Over the past week, I’ve been writing about how the free market is the best solution to health care reform. I also argued that the best way to fix health care is to get rid of third party payer, typically employers, from the health insurance purchase. The second fix was to get rid of third party payer for day to day medical expenses. For some reason, despite the fact that the market delivers food to you to survive, Americans think the market without the government involvement would not provide the insurance and medical solutions needed.

Now I’ve already argued that they would. Examples like walk-in health clinics, $4 prescriptions, and HSAs abound. The biggest fear for most people though is the pre-existing conditions and finding health insurance. I’ve exclaimed and still do that the market will address this need, because that is what the market does. It addresses needs.

The change that would help propel the creation of new insurance products is the consumer of the insurance actually purchasing the insurance. When we purchase goods and services for ourselves, we seek out the goods and services that address our needs effectively at the best possible price. This shopping will create a educated consumers and will generate competition among the providers of insurance and medical services.

Today while doing my bills, my mortgage company sent me this offer: “You can now get $100,000 of accident hospitalization insurance coverage for one full year for free.” Wow, free. Let’s take a look at the fine print. First, let’s make it clear this coverage is for accidental hospitalization. It is not for going to get your flu shot, which as we said before should be paid our of pocket. If our real concern is making sure we do not go bankrupt in the event of an unplanned disaster, surely a plan that covers accidents would be on the top of our list. So, this plan covers hospital stays and emergeny treatments. It even has an option to add your family and include doctors visits. Doctors visits are limited to one per month with a lifetime limit of 60 visits. Wow, I can probably count on one hand how many times I’ve been to the doctors in the past 20 years.

This plan is not total coverage, but it does address a need, accidental coverage. There are exclusions to this plan. The accident cannot be the result of drinking, drugs, committing a felony, flying a plane, war, accidents outside the US, etc. By limiting their exposure, they are able to offer a reasonable amount of coverage for a very low price. How much is this plan? After the free period, it goes up to $9.95/month. To add doctors visits, its $13.95/month, and for a family it’s $19.95/month.

So what does it say about pre-existing conditions? “All eligible customers who complete and return the Activation Form will be accepted. There are no medical questions or physical examinations required for enrollment.” Sounds pretty good for pre-existing conditions to me.

Now, I am not saying this plan here is the answer. It does not cover all scenarios. It’s for accidents. It does not cover cancer, heart attacks, or diseases. I think we could all agree, how could it at $9.95/month? What this highlights though is companies including your home mortgage company will offer solutions. When you are shopping for your own insurance, you will make good decisions to address your own personal needs. You will not be pigeon holed into a plan that doesn’t apply to you because a co-worker has different needs. You also will not go without options. The market is where options are created, and the government is where options are few and usually all bad.

Earlier this week, I posted a two part series on how to fix the health care crisis. The solution was to get rid of third party payer in respect to the purchase of health care and insurance. Immediately, I got and was glad to have received the red herring question of the pre-existing condition.

Let me start off by saying, that I have a child with special needs. My 9 year old son has cerebral palsy and has gone through years of physical therapy and occupational therapy to be able to walk on his own. He still wears braces on his legs. In additions, my niece has a severe case of autism, so bad that she is fed through a feeding tube. I say this because I know personally what parents have to deal with when it comes to pre-existing conditions.

With that said, free markets and freedom in general are principles on which this country was founded. Principles are meant to be applied in all circumstances, because they prevent us for choosing the wrong path. Our founders knew this. It is by veering off these principles that we are in the mess we are in now. Just because there is a hard issue to be addressed, doesn’t mean we throw away our principles. We don’t teach our children principles to guide them through life, just to have them toss them aside at the first circumstance that challenges their principles. Principles are meant for the hard issues. The are not meant for the easy issues.

“OK buddy. Enough preaching already.”

Agreed! We must start off this topic discussing the morality of government health insurance. Then we will move on to the economics of the issue.

