Health Care Reform – Market principles to deliver real reform – Part 1

Posted by Jason | Posted in Economics, Government, Health Care | Posted on 15-10-2009

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The health care debate has been taken to the next level since Barack Obama’s election. While I completely disagree with his approach to fixing health care, I must say it is a good thing to bring the issue to the forefront and try to come up with some solutions. As mentioned in an early post though, you have to look at the root causes to see what problems you need to actually address.

For those of you who might not have read my previous post, the problem with health care is the third party payer model we use, which blocks price signals from properly stabilizing the supply and demand of goods and services. In other words, we take actions that drive up the demand for more services and products while not increasing the supply of those services and products at the same time. We also add unnecessary costs on top of those services and products that then is passed onto the consumer or the insurance company.  A government take over will not address the issue of increasing demand without rationing of either quantity of services or quality of services. I know, “Hey fella, the Baucus bill doesn’t have a government take over.” The Baucus bill is leading the way to a government take over. It is creating a massive amount of increased cost on individuals, employers and medical companies. Once merged with other bills, we’ll probably end up with a government take over trigger. This is setting up a straw man that is doomed to failure. It shouldn’t be called a trigger but a lit fuse slowly moving to the bomb of government health care. Instead, we should see bills that address these problems with free market solutions.

So, what are the free market solutions? While I don’t claim to have the genius to provide all the solutions, I do believe there are some simple but hard solutions that can be implemented. Free market solutions must address the issue of rising demand that is the result of third party payer and the state of health for average Americans.

To address the third party payer problem, we must look at the biggest provider of health insurance, employers. Employers offering health care benefits was originally used to compete for employees. It quickly evolved into something that was encouraged by the government and expanded by unions. Government encouraged the expansion via the tax code and mandates. With this constant push towards more and more coverage, insurance began to take care of everything a person needs or wants in regard to health, dental, vision, and mental health.  One can quickly see that more and more people demanding ever expanding coverage only has one effect, increased cost of insurance. Then the very nature of insurance, where it takes the end consumer out of the value decision of the purchase, drives up the cost of the actual service or product. This must be addressed by fixing the root cause, which is third party payer of the insurance by the employer and the third party payer of the service or product by the insurance company.

The first step has already been enacted, but needs to be encouraged and sold to the public. Under President Bush, Health Savings Accounts, or HSAs, were passed into law to address the health care crisis. Like every other issue under Bush though, it was never sold to the public. It’s just not as sexy as “free” health care, even though it actually works.  The gist of an HSA is people purchase high deductible, low premium health insurance that would cover expenses after a certain dollar amount. In addition they can put tax free money into their HSA to cover the deductible. When they go for a doctor visit, they write a check to the doctor from their account. Once their deductible has been reached, the insurance company takes over.

The HSA addresses many of the issues that result from the unique insurance model that is used by the health care industry. In no other insurance model, does insurance take care of everyday occurrences. Insurance is to guard a person or organization against risk. The best example is car insurance. We buy car insurance to make sure that we can get our car repaired or paid off if we are in an accident. We also get liability insurance to insure ourselves against a law suite if one is filed by the other party in a vehicle accident. We do not use our car insurance for oil changes, new tires, or even an expensive item like a transmission replacement. These are wear and tear issues that are guaranteed to happen, while accidents are not. If we are responsible, we plan for things that are guaranteed to happen, and we insure against those things that may or may not happen. This model of insurance is why you can get an oil change for under $20, but a new fender for some reason costs thousands. Notice the part of vehicle repair that is paid by insurance is much higher compared to the part that is paid out of pocket. When we pay out of our pocket, we shop around and demand better deals. When insurance pays, we could care less.

For some reason though, with health care, we ignore this model, and we buy health insurance for our human wear and tear. We all know we are going to get sick. We all know we’ll need check ups. If you have kids, you know they will need vaccinations. For these items, we should be planning financially to pay for these. What we should be insuring against are things like cancer, heart attacks, or situations that can lead to hospitalization. With this change, you will see consumers shopping around and demanding better pricing. With this change in behavior, medical companies would have to compete more fiercely for your dollars, which would drive costs down.

While this addresses the third party payer issues from the actual medical purchase side of the issue, it still doesn’t address the third party payer side of the insurance purchase. Just as employers were encouraged to add health benefits via the tax code, they should now be encouraged to get out of the health care business. Businesses waste vast amounts of resources on the shopping, buying, and administering health care insurance for their employees. Does this add to their business production and to the larger production of our country? No it doesn’t. If employers handed the health care insurance purchasing decision to their employees, they would then be able to focus on what they do best, which is grow their businesses. They also would be relieved of a huge (huge really doesn’t do it justice) expense. This massive reduction in expenses would result in more jobs. There is no doubt that the cost of health care insurance has resulted in many companies not hiring that extra person. It’s a return on investment hurdle that is much higher as a result of the extra cost. In addition, the reduction in the cost of doing business would result in lower prices of the goods or services delivered by the company. As Thomas Sowell points out in his blog, Magic Numbers in Politics, prices are interconnected and the reduction in the price of one good filters through the economy and lowers the price of other goods. He uses a great example.

