Recently a friend of mine, Miles Dean, got into an email discussion around healthcare with John Laxmi. I found it so interesting and understandable, that I thought you might as well. Here goes.
Miles: The Supreme Court is considering the Affordable Health Care Act, and much discussion is on the question of individual mandates and how these requirements infringe on our rights. Why is it OK to mandate auto insurance, but not health insurance? What’s the difference between cost shifting on cars and accidents, and cost shifting on health care?
To get license plates for our cars each year, we show up at the DMV with a copy of our title, proof of insurance and a paid tax bill. The reason for showing up with a proof of insurance is so that we, or another driver who can’t, or chooses not to obtain some insurance, can’t foist the cost of repairs on other drivers. This is a mandate.
If I don’t have insurance, they won’t let me license my car, and if I get stopped without tags and insurance, it is likely that authorities will take my Drivers License and possibly take my car to some impoundment. This is a mandate with penalties.
I’m sure that Tea Party and Libertarians feel that these requirements are intrusions. OK, what is their solution when some uninsured motorist runs into the side of their car?
With all this “stuff” taking time, the US continues to compare with third world countries when it come to the quality of health care provided.
JL: Automobile insurance is often suggested as an analogy to health insurance to argue that the mandate for the former justifies a mandate for the latter.
The analogy is not apt on several counts, the most important being that health “insurance” is not really insurance at all. The term “health insurance” is an oxymoron.
Insurance is the business which seeks to make profit by setting premiums at a level above actuarially estimated claim payments. Premiums are paid by policyholders who want compensation for things that they themselves seek to avoid by their own actions. The presumption is that a policyholder with a fire insurance policy will do everything to prevent a fire leading to claims. A policyholder with an accident insurance policy is presumed to do everything to prevent an accident because the accident will be injurious to the policyholder even if the insurance policy pays the claim. Even life insurance (which should be called death insurance) is based on the presumption that most people will try to live as long as possible, in their own interest, even though that will postpone the timing of payment of the claim.
The so-called “health insurance” is different from the above types of insurance. People with health “insurance” do not – on their own – minimize or prevent claims. Far from it. We go to healthcare providers as often as we want and the government wants claims paid regardless of our behavior. The insurers resist and try to limit claims, but ultimately, the insurance companies are regulated and dictated to keep premiums low while paying claims with minimal restrictions. While auto insurance is also regulated, auto insurers can depend on the self-interested behavior of the insured. Health-insurers cannot.
This is not how “insurance” is supposed to work, by the original inventors of the concept of insurance or by present-day corporations engaged in the business. In most other forms of insurance, the insurer can make a profit by the presumed behavior of the insured to minimize claims. In health insurance, the opposite is the case. The health insurer cannot make a profit, except to the extent dictated / allowed by regulators.
Otherwise: Great distinction, Lax. Health care is a good that people use/overuse. If you lower the price, they will use more of it. If I get a great deal on auto insurance, I don’t decide to go out and get in a wreck, but if I have good health insurance, I am more likely to go to the doctor for a trivial complaint.
But as you say, it’s taken us decades to get into this mess. Our current system is very inefficient. The convoluted system whereby users don’t pay has created entire industries devoted to negotiating the regulatory morass, e.g., coding (helping doctors get the maximum amount from every visit.)
We need to cut this Gordian knot. What’s wrong with the federal government stepping in to take a role?
JL: We are a nation of laws, and the federal government does not have the legal right to step into this problem.
Automobile insurance is mandated by state laws. While states and local governments may impose such mandates, the national government may not, according to most constitutional scholars.
Also, there’s the broccoli argument. We pass laws to protect others from the actions of a few. Automobile liability insurance is designed to pay for “third party” injuries, not to pay for injury to oneself. State automobile insurance mandates do not require a driver to insure herself, the mandate is only to insure third parties. Health insurance mandate, on the other hand, is being imposed on a person even when and if a person is healthy. The argument is that the person may become acutely sick some day and go to an emergency room and claim benefits. But, the mandate compels a person to buy insurance even if that person remains healthy enough and accident-free never to have to go to an emergency room.
Automobile insurance is designed to protect damage from those driving on public roads. If one does not choose to drive at all or choose not to own a car at all or drives only within one’s own property, the state does not force that person to buy auto insurance.
Otherwise: Do you buy that Miles?
Miles: Not really. I think that the “State Only” argument falls down because the federal government has control over those issues involving Interstate Commerce. Health care is largely provided by hospital chains that are located in multiple states. Insurance, the same. If these providers make available “free care” in one state, or more free care in one state, they try to make it up with better margins in another state. To the extent they are successful, their CEOs and stockholders are rewarded. The federal government has the responsibility to regulate Interstate Commerce. The requirement that all participate is a method for doing that.
JL: Miles, yes, you bring up a good issue, i.e., the national dimensions of healthcare and healthcare insurance.
The interstate commerce aspects of healthcare and healthcare insurance could provide justification for the federal government to play a role. However, that reasoning cannot justify the individual mandate.
While healthcare is a national industry, healthcare INSURANCE is not. Health insurance policies are not portable from state to state. They are not uniform either. They differ from state to state.
As you well know, historically, the insurance industry (all types of insurance, not just health insurance) has not been regulated by the feds; it has been regulated by states through state insurance commissions. Insurance companies spend enormous amounts of money, time and effort to get their policy terms approved by the insurance commission in each of the states in which they sell insurance policies.
