Jon Hall's ideas about Health Care reform
A Cold Eye on Healthcare Reform
by Jon N. Hall
March 15, 2007
If insurance actuaries could predict with certainty that every year every house in Kansas would be destroyed by a tornado, how much would a Kansan be charged to insure his house against tornado damage? If you think his yearly premiums would be equal to the replacement cost of his house, go back to business school. Since every Kansan who had such insurance would be making a claim, the premiums would be rather more than the replacement value of a house. After all, insurance is a business, not welfare. Businesses exist to make profit. Also, insurance companies must pay for the overhead involved in running a business: salaries, advertising, computers, rent, paperclips, and perhaps even health insurance for the employees.
The far-fetched scenario above illustrates a basic law of insurance: The higher the probability of an event actually happening, the higher the premiums to insure against it. A corollary to this law, and the larger point here, is this: Insurance is only feasible when the majority of policyholders does NOT make a claim. The more that policyholders file claims, the higher the price of premiums, until you reach the point where insurance is too expensive, and then the insurance companies go out of business. The insurance industry can try to force policyholders to make fewer claims. They can raise co-payments and deductibles. They can raise premiums for policyholders who pose higher risk, such as teenage drivers. Also, they can refuse to insure those who are most likely to make a claim. For example, they might refuse to offer flood insurance to those who live in ocean-side communities below sea level. However, in all these attempts by insurance companies at keeping premiums affordable, it is the policyholder who picks up the difference.
So in our hypothetical Kansas with the really crumby weather, smart Kansans would elect to forego home insurance altogether. Since they’re going to have to eat the costs of their houses whether they’re insured or not, why pay for an insurance company’s profits and overhead? We’re assuming policies covering tornadoes were available in this hellish Kansas, which, incidentally, they wouldn’t be. (However, Kansans would still be able to get hurricane insurance, and at the same low price.)
It used to be that America thought of insurance as protection against very rare calamities; catastrophes that would ruin you, wipe you out financially, such as tornadoes. Those things we expected to happen, we paid for with money out of our own pocket.
But over recent decades, the way we think about insurance has changed dramatically; we now think insurance should be for just about everything, even inevitabilities. We now have a separate category of insurance for what all insurance used to be for—catastrophic insurance. Inasmuch as the insurance industry has tried to accommodate the new thinking, we see more and more things covered by insurance. So, more and more folks are filing claims for an ever-widening array of things, which drives up the price of premiums. Nowhere is this trend seen more than in health insurance.
Back in 1994 when Hillary R. Clinton was trying to “reform” the entire American healthcare industry, it was said she was trying to take control of one-seventh of the American economy. Even with millions of folks having recently fallen off health insurance rolls, the healthcare share of the Gross Domestic Product has now ticked up to more than 15 percent. So with our economy running an estimated $13.7 Trillion GDP, healthcare in America is currently more than a $2 Trillion enterprise. In longhand that looks something like this: $2,000,000,000,000.
With a total population of 300 million, it could cost an additional $372 Billion to provide healthcare to the 46 million uninsured—just for 2007 alone.
Of course you need to be very skeptical of this $372 Billion estimate, as it was derived with the crudest prorating: ($2 Trillion multiplied by (uninsured divided by insured)). It doesn’t take into account a slew of factors that would alter the estimate, such as:
Some of the uninsured are currently getting healthcare. And a few of them, violating every precept of the political left, actually pay for their healthcare with their own money. But some of the uninsured get a free ride by using emergency rooms and free clinics.
However, some of the uninsured aren’t currently getting healthcare. And many of these won’t get healthcare in a new free system either, because they’re perfectly healthy young people. (Young men are notorious for not going to the doctor.) But others won’t avail themselves of free healthcare because of their beliefs, such as followers of Christian Science. (It seems unfair to make them pay for something that violates their creed and which they won’t use.)
The thorny issue of how much it will cost to insure the uninsured and provide them with healthcare lies beyond the scope of this article. But it seems reasonable to suspect that there is a pent-up demand amongst some of the uninsured; after all, they’ve been deferring treatment. And some of the uninsured come from the margins of society, the underclass. They can be unemployed, homeless, self-destructive, addicted, and even psychotic. By the standards of the insurance industry they are uninsurable. In short, they’re some of the unhealthiest people in America; and providing them with healthcare and health insurance will cost, and plenty.
But the problem of insuring the uninsured may be the least of the pressures facing the health insurance industry. Indeed, “the uninsured” seems to be a wedge issue, and as such may be overblown. The greater pressure is the costs imposed by all the rest of us—those currently insured. The aging of America and the ever-increasing array of treatments ALL of us will demand, that’s what will really bust the bank. Demand is running amok.
