Ram Nagarajan is an MBA graduate from the University of Chicago who believes in individual liberty, limited government and a market based approach to solving complex socio-economic problems. He is also a computer science engineer and a software architect and believes that technology can play a vital role in improving the human condition. He was born and raised in India and is now living in the United States of America as a legal permanent resident. He cherishes the American Constitution of justice & equality and the classical liberal values of its founding fathers.
While not an economist, he has an avid interest in economics, particularly Milton Friedman, Ludwig von Mises & Friedrich Hayek schools of thought, and is interested in bringing these sound economic principles along with technology options in solving complex public issues. He truly believes that public policy should be very carefully crafted to limit to serving only those who are not served by market based solutions and with minimal effect on free-market open competition; and only such policies will have the most impact in improving the overall quality of life.
“The hardest thing to explain is the glaringly evident which everybody had decided not to see.” – Ayn Rand
The Health Care System in America, at the time of writing this article, is based on the Patient Protection and Affordable Care Act (ACA in short). The ACA was passed by congress and signed into law in 2010 by then president Barack Hussein Obama and hence popularly called Obamacare. While the ACA addresses some issues of the previous health care system like insurance coverage for pre-existing conditions, there has been a bitter-sweet reception to this law by the people. This article also comes at the heels of a new health care bill proposed by Republican majority congress called the American Health Care Act (AHCA) which has passed the house and being reviewed by the Senate. The Senate has released its own revised proposal to the AHCA called Better Care Reconciliation Act (BCRA) which is currently being debated.
The ACA is a comprehensive federal health care reform unlike prior health care laws in that it mandates individuals to purchase health insurance or pay a penalty. It also mandates employers with 50 or more employees working 30 or more hours a week to provide health insurance to its employees. It may sound ironic that in the land of the free and the home of the brave where the rights comes from the creator and not from the government, unlike in a centrally planned communist society, there exists a federal law governing Health Care for all people with mandates. However, this actually started back in 1965, when President Lyndon Baines Johnson, as part of the Great Society programs, introduced two social programs for health care in America, namely Medicare and Medicaid. Medicare was primarily designed for seniors and Medicaid primarily for the disabled. Over time these two programs expanded to consume a large portion of the GDP compared to all other entitlement programs including Social Security which was passed in 1935 by President Franklin Delano Roosevelt as part of the New Deal social programs.
|U.S. Federal spending and revenue components for fiscal year 2016 (https://www.cbo.gov/publication/52408)|
From the chart above, we can see that health care expense alone (combined Medicare and Medicaid) takes more than any other entitlement program including social security. The more important fact is that the entitlement programs (primarily health care) are projected to grow significantly as a percentage of GDP compared to discretionary spending. And significant increase in federal health care expenses even within this growth comes directly from the ACA. So understanding the ACA is crucial in providing sustainable health care over the years.
One can clearly see from the chart above that the growth in entitlement programs will become unsustainable and will completely destroy the country’s economy as we likely increase the national debt to cover for these programs. And if the federal government is unable to meet the obligations to these programs, there will be dire social consequences which will affect the very people that heavily depend on it like seniors and disabled.
A brief history of the American health care system as explained in the following provides quick highlights on some key legislation.
- 1954 – Revenue Act of 1954 signed by President Dwight David “Ike” Eisenhower excludes employers’ contributions to employee’s health plans from taxable income. While this is not a mandate for employers to provide health insurance plans to employees, it provided a widespread incentive for employers to provide health insurance creating a large health insurance market.
- 1965 – Medicare and Medicaid were introduced by Lyndon Baines Johnson as part of the Great Society program primarily for seniors and disabled respectively.
- 1974 – Two counter proposals for health care coverage by then president Richard Nixon and Senator Ted Kennedy. Nixon proposed employers paying 3/4th of health insurance premium and also having the federal government provide health insurance as a safety net for the poor. Kennedy proposed a universal health insurance program run by the federal government using tax dollars. While both these initiatives failed, these proposals directly led to bitter health care debates in the following decades along partisan lines. Even though Nixon’s proposal was not a mandate on employers to provide health insurance, the state of Hawaii mandated its employers with employees working more than 20 hours to provide health insurance in 1974.