What does that mean? It means that a huge increase in the demand for ice cream can mean higher prices for catchers’ mitts, among other things.

When more cows are needed to produce more milk to make ice cream, then fewer cows will be slaughtered and that means less cowhide available to make baseball gloves. Supply and demand mean that catchers’ mitts are going to cost more.

via Thomas Sowell : Magic Numbers in Politics – Townhall.com.

As you can see, there would be a butterfly effect in the cost of goods in our entire economy. This would unleash business and job growth. “Hold up there buddy,” you say, “ultimately the worker would carry the burden of health insurance.” This is true, but as explained above, insurance is not meant to cover those things that are guaranteed to happen. If workers buy their own insurance, they will make wiser purchase decisions. They will plan for maintenance, and they will insure against the unknown. This will drive down the cost of health care insurance. In a future segment of this blog, I will expand on this more, but for now you can see the effect of this when seen in conjunction with the interconnectedness of prices. Also, the end user making day to day “maintenance” purchases will drive down the cost of those purchases. In May 2008, Watson Wyatt Worldwide released a study that argues that the rising cost of health care insurance is a huge factor of why employee pay has been stagnant for decades. With the removal of health insurance from the employment process, salaries would undoubtedly rise. Salary increases will also be the result of higher competition for employees. Many employees pick a job based on health insurance. With that removed from their decision, they will choose to go where the work and the salaries are better. They will also not be trapped in a job because they can’t afford to lose their insurance. They will have picked their own insurance, and it would not cease in the result of a change in employment status.

In the next segments of this blog on health care solutions, I will address the unique issues of health insurance that make it much more expensive, how our country’s obesity problem is a major factor in rising health care costs, and how the market has already taken steps in the right direction to address the rising costs. As you can see though, removing the market distortion of third party payer would be better for every part of our economy and every participant involved in health care purchasing. As I said in previous posts, when listening to the health care debate, ask yourself how the proposed solution addresses the root causes of rising costs. A government take over does not remove the third party payer issue, it does not increase competition, and it will actually increase costs. With out fierce competition, the only way for costs to be driven down is by mandate. The end result is a reduction in the availability of services and/or the quality of services.

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Comments (5)

as your previous posts, you nail it on the head again… why is it that no one seems to understand this? Everyone loves how you can purchase car insurance from any company in the country, but your (meaning your employer) is limited to those who their state is allowing them to choose from.

I would love a situation like what you described above, however the Republicans could at least start to remove the “Party of No” tag if they were to suggest something that’s as logical as this. We all know the Democrats don’t want something like this because they’re looking for a power grab of the healthcare industry.

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John, I really appreciate your feedback. It’s hard to get solutions like this because human nature loves the word “free”, even though “free” is never free. All we can do is push on our representatives and try to persuade our fellow man. I’d love if you emailed this and gave a copy to everyone you know. Maybe some of them would read it and say, “Hey that makes a tons of sense.” Many though would probably say I prefer the gov’t to take care of me, but that is chance we must take. Again, thanks for your comments. It’s your feedback that keeps a small non-paid blogger like me at it.

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Thanks for article. Everytime like to read you.
Ilias

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Thanks for responding and for pointing me to your other posts, very helpful. I agree with you that the HSA approach and removing employers (and yes, government) from the healthcare equation would be a huge boon to the economy and help drive down the price of care through competition.

What happens when someone is uninsured for the catastrophic, has no money in the bank, and suffers a heart attack? Do we let them die like the TN fire fighters let the house burn? If not, who bears the cost of that care and how is it adminstered?

I am also a fan of removing employers from the retirement savings equation as well. Why have both a 401k and an IRA? Your aguments for allowing employers to focus on their business at hand hold true here as well.

Thanks again and keep posting!

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Keith,

The uninsured person having a heart attack doesn’t warrant the disastrous system we have nor a gov’t system. There is no reason to force everyone to pay excessive health care costs and be trapped in a horrible system. The reason everyone is concerned about the uninsured is because of the inflated prices generated by the gov’t and insurance.

If we got the gov’t out of health care and business got back to doing business instead of managing our finances, health care costs would drop a lot. This would allow the uninsured to pay after the fact or would allow families, churches, etc to chip in. Charities, which provided much more for the poor before the gov’t stepped in, would do so again.

Look at India, where you will end up seeing many Americans traveling to for health care in the near future. People can get many of the same services at a price they could pay themselves by the same doctors they would get in America. Medical tourism is going to be huge very soon because the US is destroying it’s system.

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