In Thomas Paine’s great work “Common Sense”, he lays out how and why governments come into existence. He describes a civilization with two people, and how with two people you do not need government. Those two people can discuss their problems and come to a solution directly. As more and more people come into this society, they can no longer work out their disagreements directly. There are just too many of them, and they have other duties that require their attention and time. This is when government comes into existence. They decide to appoint select members of the society that they believe will represent their best interests. Those representatives will then setup laws and rules that protect all members of the society. What are they protecting each member of society from? They are protecting them from each other. They are making sure that one member doesn’t use coercion on another member. This coercion can be in the form of theft, fraud or even murder. This is how government is supposed to function in a free society. I think we would all agree that the government that functions in this manner is a just and moral government.

If we all agree to that, then we must acknowledge that coercing someone against their will directly or through the government is an immoral act. This is why the free market is always moral, and all other systems are immoral. The free market allows people, in pursuit of their own interest, to peacefully without coercion come to an agreement on trading a product or service between themselves. Both parties in the transaction walk away from the transaction better than before.

As soon as the government becomes involved, with the exception of preventing coercion (contract law, prosecuting fraud and extortion, etc), they then become the coercive power. Just because they may be acting on something that the majority agrees with doesn’t mean that coercion is now moral. I’m sure the best case of this was slavery. The majority approval for the government coercion did not make slavery moral. Immoral acts are always immoral.

What I am leading up to here is having the government force any individual to pay for another individual’s health insurance is immoral. Also, forcing an individual to buy his own insurance is immoral. In a free society, people are free to pursue their self interest. They are free to be miserly, charitable or neither. They are free to be successful, and they are free to fail. This is a just and moral society. As discussed earlier, this is a principled society. As soon as you veer away from this principle, no matter what your intentions, you then cannot say that another act of coercion, say Wall Street millionaires taking our tax dollars, is immoral.

I know this may sound like great theory, but the truth is life would be much better if we stuck to the principles of our founding fathers. I think we all know and agree to that, but then for some reason we immediately find that this special circumstance is different. It isn’t different. Our founding fathers had many reasons and opportunities to take the path we are now taking. They decided to take the principled stand. They decided to take it for us. George Washington could have easily been a king. He could have setup a monarchy that would have passed from generation to generation. Read history, and you will find how easily he could have done this. People were begging him to be king. Instead, he stood on the principles they professed during the revolution, and he stepped down after two terms.

Now, enough of my moral argument. Morals are great, and we’d all be better off if we lived by them, but how will the free market address the question that prompted this blog?

The free market operates in this manner. Individuals need many things for survival and pleasure. Because they cannot meet all their needs by their own action and invention, they offer what they are best and most efficient at creating and delivering for something they need that someone else is best and most efficient at creating and delivering. This is what is known as the division of labor. For society to benefit the most from everyone’s production, this must be voluntary and with out compulsion. When voluntary, people will seek to offer what they can create better and in more supply than everyone else. They do this based on their self interest. The more value they can create the more they will be able to get from others through trade. When government bureaucrats decide who should do what, you end up with people producing things that they are less efficient at producing. This results in a lower quality of life for us all.

This is apparent even in the most obscure products and services that are offered today. Do you think in government controlled economies, people with a fetish for purple, prince garbed, frog figurines could ever find the product they seek? In the free market, even products and services that seem so obscure that they wouldn’t be worth producing are produced. They are produced because there is a need, there is someone who can produce it, and there is a price at which both agree the product is worth producing and purchasing.

In the market of pre-existing medical conditions, this type of innovation would undoubtedly take place as well. There would be entrepreneurs that see a need that needs met. Typically, these entrepreneurs have experience themselves with being on the needing side of the tracks. They found that they couldn’t meet their own need through the market, so they say “Hey, I see an opportunty here. Why don’t I offer this to society. There has got to be many more people out there with the same need.” As we know, this happens every day, and this is why we as Americans progress so quickly. This is why the internet in a very short time went from bulletin boards to what we have today, where you can make video conference calls across the globe for FREE!

