Health insurance

All posts tagged Health insurance

“Fearing that health insurance premiums may shoot up in the next few years, Senate Democrats laid a foundation on Tuesday for federal regulation of rates, four weeks after President Obama signed a law intended to rein in soaring health costs.”

In other words, they realize the bill they passed will skyrocket insurance rates (40% estimated increase in individual premiums, above the already expected increase) and now they want to control premiums now, too.

Let’s pretend you’re a company with a, say, 2% profit margin.  Let’s say one line item of expenses (health care claims) equals 84% of your revenue.  Now, say those costs go up…by 40%.  How much does your revenue need to increase to cover those higher expenses?


That’s right, your premiums will have to increase 33.6% to cover that increase in costs.  Do you think the federal regulator will approve that increase?  Here’s a hint:

“After a hearing on the issue, the chairman of the Senate health committee, Tom Harkin, Democrat of Iowa, said he intended to move this year on legislation that would ‘provide an important check on unjustified premiums.'”


Since the politicians keep linking insurance premiums to GDP growth, what if they only approved rate increases that were at par with GDP growth?  What a company’s profit margin be then?

-27.6% in year 1.

-41.1% in year 2.

Somewhere between years 5 and 6, they have a 100% loss.

Before that happens, you will not be able to buy individual health insurance, except for from the government.

Which is what Obama and the Democrats have wanted all along.

Soon, the government will be telling you what to eat, what outdoor activities you can do and what medicine you can and can’t take.

PORTSMOUTH, NH - AUGUST 11:  Diane Campbell, 5...
Image by Getty Images via Daylife

A month ago, I wrote about the “tragedy of the commons” and how it applies to health care in the US. Basically,

“The same holds true for health care. Collectively, we all have an incentive to avoid over-utilizing health care and unnecessarily burdening our system. Individually, however, when we have no skin in the game, when somebody else pays the bill, we have no incentive to monitor our use of this pooled resource.”

My proposed solution to the health care crisis was,

“I’d like to see a proposal that gives tax advantage to high-deductible plans, so people have skin in the game, and that forces doctors and hospitals to publish their prices before treatment is given. With both the use and cost of health care better controlled, health insurance will become much cheaper.”

Predictably, Harry Reid and the Democrats are not only refusing to make high-deductible health plans tax-advantaged, they’re trying to eliminate them altogether.

“The Reid bill also assaults health savings accounts, or HSAs, which allow individuals to accumulate tax-free funds for future medical expenses when coupled with low-premium, high-deductible insurance. The Reid bill changes tax provisions to make HSAs less attractive, but the real threat comes via increased regulation.

These insurance products will likely be barred from the insurance ‘exchanges’ that will demolish and supplant today’s individual market. Employers will also find them more difficult if not illegal to offer once the government has new powers to ‘define the essential health benefits’ that all plans must eventually offer. Plans that focus mainly on catastrophic health expenses, instead of routine procedures, aren’t generous enough for Democrats.

In other words, instead of bridging the gap between payer and consumer, the very heart of the problem, we’re increasing the gap.

Mark my words, this can have no other effect than to increase health care costs.  This won’t just leave the costs as they are now, but make them worse.  People who are already being responsible about health care costs will no longer be incented to do so.

Even worse, remember the other effect of the “tragedy of the commons” I discussed.  The crab fisherman I talked about did everything they could to get all the crabs before somebody else did.  The same applies here.

Health care is a scarce resource (meaning there isn’t an unlimited amount of it).  This is because there are a limited number of doctors and other health care professionals, facilities, machines, etc.  One reason prices are so high (besides the lack of price competition, see post linked above) is that our health care system is overburdened.

Cash Money

Image by jtyerse via Flickr

Another scarce resource is money.  Despite the government’s willingness to deficit finance over the past 10 years or so, there is a scarce amount of money in the world.  Of course, the US could start printing money (they’re not, despite what Glen Beck says) but if they do that on a large scale, get ready to occupy your underground bunker ’cause things will get rough.

Given that the services and the ability to pay for them are scarce, we can expect Congress to work to manage those costs through lower coverage and higher premiums for the “public” option (or legislation that makes other plans look worse, compared to the public option).

Knowing this, consumers who enroll in the public option (already expected to be the highest users of the health care system) will explode their utilization in an effort to get all the services they can before the costs go up.

The bottom line is this:  the current Senate plan not only doesn’t do anything to cut health care costs, it will raise them.  Guaranteed.  At a price of $1.2 trillion ($2.5 trillion by some measures that account for Congress’ accounting gimmicks), this is unacceptable.

