May 18, 2009

JUST AS YOU DON'T WANT FOOD STAMPS TO PAY FOR JUNK FOOD...:

What is Driving Rising Healthcare Costs?: Our healthcare system is in trouble today because we have consistently ignored market-oriented solutions and instead sought out policies based on public finance and top-down regulation. (Dustin Chambers, May 18, 2009, The American)

The drivers of high healthcare costs are manifold, and include the perverse incentives associated with an insurance-based payment system, low labor-productivity growth in the provision of care, and the closely related issue of a constrained supply of healthcare providers. The expense of treating the uninsured or under-payments from Medicare and Medicaid is shifted onto private healthcare providers, as is the expense of litigating and/or settling malpractice lawsuits. While significant ink has been dedicated to all of these topics over the years, I will focus my attention on the first three.

The United States relies on a third-party payment system whereby individuals and employers purchase insurance that allows patients to receive healthcare services that are in turn paid for by insurance providers. For the elderly and disabled, the government assumes the role of the insurer, using funds from payroll taxes (rather than insurance premiums) from current workers to pay medical providers for care provided to those currently enrolled in Medicare, Medicaid, and other public healthcare programs.

The current system overextends and perverts the use of insurance. The purpose of insurance, whether public or private, is to spread catastrophic risks over a large pool of individuals. Automobile insurance provides a great illustration of this. When was the last time you submitted a claim to your auto insurer asking to be reimbursed for an oil change or a tire rotation? Never. But that begs the question, why do you have auto insurance? For most of us, the answer is to cover the cost of a new car if we total our current one or to cover the expense (both property and medical) of the other party if we are involved in a multivehicle crash.

For the sake of argument, let’s assume that auto insurance did pay for routine maintenance. How would this affect your behavior? Most consumers are very price conscious and will only take their cars to repair shops they believe to be honest, and they are quick to question recommended repairs. If, on the other hand, auto insurance began to pay maintenance bills, I suspect that most drivers would select the most convenient shop, and would cease to be concerned with the price or the necessity of recommended repairs, because after all, it is being billed to the insurance company. We would end up with drivers unwilling to do any due diligence regarding the price or efficacy of auto repairs, and thus as a nation we would grossly overspend on them. With time, auto insurers would significantly increase premiums to cover these high repair costs, and would likely seek to screen out the owners of older cars that are more likely to need significant repairs. Soon, poorer Americans who simply want basic liabilitycoverage would find it difficult to afford the premiums and would become uninsured drivers.

Health insurance should not cover basic or routine medical services, but instead should cover major illnesses, surgeries, etc. Moreover, the government should require that healthcare providers charge all patients the same fees for out-of-pocket medical procedures (insurance companies and the government should be free to negotiate discounted prices for the services for which they directly pay, but these preferred rates would not apply to the services paid out-of-pocket by their members). This would bring normal, competitive market forces to bear on the provision of routine medical services. Insurance would then provide (as it is properly intended) coverage against significant and expensive maladies. This helps the poor in two ways. First, routine services would be much cheaper, and so the poor and uninsured would be able to afford (out-of-pocket) basic services. Second, the price of catastrophic medical insurance would be within reach of many more Americans. While high-deductible insurance plans already exist (in which the insured pays the first $1,500 to $2,000 in medical expenses and the insurer pays everything above this amount), what is really needed is for Medicare and Medicaid along with most employer-provided plans to adopt this high-deductible model. Although the current system epitomizes the overuse or misuse of insurance, the Obama plan fails to recognize this, and instead seeks to expand the size and scope of this distorted system.


...you need a medical insurance system that doesn't pay for most of the junk that passes for health care nowadays. People are stuck in the mode of thinking about medicine as if it were an essential rather than just another consumer product.

Posted by Orrin Judd at May 18, 2009 8:16 AM
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