- 1986 – COBRA (Consolidated Omnibus Budget Reconciliation Act) was passed by President Ronald Reagan to extend coverage of employees who were terminated to still be under the same employer insurance group plan while they pay all the premiums.
- 1988 – Medicare Catastrophic Coverage Act (MCCA) expands Medicare coverage to include prescription drugs and a cap on beneficiaries’ out-of-pocket expenses by President Reagan.
- 1996 – Signed by President William Jefferson Clinton, Health Insurance Portability and Accountability Act (HIPAA) restricts use of pre-existing conditions in health insurance coverage determinations, sets standards for medical records privacy, and establishes tax-favored treatment of long-term care insurance. Before this in 1993, Health Security Act (a.k.a Hillarycare), a broader health care bill was proposed but failed to garner support for passage.
- 2003 – Medicare was expanded to improve prescription drug coverage, also called Medicare Part D, by President George Walker Bush. This went into effect in 2006.
- 2006 – State of Massachusetts and State of Vermont pass Universal Health Care laws with universal health insurance.
- 2010 – President Barack Obama and the Democrats push the Patient Protection and Affordable Care Act (ACA) through congress. This legislation was voted into law along partisan lines with no Republicans voting for this bill. Democrats with complete control of house, senate and the executive branch signed this into law.
- 2011 – Supreme Court upheld the individual mandate provision in the ACA as constitutional so long as it is imposed it as a tax and subsequently the ACA was amended to include a tax penalty for failing to keep insurance coverage. Despite this, there are still over 10% of the population uninsured under the ACA.
- 2017? – AHCA (American Health Care Act) revised as Better Care Reconciliation Act (BCRA) is proposed as a replacement to the existing the ACA and is currently with the Senate. Even though this bill proposes to slow the growth of federal health care budget compared to the ACA, it may still be not enough or address some of the inherent problems of health care.
The complete history of all health care initiatives by the US federal government is documented very clearly here.
Here are some meaningful solutions that can provide good access, affordability and quality of health care in a sustainable way. Some of these are derived from quite simply understanding the inherent problems in the existing system and laws. The theme of these solutions are based on the obvious fact that we cannot keep growing health care entitlements and hope that we can provide sustainable, universal, affordable and quality health care. Instead, recognize that we need to introduce free market fundamentals into health care and limit government provided health care to a minimum safety net.
- Price Transparency
A common rhetoric about the current health care system is that it is driven by capitalistic greed of health care and insurance providers causing exorbitant cost of coverage and premiums and hence the right solution is socialism of a single payer system or huge government involvement. But this is a red herring because it is not true that we have a free market capitalistic system for our health care.
There are three core requirements for anything to be a free market capitalistic system:
- Complete and transparent display of prices from the providers for every service or product offered.
- Complete voluntary choice by the consumers to choose products or services based on informed decision making including cost of service.
- Contract between a provider and consumer is based solely on consent and volition and such a contract thus entered is fully upheld by the justice system to the full extent of the law.
Of course there are many other factors governing a free market system that fosters open competition, but the above three are the necessary conditions. So, if we look at the health care in the USA, we hardly have all the three conditions satisfied. Specifically, there is absolutely NO price transparency, both from health care providers and from insurance providers.
Imagine if you have to get a gallbladder surgery, you will often not be provided the price for it. And over time most consumers have even forgotten to ask this basic question and stopped caring about the price as long as their insurance covers the procedure. But the question of price is quintessential to the proper construction of supply and demand in a free market society. However, this question has been replaced by whether my insurance is accepted by my health care provider. And even when you talk to a health care provider (hospital in this case), the first question they’ll ask is whether you have insurance. And once you provide your insurance details, the hospital and the insurance provider go through a complex exchange of paperwork which usually takes days, if not weeks, to come back with how much you owe after the insurance has paid for it. Often times, you may never see the exact breakdown of the costs.