The changing demand for healthcare:
America used to have a huge problem with infectious disease. But we learned how to deal with that problem with high-tech things like antibiotics and vaccines, but also with low-tech things like quarantines, and cooking food long and hot enough. Diseases like polio, cholera, and small pox, if not eradicated, have been gotten under control. Of course, new infections pop up, like AIDS, Ebola, flesh-eating bacteria, and drug-resistant mutations. And old infections that we thought we had beaten reappear, as we’re seeing with tuberculosis and other diseases brought in by illegal aliens. But steering clear of infection is often just a matter of washing hands, boiling water, getting shots, and not consorting with the wrong people. In short, you can keep from contracting many infections, even dread ones, with a little common sense, individual effort, and changed behavior. The fight against infectious diseases has had many successes.
Today, however, many medical problems are degenerative diseases, such as cancer, cardiovascular disease, diabetes, and arthritis. Although degenerative diseases can strike the young, the increase in them comes from our longer life spans, which is due, in part, to our very victories over infectious disease. Degenerative diseases tend to be more intractable than infectious diseases. They tend to be chronic, things one has to live with, needing constant monitoring and treatment. They can’t be cured with, say, a regimen of tetracycline. But another factor in the rise of degenerative diseases is “lifestyle”. “Longer life spans” is a problem most of us don’t want to fix. But “lifestyle” needs to be addressed, that is, if we wish to get medical costs down and health insurance premiums more affordable.
In sterner ages, some lifestyle behaviors were regarded as Deadly Sins, as in Gluttony and Sloth. Nowadays it might be difficult to get a quorum to agree that Gluttony and Sloth were even vices. Instead, they’re regarded as lifestyle choices. Degenerative diseases due to lifestyle are unnecessary. They are self-inflicted “diseases of choice”.
America leads the world in obesity. We’ve become a nation of fat slobs. It’s a national embarrassment, all these corpulent mouth-breathers parading themselves around in short shorts. Not only do we eat too much, we eat the wrong kinds of food. We’re even seeing clogged arteries in children. Tied in with this is what might be called “acute pathological inactivity”, America just doesn’t get enough exercise. To accommodate our desire not to move, science developed the TV remote.
There are, however, others factors that come under the rubric of “lifestyle” that don’t involve essential activities like eating and moving, and can involve criminality: drug abuse, alcoholism, tobacco use, risky behavior, and other types of dissipation. And these lifestyles also contribute mightily to the cost of degenerative disease.
One inescapable reason health insurance premiums have skyrocketed is the very success of modern medicine; we can now treat so many more ailments than we could just a short time ago. We have magnetic resonance imaging (MRI), dialysis, lithotripters, lasers, cutting-edge drugs, and transplant operations, all of which are enormously expensive. A man who would have been doomed just a few years ago, can now be opened up like a chicken, the old failing part taken out and a new one put in. Rather like replacing the hard-drive in your PC. Whereas before you’d just lie in bed waiting for the end, now they heroically go to work on you.
There’s a gazillion ways the body can break down, and some folks want every last one of them covered by insurance. And if that weren’t enough, we’re seeing pressure to cover things that don’t threaten health. Such things as birth control, fertility treatments, Viagra, abortions, sex change operations, cosmetic surgery; what folks once called non-essentials and electives. Expanding the number of things covered by insurance increases demand.
All of which redounds to this: EVERYONE with health insurance is going to be filing a claim. That’s a hyperbole of course, as there are a few genetically blessed individuals who neither get sick nor need sex change operations. But the statement is close enough for government work. And it is a violation of the basic laws of the insurance business.
But wait. It gets better. There’s a movement afoot to insure EVERYONE. We’re talking about adding 46.6 million souls to the insurance rolls. Many of the uninsured are either unemployed or unemployable, and those who are employed have employers who cannot afford to pay for their health insurance. So it will fall to the taxpayer to pick up the tab. Life expectancy continues to rise, which means we have more time in which to file claims. And California governor Schwarzenegger wants to insure illegal aliens.
Bottom line: We have “unlimited” demand for a product in limited supply—and someone else is supposed to pay for it.
HOW can the health insurance business survive?
Well, it’s not supposed to.
At least that’s the position of the political left, which wants to nationalize healthcare. The left doesn’t like the baggage that comes with “national healthcare” and “socialized medicine”. They prefer to talk about “universal healthcare”, “single-payer”, “social insurance”, or some other softer-sounding thing. But it’s all the same thing.