That is not to say you would not have some progress under a government controlled economy. The problem is you would only have progress in the areas that some bureaucrat, special interest or the majority believe should be pursued. If your child suffers from a less common ailment, you are out of luck.

With the free market, you will see innovation so much faster, and you will see prices of those innovations quickly drop. How much did a little 20″ LCD screen cost just 10 years ago? Politicians love to blast the rich, but guess who will fund that new medical treatment your child or you need? When it is first developed in the free market, it will be expensive. That is because of all the research and development costs that went into innovating the product or service. The rich will be the only ones who can afford it. There are only so many rich people, and eventually the manufacturer will have to figure out how to make it cheaper to gain access to a larger market. In this process, all the other companies that participate in the creation of the product will also be pursuing reductions in production costs. This will create a butterfly effect, which will result in rapidly declining prices. I know people think it isn’t fair for the rich to be the only ones who can afford it at first, but under the government controlled market or a market with out the rich, the innovation wouldn’t have taken place.

As I said previously, when you remove the third party payer from the insurance purchase, you will quickly see incentives to live healthier. According to the CDC, chronic illnesses that are caused by life style choices account for 75% of all health care expenditures. It would be a far stretch of the imagination to believe that this number would not be drastically effected if those life style choices were punished via higher premiums. A large decrease in chronic diseases would undoubtedly reduce insurance rates, and it would reduce the cost of health care in general.

Also removing the third party payer from the day to day health care purchases would drastically increase competition and lower prices for normal health issues. This would help those who have pre-existing conditions by allowing them to get the regular medical care at a fair price. Personally, this was my major issue when searching for insurance. My son’s pre-existing condition prevented him from getting even catastrophic care. The reason being is they assumed there would be a large amount of day to day care. I wasn’t concerned with day to day care. My concern was catastrophe. I needed coverage for the care that you can’t plan for. With the decrease in the cost of day to day care that would result from paying out of pocket and increased competition, you would see insurers more inclined to cover those who have pre-existing conditions. One can easily imagine an insurance company running a new marketing campaign stating that is is the “Only insurance company to offer coverage for children with autism”. That is a market that needs served, and they would be the first to tap into that market. Quickly competitors would step up to the plate, and prices would be driven down. Doctors who specialize in a particular affliction would compete for the dollars of potential clients by offering the newest and best treatments. These are the circumstances in which the market shines best.

The last wonder of the free market that would help those who really struggle financially is charity. Historically, charity has always been the way the poor was able to receive the services that they need but could not afford. Americans are the most generous people on the planet, and it would be almost a guarantee that with the government out of the market you would see increased prosperity. With that increased prosperity, you would see more charitable donations. Insurance companies and doctors would donate time and dollars to take care of the less fortunate. One must ask what would happen with charity under a government run health care plan. If the government turns you down, it would almost certainly be illegal or at minimum be detrimental to the doctors relationship with the government if he performed a procedure out of charity.

As I write this, I get super excited as a parent of a special needs child thinking of the innovation that would be unleashed in a completely free market. Unfortunately, we have already let the barbarians in the gates, and they are not going to leave of their own accord. The likely hood that we will drive them out and take back our economy and country is slim. It involves the unknown. It’s easier to accept the mediocrity of the known than it is to trust in what we know is truth but seems so far from where we currently are. I beg you not to fear. Can you imagine what fear our founding fathers, who never knew what life was like without the protection of the Royal Crown, must have felt? The amount of courage that it must have taken just amazes me, even as I write this. I’m sure we can all agree, thank God that they did. Let’s remember life isn’t only about the here and now. It isn’t just about take care of me, and the future be damned. Now is our turn to take the principled stand. It’s our turn to make the tough decisions for posterity. If we do the right thing, one day, our children and grandchildren will say, “Thank God that they did.”

After reading the following editorial in the Wall Street Journal this morning, I had to send in a letter to the editor. While I doubt it will get published, it will here. That’s another lovely thing about the free market! Here’s the editorial followed by my response.