Compare this with a cosmetic surgery which is completely free market where the first thing you learn is the price of the surgery as everything is out of pocket and not paid for by insurance. You can choose the provider of your liking based on not just the quality of their service but also based on the cost. There is way more transparency of prices and other risk-reward details because all the providers are in an open competition for both quality of service and price. You may then argue that cosmetic surgeries are more expensive to the consumer as it is not is covered by any insurance. That is not true either. Let us take the example of a Lasik eye surgery. It is as low as $299 per eye with an average cost of about $1,600. By comparison, most people’s insurance deductibles are as much, if not higher. When Lasik was invented in the 90’s, the nominal cost was higher per eye but over time the cost has come down considerably while the quality and efficacy of these surgeries have improved vastly. This is entirely due to the free market principles of open competition that comes with transparent prices to match the demand for these surgeries and gaining market based efficiencies. The following chart clearly illustrates the nominal prices of Lasik surgeries have come down over time. More details on this can be found here.
Similarly, the nominal cost of cosmetic services which are entirely out of pocket and not covered by insurance has increased at a much slower pace than inflation. The following chart clearly explains the rate of cost increase in cosmetic services vs. the general inflation and other health care costs. Clearly, in terms of real $, the cost of cosmetic services has declined while the others have increased significantly.
Now, in case of a gallbladder surgery, the prices have gone up significantly and the cost can be varying quite a bit depending on where the surgery is performed. For example, the cost of gallbladder removal in New Jersey averages $48,000 and in Maryland, it averages $10,000 as explained in this blog. If you travel a few hundred miles you can save as much as $38,000 on an average. However, because the prices are not transparent and since a third party (insurance company) is paying for it, consumers don’t care about these price differences. And cost of anything paid by a third party will only go up over time as both the consumer and provider have no incentive to reduce prices. And to support these increasing costs, the premiums and deductibles will have to go up and up. If health care were completely free market, the prices would instead be transparent and we may even have many patients choosing to get the surgeries done out of state if the overall cost comes cheaper. Even today, there are sources where one can compare prices for various health care procedures across the US using tools such as the health care blue book. However, with government regulating the whole health care marketplace with individual insurance mandates and employer mandates, such transparency systems have not been fully developed or widely used.
So what about government stepping in and regulating these prices? This is a big mistake. Any economics 101 book will tell you that price fixing is bad and provides detrimental effects on the supply. For instance, if the price is fixed, the providers are no longer incentivized to continue catering to these services in any reasonable quantity or quality or both, as the demand warrants. Instead, there will be fixed hours, fewer providers and fewer surgeons in practice at any time. This will lead to long wait times and eventually a complete failure of health care. Think about it. If you have to dedicate 7 long years of your youth in hard long hours of education followed by residency and subsequent surgical experience to become a surgeon only to get whatever the government will now tell you that you can make, what incentive is there for you to choose this line vs. some other line in the society like an engineer or a lawyer that provides better rewards. This is not very different from a communist/Marxist/socialist system and we all know such systems have been a dismal failure as clearly exemplified by the failure of the USSR.
The proponents of government controlled health care typically argue that it has worked well in other countries. However, such comparisons or examples should be investigated rationally.
- Let us look at the Scandinavian countries where most of them provide universal socialized health care. Many of these countries are much richer countries (per-capita) and with much smaller and homogeneous populations where the population is either stable or declining to support this. If the population is large, we need more number of doctors, hospitals and other providers to support all people. Otherwise, it will lead to poor quality of service. And sustainability of these programs even in these small wealthy countries remains to be seen. It is important to also note that the per-capita household income in many Scandinavian countries far exceeds those in the US. And the US is the 3rd most populated country in the world and significantly more populated than the Scandinavian countries. So making such comparisons is not even an apple-orange comparison, but more like a pineapple-blueberry comparison.