NYTimes columnist Paul Krugman posits the “starve the beast” strategy of the right. But there’s a leftist analog: “ride the beast into the ground”. That is, load up so many mandates and requirements on the beast—the health insurance business—that it collapses and folds. Then the socialists step into the breech like white knights and save the day with their government system. The reason one might believe such a conspiracy theory is because the socialist reformers aren’t putting forth any serious proposals to keep costs down, and without such the beast will indeed buckle, collapse, and go out of business.
Part of the solution to the problem of escalating healthcare costs is simple—reduce demand. Get healthy, so you don’t have to use the healthcare system. Change your “lifestyle”, go on a diet, start exercising, stop smoking, moderate your drinking, and give up the drugs. Indeed, if America were to have a universal single-payer healthcare system, wouldn’t it be everyone’s duty to get healthy so that we can get healthcare costs down? But are the healthcare reformers going to demand that folks do the right thing and start taking care of themselves so that healthcare costs don’t spiral further out of control?
They aren’t—because they can’t. And that is the dirty little secret of the reformists.
The government can’t be constantly monitoring everybody, making sure they eat their spinach, and walk their 5 miles a day. It would involve a mammoth bureaucracy. Besides, people have a right to be unhealthy. They have a right to eat whatever the heck they want, and in super-sized portions. They have a right to gorge on trans-fats, swill booze, smoke cigs, dip snuff, or whatever, and to their hearts’ content, and if it ruins their health—tough. Folks aren’t going to change their “lifestyle” just so some utopian universal healthcare system can be made feasible. And if the feds try to take away the sole pleasures in our dreary little lives, there’ll be hell to pay and a nice revolution to boot. People have a right to be irresponsible, as long as it doesn’t hurt anyone else. But what the utopian reformists don’t understand and won’t accept is that the rest of us—the tofu-eating, jogging, responsible rest of us—shouldn’t have to subsidize irresponsibility and bad behavior by paying the medical bills of the slobs.
Escalating healthcare costs due to self-inflicted diseases and imprudent “lifestyle” are going to “run the beast into the ground”.
Are there any conservatives out there?
The new universal healthcare plans enacted in Massachusetts and proposed in California require individuals to purchase health insurance. Despite what they tell you, this is not analogous to requiring auto insurance; folks can choose not to drive, and some are unable to drive or are not allowed to. No, this requirement is of a different order altogether; it’s worse than a poll tax—it’s an existence tax. But if government can demand that individuals buy health insurance for themselves as well as pay taxes for those who can’t afford to buy it, shouldn’t government at least be able to demand that individuals improve their “lifestyle” and habits so that those who are paying won’t have to pay so much?
We’ve been down this road before, during Prohibition. Is America really ready for it again? Just what kind of fascist police state are you willing to put up with?
So it appears that universal healthcare is going to require the responsible, prudent, taxpaying adults amongst us, who delay gratification and regularly save and invest for the future, to subsidize with their taxes behavior they would never countenance in themselves. The reformers think folks should be able to lead a life of dissipation and then check in at the nearest hospital saying, “fix me”, and that you should pay for it. But aren’t the socialists forcing the taxpayer to take part in immorality? It seems a bit much to ask.
And another thing: Just how “comprehensive” is universal healthcare supposed to be? Are those getting a free ride supposed to get the very same healthcare as those who pay? Is every unemployed, homeless cirrhotic wino supposed to get a liver transplant? And will they be put at the back of the waiting list? How much are we willing to pay for the psychiatric care for the drug-addled underclass? What are the healthcare reform grandees going to require of these people to keep costs down? These are the kinds of the questions that must be answered by the reformers.
"Moral hazard" is a concept long used in the insurance business. The concept has also been applied elsewhere, such as the government bailouts of businesses. The idea boils down to this: by removing the costs and consequences of risk, folks are more apt to take risks. The way the insurance business deals with this is by putting consequences back in the equation, through riders, co-pays, deductibles, higher premiums, and, ultimately, cancellation of policies. These tactics create an incentive for policyholders to change their risky behavior by making them share in its consequences and costs. Get caught speeding, and your car insurance premiums go up. But would a government-run system drop folks from coverage? If they did, it wouldn’t be “universal”, would it?
