HEALTHCARE INSURANCE IS THE PROBLEM, NOT THE SOLUTION

It’s supposed to shelter consumers from high prices; instead it shelters high prices from consumers.

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The Obamacare debacle has been going on for three years now—long enough that its flaws should be apparent to everyone. Unfortunately policymakers and pundits still can’t see them. Pharma and hospital execs can see those flaws, but they aren’t about to point them out to the rest of us, for those “flaws” are the sources of their ongoing windfall.

What’s wrong with Obamacare is just a more extreme version of what was wrong with the healthcare scheme America had before, namely the use of insurance to pay for healthcare services and medicines.

Why do people find it hard to see insurance-based payment as the major flaw in the system? Because it’s the core concept, the initial premise, around which everything else is built. Everyone assumes at the outset that paying for medical care as one pays for other consumer goods can’t work because it would expose most people to financial ruin in cases of serious illness. Everyone assumes that an insurance-based scheme is therefore required. Moreover people are used to thinking of insurance as a general method to protect people from ruinous expenses—in the case of life insurance, for example, or home insurance.

The problem with contemporary health insurance starts with the fact that it isn’t used like other forms of insurance. It isn’t used solely to protect against some rare calamity—it is also used to pay for ordinary healthcare, even routine doctor’s visits.

How is that a problem? Consider a normal, transparent market, where buyers meet sellers and are free to choose among them. In this relatively free market, rising prices impact buyers directly, reducing their demand. That in turn puts pressure on sellers to find ways to price their goods and services more cheaply.

In such a market, a hospital charging $75,000 for a routine surgical procedure, or a pharma company charging $10,000 for a month’s supply of a drug—both examples are absolutely typical nowadays in America—would find so few customers that it would quickly go out of business. In fact, American drug companies routinely confront this market reality, and lower their prices drastically, in foreign countries where no insurance scheme protects their prices.

The downward pricing pressure that occurs in normal markets, and the human knack for responding to it with innovation, also explain why the real prices of things in other parts of the economy—such as the cost of a phone call, or a flight to Europe, or a computer—tend to fall over time.

In the case of modern American healthcare, of course, buyers don’t experience hospital and drug costs directly. They experience only the insurance premium, which they can usually afford if it’s only a couple hundred dollars a month, and in many cases their employer pays most or all of it. They don’t care that a drug they need costs $10,000 per month, because “the insurance company will pay for it.” The insurers don’t necessarily mind paying such a price because they can still make a profit, given the premiums they’re collecting which are actually exorbitant when totaled up across the entire pool of customers.

Thus in an insurance-based system there is little or no market-based downward pressure on the prices charged by hospitals and pharma companies, and so those prices have lots of room to rise—and so inevitably they will rise until premiums start to become unaffordable. At that margin, insurers will have to “get creative” to maintain their profit margins—e.g., by denying as many claims as possible. That’s exactly what was going on before Obamacare came along.

Obamacare, and the many other regulatory tweaks that individual states have introduced over the years, have made this already-dysfunctional setup worse. Why? Firstly by preventing insurers from excluding coverage of pre-existing conditions. That provision forces insurers to accept higher risk people, which in turn forces up payout costs for any given pool of insured. Thus to remain profitable or just break even, insurers have to boost premiums—so much so that Obamacare premiums are now basically unaffordable for most people: on the order of $25,000 per year for a small family, or about half the median US  household income.

The other reason Obamacare makes things worse is that it mandates the buying of health insurance. This effectively takes away the one tool consumers had to put downward pressure on prices and premiums: choosing not to buy insurance.

Note that under Obamacare, many people with lower incomes qualify for premium subsidies, which are paid for by everyone else via inflated premiums and higher taxes. Obamacare thus is not just a healthcare debacle but also a blatant vote-buying scheme in which the middle-class is forced (by law) to help Democratic politicians pay for the votes of the lower-class.

Repealing Obamacare would be one step in the right direction, then. But it probably wouldn’t be sufficient. If one follows the logic here, it should be obvious that banning all health insurance—private and public (Medicare, Medicaid)—is the only way to fix this broken system. Such a ban could take effect slowly, over several years, to give the industry time to adjust and become competitive.

It’s conceivable that the ongoing inflation of deductibles, which has forced many people to pay out-of-pocket for more routine healthcare needs, will start to stimulate the creation of fee-for-service alternatives. Note, though, that the Obamacare provision forcing people to buy health insurance (or pay a compensatory tax) takes away most of the cash people would normally have to support fee-for-service medicine, and otherwise keeps drug and healthcare costs inflated. Health insurance effectively creates a “safe space” for high prices, and so as long as it exists anywhere in the country, healthcare providers and pharma companies will seek that safe space with their prices.

Obviously there would be major challenges in making a no-insurance scheme work. First and foremost is the inertia of current healthcare policy thinking, which causes people to dismiss arguments like this out of hand. As the failure of American healthcare gets more and more dire and obvious, this resistance could weaken—although I’ll admit that Americans so far have shown a remarkable mule-like resilience in the face of this ongoing disaster. The MSM, almost completely captured by leftist tribal thinking, continues to hail Obamacare as a success story because of all the people (i.e., low-income Democrat voters) added to the rolls of insured.

The inherently high costs of doctors is another problem. Thus, part of this new strategy would be to give hospitals and other healthcare providers more freedom to provide healthcare using people whose training—compared to the traditional MD’s—is more focused and not as time-consuming and expensive. The traditional MD has to go through four years of college, four years of med school, then several more years of internship and residency. This is a ridiculously arduous process that probably most of them don’t need, and of course it leaves many young doctors deeply in debt and desperate for big-money salaries to pay it all off. Reducing this training burden would boost the healthcare labor supply enormously and make it easier to provide services more cheaply. Doctors and their associations would stand in the way of this, of course, for their interest is to maximize doctors’ fees, not minimize them.

Yet another challenge is to find a way to serve people who simply can’t afford healthcare even in a much more competitive, lower-priced system. This challenge is exacerbated by the fact that America now contains tens of millions of relatively poor foreign-born residents, thanks to its open-door immigration policies of the past several decades. The middle class currently pays for those who can’t afford healthcare via higher hospital prices (which subsidize hospitals’ unreimbursed care) and higher income taxes. One solution to this problem would be to encourage the building of charity hospitals to serve the poor. It’s an old-fashioned remedy but one that still could work. The amount of philanthropy in America is immense (more than a third of a trillion dollars annually) and too little of it is directed this way. As charity hospitals spring up to serve people who can’t pay, private hospitals and their ERs could be allowed to refuse service to non-payers—another way to keep down prices for ordinary customers.

States could build their own charity hospitals too. Medicare and Medicaid currently cost about a trillion dollars annually; eliminating those insanely inefficient federal programs would allow a dramatic lowering of federal-level taxes, giving states plenty of leeway to start their own taxpayer-funded healthcare systems for people with lower incomes.

I’m not holding my breath waiting for all this to be implemented or even discussed seriously—there’s a reason this site is titled “Heretical Notions.” Even the incoming administration, for all its departures from establishment thinking, shows no sign of being able to get “outside the box” on this critical issue.

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HEALTHCARE INSURANCE IS THE PROBLEM, NOT THE SOLUTION