- What about western liberal democracies like the UK and Canada? In case of UK and Canada, this has worked largely due to immigration of doctors in large numbers into these countries from developing nations. And as the developing nations get better and better, fewer doctors would emigrate their native countries to come and serve in these countries. There are three different considerations to health care. Affordability & Access, Quality of Care, and Universality. One can achieve only two of the three very well. With government run health care, the priorities are typically affordability & access and universality, and consequently the quality suffers. For instance, there is long wait for certain types of surgeries due to lack of adequate surgeons in Canada. This is why, according to a study by Commonwealth Fund in 2014, there as many as 52,000 Canadians sought non-emergency medical treatment in the US and elsewhere. This is because in most of these cases Canadians have to wait an average of 10 weeks from the time they see a specialist till they can have the treatment which is considered clinically unreasonable in many cases. Clearly, even universality has limits. While a free market health care system is not perfect in achieving all the three either, it focuses on affordability & access and quality of care giving rise to better health care outcomes and over time creates incentive for more doctors and surgeons to enter the field there by getting closer to universality.
- What about Hong Kong which is a single payer health care system? Success of socialized medicine in this small country is largely because of the culture of the society. For instance, Hong Kong, with the exception of health care, is an example free market society where quality of life, work ethic and savings come first before entitlements and welfare. A single payer health care system works seemingly fine here because of the homogeneity of the culture to build their livelihoods based on work and not welfare. It is worthy to note that government collects 15% in taxes (flat taxes) and spends more than half of it in health care. And the Hong Kong government provides very little other entitlements like Social Security, Medicare and Medicaid as in the United States. And it is important to keep in perspective that Hong Kong has a population (a little over 7 million) less than that of New York City, to extrapolate the health care policy of Hong Kong on a country of over 320 million with diverse populations and built-in entitlement programs is not straight forward. And Hong Kong doesn’t have crazy regulations surrounding health care like HIPAA and patient health record keeping by providers, etc. And there are also not as much malpractice lawsuits against doctors. So, to compare such small homogeneous non-welfare state is at best disingenuous.
The right thing to do hence is setup policies that force publishing of prices by all providers of health care. This should include both the health care providers and the health insurance providers. So if you need a gallbladder surgery, when you walk into a hospital you immediately find the price of the surgery or at least get a quote without providing your insurance details. You can then compare this with what your insurance covers and decide if you want to look at other providers or negotiate your price. This will instantly start creating open competition which will put downward pressure on prices and upward pressure on quality of service thereby enabling consumers to make choices based on their needs.
- Insurance across state lines and deregulation
Unlike other forms of insurance like home, automobile or life, for health insurance there are specific barriers established across state lines beyond nominal differences in state rules. For instance, a car insurance provider may need to provide varying coverage limits for different states as a minimum coverage. As an example, in the state of Colorado, the minimums are $25,000 bodily injury liability per person, $50,000 bodily injury liability per accident and $15,000 property damage liability per accident while in the state of Delaware, the minimums are $15,000, $30,000 and $10,000 respectively. Now in health care, these regulations are much broader forcing health care providers to operate almost exclusively in individual states. This forces insurance providers to have subsidiaries or independent spin-offs that are duplicated across states. This is why we have Blue Cross Blue Shield of Massachusetts, Blue Cross Blue Shield of Colorado, etc.
If we could have one Blue Cross Blue Shield across all states where they have one operations team, one sales team, one call center that caters to all states with minimal variances, it will be way more cost effective to run insurance operations for these companies. Such cost savings will result in premium reductions and/or reductions in deductibles to the consumer. The companies can also more freely compete in all the states to increase their market share which translates to providing larger health insurance coverage and pooling of risk. And what is really tragic and ironic is that very people who advocate for single payer federal government run health care system fight against deregulation across state lines when it comes to private insurance market. This is a large part of the reason why the ACA has failed for a lot of people who have been priced out of the marketplace.
If we can get-together and reduce trade barriers, deregulate insurance across state lines and open up healthy competition, we will soon have new players coming to the health insurance market and provide insurance innovatively, cheaply and more effectively with use of technology as experienced in other sectors. In a time where we have technology providing instant access to payments, transaction clearing, stock trading and fund management in real-time, we are stuck with heavy paper work driven health care industry where it takes days (if not weeks) for a health insurance claim to be adjudicated. As a potential improvement, the health insurance card could be as versatile as a chip-and-pin secure credit card where you could store all your medical history in a jiffy and carry it with you without having to have the health care provider maintain all your health records. It will be as simple as taking your health insurance card to any health care provider of your liking and get a consultation while everyone is seeing the exact same information without paperwork. This way health care is truly managed by the individuals seeking care vs. providers having to manage health records making most of the HIPAA regulation unnecessary.
