November 17, 2008

The Other Healthcare Crisis

There has been a lot of talk, especially among certain prominent politicians, about the so-called "Healthcare Crisis" that is looming over so many uninsured and under-insured Americans. They tell us that something must be done to prevent this crisis from causing financial ruin for millions of Americans. They promise "failure" if we do not come together and agree to have the government fix the "crisis".

Our leadership believes that Americans should have access to affordable, quality health care and peace of mind about long-term financial security. We will ask our members and the public to demand solutions (

Well, I feel it is the duty of freedom-loving Americans to certainly demand solutions...but not in the way they would have you believe is necessary. First, it begins with a need to understand the healthcare system and the economic principle of insurance.
Insurance groups people into pools based on risk so that it can estimate probability and costs. If insurance companies didn't group people according to risk, they would have to assume ultimate risk for all of their customers. Thus, customers who would rarely if ever use the insurance (the losers in this case) would end up paying the same premium as those who are more likely to use it (the "winners" as it were in this case). However, because of competition, insurance firms gather information about their customers in order to assess their risk. Customers at lower risk can be pooled into a lower-risk category and can pay lower premiums.
Now, there are certain things that are not insurable. Suicide, for instance. This is because suicide is wholly dependent on the actions of the insured. Suicide doesn't happen by accident. If insurance companies covered suicide, who would get coverage for it? I wouldn't. I wouldn't want to pay for it. This would not be a viable venture for an insurance company anyhow. This would be equivalent to insuring my house against arson, that is, burning down my own house myself. At any rate, actions or events that hold personal responsibility cannot be insured against because the firm cannot calculate that in their estimates of risk.
At least, that is what we would expect in a free-market. This is not the way things are today. For instance, there are many people who are put in the same risk pools who in fact belong in different pools. They have different risks, and yet they are grouped together and made to pay the same premiums. In addition, there are many people who are insured for things which are, by definition, uninsurable. Insurance has hereby become a system of income redistribution resulting from regulation.
There are several examples of these regulatory distortions imposed on the Federal and State levels upon insurance companies. In these cases, insurance companies must offer coverage for these things to their customers:
49 States mandate treatment for alcoholism by insurance companies
At least 27 States mandate treatment for drug addiction
Chiropractors in at least 45 States
Psychologists in at least 36 States
Social workers in at least 22 States
Hairpieces have to be included in Minnesota
Marriage counseling in California
In more than 12 States, companies cannot ask any AIDS-related questions
In D.C. HIV testing is prohibited for insurers
the list goes on....

The effect of these regulations is certainly not at all what was intended by legislators. The most important effect has been that insurance companies are forced to raise their premiums because they cannot assess the risks of certain individuals and cannot group others according to their risks. Therefore, customers who do not have these risks are forced to help pay for the risks of others in their artificially-high premiums.
What is the effect of this? Well, if I am being forced to pay for coverage that I do not need, I may choose to not be insured at all (after all, I haven't gone to the doctor in years). Those who remain insured are then charged higher premiums, and the problem compounds. And yet, as an uninsured person, I am then somehow part of this "Healthcare Crisis" which many propose to fix by imposing more regulation...the precise thing that caused me to be uninsured in the first place.
How do you solve the problem of people dropping their insurance? Well, a certain politician proposed a solution: mandate health insurance! Others say "single-payer" government insurance would solve the crisis. But what would be the economic effect(s) of these policies? Can we foresee them? How can we possibly solve this problem with the proposed solutions? What other solutions are there?


Liz said...

Ok, so I'm a little unclear on a few things; maybe you can send me some published info to clarify... I thought that the premise of insurance was that people of varying risks were grouped together so that everyone's premiums were reasonable-- that way, even if something catastrophic happens to a "low risk" person, he's still covered. I guess I can see how you could call this "redistribution of wealth" or something, but isn't the whole point of insurance to redistribute risk? I have a hard time separating those...

On the same vein, what are people who are high risk supposed to do if they're not included in a larger risk pool with lower risk people? They wouldn't even be able to afford the premiums without government subsidy (which I agree isn't the right way to go). Does it just come down to private philanthropy? It seems to me that otherwise, anyone with a catastrophic health condition will end up bankrupt. How is it supposed to work?

