Why is Health Insurance so Expensive?

The Health Care Crisis is not about our health care system failing. It is among the best in the World. Moreover, it is not primarily about Insurance Companies not insuring us. The "Crisis" is about the recent rise in both health care costs and health insurance premiums. It has risen faster than any other segment of the economy (other than college tuition, and for similar reasons, but that is for another article). So, why is Health Care and Health Insurance so expensive?

First, let me establish the semantics. Health Insurance has become so expensive, because Health Care has become so expensive. The insurance companies must collect enough money though all the policy premiums to pay for all the health care consumed by their policyholders. If the price of a surgery goes up, then policies that pay for those surgeries will also have to go up. So, we can, going forward, talk about either the high cost of Health Insurance or the high cost of Health Care, because it is one and the same.

Next, the general feeling held by much of the public, that the Insurance Companies' huge profits are behind the high cost of health insurance, was recently shown to be incorrect by an article in Forbes Magazine. According to Neal Boortz, "the average (insurance) industry profit margin is less than 4%."

Not only am I concerned with why health care is so expensive; but also, why neither political party has told us the real reason, or is bringing forward a real solution. As an ex-insurance industry employee who used to specialize in "Consumer Driven" Health Insurance Policies, I know the answer to the first question; but, I am truly perplexed about the second question! The best I can do is to let you know the inside truth about the costs.

However, before I do, I want to illustrate how both parties got it half-right. The Democrat plan that would require everyone to have health insurance would definitely solve much of the problem. This is because, part of the high costs at Hospitals, is due to the fact that the paying customer must subsidize the non-paying customer. Yet, the Democrat solution would create many other problems. It grows a burdensome government, raises taxes, destroys freedom, rations care, and still it ignores the main reason health care is so expensive. The Republicans are also partially correct, in that, Tort Reform and allowing state-to-state policy competition would also help drive down the premium costs. However, the Republicans inextricably stop just short of the main idea. Finally, to add to my frustration, both parties actually make limited use of the solution in their plans, but fail to see the big picture. The solution is, true Free Market Competition. I know you are thinking this sounds familiar, but wait until I explain what I mean by "true Free Market Competition," before you jump to conclusions.

The Democrats say that the Insurance Market needs "competition" that comes by adding one more competitor, a Federal Government insurance policy. This is fallacious because there are hundreds of insurance companies and thousands of health insurance plans in this country. One more plan would not add enough extra competition, in and of itself, to be hardly noticeable. The Republicans are also guilty of only advocating a mere limited version of competition. They only advocate allowing plans in one state to be available in another. Sure, this adds a much more significant amount of competition and a resultant downward pressure on policy prices; but, it could go further. Moreover, state legislatures have very strong ideas about what must be, and what must not be, in a policy. Different states have very different ideas about how best to protect their citizens. There would be a huge battle to throw these consumer protections out.

What is needed is real competition. But, not just among health insurance companies and their policies, and not just between the States. It is needed among all the health care providers (doctors and hospitals). The Free Market system has always provided us the very best products at the lowest possible prices in every other aspect of our economy. There is no need to throw out the baby with the bath water or reinvent the wheel. However, for some reason our current system has failed to give us the low prices in health care our consumers demand. Why? It is quite simple. The providers and the consumers ( supply and demand) are not entering the market place alone. They are not making the choices and the purchasing decisions free of outside interference. Just as government interference in the Free Market always results in inefficiencies - higher prices, gluts and shortages - so has the health care market been tampered with. The consumer has been removed from the purchasing process.

He has been removed from the demand side of the economic equation and here is why. When a doctor advises a patient have a procedure, the patient thinks, "My Doctors says I need it; my insurance company is paying for it; I'm getting it." That is the whole thought process. Nowhere does the patient do any price shopping or cost analysis. Imagine saying to yourself: "My baker says I need his super supreme five-layer cake; someone else is going to pay for it; so I'm getting it, right here and now!" That would eventually be a wealthy baker if all his customers behaved this way! Let us say the Doctor orders you an MRI. You never ask what it cost (assuming it's covered in your plan). It could be $1,000 less right across the street, but you will never know; because, you don't ever ask, because you don't need to ask. There is no incentive for you to ask. Therefore, there is no downward pressure on prices due to competition. This leaves the insurance companies the unenviable task of trying to hold down prices by attempting to control what they pay out; and in the process, make themselves very unpopular.

Now, my conclusions are not only based solely on theory. True Free Market Health Care exists today on a limited basis, and it has worked to lower costs, when and where it has been tried. Let me show you four of the best-known examples, and one lesser-known one. The Free Market can be clearly seen working well in Health Savings Accounts (HSA's), High Deductible Policies, Flex Spending Accounts, Elective Surgeries, and the in some relatively new, lesser-known "Consumer Driven" Policies devised by the Health Markets Insurance Company. In each scenario, I will illustrate how they have driven down prices.

