Health Insurance Hypocrisy

Either Obama doesn't know much about the economics of health insurance or he is intentionally being deceptive.

In his summary of the seven hours of discussion at the health care "Summit" on Feb. 25th, he stated that the people want a system that (1) covers pre-existing conditions, (2) and doesn't increase premiums. The second point was implied by his endorsement of a "cap" (price control) on "excessive" premiums. He also continued to argue that an insurance "exchange" would provide more competition in the market place. And he wants this "exchange" to provide a means whereby individuals can get coverage at group rates.

I hope it's obvious to everyone that when pre-existing conditions are covered by an insurance policy, the premiums have to increase. Even group policies are more expensive when pre-existing conditions are covered, but there are offsetting cost elements that makes group insurance cheaper than individual policies even when pre-existing conditions are covered. If pre-existing conditions are covered in individual health insurance policies, buyers are motivated to wait to buy insurance until they have an injury or illness that is very expensive. Without coverage for pre-existing conditions in individual policies, more people are motivated to buy insurance before they have a serious illness or injury. With group health insurance, a lot of the administrative work is done by the employer, which saves the insurance company enough money to offset the cost of covering pre-eisting conditions and to even reduce the premiums compared to individual policies. The bottom line is that any law that requires health insurance companies to provide coverage for pre-existing conditions will increase the cost of insurance for everyone.

As for putting some sort of a "cap" on health insurance premiums to prevent price gouging, that's a blatant form of price controls. If insurance companies can't cover their costs, they will either find ways to reduce benefit payments or they will exit the market.

As for the idea of an "insurance exchange" that will help individuals to get insurance at group rates, that will only happen if some intermediary between the customer and the insurance company provides the administrative functions that are typically provided by an employer with a group policy. It is a contradiction (or oxymoron) to argue that group rates can be provided to customers who buy one policy at a time. If pre-existing conditions have to be covered, there would be some savings in the cost of issuing a new policy (such as no health examination.) But that's not likely to be enough to fully offset the added cost for pre-existing conditions and for having to issue individual policies.

Finally, a government managed insurance "exchange" is certain to be regulated -- which will increase costs for everyone.

Just my two cents based on having worked as the CFO for an insurance company.

Vern

A Simple Solution to the Health Care Problem

First, let me define the "problem".

Health care is too expensive and the cost keeps going up.

Obama and his progressive friends want to solve the problem by providing some kind of "insurance" for about 15 million currently uninsured people and by cutting back on what the government will pay to medical providers. It's beyond my comprehension how anyone can seriously regard that as a solution. This so-called solution will increase demand on the medical care industry while creating pressure to reduce the supply of service providers. Let's see now. More demand. Less supply. Isn't that the definition of what causes higher prices?

Meanwhile, the ultimate consumer of medical services is kept out of the loop.

Need another test? Sure. Why not? I'm not paying for it. Need an operation -- just in case? Same answer. I'm not paying for it. Is another doctor less expensive than the one I'm using? Maybe so, but I don't like to expose myself to another doctor. I'll stick with the more expensive one that I know because I'm not paying for it.

Who is paying for it?

Well for most of us, it's the insurance company selected by our employer.

Wait a minute. I choose my own auto insurance company, my life insurance company and my home owner's insurance company. Why is someone else choosing a medical insurance company for me? Oh, yeah! That's right. It's because my employer is paying for the insurance.

But why? Why don't I pay for my own medical insurance the same as my auto, home and life insurance?

Well, it's because when my employer pays for it, it's tax free. The company deducts the premiums the same as they deduct what they pay me and what they pay for other expenses. But I don't have to pay taxes on the cost of my insurance. And the benefits I get when I use the insurance is also tax free.

What about people who don't have employer paid health insurance? If they buy their own insurance or just pay for their medical expenses as and when they need to do so, they may be able to deduct those medical costs as an itemized deduction. Or they can set up a deductible health savings account and use tax free income from the earnings to pay their medical expenses and insurance.

Either way, most medical care in the U.S. is income tax free and isn't subject to the Social Security tax either.

Why? Part of the reason is because it is popular and because it didn't seem right that taxpayers had to pay income taxes on money used for medical care when the expenses were often such a large and uncommon burden. Also, it goes back to the second world war when there was a freeze on wages. So some employers came up with the idea of giving their employees some benefits because they couldn't give them a raise.

But in time, the system grew more and more popular. Unions jumped on the bandwagon and negotiated more and more generous medical benefits for their members. Eventually, only a very few employers didn't offer company paid medical insurance with generous benefits.

So now, we have a system where the consumer is divorced from direct involvement in the cost of his medical care and where comprehensive medical benefits are the norm. Thus, health insurance pays for small and recurring charges like an annual exam or prescription drugs that we need every month. And few people have any incentive to care about the actual cost of the medical care that is paid by the insurance company. Is it really a surprise that the costs keep going up?

So here is the simple solution to the health care cost crisis.

Eliminate the tax incentive for medical care entirely. No more employer paid free health insurance or medical reimbursement plans or tax free health savings accounts. And no more itemized deductions for medical expenses. Health care insurance won't be deductible, but the benefits received from the insurance company won't be taxed as income. That's the same approach that applies to auto, home and many other kinds of insurance.

But there should be a quid-pro-quo from the government to make up for the loss of tax benefits for health care. The government should be required to provide everyone a tax refund or tax credit to offset the extra taxes they would collect. That would help to buy some genuine insurance for major medical costs. And it would give the insurance industry an incentive to dust off some rarely used major medical policies they haven't been able to sell.

Also, the government should eliminate the state monopoly on not being able to buy health insurance from out-of-state insurance companies. I understand that insurance is regulated by the states instead of by the federal government, and I'm in favor of that. But I suspect the commerce clause in the Constitution could be used to end the state monopoly on health insurance.

Of course, I'm indulging in a fantasy of common sense rather than the reality of a socialist government. Don't lose any sleep over the prospect of losing the tax give-away for health care insurance and benefits because it "ain't goin' to happen" any time soon. And don't seriously believe that any other solution will really reduce the cost of health care.

Just my two cents.

Vern Jacobs