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Obamacare skirts the real reason behind Health Insurance mess

Obamacare skirts the real reason behind Health Insurance mess

by Kshitiz

So the government has shut down. And most likely the Republicans are going to pay a price for this, if polls read the public mood accurately. To bring government to brink to extend the last leg of a political battle that was lost, howsoever barely, is neither good politics nor policy. But that the Affordable Health Care Bill was passed, and upheld by the Supreme Court and is now a reality does not mean that it was a good solution to the problem that afflicts the state of health care in the United States.

The legislation, passed amidst much jubilation and acrimony together, is the most significant change in the way healthcare and medicine is practiced in the United States. However with the rushed passage, many of the projections are now found to be either not coming to fruition or unintended consequences that nobody got the time to think about. Though the law exists, and its constitutionality upheld by the Supreme Court by naming it as a tax, a name the original proponents avoided, it is instructive to consider whether the law has served its vaunted purpose, and if it is going to.

 Obamacare was sold to the nation much like most governmental programs are sold. It would offer free health care to all, covering all possible diseases, would not care about pre-existing conditions, and with all that, cut down the cost. One might wonder why such creating something out of nothing magic was not thought of by anyone else.

It was pointed out by many parties that the cost of Obamacare would be much more than is projected. Which governmental program finances have been rightly projected, in any country? Of course, all the cost is always put to future, with benefits brought earlier to sweeten the deal and garner public support. And so it was in the case of the affordable health care insurance.

The fundamental reason any universal health insurance plan is bound to fail lies in the way insurance works. Insurance, by its very definition is a market-economy version of sharing costs. It is typically intended to temper the hard falls to individuals that life (or market) brings at times. The system works as follows. Many individuals who are afraid of a calamity that is improbable, but if it occurs would bring them to ruin, combine resources and promise to help the one to whom the improbable calamity actually afflicts.

So you buy car insurance to pay for an improbable event of an accident that might cost you more than you afford to pay. Since it is difficult to set aside money to pay for such an improbable accident, if it were to occur, you pool in with many others like you. Each participant pays only a tiny bit, but if an accident does occur, that person gets most of the money. This is a reasonable way to hedge for a calamity that might never really occur, but if it does can be ruinous and preparing for which individually is very expensive. Insurance, in other words, is the solution created for improbable events, or calamities (which must be improbable too to make it work).

The fundamental problem with the US health care system is that the insurance has ended up being a safety mechanism for commonly occurring events. If I am using my insurance policy to pay for a common cold, or pregnancy, the cost cannot be sustained in an insurance set up. Since at the time of need I do not have to really pay anything, there is an incentive against avoiding costs. I do not shop around with price in mind. Since the medical system knows that the patient is completely insensitive to the price of the procedure, it has a positive incentive to use as many procedures as possible, and to keep the cost of procedures high. Now since everyone has cold a few times in a life time, and most people have babies once, what sharing has really occurred? Insurance paid for me when I needed it, but I paid my share for all the others when they needed it. Worse, when I actually used insurance, knowing that everyone else is paying for me (through their premiums to the insurance company), I had no reason to be careful about the cost. Nobody is careful with other people’s money! And so premiums keep increasing for everyone.

Expensive medical technology cannot be justified as the reason for persistent high medical cost. Technology has brought advanced phones within reach of masses even in poor countries. In fact, the only field in which health care costs have come down significantly is in the area of cosmetology and cosmetic plastic surgery (a.k.a. fixing up your nose and eyelids), where the government has no populist role to play and the insurance has had no role to play. This just illustrates how the market is distorted due to insurance for common health events.

With the insurance provided by large employers, often mandated within the terms of compensation, there is no incentive for the employee to shop around for insurance. My employer pays my insurance whether I want it or not, so why should I go find a competitive one that fits my personal requirements. This has resulted in a society with two categories: those with decent insurance, and those with none at all. This is contrary to what is expected in any society: a continuum of premium to low level insurance, to yes, uninsured. Consequently, hospitals either receive patients who do not care for the cost, or those who just get free services. In any other economic activity, customers balance service with its price, but it seems not to matter much in medicine in the United States. A free marketplace is non-existent for medical services, with each patient (with insurance) being impervious to cost forcing it to rise to a level where the uninsured find it prohibitive to use.

These distortions are unacceptable, since they result in increasing prices for the customers overall, while they continue to remain insensitive to the price at the actual moment of purchase (my insurance will pay). Obamacare will end up distorting the system even more, probably forcing a situation in future where the equivalent of gas pump queues exist in medicine, that is by price control or salary caps. Insurance, by its very nature can work for catastrophe, not for usual daily issues that everyone faces. One can imagine the abuse that would result if auto insurance companies start paying for gas, and usual wear and tear. Probably the concept of universal health care insurance is flawed in its very basics.

The concept of insurance must be limited only to improbable events, and catastrophes. And one way to consider this is to open insurance directly to marketplace by removing the tax incentives for employers to provide health care insurance to their employees, or to provide it in cash that the employees can use for whatever they want to use the money for. If they misuse it, tough luck. But most will sensibly plan for their health shopping around for insurance plans that suits their needs, and expectations. This will result in a real marketplace to emerge in healthcare services where people will shop both for quality and cost, driving down prices for medical services. Consumers always get the best deal when competition exists in the market.

 

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Kshitiz is a senior scientist at the University of Washington, Seattle School of Medicine, and a medical entrepreneur. He is also the author of “The Revenge of Shakuni” ¬† ¬† www.kshitiz.info

Photo acquired under Creative Commons License by Tax Credits



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