How healthcare is like higher education:
Enterprises with runaway costs, such as higher education and healthcare, often have the same financing scheme: multiple payers. Such enterprises can, and do, depend upon assured streams of cash flowing into them. These streams can come from dedicated taxes (Medicare), or direct infusions from government treasuries (state colleges), or mandated purchases of health insurance by the individual (Massachusetts’ new healthcare system), or employer-provided health insurance, or government-backed loans for college. Out-of-pocket payments by individuals gets put on top of these other payments. If one payer can’t or won’t pay the tab entirely, then you just bill the other payers for the remainder. A patient can have his medical bills paid by 3 or more parties. With multiple payers the market is subverted and there is no pricing discipline. This leads inexorably to price inflation, which in the case of healthcare and higher education outruns the overall inflation rate big-time. And it results in waste. It’s why colleges can pay handsome salaries to professors for very little work. It’s why the University of Colorado can afford a 6-digit compensation package for the likes of a Ward Churchill, whom some regard as a shameless fraud. The hospitals and colleges don’t have to prioritize; the money is assured; they can have it all, because somewhere someone will pay—someone else.
Despite healthcare’s soaring inflation rate, the socialist reformers want to throw yet more money at it. How are you going to get costs under control by putting more money into those “assured streams” of revenue? You’re not. Healthcare in America is already too expensive. Employer-provided health insurance is threatening to ruin the automobile industry, as well as the airlines and other enterprises. The reformers think that by eliminating paperwork and other efficiencies that they can reduce costs. (If so, what’s the need for more money?) But the healthcare industry would respond to any increased cash flows by simply raising their fees, just as higher education does.
In 10 years, healthcare spending is projected to top $4 Trillion, double what it is today, and much more than all federal spending today. Healthcare’s share of GDP will increase from 15% to 20%. That is, if the economic assumptions all pan out. We’ll see more doctors out on the courses each afternoon, and the less serious golfers will be in a fix finding tee times.
The solution to the problem of multiple-payers is NOT single-payer, not if it means another government-run monopoly. (Government just hates monopolies, except for government monopolies.) And the solution to the dilemma of healthcare inflation—and just about everything else, for that matter—is competition. And the way to get competition is by withholding funds, NOT assuring them. That’s why Health Savings Accounts are so attractive. HSAs keep money out of the healthcare pipeline until a problem comes up. And HSAs are also a fine incentive to improve your lifestyle and behavior, so that you don’t have to tap into your own money.
Speaking of universality, the feds should enact a universal, nationwide law that allows employees to opt out of their companies’ health insurance plans, and to direct their employers to divert the money into HSAs. That way if the company goes bust, like Enron, or stops providing health insurance to their employees, employees who have chosen the opt-out will at least have some healthcare money set aside. And because it would be universal, such HSAs would be portable, making it easier to change jobs.
A reform that won’t hurt any American:
Why would we trust the feds with our healthcare when they’re so poor at doing their enumerated constitutionally mandated duties, like defending America from invasion? Because America has for decades had an essentially open border and an insane immigration policy, we’ve seen the reappearance of diseases we had long ago eradicated, as well as the appearance of brand new diseases we’ve never seen—all brought in by the invaders. If the feds’ laxity in protecting the country from disease-ridden interlopers who shouldn’t be here is making our health more precarious, why trust them with a government-run single-payer system? Let the feds stop illegal aliens from bringing in exotic diseases before we even consider letting them near our healthcare.
A place to start healthcare reform is to stop paying for the healthcare of illegal aliens. Healthcare for illegal aliens costs border-states like California billions each year. Proposition 187 was designed to halt this, but the courts backed it out, thwarting the overwhelming will of the citizens of California. We should also start interpreting the 14th Amendment the way it was intended (and written) by ceasing to grant citizenship to children born of illegal aliens. The 14th Amendment was meant for the children of slaves, not invaders. We need to destroy the magnets that attract illegal aliens who further exacerbate our healthcare dilemma.
Are the reformers smart enough to design a system with real cost controls? Are they smarter than the market? America hasn’t had a real market in healthcare for more than 60 years. Since 1993, when it started to tax all earned income, Medicare has been a welfare system. And don’t call Medicare “social insurance”; the insurance business isn’t allowed to charge policyholders differently based on who can afford to pay more. Let’s put the market back into healthcare.
David Walker, the U.S. Comptroller General, the nation’s top accountant, is horrified by the actuarial nightmare imposed by entitlements. Walker told Steve Kroft of CBS News: “the real problem, Steve, is health care costs. Our health care problem is much more significant than Social Security.” Walker assures us that our present course with entitlement spending is unsustainable and immoral. But socialists want more.
