Government Health Care

Government Health Care

Oct 28
Government Health Care

One of the things I love about a capitalistic society is that if money CAN be made at something then somebody is already doing it.  If nobody is doing it, it means you probably can’t make money at it.  If there is a huge hole that the government feels a need to fill because nobody in the private industry is doing it, then I can guarantee that they will lose money in the endeavor and require more tax dollars to pay for the shortfall.  Forget about whether or not the government can do it efficiently – if someone COULD make money at it then we wouldn’t need the government to do it.  So if the government has to do it, it’s because the only way to do it is to lose money.

The debate on health care is no different.  If the government has to create an insurance program because nobody in the insurance industry is doing what the government thinks needs to be done, it is a guarantee that the program will lose money.

If a government program needs more money than it can bring in, the only way to pay for it is to raise taxes.

I’m going to do my best to explain this from a non-political perspective.  Hopefully I’ll do a good enough job with some simple economics that it will make sense to everyone.  Admittedly, these are over-simplifications, but I think you’ll get the point.

First, let’s start with the concept of insurance.  Insurance is meant to “indemnify” the insured in the case of a loss.  The last time I bought a printer at Best Buy, they offered to sell me insurance for the printer in case something happened to it.  The printer only cast about $75, so I decided that if something happened to it I’d just spend $75 and buy a new one.  I decided to “self insure” because I wasn’t concerned about the cost of the loss.  However, I have insurance on both my home and my car because I can’t just buy new ones if something happens to them.

However, we have come to treat health insurance as something very different.  In the case of my car, I only “use” my insurance if something happens to my car that I can’t afford to pay out of pocket.  If I used my car insurance the same way that we use health insurance, I would never change the oil and I would expect someone else to help pay for my gas and wiper blades.  The cost for gas and wiper blades is just part of owning and using the car – they are not “losses” and so don’t qualify for insurance.

And yet we expect to use health insurance for things that are part of being alive and “operating” a body.  What are “losses” with respect to our health?  What are unforeseeable events that can be economically crippling?  Would getting a cold qualify?  What about having allergies?

Basically, there are some things you can anticipate and plan for such as getting a cold and needing cold medicine.  In fact, you probably already do this to some degree – you have medications and supplies on-hand at home for when you need them.  It’s the things you couldn’t reasonably anticipate or prepare for that lead to you needing and using insurance.  It could make sense to have cancer insurance – cancer treatments are a HUGE expense and are impossible to prepare for in advance.

But to say we need “insurance” to cover each and every little thing is like saying we need someone else to pay for Christmas presents because we forgot Christmas comes in December and we failed to plan ahead.

By its very nature, insurance is a “socialist” instrument.  Insurance takes a pool of people and they share the costs for each other.  The amount each person pays is basically a function of probability – the probability of an event happening to any given individual and the anticipated cost of such an event happening.  For example, let’s say we all want to take care of each other’s homes.  For the sake of argument, let’s say we each have a $100,000 home, that we expect damage to one of our homes once a month, and we think the typical damage will be about $20,000.  This means that we need a minimum “income” of $20,000 a month to take care of damages.  If we have a pool of 200 people, then we each need to pay $100 a month ($20,000/200).

The trouble comes when we’re all paying in and someone decides they want some of that money to repaint their front door because it was scratched bringing in a new pool table.  It was “damaged.”  This raises a lot of questions and dilemmas.  Let’s say we agree to pay for the scratches on the door.  That person gets some money “for free” to pay for their door.  Someone else says, “If they are going to get money for a scratched door, then I definitely should get some for the porch lights I had to replace because of the last storm that blew through.”  Before long, everyone is receiving money because of “damages” to their property.

Suddenly the amount being paid out is more than $20,000 a month.  It’s actually $30,000 a month, which means that there isn’t enough money coming in to cover expenses so we have to raise rates to $150 a month.

All of a sudden everyone is paying more, but what they “get” for paying more is the same.  It isn’t long before someone comes up with something new that they want reimbursed, like having a tree limb removed because it might cause the house to be damaged.  Others catch on and soon the insurance pool is paying out even more than before, despite the fact that everyone is contributing more.  It simply cannot keep up with the demands on funds.  Rates are raised even more and soon become $250 a month.

