Health Care Economics Unspun: Start In the Commonwealth of Massachusetts

Former Massachusetts Governor Mitt Romney and company were so proud of their health bill

Former Massachusetts Governor Mitt Romney and company were so proud of their health bill.

As the United States looks to revamp its health care system, some say it is a complete failure, while others contend it is the best system in the world, despite its flaws. These are the projections and facts about U.S. health care on a national scale:

The cost of health care will account for nearly 18 percent of the nation’s gross domestic product (GDP) in 2009. It’s a number that, according to the Centers for Medicare and Medicaid Services, could eclipse 20 percent by 2018 if changes aren’t made. That would be somewhere in the ballpark of a national $4.3 trillion tab. The cost of health insurance to combat soaring health care expenses is growing out of control as well. Since 1999, employment-based health insurance premiums have increased 120 percent, compared to cumulative inflation of 44 percent and cumulative wage growth of 29 percent during the same period.

The average employee contribution to company-provided health insurance has increased more than 120 percent since 2000. Average out-of-pocket costs for deductibles, co-payments for medications and co-insurance for physician and hospital visits, rose 115 percent during the same period.

The United States spends more money on health care than any other country in the world. While other industrialized nations like Switzerland, Germany, Canada and France offer government-provided health insurance to all, the U.S. still outspends them. Switzerland spends 10.9 percent of GDP, Germany 10.7 percent, Canada 9.7 percent and France 9.5 percent. Compare that to the U.S. spending spree of around 18 percent. But why do we spend so much more than industrialized nations where everyone is insured, despite having 46 million uninsured Americans? Partly due to the fact the United States is the wealthiest. The wealth effect, and the income effect, tell us that as one’s income or net worth increases, so to does their consumption. Naturally, as the richest country, and likely the most materialistic, the U.S. spends more than anyone else across the board, including health care expenditures.

Take the pain away...fast!

Take the pain away...fast!

We’re also a pill-popping society. Our first instinct is to use medication for any bump, bruise or pain. Instead of letting the pain of a headache pass, we take two IBUprofen. Instead of eating vitamins and nutrients before and during a flu, we take NyQuil, or better yet, codeine cough syrup. And just because the U.S. has 46 million uninsured, does not mean they do not gain access to medical care. The uninsured show up in emergency rooms, and they’re treated by law. ERs provide the most expensive medical treatment on the planet.

It is important to note that part of the reason the U.S. outspends other industrialized nations is a byproduct of our wealth and cultural attitudes about medicine. In many ways, the U.S. is an anomaly, and comparisons to other countries have limited value in this area.

Fortunately, the United States need only look toward Massachusetts for results of a government-provided health care model.

What we can all agree on is that a health care system with these cost trends, needs improving. But is it, as Vice President Joe Biden eloquently states, to spend even more money?

Money we don’t have, mind you, and can’t possibly tax enough rich people to cover the costs of a public option. It will surely result in an open palm to China, and yet another trip to the printing press to devalue the dollar.

Back to the Commonwealth; Massachusetts took a paternal role and decided everyone should have health insurance. Thus the individual mandate was born. Residents 18 years of age and older were required, by law, to obtain health insurance. If private health insurance could not be obtained, by say, an insurance company refusing coverage to an individual due to asymmetric information, Bay Staters would have to seek health insurance through the Commonwealth Connection program. After 3 years, 200,000 people still remain uninsured, despite tax penalties levied on residents who failed to become insured. Massachusetts does have, by far, the lowest uninsured rate in the country.

What should we learn from the individual mandate? Some people will still choose to go without health insurance; it’s expensive, even with government subsidy help. Insurance costs are getting so expensive, as noted above, that some Massachusetts residents decided to ignore the mandate altogether, and incur new tax penalties instead. No health care plan will insure everybody.

Speaking of rising costs of health care, since the inception of former Governor Mitt Romney’s health plan in 2006, Massachusetts has experienced a total health care spending hike of 28 percent. Insurance premiums have increased by 8–10 percent per year, nearly double the national average. From 2008 to 2009, my premiums increased by 34.67 percent, so who’s got the raw deal, right? That spike was in the face of a couple routine doctor visits over the calendar year, and zero serious medical concerns.

House should treat us all. That's regulation I can believe in.

Maybe House should treat us all.