Please, please, please contact your Senator and Harry Reid’s office and make sure they know how you feel about this bill.  Your ability to provide health care for your family is at stake.

{{w|John Shadegg}}, U.S. Congressman.
Image via Wikipedia

Than opening up the Wall Street Journal and seeing your name:

“John Shadegg’s proposal is certainly a better alternative than the Democrats’ bloated bill, guaranteed to increase costs and explode the deficit (“The No-Cost Path to Cheaper Health Care,” op-ed, Nov. 6). However, it still just chips away at the heart of the problem, the actual cost of the health-care procedure. I’d like to see a proposal that gives tax advantage to high-deductible plans, so people have skin in the game, and that forces doctors and hospitals to publish their prices before treatment is given. With both the use and cost of health care better controlled, health insurance will become much cheaper.

– m”

(link removed for safety reasons)

Okay, maybe there are stranger things

Deadliest Catch
Image via Wikipedia

Ever see the show “Deadliest Catch”?  It’s a “reality” show about commercial fisherman going after crabs in the Bering Sea.  This job is one of the most dangerous in the world, mainly due to the conditions of the sea and the speed at which they try to catch these crabs.  Why do you suppose they have to hurry?  What’s the danger in taking their time and catching the crabs when it’s safer?

Obviously it’s because if they don’t get the crabs quickly, somebody else will.  You see, it’s not like you have some crab farm and you can harvest them at your leisure.  The crabs are out there for everybody to get.  Every crab you fail to catch is another crab in the net of your competitor.

This is a living example of what’s known to economists as the Tragedy of the Commons.  Because nobody owns the crabs (lack of property rights), there’s no incentive for an individual fisherman to leave enough crabs behind each year to replenish the stock of crabs and ensure more for next year.  This leads to overfishing and, without some sort of intervention, extinction of this type of crab.

Image by Getty Images via Daylife

The solution to this problem, alluded to above, is to assign property rights.  Divide up the existing stock of crabs among all fisherman.  Because these fishermen would own a group of crabs, and no others, they’ll invest lots of resources into making sure these crabs not only replenish their population but grow in number over time.

In other words, tie the fishermen’s outcome to that of the crabs.  Give them some skin in the game.


Let’s switch gears to health insurance. Try to answer the following questions:

  1. How much did you pay for the last medical service you consumed?  This could be a doctor’s visit, an MRI, a surgery, anything.
  2. How much did the service cost?  In other words, what did the provider charge?
  3. How much do two other physicians/hospitals/centers charge for the same service?

I’m guessing the answers for 1 and 2 are different (with 2 being much higher) and that you can’t answer #2 or #3.  If that’s true, don’t feel bad.  Almost nobody can.

Did you ever wonder why that is?  I’ll tell you a story that highlights what I believe is the main reason.

Video from Finley's 4D ultrasound
Image by Jeff the Trojan via Flickr

When my wife was about 12 weeks pregnant with our second child, we had our routine OB/GYN appointment.  During this appointment, our doctor checked for the baby’s heartbeat with his little doppler radar thing.  We eagerly awaited the *swish*, *swish* sound the baby’s heart would make through the radar.

Unfortunately, after about 2 minutes, he still hadn’t found one.  Having recently had a miscarriage, we were horrified.  Our doctor, who is fantastic, understood this and immediately ordered an ultrasound while telling us it was probably his equipment.

Here’s the part where you think I’m a heartless jerk.  I may sound like I’m joking, but you really will.  At least for a second.  Ready?  Here goes:

One of the many thoughts I was having was, “an ultrasound costs $690.  Is it really necessary?”

Go ahead and stare at the screen in stunned disbelief, I can wait.

Yes, when the doctor couldn’t find our baby’s heartbeat, three months after a miscarriage and in front of my pregnant wife and our doctor, I asked “is this really necessary”.  And I asked it because of the cost.

What I also said was, “let’s wait a few minutes and check again.  If we don’t find it then, let’s get the ultrasound”.

Everybody agreed.  A few minutes later, the baby had moved and we found a perfect heartbeat.  Our second son is now four months old and huge.  (Seriously, he’s big.  Did you hear about the kid in Colorado who was four months old and denied health insurance because of a pre-existing obesity condition?  Our kid is that big.  Anyway…)

But why, at such a time, did I ask that question?  Wouldn’t insurance have covered it?  What did I care about the cost?

