A Preliminary Look at Health Costs and Insurance

I was asked to address the question of insurance in connection with healthcare, so I am finally mostly over my flu and hopefully can think more lucidly.  Insurance, as has been defined by some others, is simply a hedge against the future attained by paying someone (an insurer) who has established a firm that accepts many similar payees into a pool.  Out of that pool come payments now to those in need of them (contractually) and also those not in need have an expectation (contractually) that when they need the money it will be available to them also.  Such pools of course contain many different kinds of people: old and young, rich and poor (or at least poorer), healthy and less healthy (but not below a certain threshold of health), etc.  The insurance company wants many healthy, younger and better off people in the pool so that it can pay for the medical costs for all enrolled and make profit for its stockholders.

The hubbub now over insurance is mainly:

  1.  Whether those with pre-existing conditions ought to be able to get coverage after the fact.
  2. What should be covered and what might not be.
  3. Whether certain designs for insurance provision may create incentives to overuse the insurance, leading to a possible failure of the industry.
  4. Whether insurance prices should be regulated to keep them lower rather than higher.
  5. Whether insurance costs/prices can be reduced through competitive structural changes in that market as well as changes in the healthcare market.

So let me make a few comments about what insurance is not.  It is not, nor was it intended to be, a transfer program.  The pre-existing condition problem is a classic example.  If insurance companies are required to cover all pre-existing conditions and if an individual is allowed to purchase insurance coverage after he/she discovers they are ill, then we no longer have insurance but a simple transfer program–money from those already enrolled straight to those enrolled after discovery of illness.  At that point there is no real incentive to purchase real or traditional insurance.  Just wait until you are sick.  And if the insurance company is not allowed to charge more, then they stand to lose large amounts while the person claiming coverage can take advantage of already enrolled people.  That latter group’s premiums may then be raised, encouraging them to exit the market–and wait to claim their own pre-existing coverage.  That sounds like a recipe for complete collapse of health insurance.  Then the demand would really begin for single-payer healthcare.  And it is not insurance in reality.

But even more generally, insurance as presently structured does cause people not to pay nearly as much attention to healthcare cost, since they mainly pay a deductible or a co-pay and never have to see the full bill (unless of course they are sent one).  There is then a tendency to use medical providers more than in the case in which one actually had to pay at least a good portion of the cost/price.

Insurance was never supposed to cover most of our healthcare costs.  It was intended to be supplemental.  Obviously it hasn’t turned out that way.  Part of the blame for that has been the propensity of medical/healthcare providers to charge more, knowing that insurance would pay for the extra cost/price.  That becomes part of the vicious cycle.

What do we do?  I am convinced that the most important thing we can do is re-build the insurance and healthcare markets from the ground up to be fully market-driven and competitive.  This means:

  1.  Eliminate all regulations that stifle competition.
  2. Eliminate any and all subsidies to providers that are disguised as regulations but that really are designed to stifle competition–such as limit medical school enrollment, allow states to restrict insurance providers from other states, prevent competition among hospitals or among specific kinds of health services, e. g., MRI services..
  3. Institute tort reform.
  4. Allow individuals to purchase any particular “package” of insurance coverage they wish, so long of course as they pay more for more (which they would in my “system”).
  5. Allow individuals to purchase insurance as individuals, not only if they are connected with a company that includes health benefits. Then  allow those individuals to “carry” that coverage with them wherever they go and whatever they do in terms of specific location of employer.
  6. Allow insurance companies to incentivize consumers who lead healthier lifestyles.  This already happens but it needs to be used more.   Overall costs can then be lowered for insurance.
  7. Incentivize physicians to charge flat fees that do not include insurance.  One goes to the doctor, pays a fee for the visit and that is it.  No insurance.  Ideally, insurance is/was for catastrophic events, not the periodic doctor visit.  If all doctors went to this system, I believe healthcare costs would go down considerably–though we cannot forget other issues such as hospital visits, etc.
  8. We have to find a way to disincentivize people from overusing healthcare, for example, emergency room visits, etc.  I suppose we could encourage more doctors to be available for home visits or “on call” during off-times, or other such moves.  It makes no sense to visit and emergency room for a cold, for example.  Some people use the emergency room because they don’t have insurance, but if some of my other proposals work, then that might disappear or be substantially reduced.
  9. Change laws to allow more individuals to perform what is traditionally reserved for physicians.  This can even allow for specialists who perform one activity, for example, giving shots or taking x-rays, but the scope of competition must be broadened considerably so that individuals can perform only that function and compete independently.
  10. Require pricing for services in healthcare to be public and clear.

If we can get costs down for healthcare, we can move back to what worked quite well:  Only purchase insurance to cover catastrophic events.  Otherwise, healthcare providers can operate without insurance.  The consumer would just pay relatively lower (much lower) payments as needed when they use the care (regular doctor visits, some minor outpatient surgery, etc.).  This only works however if the entire healthcare and insurance markets are overhauled at the same time and to the same extent.

