramatically.
Here’s a real world example. A man needs a knee surgery, and his doctor wants him to use a hospital. He checks with the hospital and has them give him an all-in price of a little over $32,000 for the procedure. His insurance policy pays a fee of $10,400 for that particular procedure. Because hospitals are generalists and have to be prepared for almost anything, they are very expensive places to have an elective surgery. The man instead called a local surgery center that specializes in outpatient orthopedic surgeries and they offered a cash rate of $6,500. The man was able to get his surgery done and keep an extra $3,900 in the process. Not everyone can afford to pay out of pocket like he did, but it illustrates how market pressures can dramatically change prices. As a consequence, indemnity policies usually cost about a third the cost of traditional major medical insurance, and usually offer better coverage with lower deductibles and much lower out of pocket expense if someone is willing to take the initiative to act as a true healthcare consumer.
Medicare for All only increases the problems that are already in place with healthcare. Do you want to pay less money out of pocket for your healthcare, or do you want to pay a massive bureaucracy to manage it for you? Do you want private health insurance to become less expensive and allow you to choose the coverage you want, or do you want government deciding whether you are deserving of the health coverage you want?
We don’t necessarily have to go with indemnity coverages for the US, but we do need to think about health insurance much differently in order to keep government from destroying the good in our healthcare system, and magnifying what’s bad about it. We have to consider health insurance more like the other types of insurance we use. It’s intended to transfer the risk of significant financial hardship. We can’t afford to treat it like an entitlement or a right. Health insurance is not, by any means, the only factor in the costs of healthcare, but is probably one of the most significant. If we have any hope of making a real and dramatic positive change in the costs, quality, and outcomes of healthcare in the US, we have to get government out of health insurance, and we have to bring about full free market forces to bear on health coverage.
Danny Chabino
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