Some Americans go without health insurance because they have what insurance companies call a pre-existing condition. Upon filling out the depressingly thick application for individual health insurance, many folks are denied because of a prior car accident, bout with cancer, acute kidney disease, etc. These pre-existing conditions, which if anything makes a person in greater need of health coverage, poses too great a financial risk for the insurer. When health concerns limit one’s access to health care, it’s no wonder the issue has turned many heads.

Insurance companies are not being greedy and evil. I’ve documented on many occasions that it is rational for insurance companies not to take on people who are likely to drain insurance pools. If insurance premiums are to remain reasonable for all other policy holders in the pool, those with pre-existing conditions can’t necessarily join the party. In addition, I’ve documented that health “insurance”, as we know it, really isn’t insurance at all. An insurance scheme, by definition, can only apply to a rare event. I don’t think a monthly prescription, and multiple trips to the doctor every year necessarily count as rare, unpredictable events. Click on the last link for greater insight into this matter.

Part of the health care reform bill passed in March addressed the issue of pre-existing conditions. The Affordable Care Act will force insurance companies to take on the same applicants they’re denying today, beginning in 2014. While it’s easy to see this as a win for humanity, not so fast. How will bringing in millions of the most expensive people into today’s insurance pools decrease health insurance costs? I thought the buzz word in this bill was affordable. Now, there will be monetary penalties beginning in 2014 for those that remain uninsured. The hope, by both health insurance lobbyists and the government, is that healthy, cheaper people will join the pool and help stabilize costs. Fines for the uninsured don’t ratchet up to meaningful levels until 2016. These menaces to society will pay the greater of $695 (up to $2,085 per household) or 2.5 percent of income. At this point, it will be increasingly more difficult for people to justify not obtaining health insurance.

I’m not suggesting the possession of health insurance is a “bad thing”. But the individual mandate is a paternal solution at the loss of more personal liberties. Beyond this, it may actually be rational for a healthy 25-year-old not to pay out $1,500/year in premiums. The expected value of health insurance may not be greater than the costs of insurance for a young person in tip top health.

The Affordable Care Act did not want to leave the pre-existing crowd hanging until 2014. With underemployment hovering around 18%, and many companies opting to contract work out to freelancers to save on labor costs (benefits, worker’s comp, etc.), more people are an accident away (or hereditary consequence) from bankruptcy. In the bill, a bridge for those with pre-existing conditions was instituted called the Pre-Existing Condition Insurance Plan (PCIP). PCIP is ran through both the state and federal governments. To find out how it works in your neck of the woods, click here, and then click on your state on the map. To qualify you must be a citizen or national of the United States or lawfully present in the U.S., have been uninsured for at least the last six months, and prove you have been denied by an insurance company due to a pre-existing condition.

While I’m happy that both the PCIP bridge and the eventual change in law will allow many to obtain health coverage, I don’t feel the Affordable Care Act meaningfully addresses any of the issues in our health care system. Namely, the multitude of reasons health care is unaffordable. SwiftEconomics.com has identified the problems, and offered many solutions which are littered throughout this column in links. To put it simply, very few market forces determine prices in our health care system. Prices which show up on a patient’s final bill have very little to do with the supply and demand for those supplies and procedures. They also have very little to do with what insurance companies reimburse for those services. One part of health care inflation has to do with arbitrary price setting. Prices of supplies and procedures in hospitals are almost exclusively determined by arbitrary groups. They’re set in a cat-and-mouse game between the hospital and insurance companies, where prices are raised on particular items or services in hopes of maximizing revenue within the structure of a negotiated contract. Then there is a disconnect between the prices of services and the contractually negotiated reimbursement rates between the hospital and insurance company. So you have actual costs of a service to the hospital. Then you have prices on a patients bill, inflated arbitrary figures for the most part which may or may not cover the cost of the service. Then you have prices for the insurance company, previously determined in negotiations.

Now think about what this system does to those that have no health “insurance”? They’re stuck with the arbitrary, inflated prices not driven by market forces. The prices don’t reflect reality. For patients with “insurance”, prices often don’t matter, in the sense that their marginal costs may be fixed. For example, they have a co-pay of $20 for a trip to the doctor, and everything beyond that is covered by insurance. Even if there is a larger fixed deductible, the logic holds. Say, though, there is a co-insurance rate on a patient’s policy. They will pay a percentage of total costs, which means they, too, are affected by the arbitrary prices, but still relatively insulated if their co-insurance rate is only 10-30%. While our “insurance” plans aren’t really insurance plans, costs spiraling out of control have strong-armed us into needing the pay-for-the-lion’s-share model.

Another reason health insurance costs are outrageous is that demand for health care is out-pacing supply. It’s becoming less attractive to practice medicine all the time. The costs of malpractice insurance, the increasing lawsuits in a litigious society, and the inability to be reimbursed even as much as the costs of some of your services are just a few of the reasons becoming an MD is getting less appealing (remember the 11 years of higher learning/residency and the associated debt involved). Starting clinics is also very onerous and regulated. It simply isn’t as lucrative to become a doctor as it once was, unless you’re Dr. Gregory House. Demand is raging for many reasons. One is we are a generally sedentary and unhealthy society. Another is we are the wealthiest nation in the world, and the income effect takes hold. Another reason is we don’t shoulder the lion’s share of our mundane medical costs, the insurance company does. So we take more visits to see the doc than we need. And another is that we have 36 of the top 50 medical facilities in the world. People come from all over the world to have health care services performed. People come to the United States in general from all over the world for opportunity, at which point we serve their health care needs.