Despite tax increases in Massachusetts, the health care program faces huge deficits. The state is considering caps on insurance premiums, cuts in reimbursements to providers and even the possibility of a “global budget” on health care spending. In layman’s terms, this means less health plan choices for the individual in the face of increased demand, less money (thus incentive) for doctors and rationed health care. The best way to control costs is by cutting out services and paying doctors less. As altruistic in nature I’m sure many physicians are, I doubt they went through a demanding (and expensive) 9-12 years of higher education to have their earning potential stymied.

According to The Boston Globe, wait times to see primary care physicians in Massachusetts has grown to as long as 100 days. Naturally, when reimbursement rates (payment to the doctor) get siphoned off for state-sponsored insurance, doctors aren’t as motivated to see those patients. Doctor shortages mean a decreased supply of medical care. Individual insurance mandates coupled with tax penalty incentives to become insured, equal an increase in demand for medical care. Less doctors, more patients…hmm, higher costs and longer wait times.

The answer to health care problems in the United States will not be solved with a Commonwealth Connector model. It has failed, it is history and we would be wise to learn from it before adopting it as a national strategy. The uninsured people in the United States fall into a few categories. Some are choosing to be uninsured, opting instead for a “pay-as-you-go” model. If you believe your risks to a catastrophic health trauma are low, why shell out $10,000/year in premiums? Others choose to go without insurance because they believe the policies are not actuarially fair. That is, the expected value of the policy is less than its cost. The healthier a person is, the less the expected value of a health insurance policy will be. And lastly, some people are uninsured because insurance companies deny them coverage. This is largely a problem of asymmetric information. Most people are insured as a member of a group: employees of a company, a sitting senator, a congregate of a church, etc. Risk is greatly lowered to insurance companies that do this, compared to insuring on an individual basis. In large groups, a distribution of potential health outcomes can be mapped out and a more accurate estimate of costs can be established.

An individual knows much more about their own health, lifestyle and risk factors than an insurance company does. An insurance company has to assume, by the fact a person is seeking health insurance, that they anticipate high medical bills looming in the future.

The government should take the 46 million uninsured people and place them in groups. Group them by age, trade, at random…whatever. The important thing is to group them together and present the groups to insurance companies. If they were to be distributed by equal age distribution across the groups, you’d have a lot of healthy twenty-somethings to work with. Many uninsured people are young and healthy and don’t feel their risk of medical catastrophe is high enough to pay insurance premiums every month. Insurance companies could lower their risk in insuring the same people they turn down on an individual basis. Pretty neat, huh?

A more extreme way of helping ease asymmetric information in health insurance markets would be to require, by law, that all Americans obtain health insurance. This would immediately stop insurance companies from assuming an individual, seeking insurance, automatically expects high medical bills in the near future. Instead, people would just be law-abiding citizens seeking insurance. It’s a paternal solution, that has its drawbacks of freedom, but is an economic juggernaut of logic. More Americans would be prepared for a medical emergency, even if they believe health insurance policies are not actuarially fair (worth paying given the risk). Such a law would increase demand for health insurance in the free market, help individuals get insurance policies and help drive down prices for all. Want a cherry on top? Lift bans on people taking out-of-state health insurance policies. The competition brought by a Californian, seeking cheaper insurance in Columbia, Missouri, would drive prices down even further.

Doctors cannot order tests and write prescriptions that aren’t absolutely necessary. Patients need to actually care about the cost of tests and medicine; an incentive not currently achieved by a premium/deductible/co-pay system that keep costs relatively fixed for the patient, and picks up virtually the entire tab. The food supply with chemicals, pesticides, sprays and hormones likely have detrimental effects on the nation’s health. These are real issues that the government fails to address. If we’re serious about overhauling the health care system and promoting preventive medicine, let’s get serious.

The final point worth noting in the health care debate is as follows: what we refer to as “health insurance” isn’t insurance at all. Insurance schemes, by definition, can only apply to a rare event. If a huge pool of people obtain insurance for events that are likely, there cannot possibly be enough premiums collected to pay for everybody’s claims. “Health insurance” today are various plans to pay for the lion’s share of all health care costs. Insurance has devolved in the health care sector, partly as a result of skyrocketing costs. As we learned in Massachusetts, skyrocketing costs come from doctor shortages and an increase in patients. Anything that decreases health care supply (regulations, reimbursement caps, etc.) and increases health care demand (individual mandates, wealth, superfluous doctor visits due to wealth and a “pill-popping” mentality, etc.) will spike costs.

And that is health care economics unspun.

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