Sheldon Richman at the Foundation for Economic Education on ‘healthcare reform that isn’t’.

by Sheldon Richman

11 Sept 09 | FEE

Let’s begin by noting that the so-called health-insurance companies deserve little sympathy. As they exist today, they are very much creatures of the State. In fact, there’s a sense in which it can be said that if we didn’t have health-insurance companies, we wouldn’t need them.

Economist William Niskanen writes, “We did not have a health care crisis in 1940 when few people had health insurance.”  In fact, that year only 10 percent of Americans had such insurance (henceforth imagine ironic quotation marks). But World War II was a bonanza for the industry, especially Blue Cross Blue Shield. Government economic controls prohibited firms from attracting or keeping workers with higher wages. So someone hit on the idea of supplementing wages with noncash compensation, specifically, health insurance. The government said okay and the rest is history. Employee insurance was untaxed, creating a bias toward employer-provided health plans. If an employer bought a $5,000 plan for a worker, that worker got the full $5,000 benefit. But if the employer paid the worker $5,000 in cash, the worker would pocket $5,000 minus federal and state taxes. He’d need more than $5,000 to buy a $5,000 policy.

The government intervened in another way. According to Niskanen, “[T]ax and regulatory preferences for the Blues displaced the older form of commercial indemnity policies with policies providing cost-based reimbursement.” This act of social engineering—arrogant politicians and bureaucrats always think they know better than the collective wisdom stimulated by the free market—had huge (and presumably) unintended consequences that account for many of our current problems. Under the old-style indemnity plans (which individuals shopped and bought for themselves), contracting a catastrophic disease triggered a fixed insurance payment—to the policyholder—according to an agreed-on predetermined schedule. The money was hers. If she could find services that cost less than the insurance payment, she pocketed the difference. Of course, this provided an incentive to be cost-conscious in buying medical care. Homeowners’ and other types of insurance still works like this.

In contrast, under the Blue Cross Blue Shield model pushed by government—which began not as insurance but as a prepayment plan for doctors and hospitals—the policyholder never sees a dime. Treatment simply sets in motion a process in which the insurance company sends a check to a hospital, lab, or doctor. No treatment, no payment. The individual has no reason to shop around (there can be great variation in prices), or to question whether a test or procedure is necessary, or to even ask what anything costs. What’s the point? It would seem only to save the insurance company money.

The insurance companies take this into account when negotiating with providers and employers who buy coverage on behalf of their workers. A key problem here is the disconnect between cost and benefit (which would be aggravated by the Obama plan). In most cases employers pay for their workers’ coverage with money that otherwise would have largely gone into cash wages. To the workers, it looks like free (or pretty cheap) coverage. Because of competition among employers and the rigged tax laws, coverage has become more luxurious, including services for situations that are not even insurable. A good example is maternity benefits. Pregnancy is not a disease, is largely preventable, and usually results from a volitional act.  From a true insurance perspective, it’s ridiculous to expect coverage. (It would be like insurance against gaining weight.) The same could be said for many other “conditions” that are covered today. Well-baby care? Is that insurance against a baby’s being well? (Orwell was right: corrupt the language and one can get away with anything.)

State Mandates

To make matters worse, state governments have mandated that all “basic” policies include coverage for situations that are either uninsurable or unlikely to affect most people. Most people shopping for insurance in a free market would never buy this coverage because it would unnecessarily increase their costs. If they decided later on that they wanted, say, chiropractic or acupuncture, they would pay for it out of savings.

Writing in The Freeman, John Seiler reported that the Congressional Budget Office estimated that “for every 1 percent increase in the cost of insurance, 200,000 to 300,000 people nationwide lose their insurance.” He adds, “State mandates keep about one quarter of Americans from getting health insurance, according to John C. Goodman, president of the Dallas-based National Center for Policy Analysis, a free-market think tank.”

In 2007 the average number of mandates in the United States was 36, with a high of 62 (Minnesota) and a low of 13 (Idaho). Might this have something to do with the size of the uninsured population? The Great Humanitarians in Washington seem strangely incurious about that.

You and I could evade the mandate plague somewhat if we were free to buy policies offered in low-mandate states. But—under the federal  McCarran-Ferguson Act—we aren’t free. That 1945 decree shelters the states—and the insurance companies—from the interstate competition that might have reined in their regulatory regimes.

Do we have mandates because we are too dumb to know we need coverage for chiropractic, acupuncture, social workers, alcoholism and drug-abuse treatment, marriage counseling, hearing aids, toupees, contraceptives, and so on, ad infinitum? No. We have mandates because the providers of those products and services wined and dined enough state legislators to get these special-interest bills enacted. The insurance companies don’t mind: They can recover the cost from people who don’t realize they are paying for the “free” (or cheap) “services” because they think their bosses are paying for the coverage.

State regulation also sets up barriers to entry in the insurance industry. As a result, each state is a walled fortress that protects established insurance companies from competition. This doesn’t make their profits spectacular (see this), but it creates safety and stability, which are worth something.

No Free Market

So no sympathy here for these state creatures of privilege and protection. We can safely guess that today’s companies look nothing like companies would look in a free insurance market. The federal and state governments—to some extent haphazardly—have almost completely determined the nature and shape of the industry, giving us a classic government-sponsored cartel.

But…

None of this justifies what President Obama and his ilk call healthcare “reform.” They merely propose more of what we already have: more “free” insurance for more people, more coverage for more uninsurable situations, lower out-of-pocket costs—all of which means less cost-consciousness and higher prices, which seeds the ground for price controls and rationing. In the name of creating competition, Obama would further suppress it, rather than dismantling the current anticompetitive regime.

The solution to the problems caused by what I’ve described above cannot be to encourage people to believe, childishly, that they have a right to health care—that is, a right to other people’s labor—or that  resources are not scarce. Yet that is what Obama & Co. are doing. A core principle of their scheme is that no one could be turned down for insurance because they are already sick. That’s not insurance; it’s welfare, with the costs to all of us disguised and the politicians unaccountable.

The other night Obama also demanded that insurance companies cover preventive services—physical exams, colonoscopies, mammograms, etc.—for free. He also insists on low caps on out-of-pocket expenses and unlimited lifetime payouts.

But none of this is free. Someone will have to pay the doctors, clinics, and hospitals. Who? The answer is: the insurance companies. Where will they get the money?

One need not sympathize with the insurance companies to see that it it sheer demagoguery for Obama & Co. to rail sanctimoniously against them for not giving away their shareholders’ and employees’ money on demand. They’re businesses not charities. If the “reformers” think they can run a better company, let them try—in the free market. (That company executives favor most of Obama’s plans tells us that forcing people to buy insurance is worth more to them than the coverage mandates.)

By all means, strip the insurance companies of the privileges governments now provide. Throw them into the free market and let them fend for themselves. Open the gates to new entrepreneurs and innovators. But do not expand the rotten system that increases and hides costs while leading people to believe that medical care is manna from heaven. Pandering to people’s wish for free services ought to get a politician—even a president—hooted off the stage.

Sheldon Richman is the editor of The Freeman and “In brief” at the Foundation for Economic Education, senior fellow at the  Future for Freedom Foundation, research fellow at The Independent Institute. He is a contributor to The Concise Encyclopedia of Economics and blogs at http://sheldonfreeassociation.blogspot.com.

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