Contemplating Health Care Reform

Sunday, August 9, 2009

Consumer Protection or Consumer Nightmare?

Proponents of the current proposed health care reform legislation are stressing “consumer protections” measures in the bill, including:

• Prevent insurance companies from denying coverage for pre-existing conditions
• Cap the amount insurers may require policyholders to pay out of pocket in a given year
• Require all insurers to cover routine check-ups such as mammograms, colonoscopies, and eye exams.
• Prohibit insurers from dropping or "watering down" coverage for someone who has become seriously ill.
• Eliminate both yearly and life-long spending caps

Politicians seem to believe that insurance companies grow money on money tree farms and they’re simply too stingy to cover any and all treatments for any and all health issues that might occur. They also omit a small detail – having “insurance coverage” is not synonymous with “treatment”.

In fact, insurance companies must obtain resources to pay for health care for sick individuals by collecting premiums from the pool of policyholders. They are limited in the amount of coverage they may provide the sick because there are natural limits on how high the premiums they charge may rise before people start opting out of the pool and stop paying their premiums. It’s a trade-off. A large reason for the estimated 10 million young uninsured who make over $50,000 per year is that they don't find the expensive, mandate-laden coverage worth it.

If the insurance company must pay for all of this additional coverage and take all the additional risks imposed by legislators, it must also collect additional premiums. This can only mean that premiums for private insurance will either skyrocket, or insurance companies will soon be overwhelmed by claims and go bankrupt - or they will have to “water down” care and deny certain treatments.

Will government be able to do better? The government has a problem similar to private insurance companies – it must collect money in the form of taxes from everyone else to pay for the treatments it promises the sick. The only problem with that plan is that “everyone else” is a much larger voting block than the few sick people in our country at any given time. It is difficult to imagine that tax rates can be raised high enough to make good on government’s promise of top-notch coverage for all if they should be unfortunate enough to become truly sick. In fact, it already limits (“waters down”) treatment in its Medicaid program for cost reasons, as do all other countries with socialized medicine.

The bottom line is that there is no free lunch. There is no such thing as unlimited coverage coupled with cost controls. It’s one or the other. At some point, you will not be able to force someone else to foot the cost of your $40,000 treatment to give you a 5% chance at 6 more months of life. The difference between a government run health care system and a private system is who gets to decide what your life or limb is worth and who decides how much health insurance coverage you must purchase. In a private system, you have the option to pay out of pocket for the difference between what the private insurer won’t pay and what your life or limb is worth to you. In a government (or "public option")system, that decision is made entirely by the government.


  1. Marshall Titus DDSAugust 10, 2009 at 4:44 PM

    You will always have an option to pay out of pocket in any system. The bigger question is will those who cannot afford to pay have access to healthcare? As long fee-for-service is the payment model for a government plan it will not survive, in my opinion. If the payment model for the government plan changes to a military scale capitated payment using VA facilities (expanded) and creating their own, the goal of true health care for all will be attainable.

  2. Actually this is not true. For any European or Canadian system you cannot pay out of pocket at all for any of your care except for dentistry or optometry. If you would like to get an MRI done at a private facility --- this is simply not an option, since imaging centers are not legal in those contries. I meant it is not legal to own an MRI center unless it is a part of the hospital. That is why you have to stay in lines and wait for a specialty care sometimes for 6 to 8 mo. My grandmother in Canada is on the wait list for the ophthalmologist-- its been 5 months so far. Actually most capitation plans dont and will not work either unless the quality care is deminishes. Technology and procedrues are becoming more and more complex unless we want to stall the progress --- capitation plans will be a great option to cover everybody with a poor quality health care.

  3. Ability to pay has much to do with income and prices. The current US health care problem is almost entirely a financing problem. People always will strive to maximize the value they receive relative to the cost they pay.

    Almost all consumer items have a downward pressure on prices, since consumers are able to keep for themselves whatever savings they can find through shopping and negotiating. That creates a consumer-oriented pricing system as people have an incentive to maximize their utility by driving down prices.

    Prepayment systems, which include all private and public third-party health care financing systems, result in an upward pressure on prices as people who have already paid for the services (via premiums or taxes) can only increase consumption to maximize their utility.

    Direct consumer financing puts cost control in the hands of the consumer, who is best able to make his rationing choices based upon his unique set of values.

    Third party financing puts cost control in the hands of the third party. In the case of private insurance companies, who must be profitable to exist, that results in micromanaging of the payment schedule which is perceived by physicians and patients as overly complex and intrusive to care. In the case of public financing, like Medicare, it either does the same, or because profitability is not a concern, leads to growing expenses until expenses cannot be further financed through taxes and debt. At that point, either denial of coverage, and/or centralized rationing of care must occur. Centralized rationing is quite literally incapable of reflecting the value set of each individual consumer.

    The other side is income. As health care prices grow in third-party financing, the prepayment by necessity grows. The increase in taxes and insurance premiums reduces people's incomes and therefore their abilities to afford anything, including health care.

    The only way to simultaneously maintain the level of quality that most people currently experience, and make both health care and insurance more affordable to those who are currently priced out of the system, is to remove disincentives to direct consumer-level financing. It most certainly will drive prices down. That will result in more people being able to purchase their own insurance and care. It will also make the perceived necessity for purchasing insurance decline as more people find they afford to purchase care directly when they need it. That creates another competitive pressure on insurance companies.

    The result of a system that drives down prices according to consumer preferences is that the problem of the uninsured dramatically declines, making any targeted government solution less intrusive, and much more affordable.

  4. Marshall Titus DDS,

    Unfortunately, the current legislation makes it virtually impossible to open and run private facilities. This is part of the deal reached with the hospital lobby.

    While fee for service is imperfect, capitation plans have their own drawbacks.

    We will be posting about both topics in the near future.