BEN said...

The principle of insurance is NOT that people of varying risks are grouped together, it is the opposite: that people of the SAME risk are grouped together. That is why insurance tries to find out as much information as possible--so that they can group a person correctly according to the risk they see in that person's condition and behavior.
If I group a football player with an office clerk and insure them both for broken bones, the office clerk will be the loser. Thus, he will look for another company in competition with his first that offers a pool for people more like him so that he doesn't have to pay for the high risk of the football player.
The higher risk people are grouped with higher risk people and, as such, pay higher premiums, and rightly so. If they want to lower their risk, they can change occupations etc. They must accept those premiums as costs of their high-risk occupations though, if they want to be insured.
The question of whether a person can or cannot afford something cannot be determined by a free-market. The market merely sets the price based on demand for this high-risk insurance. However, it seems to me that if certain companies were not so heavily regulated, they could expand their pools of highest risk patients to possibly include people all over the world. Furthermore, they would voluntarily engage in insuring certain high-risk people as part of a private charity undertaking. There are many such businesses that do this. They give away their services to people, even if it is motivated by a desire for good publicity. Thus, they hope that they will attract new customers who want to support their programs. Coke does this. Car companies do this etc. There are many scholarships that are from private businesses too.
Also, let's not forget the role of purely charitable organizations such as churches. They do more good than is commonly known. Childrens' Hospitals, for instance, offer wonderful care, at no cost, to children with all types of diseases whose parents cannot afford to pay for medical care.

Liz said...

I think what you're saying makes sense-- the only thing that I take issue with is that many (if not most) people who are in high-risk insurance pools are not there because of choice (as in their occupation), but because of illness or disability--sometimes as product of bad choices (as in gum disease or lung cancer caused by smoking), but probably more often through no fault of their own (type I diabetes or breast cancer or any other number of diseases and disabilities).

Perhaps corporate philanthropy is a part of the answer, but would they really have enough profit from the low-risk people to afford paying all the bills for the high risk people? If that was the expectation, then wouldn't they raise premiums on the low-risk people to compensate for the costs of the high-risk people? And isn't that the same effect of having pools with people of varying risks?

BEN said...

Well, the insurance company wouldn't raise rates if it means they lose their competitive edge in the market. However, they may calculate that they actually receive an increase in profit when they are charitable.
In any event, they may not need to pay at all. Many doctors actually refuse medicare and medicaid payments. Instead, they give away their services for free much in the same way that lawyers are expected to do pro bono work.
There are also many ways that healthcare costs in general could be brought down. For instance, there are regulations that limit the supply of doctors. Medical schools are so closely regulated that thousands or more applicants are turned away when the schools have plenty of seats empty.
Not everyone that has a health issue has to see a full-blown doctor. There could be a whole continuum of certifications all regulated by the healthcare industry itself, not government, that say what a "doctor" is or is not qualified to do.
These types of certifications exist in all kinds of areas. They even exist for computers and networking but with no regulation at all from government.
Healthcare is the only industry that I know of where technology actually caused prices to go up instead of down. Now, people have even more reason to find competition in the medical field with the vast amounts of information available on the internet.

VeLynn said...

I think there is confusion in regards to life insurance and an health insurance (Suicide is not part of health insurance, it is part of life insurance)
In reality, all insurance products are base on a risk group. My family will be paying around $2,000 dollars per month for health insurance (large family) if I try to get insurance for ourselves.
The insurance industry has design a product call Group insurance. There is a great advantage in getting insurance through a company though. The rates are flat no matter what. That is why people get cheaper premiums through work than individually. The company is the one taking the hit on the cost – this is call a company benefit. This is a private entity; managing the funds; so, this is not re-distribution of wealth. This is an agreed benefit that is voluntary – you pay you get it, you do not pay - you do not get it. Now, if a company does not want o offer health insurance is up to them – Capitalism at work. That means that they get more from their workers (they pay less – no benefit for the same job that a company that pays insurance gets for). Nothing wrong – it is just business economic.
In life insurance, everyone pays different rates –and let me tell you insurance rates are extremely expensive for a smoker vs. a non smoker, for motorcycle driver to non drivers.
I do believe the problem in health care is compounded:
1. Greedy doctors
2. Greedy insurance companies
3. Greedy lawyers
4. Demand
Greedy doctors:
I have friend that want to be doctors and they are not willing to get a low paying job – due to greed and due to their student loans.
Greedy insurance companies
They make a lot of money – capitalism at work – Buffet owns several of them and they are the best money making business for him.
Greedy Lawyers
We are a society that loves lawsuits. We want fast money for no work
High demand – you get seek you are willing to do anything to get well or your love one.
There are a few problems but I do not think is the government fault. Rich doctors lobby for regulations so that they keep the number of doctors low.
Insurance companies lobby for restrictions in business areas – like a franchise. State lines are the limitations and also there is no group insurance for multiple companies.
In other words – A few rich guys were able to manipulate the laws to make them on their favor.
We people get seek and we are not willing to stop the current method of medical service. You want service you want it now.
Deregulation may not be the solution.

