The health care reform debate has been at the forefront of the national media spotlight since Americans got tired of talking about the economy. What amazes me is how few economic discussions are involved in assessing what should be done to fix America’s broken health care system. Instead, the discussions focus on hyperboles, emotions, and a whole lot of fear mongering. This is my analysis of the situation.
Part I: The Problem
Profit Maximization
Insurance companies are corporations. Corporations have one underlying goal: to maximize profits for their shareholders. This is not necessarily a bad thing, but it is a fact. Insurance companies are not in business to make sure everyone is insured, they are in business to sell policies and make money.
Think about insurance policies like TVs. If it costs you $50 to make a TV, but you can sell just as many for $100 as you would for $50, it would be stupid not to sell the TVs for $100. Let’s say you can sell ten TVs for $100. That’s $1000 in TV revenues and $500 in costs, with a profit of $500. What if you could sell eight TVs for $200, with two fewer people buying TVs because they’re too expensive? That’s $1600 in revenues and $400 in costs, with a profit of $1200. It would be stupid not to raise the price to $200. But what about those two poor suckers who don’t have TVs anymore? Well, they’re just TVs so it’s no problem.
Health insurance operates in the same manner. Insurance companies are incentivised to charge higher and higher rates, up to the point where profit is maximized and any increase in price will cause companies or individuals purchasing the insurance to drop coverage at a loss to the insurer. But, unlike with TVs, not having an insurance policy means risking sickness, death or bankruptcy. This makes health insurance highly inelastic, in that a large increase in price will cause only a few people to drop coverage. Letting people die by forcing them to drop coverage because costs are too high is thus built into the private system.
Market Power
In a purely competitive economy, insurance companies would not be able to charge rates as high as that which would maximize profits, because other companies would charge cheaper rates. Going back to the TV example, imagine if your competitor sold similar TVs for $100. Lets say that if you charged $200, you could only sell 2 TVs with a profit of $300, which is less than the $500 you would make if you sold them for $100. It would make sense to buy your competitor out so that you can jack up the price to $200 and sell just as many TVs. Or, you could talk to your competitor, and agree to both sell the TVs for $200. Or, even better, you could buy the factory that sells the TVs to your competitor, make that company stop selling to the competitor, then jack up the prices and watch your competitor fizzle out. This is called gaining market power, (monopoly power if you are the only seller).
Most of the health industry is not competitive. There are a limited number of health providers, and they collude on prices. Healthcare companies gain market power in a way that is similar to the third example in the previous paragraph. The factory producing TVs is like a hospital providing health services. Insurance companies often own hospitals, or have exclusive agreements with hospital operators. They make sure no other insurance companies have access to those hospitals, or make agreements with other companies to charge the same prices for access to those hospitals.
Insurance companies will charge rates that are as high as they possibly can, and squeeze people out of coverage. In a recession, more people and businesses are forced to drop coverage because they don’t have jobs. Insurance companies raise rates to compensate for having fewer customers, because they know that the remaining customers will fork over more money for an essential service like health care.
Pre-existing conditions
Insurance companies are also disincentivised from providing coverage to people with pre-existing health conditions, the people who need health insurance the most. Think about it like a life insurance policy. Would you sell a policy for $100 a month that paid out $100,000 to someone who was likely going to die in 2 months? That would be stupid, since you know you would lose almost $100,000 on the deal. Similarly, health insurance companies would not provide coverage to someone who has suffered from cancer, since that person is likely to rack up a lot of medical bills if their cancer comes back. Health insurers are in the business of risk, and sick people present too high of a risk.
Society loses
The result of all of these issues is that society loses. Health care should not be a scarce commodity like TVs. It should be a universal commodity available to all. Anyone who disagrees with this thinks that people should die because they are poor. This is a viable argument that can be made: if you can’t afford health insurance, then you should die if you are sick. We live in a capitalist system, and people who haven’t figured out how to manipulate the system to maximize their financial gain should die. This argument is completely inhumane, and I can’t understand the thought process of those who make it.
