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.

Yesterday, the Senate finance committee passed the Baucus bill, well wasn’t a bill, but a set of ideas. One only need to look at the new $507 billion in new taxes to see why government should leave the reform to the private sector. This bill will not only drive up demand, thus driving up costs, but it will also drive down supply and stunt job creation. Obviously, if supply is driven down, cost also go up, and without job creation people can’t afford health insurance anyways. Ok, so let’s take a look at these new taxes and see how they will affect the market. Below is a list of new taxes from CNSNews.com.

(CNSNews.com) – The health-care bill that the Senate Finance Committee will vote on today will cost a total of $829 billion over 10 years, with $507 billion of that cost being covered by new federal taxes and fees, according to the Congressional Budget Office (CBO).

These new taxes and fees include:

– $201 billion in new taxes on high-premium health care plans.

– $83 billion in new taxes paid by workers who will receive less employer-sponsored coverage or lose that coverage altogether but will be compensated with higher wages or monetary benefits, which are taxable.

– $23 billion in penalty fees paid by employers who do not comply with the federal insurance mandate.

– $4 billion in penalty fees paid by individuals who don’t have health insurance.

– $16 billion in new income and Medicare payroll tax revenue due to changes in Medicare.

– $180 billion in other tax revenues items calculated by the non-partisan Joint Committee on Taxation (JCT).

According to the JCT, this $180 billion in new taxes would include: A new tax on prescription drug makers that would account for $22.2 billion over 10 years; a new tax on medical device manufacturers that would bring in $38.6 billion; and a new annual tax on insurance companies would net the government $60.4 billion.

Also, a provision that raises the threshold at which medical expenses become tax deductible, from 7.5 percent of income to 10 percent of income, would reportedly yield the government $15.2 billion in new revenue from sick and disabled Americans with high out-of-pocket medical costs.

via CNSNews.com – Finance Committee Health Bill Includes $507 Billion in New Taxes and Fees.

Now let’s take each one of these taxes and see the law of unintended (let’s hope they are unintended) consequences in action.

The first tax is $201 billion on high-premium health care plans. These are the Cadillac plans that many union guys get. You know, the blue collar guys that supposedly the Democrats love to help. So, one must ask why would you tax these plans and what is the effect of the tax. One only needs to look at the cigarette tax to see the purpose. You tax cigarettes because you want to make it more expensive to smoke and thus drive down the number of people that smoke. Similarly, taxing these high-premium plans will increase the over all cost of them and dissuade companies that offer them from continuing to do so. This is the first example of the socialist principle that if we can’t all have a candy bar, none of us will have one. Because we can’t all have Cadillac health care plans, none of us will. Who does this help? This surely doesn’t help the average Joe. Hmmm, wonder if this applies to Congress’s Cadillac plan?

The second tax listed is $83 billion paid by workers who will receive less coverage from employers or lose coverage, but in turn will get paid more because the employer doesn’t have the insurance cost. Here we go again, with liberals looking out for the common man. The plan drives up the cost of insurance, which is likely to cause many companies, especially small businesses, to drop or reduce the health insurance plans for their employees. “No problem,” says the Baucus bill, “We’ll just tax you the worker.” These taxes are what they believe will be higher wages. The government is showing its hand here. It knows that all costs of an employee lowers the employees wages. Keep this in mind next time the government wants to tax the corporation more. Ok, back to this tax. So, when your employer drops your insurance, the government is betting you get a raise. You better hope they are right, because you’ll be mandated to buy your own insurance or pay a fine.

The third tax is $23 billion in fines paid by employers who don’t comply with the almighty state. OK, so now the government is back to raising the cost of your job to the employer. If you are the employer, is this going to increase your likely hood of hiring or decrease? Also, if you are an employer, you are going to compare the cost of the penalty compared to your current insurance costs. If the penalty is less, you are going to go with the penalty. The difference between fines and insurance costs is insurance costs grow ridiculous amounts every year, and fines will be a fixed cost. From a business planning stand point, that is a plus for going with the fines. So now, not only do you not have health insurance, but money that could be going to paying your more is being sent to the government with no benefit to you.

The fourth tax is $4 billion paid by YOU! That’s right, buy health insurance or pay the government. Isn’t freedom great? So, let’s wrap our heads around where we are right now. If you have awesome health insurance through your employer, the government is going to make it more expensive by taxing it. When you employer drops that, they are going to pay a penalty. Then you  have to hope you get a raise of which you’ll pay taxes on. If you deem you can’t afford to buy health insurance yourself, guess what, you will now pay a fine as well. There sure is a lot of spending going on here, with the end result being you still don’t have health insurance. If you are younger, you may still be better off paying these fines though and holding off on health insurance, because you can just wait till you are sick to buy into health insurance. What the heck, the government is preventing insurance companies from turning down anyone for any reason. Hey, they are just looking out for the common man. Thank your lucky stars!

How many more taxes do we have to go through. I’m starting to throw up a little in my mouth. OK, push through it! The next tax is $16 billion in new Medicare payroll tax due to changes in Medicare. I’ve tried to determine what the hell this means, but have been unable to find exactly what’s proposed here. It sounds like they would raise the payroll tax. If it’s raised on the portion you pay, you just got a tax increase. If it’s raised on the employer’s side, companies just got another reason not to hire or to pay you less.

The last part is a whopping $180 billion in other taxes. So what are these taxes? This is where you get some of the most ridiculous parts of the bill that will do the exact opposite of the the bill claims to do. So, $22.2 billion will be a new tax on drug makers, $38.6 billion on medical device manufactures, and $60.4 billion on insurance companies. So, let me guess, these companies are just going to swallow the crap the government just got shoved in their mouth. This is why politicians should stick to speeches and leave the market to the private sector. Companies don’t pay costs. Consumers pay costs. All of these taxes, drive up the cost of drugs, medical devices, and insurance. This is completely contradictory to what politicians say their goal is. Then again, maybe we just have their goals wrong. I’m guessing they know this, and in a few years they’ll come back and say, “See, the free market isn’t working. We now have to step in and take more control to bring these costs down.” If these taxes can’t be passed on to the consumer by some other legislation, the companies will not be able to meet their profit goals. If they cannot reach their profit goals, they will not make the products. Without the product, supply diminishes even more and drives up costs. So, you either have costs driven up by government induced cost burdens on the medical companies or you have costs driven up by a shrinkage in supply. Pick your poison!

The last one is just perfect. The government loves us so much that they want to make it more expensive if you have very high medical bills. If you have very high medical bills, chances are you are disabled or have a child that has a disability. Don’t worry the government is so compassionate, that is going to make you spend 10% of your income instead of 7.5% before you can get a tax deduction on it. Aww, they are so caring.

Hopefully, if you made it through this blog without vomiting, you see the that government is not trying to help people. They are setting up taxes and other penalties so later all the government zombies come back begging the government for more help. Of course, the government will gladly help out again until they get a nationalized health care system.