Part I: Incentivizing Health Care: The Problem with Health Insurance Companies

Let's face it; there's money in medicine. When was the last time you saw a doctor (not a medical student) driving anything other than a Mercedes Benz, BMW, Jaguar, Volvo, or another expensive car? We spend a great deal of our gross domestic product on health care; everyone knows that. But the problem is we have too many people trying to extract profit from our health care.



The biggest culprit today, and the focus of the health care bill, are the health insurance companies. The purpose of insurance companies is to allow people to pay a small premium so that if a qualifying event were to occur (auto accident, surgery needed), an individual would have that event covered.



People can provide insurance for themselves; it's called self-insurance. The problem is people are reluctant to self-insure but at the same time want to avoid risk.





One of the first things I learned in Economics 101 was about self-insurance. If people were to take the same amount of money they paid in health insurance premiums and just save it (or invest it), if a qualifying event were to occur, they would be able to cover themselves. The problem is (as mentioned above) people are reluctant to self-insure. The growing account balance is too much to resist and people are tempted to use that money for things other than health care. So people who are risk averse elect to pay health care premiums and essentially never see that money again until a qualifying event occurs.



But because health insurance companies have a responsibility to their shareholders to remain profitable, their best interests are not your best interests. Your best interest is to have that life-saving surgery or receive treatment for what they call a "pre-existing condition". Their best interest is to (1) extract the maximum amount of money from you without you dropping their health insurance or (2) cover your health care costs as long as the premiums you pay are greater than what you cost the company.



But insurance companies don't just charge monthly premiums; that was just not enough. Never mind you pay them anywhere from $100 to $1,000 in premiums every month, if you do get sick, need prescription medicine, or go to a doctor, you have to pay a co-pay. If, God forbid, something life-threatening happens to you, then you have an out-of-pocket expense that is paid in addition to your premiums. Even worse, if something else life-treatening happens to you in the same year, then you pay more money to hit your maximum out-of-pocket expense and then insurance benefits cover 100% of the remaining costs of health care. Exactly how much money should we pay to a company for our health care?



When you add that insurance companies drop the coverage of select individuals because they are "uninsurable" (which means they can't turn a profit on them) and do not cover some "experimental" procedures, it just adds more evidence that the insurance market has had a breakdown.



Insurance companies had to fight moral hazard (when people abuse insurance programs with the overuse of health care) by introducing co-pays and out-of-pocket costs. This was because there was no disincentive to seek medical care anytime someone thought they needed it. Introducing a co-pay makes people forfeit more money to seek medical care. Insurance companies made the co-pay small enough so that it wouldn't completely dissuade people from seeking needed medical care, and large enough to stop people from seeking medical care for trivial ailments). Since insurance companies were first created to help people insure themselves against bankruptcy in case of a medical emergency, their incentive changed to consistently being profitable once these health insurance companies became publicly traded (and had share holders to keep happy).



A capitalist government is supposed to step in and correct a market problem with either policy or incentive. But the incentives in the health care bill are the ones being discussed today. The health care bill will create an incentive for healthy individuals to switch from their private or employer provided health insurance to a government option because it will, no doubt, be cheaper than their current health insurance premiums.





Another main concern of the health care bill is that, much like the health care plan in Canada, a government run health insurance plan will result in long delays for care. Some estimates say it may take 6 months for someone to receive care for a pre-existing condition. However, emergency care will be provided on an emergency basis. That being said, healthy individuals will worry less about the long waits for health care, as select the government plan in order to capitalize on costs savings on health insurance premiums. The healthy individual will only care about the speed of which emergency care is administered (which will be the same as under any health care plan) as they will not require regular or frequent doctor's visits. Only (1) the individuals with pre-existing conditions and (2) the sickest individuals that have private or employer provided health insurance will avoid the government plan. This will cause the same death-spiral of health inurance discussed in one of my previous columns.



Previously, I argued that the best solution is to put the uninsured on an expanded Medicaid program. However, this may not necessarily address the problems we have with insurance companies. The biggest problem I've identified with insurance companies is that they are profit-seeking companies because they are publicly traded. My solution to this problem will be discussed in Part II of this column.