Why Not Actually Reform the Health Care Industry?

The Baucus health insurance reform plan, like the plan being sold by the President on every media outlet, will make health care more expensive, less efficient, and do nothing to improve the health of Americans. The problem is that the current system of health care in the United States is fundamentally flawed due to prior government intervention and further government intervention will only lead to higher costs and bureaucratic rationing. Proper reform would be to address the fundamental flaws in the health industry, which are third party payment, employer-based insurance, massive governmental intervention and lack of competition in the insurance market. Nothing in the bills before Congress or the plan of the administration will reduce these problems. On the contrary, the proposals will aggravate the situation.

Everyone knows that when taking a friend to dinner you wait until the friend has ordered before announcing you are picking up the check. People alter their behavior when someone else is paying. The large majority of health care expenditures in the United States occur when the person paying for the service is not the person receiving the service. This creates a situation where the demand for health care services is artificially increased, leading to higher prices to be paid by those doing the paying — the insurance companies and those who don’t have coverage — and in turn, higher prices for insurance premiums and fear of being without insurance for everyone.

Producers of medical services have an incentive to produce services which are covered by private insurance companies or the two massive government companies, Medicare and Medicaid. If the service is covered by insurance, then the higher the price for the service the more revenue, since consumers don’t pay for the service and their demand is unaffected by the higher price. Because insurance is so heavily regulated, those who produce health care services will spend lots of resources lobbying the state and federal governments to require insurance companies and Medicare and Medicaid to cover their services. This system results in medical services and research being concentrated in areas that are politically favored rather than what is efficient and rising costs for health care and health insurance.

Employer-based health service coverage is another fundamental aspect of our health system that needs to be changed. In the case of employer-based health insurance you cannot decide that you want a cheaper policy that does not include coverage for items that you believe will be easy to avoid. It also means that you can’t save yourself money by taking actions that reduce your chances of using health care services, such as avoiding fatty foods and exercising regularly. Finally, it means that if you lose your job you lose your health insurance. This is a particularly serious drawback if you have something like cancer, so when you attempt to purchase your own insurance in the private market you will have a preexisting condition and be denied coverage. If insurance were purchased by the individual, such as is the case for other types of insurance, the system could result in persons who got cancer having their treatments paid for and not losing coverage as long as they continued making premiums.

All of the government reforms simply add to the systemic problems. Requiring health insurance companies to provide coverage to people with preexisting conditions makes it clear that this is not insurance but rather prepaid medical care. Imagine if life, fire, or car insurance coverage could not be denied to someone because of a preexisting condition. That would certainly alter the timing of when you bought insurance. Recognizing this, the proposals require everyone to purchase these policies. This only aggravates the third party payment problems. Requiring businesses to provide health care for their employees is exactly the wrong thing to do. We should be moving away from employer-based health care and towards individual purchasing of true health care insurance and direct payment for services that improve one’s health.

The solution to the problem is pretty clear — move government and private health care to health savings accounts and catastrophic insurance, reform medical malpractice law, and allow interstate competition of health insurance. These reforms would actually improve the system, but they are unlikely to be offered because they involve less government control and more individual freedom — something that seems to be anathema to our government policy makers.

Cartoon by Brett Noel.