Entitlements account for an ever-growing share of the federal budget; way over half. Entitlements, after having “run the beast into the ground”, will run the federal government into the ground. In trying to make government a cornucopia, the reformers simply lack the ability to say “no”. Instead of throwing yet more money at this problem, we should instead institute a “freeze” or a budget cap on entitlements. Which could involve means testing or cross-the-board cuts. We should also institute a mechanism that requires all redemptions of federal “trust fund” treasuries to come only out of general fund surpluses (if any), which this writer has urged here.
The federal government, including its entitlement programs, operates entirely on a cash-flow basis. Incoming revenue is immediately spent. If there’s a surplus, the feds must spend it as well; e.g., by retiring debt. Medicare isn’t amassing reserve funds for your next round of chemotherapy; the money will come from future tax revenue. The federal government has no legal mechanism to save money. The so-called “trust funds” are full of nothing but IOUs.
But corporations and individuals can’t operate like the feds; they must set money aside. Folks who don’t trust the feds to be there for them, or who are offended by the way the feds operate, or who want to be assured that funds will be waiting for them when they need it, should be allowed to opt out of federal programs.
One area where the federal government gets low marks is in Compassionate Pain Relief. The feds are so paranoid about folks getting hooked on drugs that they let them suffer, even when there are cheap anodynes at hand. Take medical marijuana: AIDS and cancer patients swear that it helps them with nausea due to chemotherapy and allows them to keep food down. If the feds won’t even allow terminal patients a little pain relief, how can we trust them with something as daunting as universal healthcare?
Every dollar spent on entitlements is a dollar that can’t be spent on homeland security, terrorism, NASA, the border, and everything else.
The bribing of America:
Government has done nothing less than corrupt the American people. Government tells the folks they needn’t prioritize and make hard decisions about husbanding their money, because the feds will take care of them, see to their needs in their old age, and pay for their healthcare. So America splurges on frippery. And indeed, we see that America now has a negative savings rate—for the first time since the Great Depression.
But then the feds don’t save either. Nor do the feds prioritize. Government has infantilized us. Each day we become more like Europeans. Soon we’ll see farmers rioting in the streets because they had to spend their own money to have a boil lanced or a wart removed. Just like France.
Yet, some Americans are taking radical—literally radical—steps to avoid disease: Women of families with extremely high rates of breast cancer are electing to have their breasts removed, just to avoid the disease. But the feds ask nothing of us.
Conservatives—those who advocate limited government and individual responsibility—simply cannot compete in the bribery sweepstakes with socialists who promise the world. Wanting to be all things to all people, the socialists are soon to discover that they’ve over-promised and cannot deliver on their extravagant commitments. But will their discovery be soon enough to avoid the bankruptcy of the U.S. federal government?
Back to Kansas:
Our Kansas thought experiment at the beginning of this article illustrates the folly, if not the impossibility, of private insurance policies covering inevitabilities. But with health insurance that’s exactly what we’re doing. It’s a physical world, folks. Entropy happens. Everybody’s body fails.
Government is utterly dependent on most of us taking responsibility for ourselves. Government has neither the ability nor the inclination to take care of us all. If we want to keep our teeth, we better not rely on the government to make us brush and floss. If everyone were to demand of the feds that they feed them and minister to all their needs, America would just up and die. So why do the feds cultivate irresponsibility? If everyone were irresponsible, who would feed us?
Imagine someday a lefty Congressman squawking on C-Span: It’s unconscionable, simply unconscionable, that this country doesn’t have universal eaters’ insurance. The United States is the only country in the industrialized world that doesn’t have eaters’ insurance. Why should Mary McAfee of Chicago, Illinois, single mother of 3, have to use her own money to buy food? I will not rest until this great country of ours has National Eaters’ Insurance. We need an Eaters’ Bill of Rights.
Don’t groan. If the government is going to provide things for people, shouldn’t it start with the most essential things? Like food?
Does the insurance business model really work for healthcare? The deterioration of the body is neither like accidents, nor akin to acts of God, as in tornadoes. If we can be assured that ill health will befall each and every one of us, why insure for it? Should it even be thought of as insurance if it’s for the inevitable? If each of us is on a sinking ship with a seating capacity of one, isn’t it “everyman for himself”? Shouldn’t everyone be preparing for the inevitable?
If America wants to preserve the private health insurance business, ALL private health insurance policies should be “catastrophic insurance”. Period. Just as in the days of old. This would mean we’d all be paying more out-of-pocket. And if America is ever going to get back to being a nation of adults, that’s your prescription.
Jon N. Hall is a mainframe programmer/analyst from Kansas City. To visit his blog click here.
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