By VERNON L. SMITH

There is widespread agreement with the principle that our health-care system needs to be reformed. But our representatives and our neighbors have much trouble in reaching agreement on the particulars. There have been many legislative bills offered and hundreds of amendments with no clear path to a resolution.

Health-care systems everywhere encounter cost overruns and rationing devices, like queues, in their diverse attempts to deliver products for which demand has long grown faster than other economic sectors. Why is it so difficult to find the private and public means, the combination of markets and government assistance, that enables a preferred outcome to emerge?

This question has a simple answer that plagues health care everywhere.

The health-care provider, A, is in the position of recommending to the patient, B, what B should buy from A. A third party—the insurance company or the government—is paying A for it.

This structure defines an incentive nightmare. You do not have to be an economist to realize that, when phrased in this way, nobody knows how to solve this problem. Hence the many experiments, all of which have been deemed less than satisfactory.

I don’t know whether this problem has a solution. If it does, I think it requires us to find mechanisms whereby third-party payment is made to the patient, B, who in turn pays A, supplemented with any co-payment from B for services. Hence, from the moment B seeks services from A both know who is going to be paying A for what is delivered. A and B each has need for what the other brings to the table, and this structure carries the potential for nurturing the relationship between A and B. B is empowered to become better informed about the services recommended by various A’s that he might choose among, and the A’s might find it particularly important to build good reputations with B’s.

Mr. Smith, the 2002 Nobel Laureate in economics, is a professor at Chapman University.

via Vernon L. Smith: The ABC Dilemma of Health Reform – WSJ.com.

Subject:  In response to “The ABC Dilemma of Health Reform”

Leave it to the intellectual to turn the simple into the complex. Mr. Smith, a Nobel Laureate, says “I don’t know whether this problem has a solution.” Is he serious? Any economist knows the disaster that ensues when price signals are not available to the purchaser.

The entire system can be fixed by addressing third party payer in respects to the purchase of medical services and the purchases of the insurance. Instead of further incentivizing the distortion of the market via the tax code’s promotion of employer purchasing of insurance, we should incentivize the individual. When the individual purchases his own insurance, he’ll make better puchasing decisions, such as buying a catastrophic plan instead of a plan that covers everything down to teeth cleaning. The individual will also make better purchasing decisions when the doctor tries billing him $10 for a band-aid.

When the accumulative effect of millions of these first party payer transaction kick in, you will see prices come back in line with the rest of the market. You will see entrepreneurs battling it out for the consumers dollar.

Sincerely,

Jason Vanzin

I know I’m starting to post a lot of videos, but as I find great videos that advocate the free market I want to share them with my readers. The free market is so powerful. To demonstrate that power, Milton Friedman will use something so simple as the pencil.

Guys, here’s a great video on the free market. Pay particular attention to who the immoral actors were in the mortgage crisis.

Finally a politician that gets it! This is spot on. I believe someone else said this. Hmm, who was that?

By Rep. Bill Cassidy

Price is power. Given limited resources and infinite wants, price empowers us to determine the best use of limited resources.

With health care, the closest most patients come to price is the $15 or $20 co-pay. When we leave the doctor’s office, we don’t know if we received $5 worth of health care or $500.

On the surface, it’s a bargain. But the “bargain” hides and contributes to higher insurance premiums and massive medical inflation.

Our current system ignores the power of price. We can’t know or compare prices, much less be rewarded for acting on them. Because there is no incentive to control costs, we don’t. At $15, why not request any test? According to a McKinsey Quarterly report, the disconnect between price and cost is a leading driver of skyrocketing medical inflation, along with the burgeoning cost of treating chronic disease and the expense of administrative overhead.

via The power of price – Washington Times.

By Donald J. Boudreaux Friday, October 16, 2009

Political discourse has more than its share of question-begging words.

For example, ponder the word “fair.”

“Fair” is perhaps the most misused word in all of politics. By definition, everyone this side of masochism and sociopathy favors “fairness.” No one believes that society would be a better place if only it were less fair.