In general, local / state regulation is better than federal legislation. State and local regulators are in better touch with local problems and are better suited to regulate activities within their local jurisdictions. However, local and state regulators do no always learn from one anothers’ experiences (in spite of national associations). For example, the National Association of Insurance Commissioners (NAIC) has been around for a long time. The NAIC could help coordinate the way state commissions approach insurance-related issues. But, the NAIC does not have legal standing and has not been able to streamline the regulatory methodologies of state insurance commissions. This is an issue not only for health insurance but also for other forms of insurance. This is one of the reasons insurance policies run to tens of pages of fine print with disclaimers about which provisions apply in which states. This (absence of federal regulation) is also cited as one of the reasons for the financial crisis, namely the role of financial derivatives. Many credit derivatives were structured as insurance products instead of being treated as investment products. These derivatives were then bought and sold as bilateral insurance contracts instead of being traded on the securities exchanges which have elaborate rules and collateral requirements. This is now being remedied by new regulations governing derivatives. Similarly, if the federal government had created an insurance regulator to replace (not duplicate) the state insurance commissions, health insurance would become far more streamlined nationally.
A parallel can be found in the energy industry. The Federal Energy Regulatory Commission (FERC) regulates interstate energy utilities like pipelines leaving state utility commissions to regulate intrastate utilities. This has been working generally satisfactorily.
Regardless of which level of government regulates an industry, regulators must understand the economics of that industry. As I mentioned earlier, “health insurance” is a misnomer. The firms in the business should be called “healthcare mutual associations.” Essentially, they pool large numbers of participants, use the collective bargaining power to lower the cost of medicines and service and use their collective clout to expand the number of providers (i.e., doctors, nurses, attendants).
Otherwise: By the way, the CEO of one of the auto insurers wrote an op-ed in the New York Times last year called “Regulate Me, Please,” asking the federal government to step in to replace state by state regulation and NAIC.
Miles: If there was a willingness to deny health care to those who don’t have insurance, then one could make the case that insurance or no insurance should be left as a voluntary decision, but in the absence of such, I don’t want to always be paying the cost shifting burden for those who choose not to have health insurance.
JL: Fair point. None of the above arguments is to deny health care for all citizens.
We could, as a society, decide that in order to provide health insurance to everyone, we can live with a highly regulated health-insurance industry. But, universal healthcare could be achieved more easily by the government using our tax dollars to buy insurance for those who cannot afford it, instead of mandating every citizen to buy insurance. In the end, the social objectives would still be met but the constitutionally guaranteed freedoms would be preserved.
If the federal government had chosen to impose a “tax,” citizens could not refuse. But, the U.S. Congress did not have the gumption to impose a tax for health care. Instead, it chose to dictate that citizens purchase an insurance policy.
Otherwise: Not only do we not have the gumption to tax, but we don’t have the gumption to take away tax loopholes, which would change the way people view health insurance. I think the problem is there should be no such thing as untaxed employer-provided healthcare, period. Employers began providing health care to circumvent wage controls. Now people have come to expect it. But there is absolutely no way that employer-provided healthcare should be an untaxed benefit. That is hugely discriminatory against people on the lower-middle rungs of the healthcare ladder, who must pay with after tax dollars and who must pay rack rate.
JL: With all the faults of our system, our healthcare system is a lot better than most third-world countries and is also better than many first world countries.
Otherwise: Not sure about that one. I have lived all over the world, and everywhere I have lived the local healthcare system promoted the idea that it was best. That is bloviating by pompous medical people. In my experience, excellent health care is available everywhere. When I retire, I will not hesitate to go to Mexico or India for an expensive procedure.
Our healthcare is ruinously expensive. On a value basis, our healthcare is far from the best in the world. In Ecuador last week, a member of our party got four hours of medical care and two CAT scans at a private hospital for $200. Our costs are ridiculous because of the monopoly system imposed by the AMA, in part because hospitals have engaged in an arms race and have huge overcapacity in the system, and in part because doctors overprescribe because of big pharma marketing and sales. Doctors from all over the world flock to the U.S. because this is where you can make the most money. I am sure there are other reasons as well. That excessive cost is why the number of people covered by health insurance has dropped from 75% in the late seventies to 50% today (stats from memory, may be a little off.) It would be even worse if large employers did not use intermediaries who squeeze providers for discounts.
Miles: Part of the high cost is also the cost of profit-making intermediaries, i.e., the insurance companies. According to Fortune 500′s 2010 list, the top seven health insurance companies in terms of overall revenues include: UnitedHealth Group – $87 billion, WellPoint – $65 billion, Aetna – $34.7 billion, Humana – $30.9 billion, Cigna – $18.4 billion, Health Net – $15.7 billion, and Coventry Health Care – $13.9 billion. The average comp of the CEOs of those organizations was $10.5 million last year.
JL: We have a lot of potential ways to improve and reform the system. The sky will not fall if the Supreme Court declares the individual mandate unconstitutional. There are many other reforms in this sector that we have barely scratched the surface of. The healthcare sector is one-sixth of our economy. How we regulate this sector deserves very careful deliberation.
Otherwise: One-sixth of the economy. I think that says it all. Thanks guys.