The real crux of the issue is such a discourse on innovative solutions, meaningful reductions of cost or improvement of access and quality never happens in the government as governments are never in the business of constant improvement unlike the private enterprise facing open competition. This is why expecting innovation and progress from the government is an oxymoron and moving to a single payer system will eventually result in poor quality of health care at a much higher price with no options. Think about it, if it were up to the government, would they have created Uber, Airbnb, iPhone or Mobile banking? No they would not. It takes entrepreneurs to create a whole new industry and marketplace to improve our human condition by satisfying the needs that others have not looked at. Governments have never provided such a function in a society. If it were just up to the government, people in New York City will simply be using Yellow Cab and if there are no cabs available because of rush hour or bad weather, tough luck. It took an Uber entrepreneur to see the unfulfilled need of those waiting for a cab but couldn’t get one on time even when they were prepared to pay higher price. And it was the marrying of such demand with people who owned cars and liked to make extra money that dramatically improved transportation. If it were for government, we would be stuck to booking hotels for our holiday travels, but thanks to an Airbnb entrepreneur, we can now travel with our family and stay in home like residences at affordable prices with also the option of resort like experience of high end private properties that would have been completely inaccessible otherwise. So we should hence be wary of a glossy government program to substitute a free market enterprise system and its ingenuity as most often the name of such government programs are the very opposite of what it purports to accomplish. Like the oxymoron name of ‘Affordable Care Act’!
To just have such open discussions on meaningfully deregulating the health care marketplace, the political left has effectively shut down those who just want to have such discussions by demonizing them as ‘unfeeling right-wing extremists who don’t care about the poor’. This couldn’t be further from the truth but such rhetoric suppresses a free discourse of solutions and fosters a chilling effect on anyone trying to have a reasonable and rational discourse. There are so many rules and regulations governing health care that it takes a miracle to even understand all of it fully. Imagine a set of doctors running a clinic trying to keep up with regulations, both from the government and from the insurance providers, just to collect their payment after servicing a patient. They have to keep and maintain health records, comply with HIPAA regulations, store these data for 7 years even after patient’s death or leaving their clinic, spend on expensive software to submit claims and understand thousands of charge codes that can drastically change how much money they would get for the service they provide. We have built a whole slew of unnecessary complexities in a service as simple as going to a doctor and getting a prescription. And the regulations for pharmacies and how insurance pays for them is even more atrocious. This causes delays in filling prescriptions and increases cost of medicines due to huge operational overheads.
There are similar deregulations that are required on the supply side of pharmaceutical drugs and the rules surrounding drug patents should be discussed. For a drug, as life-saving as Epipen against life threatening allergies, to have a 15 year patent with free ride to charge any price the company wants is very anti-free-market. In a free market, there will be not be long-term patents without some controls as a long-term patent in essence is a mandated monopoly which is the antithesis of free-market open competition. While it is essential for a company that spent a lot on R&D and invented a drug has a right to patent it, the patent thus granted should come with caveats such as flat price over the life of the patent, shorter patent life, patent sharing, etc. Also, if you look at the R&D costs of bringing a drug to the market, the regulations imposed by FDA play a huge role. While it is necessary to have an FDA to monitor the safety of the drugs, other developed countries have introduced safe drugs faster to the market. And Safety is relative. A drug with even a 15% efficacy against a life threatening condition like terminal stage cancer should be approved faster than a drug that reduces common cold symptoms by 48 hours even at higher efficacy rates. While both drugs are needed by the society, having even remotely similar safety standards is flawed. And such safety considerations are better done by free market as long as the pros and cons of the drug are clearly and transparently provided at point of sale. And US is the only country where you can advertise freely for a drug that should really only be prescribed by a doctor and not asked for by a patient. And some of these advertisements are very disingenuous, but that is a whole another discussion in and of itself.
