Monday, April 14, 2008

Finding the True Cause of the Health Care Problem

Jonathan Kellerman has written a nice piece on the insurance industry, comparing insurers to Mafia Dons.

In a sense, he's right. The way the system works in the U.S. at the moment is neither socialized medicine nor free market, and this bastardized network we work under is almost as bad in its effects on its customers--both patients and doctors--as centralized health can be.

As Kellerman says, the insureds (or often their employers) are squeezed on the premium end, and on the payment end the supplier of services (the doctors) are frazzled to death by the bureaucratic hassle, delay, and restrictions. Insurers do seem to have an unbelievable amount of power to drive us all nuts while not performing as we believe they should (even causing deaths by denying coverage as the presidential candidates are constantly reminding us).

[Thanks to for the image.]

The reasons? Kellerman only hits their periphery. He blames the insurance companies and makes no mention of the real culprits, Medicare and our numbed premium- and service-pricing incentive structure.

In the American health industry, both direct government interference and its indirect handicapping of a market mechanism collude to kill the vital factor in all free-market operations: Open and fair competition.

Medicare, as the government agency responsible for setting the rates for most services, has the power to pay for them, but it lacks the tools, knowledge, and/or willpower to control the pricing of it all--something even socialized-medicine countries do better.

Unfortunately, the real cost of centralized control of pricing, even if it is done "correctly," is the poor quality of the services afforded in government-provided health care countries like Canada and England. This is due to the underlying economic principle governing price controls, which says that when you limit the price of something, that something will become rare. Remember the gasoline lines after Nixon imposed price controls in the 1970s.

The second, more indirect way the government destroyed the pricing mechanism is by creating tax deductions for employers to pay health premiums. The actual beneficiaries of health coverage no longer have direct participation in pricing of premiums or services, and they have become insulated against price increases and the profit theft Kellerman describes.

Most of Kellerman's article is great. I would only change his prescription for a cure. He advocates less health insurance. I would rather find a way to allow the system to cure itself by eliminating the two government faux pas mentioned above.

I think this can be done by transferring the funds to pay for premiums from the employer to the insureds themselves, so as to include the latter in the pricing transaction. In this way, a competitive market would evolve. Most likely, insureds would prefer to purchase less expensive catastrophic coverage and pay for maintenance visits themselves. Not only would this limit the national budget for health insurance, but it would lower the general price level for services as people began to compare prices and weigh the benefits and cost of their health-care choices.

As for the indigent, Kellerman says this:

"A small percentage of indigent individuals won't be able to afford even low-cost procedures. For them, government-funded county facilities are the answer, because any decent society takes care of the weakest among us."

I would keep the government out of it and allow private hospitals to regain the position they once held as the givers of charitable health services. The generosity of the American people being what it is, the funds would appear like magic.

Kellerman also says:

"If substantial numbers of health-care providers shook off the insurance monkey on their back, en masse, and the supply of providers was substantially increased by opening more medical schools, the result would be a more honest, cost-effective system benefiting everyone. Except the insurance companies."

I would change the focus of his ire. It is not the insurance companies or the medical schools that are at fault, really. His solutions infer a Daddy-Government, top-down solution.

I would rather blame the government for (1) mismanaging the pricing of health services they reimburse; and (2) creating the incentives for employer-paid health coverage through tax deductions, which put too many middlemen into the health care market transaction and destroy the competition that controls prices. This would allow the market forces to work their magic from the bottom up.

Make these three changes--(1) turn government-funded charitable health services over to private hands; (2) revise Medicare's procedures (privatizing it being pie in the sky); and (3) turn employer-provided coverage choices over to the insureds--and I think things would correct themselves in short order. The Health Savings Account system already in place is a step in the right direction.


Anonymous Anonymous said...

Katy, I love the site and the idea of economics and humor blended into a smoothie of funny goodness. I would definitely link to your site in the future.

5:15 PM  

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