The difficult question, though, is “What is ‘fair’?”

We have little difficulty distinguishing fair from unfair in small settings. If Mom bakes a pie and Junior scarfs down three-quarters of it before any other family members sit down for dessert, that’s unfair of Junior.

If I agree to mow your lawn in exchange for you washing my car and then renege on my part of the bargain after you wash my car, that’s unfair of me.

But distinguishing “fair” from “unfair” in large, complex settings is vastly more difficult than politicians make it seem.

Consider the distribution of income. Is it unfair that some people earn multiple times more dollars — often hundreds of times more dollars — than other people earn?

Seems unfair to many folks. Why should Sal the surgeon take home a salary 50 times larger than the salary taken home by Tony the teacher?

If Sal and Tony were assigned to their jobs by some authority and if that authority pays Sal more than it pays Tony simply because Sal has a more beautiful sister than does Tony, that would be unfair.

But in market economies persons aren’t assigned to jobs. Each of us chooses our career. If Tony chose to become a teacher, that means he chose not to become a physician.

Also in market economies, salaries are determined by impersonal market forces rather than by some authority.

So how can it be unfair that Tony doesn’t earn a salary as high as Sam’s? In a very real sense, he chose not to do so.

Tony’s reasons for choosing a teaching career (and avoiding a career in medicine) might be admirable or understandable. Perhaps Tony loves working with children. Perhaps he relishes having long holiday breaks and summers off. Perhaps he cannot stomach the sight of blood. Perhaps he was put off by the prospect of spending all the extra time in school required to become a physician.

Whatever his reason, he clearly gained — or expected to gain — by making the choice that he made. In Tony’s mind, when all the expected costs and benefits — monetary and nonmonetary — of practicing medicine were weighed against those of teaching, he obviously concluded that teaching offered him the better standard of living.

Of course, it’s true that Tony would have preferred to have all the benefits he gets from teaching — for example, long holiday breaks — and the higher salary paid to a surgeon.

But that option was never on the table — not for Tony, not for Sal, not for anyone.

It’s also true that Tony might come to regret having chosen to become a teacher rather than a surgeon. But so, too, might Sal come to regret his choice to become a surgeon.

Our imperfect capacity for making decisions, or for seeing the future more clearly, is unfortunate, but it’s no source of unfairness.

The bottom line is that looking merely at one aspect of people’s lives — the amount of money they earn — provides far too little information for determining if their lots in life are “fair” or “unfair.” All things considered (and it would be unfair not to consider all things!), Tony’s lower salary as a teacher does not seem unfair when compared to Sal’s higher salary as a surgeon.

Another possibility is that Tony wanted to become a surgeon, but he doesn’t have the brains to get into medical school.

Under these circumstances, we might feel sorry for Tony. But, once again, there’s no unfairness in the picture. No one broke the rules of the game. No one singled Tony out, or singled out the ethnic group to which Tony belongs, to prevent him from becoming a surgeon.

I wanted to play quarterback in the NFL, but I utterly lack the physical requirements for that job. All the desire in the world would never have enabled me to earn my living on the gridiron.

Feel free, if you wish, to pity me. But neither you nor I can find anyone or anything to accuse of being “unfair” toward me.

When politicians thunder about “fairness,” they too often focus on only a handful of facts, selectively chosen to portray eminently fair situations as being unfair. And that’s unfair!

via Fair’s fair — right? – Pittsburgh Tribune-Review.

Today, the Wall Street Journal has an article about the battle being waged between Wal-Mart and Amazon to be the dominate book discounter on the web.

Wal-Mart Stores Inc. launched a brash price war against Amazon.com Inc. on Thursday, saying it would sell 10 hotly anticipated new books for just $10 apiece through its online site, Walmart.com.

That was just the beginning.

Hours later, Amazon matched the $10 price, squaring off in a battle for low-price and e-commerce leadership heading into the crucial holiday shopping season. Wal-Mart soon fired back with a promise to drop its prices to $9 by Friday morning — and made good on that vow by early evening Thursday.

via Wal-Mart, Taking on Amazon, Launches Price War on Books – WSJ.com.