We should take time to understand the variations of costs in our health care system. We have costs of services. These, typically neither the patient nor the hospital doctor shoulder the brunt of. Imagine going to a day spa where you receive a pedicure, manicure, mud bath, face mask, and deep tissue massage. What if your payment for these services only covered a fraction of the costs to provide the service? Well, said day spa would be going out of business in a hurry. Now suppose that you had day spa insurance, your services were priced at $250, and they cost the day spa $200 to provide. You covered a co-pay of $25, and your insurance paid a contractually agreed upon rate of $160 for the package. So you’ve contributed 10% of the total price for the trip to the day spa. This is quite a deal which would encourage you to return over and over again. The day spa collected a total of $185 for services rendered, that cost them $200 to provide, losing $15 for their trouble. Welcome to the reality of many services at a hospital. The facilities survive by making more exorbitant returns on other select services and procedures.

We also have costs of health insurance. Premiums go up as a result of general health care costs rising. More money leaves the pool every year, all else equal. As the country’s population increases and ages, individual health costs go up, increasing premiums. Remember that we’ll be ushering in millions of new people into the insurance pools as a result of the Affordable Health Care Act, presumably increasing costs for these pools beyond the additional rise in new premium income. And finally, health insurance markets must be freed to compete across state lines. By setting up health insurance oligopolies in every state, consumers are limited in their choices. A person living in Santa Barbara, California should be able to purchase insurance from Newport News, Va. Oligopolies aren’t known to lower prices. Real markets with competition and limited barriers to entry do.

So what is the answer to curbing health care costs at the patient bill level? It would be wise to do everything a government can to encourage the practice of medicine. Supply must not only keep up with demand for health care, but it must outpace it for prices to go down. This means any number of things; perhaps added protection for MD’s from lawsuits, less regulation to make it easier to start new clinics, and more freedom for doctors to run a practice how they see fit. For patient advocates, this seems like a scary prospect. But just as the restaurant that gives people food poisoning everyday, the medical practice which egregiously harms its patients on a regular basis will not be patronized. With the Internet, you’re not only relying on word of mouth to relay information but a running digital journal of people’s experiences in these offices, with these doctors.

The prices on patient bills must get closer to reflecting reality. That is, the costs of the supply or service at hand, as well as the overall demand for it. Having an insurance system which looks at a $150,000 patient bill, and reimburses $45,000 simply doesn’t make sense. Medicare and Medicaid set the example for reimbursement methodologies with many private insurance companies (payors). And as long as insurance companies only pay fractions of bills, hospitals will look to increase overall prices as much as contractually possible, or more so, to maximize revenue (further screwing the uninsured). Eventually the hospital will eclipse a price threshold and head to re-negotiate a new contract with the private payor. The process occurs over and over again. Hospitals truly need all the revenue they can get considering many services lose money. Not to mention if a facility wants to expand or open clinics to add beds and services for the increasing population.

Part of returning patient bills to reflect market prices is the patient shouldering more of the costs. This could be a long transition, being costs are so high at the moment, and people who aren’t young and healthy have immediate medical costs looming. In other words, older folks don’t have years to build a medical savings account. But those who are young should build a medical savings account either through their employer and/or on their own. Corporations assisting their employee’s health needs should look more like the Whole Foods model. Whole Foods CEO John Mackey had this to say about his company’s health plan:

The way it works at Whole Foods is we got rid of our cafeteria plan and we put everybody into one plan. The company pays 100% of the premiums for all full-time team members. They’re automatically enrolled and since that’s 87% of our team member base, that’s just about everybody. We also pay an increasing portion of the family premiums based on how long they have worked for the company, and we set up a high deductible. It’s not as high as it needs to be, but it was as high as we thought was politically possible within our team member base as a starting point, because they didn’t have any money in their PWAs [personal wellness accounts] or their health reimbursement accounts. So, we set it up with $1,000 deductible in medical costs and a $500 deductible for prescription drugs … We also set a $3,500 maximum out-of-pocket expense, which includes the $1,500 in deductibles, plus another $2,000 that would go toward co-pays once the deductible was exceeded. We set the exact same plan up for our families as we did for individuals. As soon as you got to $3,500, the company would pick up 100% beyond that. And we funded these personal wellness accounts, which we call PWAs. Again, the IRS made that possible with their ruling, although they are technically called health reimbursement accounts (HRAs). The new health savings accounts, which passed in the new Bush Medicare monstrosity along with prescription drugs for seniors, well, the silver lining in that was the HSAs. But those weren’t available when we started our plan … We give every one of our team members a MasterCard debit card and they can access their funds for the appropriate health and wellness expenses vis à vis that debit card. Their total service hours for the company determine how much money we deposit in their account. Here you can see it according to service hours, and 2,000 service hours represent about one year of employment if you work 40 hours a week. You can see that after two years you’re basically going to get $1,500 which will cover your entire deductible, and at 10,000 hours it goes up to $1,800.

Plans of this nature force patients to be consumers and shop prices. By patients actually being aware of prices at the doctor’s office, and spending with discretion, doctors would have to compete with other doctors for their patients. Patients would ask if tests are necessary, or if there are cheaper alternatives. Competition is good. Patients shouldering more responsibility for their medical costs is imperative to lowering aggregate health care expenditures as a nation.

Finally, Medicare must be completely reconfigured. Proposals seem to indefinitely be on the table, generally including bumping the minimum age above 65, and reducing benefits over time. Quasi-fiscal conservative Congressman Paul Ryan has laid out one such plan in his “Roadmap” found here. Obviously as life expectancy and population continues to expand, social health insurance needs to be reeled in.

These issues would be a start to reforming health care. Unfortunately, none of them were addressed. Like the Wall Street reform bill passed yesterday which didn’t even mention Fannie Mae and Freddie Mac, government regulation strikes out again.

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