Lastly, the malpractice suits against doctors and other health care providers are onerous to the most part. They force providers to carry expensive malpractice insurance. And the way malpractice suits are created and settled are quite questionable. We need to understand that doctors are humans and NOT Gods. While there are legitimate lawsuits for true malpractice, there have been so many frivolous lawsuits with lawyers advertising to participate in class action lawsuits against a provider with promise money in return. A lot of money is spent just hedging against, defending and settling these lawsuits out of court. If there are simple laws to impose very high fines against those who bring forth frivolous lawsuits, we will have far fewer malpractice lawsuits and will greatly reduce malpractice insurance. More important than deregulation is an atmosphere where each regulation is reviewed objectively with respect to the cost it imposes vs. the value it brings. And once such review is complete, those regulations should be either revised or repealed as necessary. Almost all those in favor of deregulation are not saying ‘no government intervention at all’, but just in favor of fewer meaningful high value regulations as opposed to regulating everything.
- Breaking the Employer Provided Insurance Mandate
With the ACA, employers with 50 or more employees working 30 or more hours a week are required to provide health insurance coverage to all its employees. Everything in the ACA is based on the premise that health insurance coverage is health care and if you read any news article they would refer to ‘health insurance coverage’ or simply ‘health coverage’ when they truly mean health care. However, one must examine if they are both the same or even linked. In today’s health care system in America, one must have health insurance in order to get any decent health care as the cost of health care without health insurance can be quite exorbitant. However this does not mean health insurance is a direct substitute for health care. This just simply means health care becomes a little affordable for a long list of treatments with insurance. So when you read an article that says 20 million are without health insurance, it does not automatically mean that they will not get health care, but their costs will be higher. But most of these costs and often spent on emergency rooms that are actually shared by the public anyways.
Now let’s examine the employer health insurance mandate. According to a detailed study conducted by the American Action Forum, the ACA is taking a toll on small businesses with billions of dollars in reduced pay and hundreds of thousands fewer jobs as reported by this CNBC news story. According to this report, take-home pay at small businesses was trimmed by some $22.6 billion annually because of the Affordable Care Act and related insurance premium hikes. Individual year-round employees at businesses with 50 to 99 workers lost $935 annually, while those at firms with 20 to 49 workers are out an average of $827.50 per person in take-home pay, the report found. That report also says that there has been a loss of more than 350,000 jobs due to Obamacare-era premium hikes at small businesses. In five states, the losses have exceeded more than 20,000 jobs apiece, including Florida, New York, Ohio and Texas. California lost an estimated 42,788 jobs due to Obamacare, the report estimated.
One must understand that every regulation comes with both intended and unintended consequences. Unintended consequences arise because people either try to avoid the regulation altogether or alter the way they do business to circumvent all or some of the negative effects of the regulation. In this case, the law simply puts downward pressure on employment by small businesses, esp. under 100 employees category, to either reduce employment or reduce hours or both. It is clear that having mandates usually has negative consequences. The question is whether the positive outcomes from such mandates outweigh negative consequences. Let us examine that.
We know for a fact that there are fewer options for individuals to purchase insurance in the health care marketplace and more and more insurance companies are fleeing states as it is becoming harder and harder for the insurance companies to make a profit with this law that caps out of pocket and forces insurers to insure pre-existing conditions. As a result, the premiums and deductibles have skyrocketed in the individual marketplace. This makes people owning small business, employees working for small business who don’t get employer provided health care, and freelancers to absorb a very high cost of health insurance coverage with very few options to choose from. Also, many of these plans come with such high deductibles and out of pocket maximums, that most normal to healthy individual get nothing for their insurance premiums. Despite the promise of universal coverage and the individual health insurance mandate, over 25 million people are still not purchasing health insurance and paying a fine instead. And most of them are either young & healthy individuals or unemployed. More of these are actually needed to keep insurance costs under control.
