Friday, September 25, 2009

The problem with health care costs is the insurance

The Democrats' health insurance reform proposals will magnify the problems that make health care so expensive:
The administration's plan will impose mandates that employers provide coverage, mandates that individuals obtain coverage, and mandates about the form this coverage will have to take. These will remove the freedom to choose one's health-insurance plan, because government, in its effort to correct perceived inequities, will dictate which health-care services must be covered and which health-care providers must be used. ...

The mandates will lead to large increases in the cost of health insurance for everyone. Research studies have shown that as people become insured, especially under a health plan that offers broad coverage and low copayments, they consume more health-care services. The best estimates indicate that each newly insured person will approximately double his or her health spending.

With 30 million to 40 million newly insured persons under the administration's plan, aggregate health-care demand will increase significantly. But when demand expands prices increase. ...

The mandates will also have adverse additional longer-run consequences. According to provisions in both House and Senate bills, mandated plans must have low copayments and provide coverage of health-care services that is at least equal in scope to a typical, current employer-sponsored plan. But these are the very flaws that are responsible for high and rising health-care costs...

Comprehensive, low-deductible, low-copayment insurance has brought us to where we are today. The administration's plan to expand and lock-in this flawed paradigm will ultimately defeat the goal of making health services more affordable for everyone.
Again, insurance is what causes health care to be so expensive, because it encourages the population as a whole to purchase more health care services than it otherwise would. Increased demand then pushes up prices. As I quoted economist Martin Feldstein in an earlier blog post:
Since a typical 20% copayment rate means that an extra dollar of health services costs the patient only 20 cents at the time of care, patients and their doctors opt for excessive tests and other inappropriately expensive forms of care.
By the way, here's a list of reform ideas that the Democrats are ignoring. Here's a functioning national health care system that results in far lower costs than the European-style health care systems that the Democrats want to emulate.

1 comment:

  1. In order to properly assess the economic impact, it is necessary to assess the markets and market structures of the products in health care, from health insurance to the educational expenses of health care workers. It is necessary to assess the current regulations that affect each of these markets. And lastly, it is necessary to consider the full health care bill as it affects all of the markets.

    The health insurance market alone has both barriers to entry and economies of scale, structure that creates monopolies with the ability to hold pricing well above an ideal free market. In addition, health insurance industries enjoy an anti-trust exception.

    The health professional industry, doctors, nurses, and pharmacists are regulated and licensed, an unfortunate necessity that creates barriers to entry and monopolistic market structure.

    The same can be said of drug and device manufacturers regulated by the FDA.

    Due to these monopolistic structure of the health professional industry, education markets for professionals demands higher prices.

    As well, the very concept of insurance is an everyone plays game. The current state of the market tends to have healthy people opting out while health insurance is saddled with those that know they will need it. While the private companies are affected by this to some degree, Medicare takes the highest risk group.

    The full HR3200 addresses the imbalances created by both the current regulations designed to protect public health as well as bring the real insurance enrollment in line with the way the insurance model really functions.

    HR3200 adds doctor loan forgiveness and a nursing pipeline. It also better manages the Medicare costs. It brings everyone into the health insurance pool. As well, it provides for greater competition in health insurance markets that are now enjoying a government sanctioned duopoly.

    How all of this will play out precisely remains to be seen but it is fundamentally unrealistic to assess the impact of health reform without considering all the variables.

    An alternative, that I discussed with my neighborhood meth dealer, is that all of the current regulations should be repealed. We are both in agreement with this idea as he would like to start marketing antibiotics, prescription pain relievers, and local anesthetics. I would find the antibiotics useful as I now when my kids have an ear infection and a $250 15 minute appointment to see a doctor for what I already know is a bit excessive.