Editor's Note: This is the first post in a three-part article series. In case you missed it, you can read the first post here.
Increasingly, Americans cannot afford our healthcare system. One out of five dollars spent in our economy is on health care. Spending this much money on health care is a major reason why we are stuck in a low-growth economy.
The first of this three-part series examined our country’s healthcare crossroads. One road leads to continued high prices with diminished heath benefits. The other road addresses the contentious issues of our health insurance structure and lifestyle choices. If we solve them, Americans will be healthier and healthcare will be more affordable.
This second article focuses on solutions to an insurance and drug industry business model that keeps raising prices without improving our national health.
Why insurance and drug prices are so high
Insurance companies and drug companies can raise prices because they have the power to do so. Competition is limited, at best. Regulation is limited, at best. Here are four examples:
- Drug companies set their own prices. Drug companies can raise prices unfettered by government price regulation because they have won protected monopolies granted by the U.S government.
- Use of complex pricing to gain pricing power. Consumers are too often buying services "blind" because they cannot understand health insurance prices and complex contract terms and conditions. The classic example is our national malaise of thinking we are getting a fully paid for health service under our healthcare plan, only to have the insurance company use the complexity of the plan to deny payment on part or all of the cost.
- Price discrimination. Insurance companies maximize revenues through price discrimination based on whether someone works for a big company, small company, is self employed or is unemployed. For example, a healthy person working for a major corporation pays a lower price than a healthy person working at a small company. This maximizes revenues since the majority of Americans do not work for large companies.
- Insurance and drug company lobbying. Lobbying has paid huge financial dividends for insurance and drug companies at the consumer’s expense. Medicare is a classic example. The government healthcare system purchases $112 billion of drugs annually. Industry lobbying has successfully won Medicare rules that reward doctors for using more expensive drugs.
Three steps to lower insurance and drug prices
How we buy car insurance provides an alternative model for acquiring health insurance. The key economics that enable competitively-priced, affordable car insurance are:
- Universal coverage. Insurance is a pooling of risk to achieve a lower average cost. The larger the pool, the lower the risks and costs. This is the economic driver behind mandating car insurance to gain a drivers license.
- Intense competition. Intense competition provides consumers with coverage choices that are price- and service-competitive. Marketing competition drives consumer-friendly price designs that can be easily advertised.
- Price regulation. State regulation of the car insurance industry limits unfair pricing, like price discrimination between like-risk consumers.
The three steps that will create this type of competitive system for health insurance are:
- Requiring all Americans to have health insurance. Yes, that means if you are healthy as a horse then you are buying health insurance you might not want. But the fact that you will someday demand health insurance is why everyone has to be in the pool. Doing so will make health insurance more affordable for all.
- Selling health insurance as a national service. Selling health insurance on a national scale will create real competition. This will drive down prices and expand service. Just like in car insurance, individual states can regulate the insurance and drug companies’ prices to promote price transparency and pricing fairness. They can also provide arbitration to address claim denials.
- Legal enforcement against monopoly and oligopoly pricing power. As a national healthcare system, insurance companies would be held accountable to the Sherman Anti-Trust Act. This legislation empowers our government to sue companies that use their size to overwhelm consumers with higher prices.
Two key challenges to insurance industry reform
You may remember Sen. Bernie Sanders (D-Vt.) advocating for a single-payer system during his presidential campaign. A single-payer system is how we buy car insurance, as well as life and home insurance. But a single-payer system confronts two very real challenges.
- Resistance from workers at larger companies. If you work for a large company that pays for all or part of your health insurance, you are already getting a great deal. This is a tax-free benefit. Who wants to lose that? That self-interest blocks political consensus for a single-payer system. One potential solution is to legislate company paid health benefits as tax-free to employees and a tax deduction for companies.
- Claims of socialism. I am on Medicare. So are 55 million other Americans. It works great. Monthly premiums are affordable, and the service is excellent. One form of a single-payer system would be to put everyone on Medicare. There is research that calculates $375 billion in annual savings if Medicare was available to all. Those who oppose this idea think it is socializes medicine by replacing consumer choice with government choice. In fact, Medicare empowers individual choice in doctors and hospitals.
A larger concern is that applying Medicare subsidies to all of us could bankrupt our government. A solution is to provide those under 66 years of age with unsubsidized Medicare. Even unsubsidized, Medicare would probably cost less than our current insurance.
A third complicating factor is that a lot of doctors do not like the lower prices paid through Medicare, and they are opting out of providing service through the system. They can do this as long as they can rely on insurance and drug oligopolies to pay them higher prices. Many doctors will resist this idea based on their own economics.
What it will really take to make healthcare affordable
Adopting a single-payer, competitive business model is proven to deliver lower prices and improved service. Adopting this business model for health insurance is likely to produce similar result.
But doing just this is not enough. The ultimate solution is for Americans to act in ways that promote their health.
The third article in this series identifies the five lifestyle behaviors that Americans must address if they are to gain affordable and universal healthcare.
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