This is how the free market works without government intrusion. Competitors work to gain market share by delivering either a better mouse trap or a cheaper mouse trap. The winners are the ones, who can deliver it cheaper and better, and the consumer who gets to benefit from the competition. There is no market in existence that must be taken out of this type of economic activity in order to better deliver it to the people. This includes health care. Are we to believe if health care was opened up to competition that you wouldn’t have the Wal-Marts of the world stepping in to deliver solutions? Just because it’s health care doesn’t mean it’s market is different.

The truth is the government is not in health care to better deliver a service. It is in the market for control. It wants to decide who gets what advantages, and who get what services. It wants to profit itself from the consumption of health care, and it wants to gain the power from that is derived from controlling access to health care. If you want to see health care flourish for all people and to deliver progressively better and cheaper mouse traps, get the government out of health care. We will all be better off for it.

In the first installment on free market health care reform solutions, I spoke of the problem with using third party payer in respects to health insurance and health care purchases. The effects of changing that one aspect of the health care industry would vastly improve our current system and would result in more jobs, better care, and a booming economy. To take the free market concepts even further, we must now look at how the uniqueness of the health care  insurance model makes it much more expensive than other insurances, how obesity is driving up health care costs for the obese and the fit, and how the market has already taken some steps to address rising costs.

Health care insurance is a very unique insurance purchase when compared to auto, health, or any other insurance product. When you purchase home owner’s insurance, you buy it in case of fire, flood or burglary. You do not buy it because you know you are going to need your roof replace, a new furnace installed, or your carpets cleaned.  If home owner’s insurance was treated like health care insurance, you would have to pay astronomical prices for the insurance because the providers of the insurance would have to cover maintenance, and in some plans would cover elective improvements like a deck or a finished basement.

To make it even more absurd, when getting your insurance through your employer, not only is your rate based on the amount of maintenance you use or the risk of your decisions, but they are also based on other individuals that you have no control over. Imagine if you invest in a security system, fire detectors and fire retardant building materials in order to lower the risk of your house catching on fire. This would be similar to exercising, eating right and having regular checkups. Currently, your home owners insurance would be reduced because of the responsible actions  you took. Now, if home owner’s was ran like health care, your rate wouldn’t be based on your actions. It would be based on your group’s actions. If a member of your group moves to a high crime area, has no smoke detectors and has very old wiring, your rates would need to take into account his chances of a fire. As you can see, you are punished for actions you have no control over. This model punishes the responsible and rewards the irresponsible. The effect is higher prices for all and no encouragement for good behavior.

As stated in part one of this blog, this third party payer model leaves you with a vicious cycle of increases in the price of insurance and cost of health care. With the removal of third party payer, we would be rated based on our own individual risk and behavior. By removing the group, you now  have an incentive to be responsible. Just like you may install a security system in your house to get a decrease in your home owner’s premium, you would be encouraged to get your BMI down to get a break on your health insurance. You cannot expect good health behavior patterns when people are shielded from the effects of their own actions by the group. You will also have the incentive not to frivolously waste health care services. You would not submit a home owner’s claim every time you need a shingle replaced on your roof, because your premium would rise to cover the risk of another shingle needing replaced. Your risk rating would be worsened by your continual submission of claims. Similarly, you would not run to the doctor every time you get a headache, and if you did you would be more inclined to pay out of pocket to prevent your risk profile being negatively effected. Paying out of pocket is a good thing. It cause you to shop and demand better prices, which results in more competition.

As you can see, the health insurance model is unsustainable as is. It must be allowed to move into the model of every other insurance plan we know of. People must be weighed on their risk. They must be rewarded with lower premiums for taking responsible action, and they must be punished with higher premiums for being irresponsible with their health.