The large category of people who have health insurance, primarily from employer provided health insurance, have seen their premiums, deductibles and copays go up significantly. Even though the costs of employer sponsored health insurance premiums are cheaper to the individual than the insurance market (since the employer absorbs over 2/3rd of the cost) and negotiates a better group plan, a large number of small employers are not providing coverage for employees’ families. For instance, according to Kaiser Family Foundation survey in 2015, only 65% of small employers provide health insurance coverage to employees’ families compared to 85% of large employers providing such coverage. In essence, in a few years, the cost of Affordable Care Act to families will be so great that they will completely give up buying insurance. It is just a disaster waiting to happen. In fact, the Democrat Governor of Minnesota, Mark Dayton, criticized the Affordable care act as “no longer affordable”. And Democrat ex-president, William Jefferson Clinton, called the ACA “the craziest thing in the world”.
There are a plethora of other issues with employer mandated health insurance. Unlike any other type of insurance where the individuals can freely shop for insurance and make a switch at any time if they don’t like their plan, the health insurance can only be purchased during a small window of few months during open enrollment period. And for employer mandated insurance, this window is much smaller. Moreover, the choices are virtually non-existent in employer mandated insurance as it is with one insurance provider and often a choice between high cost smaller deductible plan and a lower cost high deductible plan. Either case, the total cost per year is pretty much the same for most families. And if the employee changes job half way through the deductibles and out of pocket maximum restarts with their new employer sponsored plan. And if for any reason, the employee loses his job, he will have to foot the entire cost of health insurance without the employer contribution using COBRA or go without health insurance and pay a penalty to IRS. With health insurance companies wanting to grow and increase profits quarter-over-quarter, the premiums and deductibles in this model are only bound to go up forcing more and more employers to cut coverage for families.
Now let’s look at the option of removing the employer mandate and passing on the employers’ contribution to employees’ paycheck and let them buy insurance from the marketplace at any time. Clearly this only works best after the first two items explained above of price transparency and deregulation are implemented first. If the individuals purchase health insurance in private marketplace then, they can choose from a plethora of health care plans offered across the country that cater to their specific needs. And, after all this, if an individual or a family is unable to buy health insurance as they don’t have a plan that is affordably available to them, there can be a social safety net to subsidize those individuals directly by way of tax credits to get a plan that they can afford. Such subsidies can exist based on means test. Also, the individual health savings account can be expanded to allow for individuals to contribute pre-tax income to their health care need and allow it to grow like a 401(k) account with complete transferability to a beneficiary of their choosing. These may help reduce government’s role in health care significantly and end this out-of-hand big entitlement expense.
- Removing non-emergency treatments out of insurance
The word insurance is used for protection against risk. Car insurance is not for car usage or maintenance, but for protecting against the high risk of a car accident. Same goes for life insurance or any other insurance. You buy insurance to hedge against certain high risk that you don’t want to pay for out of pocket. The insurance companies sell insurance to cover your risk by pooling the risk of all the insurers. That is why regular maintenance of your car or your home is not covered by insurance and is an out of pocket expense. That is why a high risk car driver (frequent speeding charges, higher rates of accidents, etc.) pays more into car insurance premiums than a low risk car driver.
Now let’s look at health insurance. Health insurance, like all other insurances, should also cover high risks that most people are unwilling to pay by themselves. Over time, with employer sponsored health insurances, government regulations and mandates, health insurance now covers just about everything related to health including routine maintenance like wellness checkups, common cold and fever, simple infections and illness, common prescription drugs like antibiotics or pain medicine, contraceptives and several other non-emergencies or high risk items. Since everyone at some point in time will go to a doctor in a given year or use many of these non-emergency services, covering these under insurance means everybody eventually pays for it using their insurance premiums. In a healthy society where most individuals have few non-emergency needs in a given year, they all still pay high premiums because the insurance providers have no easy way of gauging the cost of covering such non-risks. In addition the insurance companies are burdened with processing large number of claims from these office visits regardless of their risk. This significantly adds to the operational cost of these insurance companies thereby adding more to the premiums than if they had to only cover high risks.