BEN said...

I was talking about insurance in general when I mentioned suicide and that was only as an example of something that is not insurable. But no, suicide is generally NOT part of life insurance. If it is, then you are part of a higher risk pool.
There was another point that I wanted to comment on:

The company is the one taking the hit on the cost – this is call a company benefit. This is a private entity; managing the funds; so, this is not re-distribution of wealth.

First of all, the company is simply choosing to compensate the employee in health insurance rather than higher pay. This doesn't mean the company is taking the hit. It could not pay for health insurance and would instead have to pay higher wages/salary to be competitive.
Second, the point I made about redistribution of wealth was not to say it was wrong in this case. I was merely stating a fact. Insurance is a good way to do it and it is the free-market way of doing it. I was just saying that insurance was having a hard time actually insuring correctly when the government interferes so much.
Your comments on greed are troubling. Greed, or self-interest, is an important part of a free market. Self-interest is checked by the self-interest of others and enforcement of contracts. The issue we have now though IS greed BECAUSE of regulation by the government. In the free-market, there is risk which prevents entrepreneurs from making unwise decisions. When government removes the risk by bailouts etc, greed has free reign. Doctors aren't afraid to charge a lot because the government encourages it through Medicare and Medicaid. Insurers have to charge more for the reasons I already mentioned. Anyway, you see my point.
Freedom works. I believe in it.

VeLynn said...

Freedom does not work when you have unrighteousness.

And if you think this country would be better with the kind of freedom that they had when the constitution was just created, just see what happened to the nephites prior to Christ coming. After they fought for their freedom, GREED took over (it was not government greed – it was the people 3 Nephi 6 I think).

The lack of law enforcement is an example of what would happen if freedom will be instituted like you want. The people in power will create stronger secret combinations, just imagine a free country for them to roam around.

It was but 3 to 5 years that the nephite nation disintegrated.

It is nice to talk about freedom, and even create forums like this, but the reality is that freedom is not achieved by changing a political party nor the government's role. Freedom is created the way the Laminates fought the Gadianton robbers, by teaching the the gospel and changing the heart of people.

You start not by claiming you are a freedom fighter, but, in a silent moment let the spirit of your example and your testimony influence a soul to change.

It is nice to blame government for all our problems, this is like the man complaining about loosing his job because his company moved to China – but he stills buys his goods at Walmart (China's #1 customer).

People – the US citizens are to be blame. The Laws are written because the majority wants it that why. See what happened during this election – the people selected the most liberal person in the history of this nation. They did it not because the voice of freedom was not heard, it was because in their hearts they do not have a conviction of righteous living. They do not want to be self sufficient. They do not want to be accountable for their actions

You want to teach freedom, teach the gospel, change the soul and Freedom will be a resultant of that.

Stop blaming government for the lack of freedom we have. We need to take the blame because we are not teaching the gospel to others fast enough.


BEN said...

Freedom is the gospel. The gospel is freedom. There is no difference. We are commanded to uphold the Constitution. Just because I am talking politics does not mean I am not teaching the gospel. Careful! Many prophets have taught these same principles even from the pulpit.
Your point about being a righteous people is well-said though. But I take issue with you thinking that just because I am discussing politics that I am somehow neglecting my duty to teach the gospel.