Many would argue that under the current system, hospitals are forced to provide emergency coverage, and therefore the poor do get care. But, many are forced to go into bankruptcy because of this situation, which prevents them from having an equal opportunity to participate in the capitalist system. Further, there is more than emergency coverage necessary to have proper health care. What about diseases or operations? What about checkups that can prevent or catch sickness early? What about insane deductibles and denials of coverage for those who do have healthcare? Everyone should have a right to a basic level of health care. Lack of money should not be grounds for receiving the death penalty.
Corruption
Why has nothing changed? A problem that has persisted due to the current system is widespread involvement of insurance companies in spending money to sway people to support their companies and the current system. Again, this is just a part of the system. If your company is making $1 billion a year in profit, it’s worth $100 million to pay someone to make sure that you keep making that profit if you only will make $500 million a year in profit if you don’t make the payment. It’s worth $400 million in savings to spend that $100 million.
There’s no point in blaming insurance companies for spending hundreds of billions of dollars to fight the public option by giving money to lawmakers and spending money on expensive advertisements to sway public opinion in their favour. They are private companies, and those funds are a worthwhile investment. After all, it works. As of the writing of this article, the insurance companies have almost completely squashed the public option as a legislative solution to the health care problem. But, in reality, the public option is the only solution.
Part II: The solution
The Band-Aid
Any solution without a public option is essentially a band-aid. The current solution being sent through the senate serves to force insurance companies to take losses on people with pre-existing conditions and the poor who can’t afford insurance. The government would have to subsidize those losses in some way shape or form. Prices will keep going up, and inevitably the taxpayer will have to pay. These band-aid solutions are just another way of funnelling taxpayer money to shareholders of insurance companies. The poor will likely receive inferior and inadequate coverage.
Medicare and Medicaid are essentially band-aid solutions. Health insurance is provided to seniors or the poor with billions of dollars of government handouts. Medicare costs continually increase because basic health care costs continually increase. These costs put a greater and greater burden on the taxpayer, and lead to trillions of dollars in government debt.
The Public Option
A public health insurance provider would have a different incentive system from a private corporation. Rather than maximizing profits to shareholders, a public insurer would want to minimize profits, or even take losses, so as to make sure the maximum number of people are able to get the best possible coverage. A public organization’s incentives are directed towards pleasing voters. Thus, the more happy voters, the more support for the organization. The more people that have coverage, the more happy voters.
The public option is like a competitor selling TVs for $50, or even $40. What are you going to do if your competitor is selling TVs for $40 that cost you $50 to produce? Well, you either go out of business or build a better TV that you can make money off of.
The public option would force insurance companies to sell better and cheaper plans that would compete with the public plan. The public plan would slowly swallow up the cheap and inefficient side of the health coverage market. Many employers would switch their coverage to the public option to cut costs. Private options would be a premium service offered by certain employers. They would be forced to compete with public providers.
This scenario would be better for America. Employers would be able to see more profits because they can save money on giving health care to their employees. All Americans would be covered, and not be forced into bankruptcy to survive sickness. Medical costs would go down because the government insurer would be able to bargain with medical providers to lower medical costs. Doctors will still be rich, just not as rich.
Many people are afraid of this scenario unfolding because they think it represents socialism. Perhaps a complete government takeover of healthcare, hospitals, and the destruction of private competition as exists in Canada and other countries would be socialistic. But just providing a government option that competes with the private options is no different from a public school system, or a public parcel delivery system. Private schools have to offer an education that is better than the public system can offer. The public system thus encourages better education for all.
Some things are best done by governments, who serve the best interests of society, not their shareholders. Coming from Canada, it is astounding for me to hear the hell that Americans go through just to get health care. When I needed health care in Canada, I went to the hospital or doctor, filled some paperwork out, and showed my government insurance card. That was it. No bills, no questions, no deductible. Nothing. Just health care. Which is not to say that the Canadian system is perfect, but it is much better than a system where poverty is a death sentence.
Health care should be a right ensured by the government, not a purchased commodity like TVs. Americans need to stop listening to the rhetoric presented by the insurance companies. These companies are fighting for their lives. Fortunately for them, the people in charge of making the decision to put a public option in place are corrupt and ignorant, and will shift their position in return for kickbacks that will get them re-elected.
The only way things will change is if American support for the public option increases, and the only way that will happen is if Americans get educated about the issue, and realize that the public option will make life better for everyone except the shareholders of insurance companies.