Health Care Insurance Reform Fallacies

Most of the political posturing about health insurance reform has now gone back to the old political methods of presenting heart-wrenching cases as justification for sweeping reform. It is much akin to how the media produces a sad case to promote their agenda. During the middle of the Bush administration, when the financial outlook was really good, liberal news outlets would find some obscure person somewhere and do a story on how terrible her situation was as a way of blaming the administration. It is common procedure. But alas, you will never see a story now about how bad the economy is but how well a particular person is doing somewhere.

There are ways to improve health care access and reduce costs that are fairly simple and a lot less costly than what is being proposed. I have previously written about removing state monopolies and other strategies. However, let’s think about health insurance generically and what it is supposed to do.

Back in the day, someone thought it would be a good idea to go to someone with money and sell “If you pay me some money up front and regularly, I will pay for your expenses if you have a catastrophe of some sort.” The concept would work for fire damage, severe weather damage, your herd dying of disease, your crops not coming in, and other property losses. With the invention of the automobile and the large investment required to buy one and the potential for expenses if you ran yours into someone or something, it seemed a good idea to have insurance against those expenses. The government thought it was such a good idea that laws were passed requiring insurance. Of course, mortgage holders also required insurance for properties that they held liens upon in order to protect their loan pay back. Legislatures are always willing to require insurance as: a) they are made up of lawyers; b) lawyers always pass laws that help lawyers; and c) insurance companies are quite willing to pay legislatures to support passing those laws.

As insurance companies grew, they thought of more and more things to insure against. Of course, health care cost was one of them. Somehow, the concept changed over the years for health insurance. Using the original concept, you would have insurance for catastrophic expenses. If you were injured severely or had a very serious illness, insurance would cover your expenses (or most of them depending on how much you paid up front). Somehow, the health insurance morphed into policies that paid for everything. Routine office visits, visits to the emergency room (even if it wasn’t an emergency), home health visits, cosmetic procedures, and hundreds of other expenses became covered. Of course, there is no incentive to restrain your visits when it doesn’t cost you anything. In fact, there is a tendency to want to “get your money’s worth” out of a policy for which you pay premiums. It is also inevitable that a policy like that cannot ever be financially viable for the insurance provider because the costs have no constraint. As costs rose, it became cheaper to buy policies as a group in order to average risk across a group of people. Since people generally can’t get together and form a group to buy insurance, would form these groups? Company employees. Thus began the employer-provided insurance plans.

With an employer-provided plan, there is exactly zero incentive to restrain costs for the employee. The employee only fills out forms and the employer pays all the costs. The employer goes down the tubes. Another financial innovator went to the large employers with this idea, “If you give me a certain amount of money each year per person, I will take care of their health care needs and you will have fixed costs. If it costs more, I will take the loss, if it costs less, I will keep the extra money”. Thus, the Health Maintenance Organization (HMO) was invented. Of course, the way HMOs make money is by doing as little for patients as possible. It is built into the contract. The paradox is that the companies compete by purporting to offer more services but the way they make money is by not providing them.

The real question is how health insurance veered off the normal insurance track. If health insurance was still using the same model as other types of policies, people would primarily have catastrophic insurance and would set their co-pays and deductibles by their level of risk and how much they were willing to pay in premiums. To reduce costs, there has to be incentive for people to do it. The only real incentive is to have people pay for what they use which isn’t catastrophic. For example, if you pay for an office visit, you will decide whether you really need to go before you do. If it costs six to ten times more to go to the emergency room than it does to go to your regular doctor, you will likely go to your regular doctor rather than fill the emergency room with non-emergency patients.

I am not saying people who are destitute should not have access to care. The government should help the poor and people who are unable to work. People don’t have a problem with helping people who are incapable of working. People do have a problem with paying for people who choose not to work or providing free care to affluent people who don’t need it. To reduce health care costs, the exact wrong thing to do is to make it “free”. The real answer to the problem is to go back to basics and review what health care insurance is supposed to do and the best and most efficient way to provide that care. Trying to cover everyone with “free” care and reducing physician payments until there are few doctors left is clearly not the answer.