At this new rate, there are people in the community who say they can’t afford the higher rate.  It simply costs too much.  However, they still need the money being paid out by the insurance pool for anything that happens to their home.  They say that it wouldn’t be fair (or very neighborly) for us to only pay for damages that happen to the homes of people who pay in to the fund.  Let’s say 20 people drop out, but the demands for money stay the same.  Now the same demand is distributed across fewer people – those people have to pay more.  Before, we needed 200 people to pay $250 a month to keep up with the $50,000 a month that was needed.  Now there are only 180 people trying to cover that cost and so rates go up to $278.

When fewer people are paying in or when demand for reimbursement increases, rates MUST go up.  As rates go up, fewer people can afford to pay in, resulting in even higher rates.  This is true for insurance as well as taxes.  The burden is carried by fewer people, who pay more in order to cover those who receive benefits but pay less or nothing at all.

That’s one side of the equation.  Now let’s look at the other side.

Suppose you run a non-profit hospital.  Your only goal is to try to keep people healthy while not losing money.  You have expenses – salaries, equipment, facilities, utilities, laundry, food, etc. – most of which are required in order to provide services.  Let’s say your expenses are $1 Million a year.  When you first started the hospital, you charged a fair price for your services – just enough to not go into debt – and every patient paid for services as they were provided.

Then you get a patient who needs some pretty extensive services and is unable to pay for it.  They haven’t planned ahead and they have no insurance to cover the emergency.  Not treating them isn’t an option – you believe it is unethical and inhumane.  Now let’s say that normally you would charge $10,000 for such services, but because the patient can’t pay you get absolutely nothing.  That’s $10,000 you have to be able to recover in order to keep the business open to take care of other patients.  To make up for the loss, you raise prices on all of your services by 1%.  Basically, everyone else has to pay more because one person was unable to pay.  It’s that or you have to close the hospital because you can’t meet your expenses.

You can probably already see how this coincides with the insurance example.  The fewer people who are able to pay, the more everyone else has to pay in order to make up for it.  Otherwise the hospital shuts down and NOBODY receives care.

Governmental health subsidies, such as Medicare, further complicate the issue because they tell you how much they are willing to pay for each of your services.  They are unwilling to pay the rate you need to charge in order to break even because they are trying to control their own costs which have spiraled out of control.  Suppose Medicare only pays you 80% of what you need for your services.  You’ll have to raise rates on non-Medicare patients in order to make up for it.  So as people demand services for which they are unable to pay, the cost of services to those who CAN pay are increased.

The result is exactly where we are today.  Lots of people demanding services for which they cannot pay and those services being paid for increasingly by a smaller group of people.  Putting it all together, either hospitals raise rates, insurance companies raise rates, or the government raises taxes.  SOMEBODY is going to pay for it.

Apparently, America has become the place where we don’t care who pays for what I get as long as it isn’t ME.

It’s one thing to ask me to help pay for your cancer.  It’s another thing to ask me to pay for your bad habits.

Then again, right now it would be nice just to feel like I was ASKED.

4 comments

  1. I love this.

    I especially liked the two quotes… “If I used my car insurance the same way that we use health insurance, I would never change the oil and I would expect someone else to help pay for my gas and wiper blades.” and the simple but obviously not obvious statement of… “By its very nature, insurance is a “socialist” instrument.”

    But over all this is one of the clearest explanations of “the problem” with insurance in the first place. The examples of the home-owner and the non-profit health clinic were spot on. And, unfortunately, I agree that America is now the land of paying for everyone’s bad habits.

    • Thanks, Noel! I tried to keep the discussion away from politics. I believe this is the result of too many people taking advantage of the system and not nearly enough people taking responsibility for their own health.

  2. Jason Green

    It seems like government is trying to focus on everyone having insurance instead of changing things so insurance was used as insurance should be (ie – not for everything). I don’t claim to be very informed on all the law changes though.

    • Agreed, Jason. The way we consume health services (and insurance) is the problem. Requiring everyone to carry insurance is not necessarily a bad thing — insurance is an economically sound principle.

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