Once again, what about the truly poor?  We would have already lowered costs/prices.  So even the poor can buy more healthcare with less income.  But in addition, we could give the poor health care vouchers, which they can use to purchase any healthcare service.  As for catastrophic insurance, we could also give a voucher to purchase that.

What I have proposed is not utopia.  But we cannot achieve that on earth.  We have to look for the best, most efficient solution or set of solutions available.  And when we propose solutions, we should avoid thinking we can have all knowledge in order to centrally plan and implement.  Those most familiar, who have local knowledge, are best suited to make decisions for themselves.  Markets facilitate such choice.  We have only to facilitate markets to make them truly competitive.  The rest then becomes a little easier.

9 thoughts on “A Preliminary Look at Health Costs and Insurance”

  1. Thank you very much for the response! This was much more than I anticipated. I understand now where you’re coming from.

    I think the biggest difference in my assumptions and yours is that you view healthcare like any other good or service, the amount of demands and supply fluctuate based on price and the cheaper the price the more people demand.

    I believe people fundamentally do not want to use healthcare. Any additional demand from a lower price is just getting us up to the level of increased longevity.

    The architects of the aca side with you on this one.

    1. It may or may not be true that in every type of health care service the lower the price the more of it will be purchased. Nevertheless. lower prices are what we want IF those are brought about through vigorous competition. Then even insurance would cost less and in many cases not even necessary. In a psychological sense people likely don’t want to have to use health care, but when they do they do want it to be cheap as possible given an acceptable level of quality and choice. Healthcare is a good similar in this respect to libraries or fire services–you don’t always use them and in the latter, you don’t want to use it, but if you want or need it, it is there and affordable. MY proposal is vastly different from Obamacare.

      1. I’m sorry for the misunderstanding. Yes your proposal is vastly different. I was just noting that it has the same base assumption
        And it’s an assumption either way. I could easily be wrong.

        I love the analogy of the fire department.

  2. Dr. Causon,

    I agree and appreciate every bullet of your 10-point outline. Thank you for sharing.

    In the US, the general public equates the terms “health care” with “health insurance”. The distinction lost between the two is intentional by some. It facilitates and relates any change to a health insurance/risk transfer mechanism – with – damage to our health care as a whole.

    Though your bullet points would all help in making “health care” more affordable, it seems the problem of pre-existing conditions and community rating would still wreak havoc on “health insurance” costs.

    I might add… Darth Vader’s suggestion that people “do not want to use healthcare” may be immaterial.

    Our nation has become a population struck with chronic disease (45% of our citizens). Traditional medicine fans at addressing root problems, instead, we treat symptoms and foster dependency.

    Wellness may be picking up interest in some demographics, but the current health care system does little to support the concept.

    That to suggest, even if people do not want to use healthcare many are caught in a repeated use spiral in part, because of the system in place.

    Some of your bullet points touch on a solution for this. And, previous health insurance underwriting rewarded healthy behavior. No longer.

    A point and a question if I may…

    Among other things, the ACA released from the “tube”, nationalized pre-existing conditions and community rating. Some states had long since adopted those concepts as law. But as you suggest, both remove a fundamental tenant of insurance. As you also point out, health insurance now resembles a cash-flow management mechanism than a valid insurance policy.

    Given the changes ushered in by the ACA and what people now think should be the norm, do you think the health insurance marketplace can get back to a point where we can underwrite for pre-existing conditions?

    Are we beyond the place where we can reward those who take personal responsibility for their own wellness? Or – are we at a point where we need to concede and seek a mandated solution where everyone (cough) must pay?

    It seems to me the toothpaste may be out of the tube.

    1. Richie, whether or not people desire to consume as much healthcare as possible is quite material.

      The aca punishes plans for having a low deductible. The presupposition of whether or not people want to consume healthcare naturally leads you to make a judgement call about this. Does this raise or lower healthcare costs?

      By the way, you’re right what we really need to do is treat the causes not the symptoms. As an example there was a study that found that yoga reduced healthcare costs by 40% for those involved (I believe high stress individuals only) if everyone with stress related health problems (can’t remember for sure the numbers so let’s go with a number on the low side of 25%) did yoga, that would represent a major drop in our overall costs.

      That’s of course not to mention things like getting rid of cigarettes, weight loss, etc.

  3. Interesting look into health costs and insurance. I agree that the most important thing we can do is rebuild the insurance and healthcare markets from the ground up, so that they are fully market-driven and competitive. These characteristics would surely make the industry more efficient as a whole.

  4. This was very interesting. It was interesting to see how people use insurance and what we should do about it.

  5. I thought this was very interesting and educated me more on a topic I am not too strong with. It is intriguing to learn how people use insurance and what would be beneficial for us to do. I agree that building insurance and health care from ground 0 would be beneficial to us.

  6. I really liked your eighth point where you note: “We have to find a way to disincentivize people from overusing healthcare, for example, emergency room visits.”
    This is a great point, because a lot of people take advantage of the system. My mom works for an insurance company and frequently has to go to court to prove people are claiming false injuries. The worst part, is that some doctors are in on it. They will prescribe expensive medications for people who aren’t truly injured and turn a profit on it. People need greater incentive to not abuse the system.

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