In a Health Savings Accounts, a high deductible insurance policy is purchased for less than a lower deductible policy. The monthly premium difference is then placed into a savings account which the consumer controls. In fact, the consumer becomes the insurance company, or "self insured" for their own smaller cost and non-catastrophic health care, by paying for it out of this savings account. Seeing as it is the consumer's money that is now being spent on a doctor's visit (or other minor procedures), there is an incentive to shop around for the best price. The money saved, is money available to purchase even more health care. This is called in Economics "maximizing your good." In essence, you are getting more health care for less money. In addition, this shopping for health care serves to drive down prices. As the lower priced doctors start to receive more and more patients, the higher priced doctors either lower their prices or go out of business. (A few of the best, more sought after professionals, will still command relatively higher prices due to scarcity.)

High Deductible policies, the last resort for many of us who can no longer afford the old standard low deductible plans, work just like HSA's in that the consumer must shop for, and pay for, his own non-catastrophic treatment. The only difference is only that there isn't a tax advantaged savings account at his disposal.

A Flex Spending Account has the same dynamic. Here an employer, as a benefit to their employees, offers a certain amount of money each year to the employee for spending on their own health care. One is free to spend it on over-the-counter medicines and other medical expenses. Again, seeing as one is spending their own money, one can get more medical goods and services, if one shops wisely.

Elective Medical Procedures is a popular topic these days. The proverbial cosmetic breast-implant surgery is not covered under most insurance plans. Those who want one must spend their own money. With thousands of dollars at stake, you can bet the consumer will shop for the best price. Some have discovered that they can even fly over-seas to realize very substantial savings. (The supply of surgeons is literally expanded on a global scale. Increased supply drives down prices as well.) The result is that the price for elective and cosmetic surgeries have plummeted in recent years. If insurance paid for them, the price would still be high and heading higher.

The "Consumer Driven Health Care" product from Health Markets utilized a million dollar, computer program that allows their customers to shop the relative prices of all their hospitals, doctors, and medical procedures. By doing so, they can reduce or eliminate their co-pays, and hence have a financial incentive to shop and control the actual cost of their health care. The resulting competition among medical practitioners forces prices down.

Why can't the politicians take a page out of a winning playbook before they start to make laws affecting us all? Studying and utilizing Consumer Driven Free Market solutions would incentivize the actual consumer to make choices that will save him money and maximize his good.

Now, while the total elimination of Health Insurance Companies would in one fell stroke, put the consumer back in charge, this is not the answer. It would put health care consumers back to square one - unable to afford an expensive accident or serious illness from day one. There will always be an important need for the services of health insurance companies - the absorption of risks. Yet, a True Free Market solution would be to allow and incentivize all the above schemes and any other application of the Free Market that can be utilized. Instead of the Democrat proposed Bill that incredibly outlaws the much needed HSA's and Flex Spending Accounts, these accounts should be expanded and encouraged.

One more thing that would make health care more affordable right away is to make all money spent on health care, or health insurance, tax-free. This is another Republican proposal. However, only doing this without true competition would actually serve to put upward pressure on medicine; because, by increasing a consumer's purchasing power, you will increase demand on medical goods and services, driving up prices.

The final fix needed addresses the claim that people can not get insurance when they have a preexisting condition. Again, let's look at the semantics. Yes they can get insurance! They can not get insurance for that one preexisting condition. Insurance applicants with preexisting conditions are offered full health policies that have a rider that excludes the one condition the person already has. The consumer saved money year after year by not buying any health insurance, and then when they get sick they want some one else to pay for their treatment. In what society is that fair? The often sighted example is that this is like running your car into a tree and asking an insurance company to sell you a policy to get the busted fender fixed. The unwise insurance shopper is still unconcerned about getting cancer, having a heart attack, falling down the stairs or the hundreds of other threats to his health. He just wants his upcoming operation paid for by someone else.

The solution for this is "Portability." You see, if your insurance is provided by your employer and you get cancer and for whatever reason you loose or leave that job, after COBRA expires, you have lost your "insurability" (for that condition), because no new insurance company wants to pay-out for a guaranteed loss. If you bought and paid for the original policy on your own and you lost your job, you could still keep your policy. This is called "ownership". In fact you could maintain the same policy, for life, regardless of what conditions come down the pike. (Portability is a proposal that is also coming from the Conservative Camp, but is not being allowed air-time by the in-power Democrat Party or the Press.)

The combination of using True Free Market Principles, Tax Exemptions, and Policy Portability Ownership are all the fixes needed for the current problems with our health care system.