Nothin but skin
Image by kevindooley via Flickr

I cared about the cost because I have a high-deductible, HSA plan.  I pay the first $2,500 of coverage and 20% after that.  We hadn’t met our deductible yet so I knew I would have to pay for the ultrasound out of pocket.

And that’s what made me ask the question:  how much does this cost?  And the only reason I knew the cost is because I had paid for one just a few weeks before, confirming our miscarriage.

Of course, if we hadn’t found a heartbeat on our second try, I would have happily paid for an ultrasound.  But waiting just a few minutes saved us $690.  $690 we wouldn’t have been able to use to buy food or clothes or anything else with.

Now, think about the story I just told.  I probably spent about 10% of it justifying why I was considering the cost of treatment.  I was even a little uncomfortable typing it into a faceless computer.

The fact is, we’ve become conditioned to this idea that medical treatment has no cost and/or that it’s vulgar to consider the cost of treatment in making health care decisions.  Well, here’s one good reason why each family should consider the cost of their care:

If they don’t, somebody else will.

Whether it’s the insurance company now or the government after “reform”, if costs continue to increase like this, you will lose the ability to make health care decisions for yourself in one form or another.

Insurance companies can’t afford to pay for every runny nose and cough a person has.  They can’t afford to pay for MRI’s just so a doctor can avoid losing a lawsuit.  And, if the government takes over, taxpayers won’t want to pay for it either.  When’s the last time a politician ran on a platform of raising taxes?  Mondale in 1984, that’s when.  How’d that go for him?  He won one state.  Which means either care will be rationed or we’ll pass off the cost to our kids through deficit spending or, more likely, both.

So, one reason we don’t consider cost in our medical treatment decisions is, it’s not culturally acceptable.  But there’s a much more concrete reason.

The system, for whatever reason, is set up so we don’t think about cost.

Want proof?  Pretend it’s time for your annual checkup.  Call your doctor and ask how much it will cost.  Chances are they’ll tell you one of three things:

  1. They don’t know.
  2. They’re not allowed to say, unless you don’t have health insurance.
  3. They simply won’t tell you.

If you do get a price, write it down and call three other providers in the area and ask the same question.

What you’ll find is that prices vary wildly among service providers.  Not just $10 here or $20 there.  One place will charge $120 for an office visit and the other $275.  Why is that?

Because of the difficulty of going through the process you just went through.

Which means we can’t comparison shop.  Plus, since the payer (insurance) and the consumer (patient) are separated, patients have no incentive to find out the costs.  We assume an annual checkup or an MRI or a surgery costs the same amount everywhere.  Well, it doesn’t.  There’s a huge variation.


So what does this have to do with the “Deadliest Catch”?

It’s the Tragedy of the Commons.  Crabs in the Bering Sea are a pooled resource that everybody has access to.  Which means that, while the fishermen collectively have an incentive to conserve, individually, the incentive is to over-utilize.

The same holds true for health care.  Collectively, we all have an incentive to avoid over-utilizing health care and unnecessarily burdening our system.  Individually, however, when we have no skin in the game, when somebody else pays the bill, we have no incentive to monitor our use of this pooled resource.


Where does Congress come in?

Well, based on what I said above about all of us collectively having an incentive to conserve, shouldn’t I advocate a single-payer system, like Canada or England?


This would make the problem even worse.  Payers and consumers are separated now but they have a common link that signals to the consumer that they’re over-utilizing.  That link is their health insurance premium.

If our health insurance premium is lumped in with all our other taxes, we’ll be even further disconnected from the actual cost of our utilization, further over-burdening the system and driving costs even higher.

Any proposed solution that would widen the gap between payer and consumer is wrong at the very heart of it.

For further proof, think of the other socialist-style programs the government runs and ask yourself how they’re doing?  Medicare?  Bankrupt in 8 years.  Social Security?  Bankrupt in 8 years.  This is not an accident.  This is a necessary outcome of removing the link between cost and benefit for individuals.

Think about the current proposals in Congress.  Do the bills now widen the gap between payers and consumers or bring them closer together?  Tax increases and subsidies necessarily mean that gap is widening.  Not only that but minimum coverage requirements would mean high-deductible, HSA plans like mine would be illegal.

Alright, what can we, as individuals, do?

Get some skin in the game.  Get a high-deductible, HSA plan and start comparing prices and quality for the services you need.  Force providers to compete on both quality and price.

We do not need the government to reform our health care system.  We can do it ourselves.  And, we can save ourselves $1 trillion doing it.