Health Care – Disconnection from the Market

In the first article in this series, I argued that the actual cost of health care, stripped of cost shifting, litigation and regulatory costs, is not at all unreasonable for what it is. If you disagree with that premise, I suggest you read Health Care – a Broken Market and debate the issue there.

You will lose.

But Cost and Affordability are not necessarily the same thing, and in the case of health care, reasonable cost does not make it readily affordable. The reason is that the purchase of health care is not uniform from person to person, or from year to year through our lifetimes. Compare buying health care to another large purchase, buying a house. Imagine if at some point during your life, you would have to buy a house, but you did not know when that would be. You could live in that house all along, but when the time came, you would have to pay for it all in six months, and that the later in life that time came, the more it would cost and that you could not know in advance whether the house you had to pay for was a $200K house or a $1.2 million house. Add in that when you paid for your house, you would have to pay for another house at the same time for someone else you did not know who either could not, or more likely simply refused to, pay for his own. That is how we buy health care.

Is it any wonder we have problems with that purchase?

To make that purchase more rational, we use insurance, (usually obtained through our employer, which adds further complication,  but that’s another article.)

Health Care insurance really does two things, and should do a third it does not as it now exists.

First, as with any insurance, it spreads the risk of major expense over a large population. Most of us will never need a heart transplant or spinal surgery, but if we do, we will need it very, very badly, and few of us would have the cash on hand to pay for it.  So, we pay our premium each month (or, more likely, our employer does) and hope we never need to use the insurance.

Second, insurance acts as a bargaining agent, negotiating a price for routine health care we could not get as individuals. Most health care insurance today operates as a Participating Provider Organization, with providers agreeing to a negotiated rate for their services in return for market share. These agreements result in  lower fees than you would otherwise pay, but as providers become more successful, they often cease participating in PPO’s which have deeply discounted fee schedules, so you sacrifice some choice of practitioners. HMO’s have even more restricted reimbursement for providers and thus fewer providers participate.

The third thing health care insurance could, and should, do, but as currently configured does not, is to level our costs over our lifetimes. Typically, we have higher health care costs as we age, finishing with extremely high costs in our last six months or so of life.

This is where employer purchased health care insurance fails as a method for buying health care. The reason for this failure is that the insurance purchased for us by our employers would not be a rational choice for us were we buying it ourselves, though it is perfectly rational from his point of view.

Were we buying our own insurance, it would make sense to buy guaranteed renewable, level premium, whole life, health insurance,  but because of the enormous advantage our tax laws give employer purchased insurance, that kind of health care insurance does not exist.

Such insurance does exist in the disability insurance field, which does not have those tax consequences. In these plans, your premium, when you are young, is higher than it needs to be to cover your risk of serious illness at that age, and you accumulate a cash-plus-interest balance which will be drawn down later as you age to cover your increasing risk as you age. Your premium is determined by your age and health at the time you start the policy and continues the same, adjusted only for inflation, as long as you pay the premium.  The availability of such insurance would give us incentives to become insured as young as possible and would protect us from loss of coverage throughout out lives.

But Employers do not know, when they hire you at 25,  if you will still be working for them when you are sixty, so they have no incentive to protect you from higher premiums later in life by paying more now.  Employers choose the cheapest insurance they can find for the coming year, every year, as that is in their best interest, even though it is very much contrary to our best interests, especially when you lose or change jobs after a change in your health status. That is not evil on their part, that is simply economics. Continuity just is not as important to our employers as it is to individuals. And, of course, employers have no interest in your health care after you retire, and few make any provision for it, unless they have been bludgeoned into doing so by collective bargaining. Even in those cases, too many of those promises go unkept due to bankruptcy, mergers and changes in those industries. This is what made Medicare, perhaps the most cruel Ponzi scheme in existence, seem like a good idea.

We can, to some extent, simulate this kind of insurance by starting a Health Care Savings Account when we are young and contributing a sufficient excess to it every year, while buying catastrophic, high deductible insurance to protect us against risk, and to accumulate enough of a balance in the account to pay for more expensive premiums as we age.

But realisitically, so long as our tax laws give such an enormous advantage to employer sponsored plans, and states prohibit voluntary group plans, it will be hard to change the system effectively. In fact, it almost looks like someone set out to wreck private health care insurance on purpose over fifity years ago, but in reality, it was the government, acting with the best of intentions, that created this mess. How that happened will be the next article.

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