Now let’s examine this further with an example employer sponsored insurance policy in the US where an individual pays about $5,000 in premiums (not including employer contribution), $3,000 in deductibles, $8,000 in out of pocket maximum, $25 copay for office visits, $35 copay for specialty visits and $200 copay for emergency room admissions. Now let us just look at the office visits and specialty visits. On an average the individual spends less than 15 minutes with the physician in case of office visits. So the physician sees an average of at least 4 patients in an hour. If a physician works 40 hour weeks and 50 weeks in a year, he would hence be seeing as many as 8,000 patients a year and making as much as $200,000 a year just in copays. A specialty doctor may take 30 minutes per patient and thereby only see as many as 4,000 patients and make as much as $140,000 a year just in copays.
Now let’s look at the option of completely removing non-emergency office visits and specialty visits out of insurance and suppose that a primary care physician now charges $50 per office visit and a specialty doctor charges $150 per visit. Assuming they work just as hard and see just as many patients, they would be making as much as $400,000 and $600,000 a year respectively. This is by no means a meager amount of income and would perhaps put them on par with how much they earn today or even more. Now let’s look at the cost on the patient side. If a patient had 20 office visits in a year and 5 specialty visits in a year, with insurance, he pays $500 for office visits and $175 on specialty visits, a total of $675 per year just for copays. If these 25 visits are his entire health care cost for him that year (not including any prescription drugs or lab exams), with his insurance he has paid $5,675 that year, $5,000 in premiums and $675 in copays. Now without insurance assuming just out of pocket costs, the person would pay $1,000 in office visits and $750 in specialty visits, a total of $1,750 that year (again excluding other expenses of prescription drugs or lab charges). The individual would have saved a net $3,925 that year which should be more than adequate to cover for any health care insurance premiums for true medical emergency. In fact this example does not even account for the employer part of the premiums.
You may ask, what about the doctor’s expenses on the clinic, receptionist, nurses, and medical supplies. A lot of these are costs that can be minimized or pooled. In a clinic where 5 primary care physicians practice, they collectively make as much as $2 million a year ($400,000 each). If we say $50,000 for the clinic, $70,000 for the receptionist, 2 nurses each at $80,000 and $20,000 on medical supplies (which most medical sales reps give for free anyways), the total cost is only $300,000 so they are left with $1.7 million or $340,000 per year each which is still a very good income. Also, with a clinic they can put in overtime with after hours and weekend on-call and even charging a premium (say additional $25 per visit during these off-hours) adding to income. But the biggest expenses for a doctor today are not the above but keeping and storing medical records, paying for malpractice insurance, keeping tab with insurance claims and keeping in compliance with regulations. These steal more from the doctors than all other expenses. In fact the average income of a primary care physician is between $160,000 and $170,000 per year even with insurance paying all their bills. This is exactly why deregulation should occur before removing non-emergencies from insurance.
If the health insurance truly only covered high risk like hospitalization from accidents, surgeries, emergency visits, serious long-term illness like cancer, diabetes, kidney dialysis, etc. then we can see health insurance premiums reduce significantly. Let us suppose the insurance premium is now $2,000 annually vs. $5,000 with the same deductible, out of pocket maximum, etc. except that the insurance no longer covers office visits, common prescription drugs, basic lab charges and specialty visits, then there will be huge competition in the non-emergency care space where doctors & clinics freely compete against each other on quality and price providing wide access to the public. And the insurance companies and hospitals are freed to what they do best, provide high risk health care. Over time, prices of everything will come down to maximize care at an affordable price for most and also reach supply-demand equilibrium.
Note here that I am NOT proposing the elimination of the pre-existing condition insurance requirement and the individual insurance mandate which has to go together. Although these two are contrary to free market principles, rolling these back would take a longer time while we are rolling back dependence on government but I humbly believe that even they can be accomplished over time with reduced health care costs coming from a free-market system and its innovation potential. Also not accounted for are private charities providing for health care and in the US, this is a big proponent of providing affordable health care for underprivileged as exemplified in the case of ‘The Children’s Hospital’. Also with free-market, a large number of financing options are now possible like financing an open-heart surgery with monthly payments for 5 years like how you’d make car payments.