Not being accountable for  your actions in respect to your health has helped lead to a large number of our population being extremely unhealthy. Currently, over 35% of our population is consider obese, and the number jumps to 65% when counting overweight individuals. What’s worse is the percentage has been climbing year after year. In 1990, no state had a over 15% of it’s population classified as obese. By 2008, no state had under 15%. Colorado is the only state with under 20%. The majority of the states now have over 25%. Does it surprise anyone with data like this, that we have a health care crisis? Obesity leads to diabetes, heart disease, cancer, stroke, sleeping disorders, and countless other health conditions.  Ten percent of our yearly health care expenditure as a country is for obesity caused diseases. This is a huge burden on the insurance industry causing higher costs for us all.

Previously, we explained how rising costs come about. If demand is increased without increasing supply, then price go up. With the data presented in the previous paragraph, it is obvious the demand for health care caused by obesity would undoubtly drive up the cost of health care. Demand for drugs is driven up astronomically, because the treatment of these obesity related diseases last the remaining years in the life of inflicted. Our society has a very destructive pattern of treating diseases instead of removing the cause of the disease.

Now, I am not saying the government should step in and force people to get healthy. That is not needed. I am a freedom loving capitalist. If you want to fill up on Twinkies and Jujubes all day while reclining to the Jerry Springer show, have at it big boy. What I am saying is you pay for your actions. Do not expect those who make the tough diet and exercise decisions to subsidize your bad habits. If the free market reigned, third party payer would be gone, insurance companies would base your premiums on your risk and all the high fructose corn syrup lovers would pay for the medical resources they consume. You would quickly see the obesity rate decline, because the obese would be punished by higher premiums. With this decline, you would have insurance rates and demand on health care resources decline. Hey, didn’t we say earlier you have to decrease demand to lower cost. Well, voila, you just did it. Now you have a much healthier society both physically and mentally. The economic effects are too vast to even get into. Let’s just say everything has opportunity costs, and when we put more and more money into health care, that money it held back from other economic activities. With that money freed up, it can go into other parts of the economy that would more than likely improve our lives.

As you can see, both the first part and the second part of this blog really come down to one change. That change is removing third party payer. That one aspect of health care has caused this entire disaster we are now debating. The government cannot fix this by throwing more money at the symptoms. The free market is the only thing that can fix our health care system. It is the only thing that can fix any of our societal ills. Even though the government and the third party payer issues exist, the free market has already taken action to address issues with rising health care costs.

Let’s take a look at the regular doctors visit. Because of the demand for doctors, typically you have to schedule a doctors visit a few days out. When you do go to the doctors, you sit and wait in the waiting room. Then you sit and wait in the treatment rooms. Finally, when the doctor comes in, you see him for 15 minutes, and you’re done. This isn’t all just to have fun with you. This is because of the demand for the doctor’s services. The free market saw this an opportunity and developed the concept of walk-in clinics at your local pharmacy. These clinics are staffed by nurses that can take care of common illnesses. These nurses are schooled enough to address these issues and do so without the same cost of having a highly skilled doctor. Unlike government, the free market allocates resources based on the most efficient use those resources. When the power of the free market is released, it will create a plethora of solutions like this. Consumers will have many more choices and will be the beneficiaries of that horrible “profiteering”. Just remember profits are derived by someone developing and providing a solution to a need. Without that profit motive, that need would go unserviced.

While listening to the debate on health care, the problem seems so vast and complex. We really just touched the surface of the revolution  you would see if the free market prevailed. I did not even get into the disastrous effects the intrusion of the federal government has already wreaked on the health care industry. Hopefully, I’ve provided some food for thought and helped you realize just because a problem seems huge doesn’t mean that the solution has to be. The solution presented here is very simple, but the benefits are more than I can even touch on. As in any debate, seek the truth and use your logic and reason to come to a solution. Problems are exacerbated by those who think things are so complex that it requires “government experts” to fix it.

P.S. I’m sure as the debate progresses, I’ll have more topics to write about. Please provide feedback. Ideas are weak when not challenged. If you disagree, challenge my ideas, so I can either strengthen them or discard them. If you agree with them, share them with others.

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.