Monday, December 13, 2010

You can't fool human nature

Health care mandate disrespects law of supply and demand

Runaway health insurance premiums have put Massachusetts back in the spotlight and our Beacon Hill innovators are poised to take on the cost of this unique-in-the-nation health insurance mandate.

Because it’s the blueprint for the national health insurance law, which is gearing up for its debut in 2014, politicians are beginning to panic over the uncontrolled spiral of health insurance premiums. The IRS pegged Massachusetts’ small group family plans as leading all 50 states, coming in at more than $14,000 per year.

One has to marvel at the surprised looks on our legislators’ faces when confronted with this news. After all, the Massachusetts health insurance mandate passed in 2006, similar to the national health insurance mandate passed earlier this year, contained no cost cutting measures, other than the hope that if everyone has health insurance the cost of it would go down.

That flies in the face of Economics 101.

Supply versus demand

The first concept I learned in Econ 101 was supply versus demand. In this fundamental economic model, price remains steady as long as supply for a product or service equals demand for the same product or service.

If supply begins to exceed demand, the price of that product or service starts to decline in a Mother Nature-like adjustment to bring the system back to equilibrium. The reverse applies when demand outstrips supply, with price inflating until supply and demand once again return to homeostasis.

Has anyone new to Cape Cod tried to find a primary physician lately?

Why is there such a scarcity of general practitioners these days?

At a time when the ranks of general practitioners is stable or in some areas shrinking, Massachusetts mandated that everyone purchase health insurance. Since most of the previously uninsured folks are unable to afford an insurance plan that allows one to go directly to specialists for treatment, they are forced to seek out a primary physician.

Demand: Increasing

Supply: Not increasing

Price: Inflating

Two more issues significantly increase demand on our health care system.

Out of sight, out of mind

I’m old enough to remember the classic indemnity health insurance plans. In the 80’s, our plan had a $250 individual deductible and a $500 family deductible. After paying the first $250 of health care expenses for one of our kids, for example, that child would then be on 80/20 coinsurance. Spend another $100 on the same rugrat and $80 would be refunded. The same coinsurance would be in place for everyone in the family once we forked over a total of $500 for the family unit.

I hated this system because we fronted all of the money and had to fill out reimbursement forms to recover our 80%. Invariably, the insurance company would delay repayment by asking for further information or pay less than 80% claiming that the doctor’s charges exceeded the “customary fee” for the area.

But I can tell you one thing. I knew exactly how much our health care cost. We didn’t rush to the doctor every time someone sneezed. A lot of people didn’t rush to the doctor when suffering symptoms of a serious disease either. That scenario gave birth to health maintenance organizations (HMOs).

The theory that catching a malady early is cheaper than treating it after it becomes acute or chronic does hold water. To encourage people to be proactive about their health care, HMOs created the concept of a primary physician, essentially an agent that triaged a patient’s situation, treating minor cases, and referring more serious ones to specialists.

A good idea that has a fatal flaw: The hook to encourage people to join these HMOs, knowing that they’d give up a great deal of freedom by being forced to funnel their health care through a primary physician, was the concept of a co-pay.

The first HMO we subscribed to offered a $10 office visit co-pay and no individual or family deductible. Wow, we thought. Now we can go to the doctor every time a kid sneezes.

In spite of the fact that we received an accounting of the actual cost of our office visits, it didn’t matter. That we paid $10 to see a doctor was the only thing that mattered. Those printouts were quickly filed without having been scrutinized.

In a way, the pendulum started to swing too far. After awhile, we stopped getting the detailed accounting of actual costs and we became blind to the real costs of health care. It plays to human nature to ride a roller coaster over and over until you vomit if you have an all-you-can-ride pass; something that would never happen if you paid by the ride.

High costs beget even higher costs

The other side effect of Massachusetts’ mandated health insurance law stems from the so-called minimum creditable coverage (MCC) clause. It’s not enough to subscribe to a health insurance plan in Massachusetts. The plan must comply with the minimum standard of covered items as determined by the state legislature. If a plan falls short of offering every bell and whistle listed in the MCC, it does not meet the mandate and the policyholder is punishable by a fine of more than $1,000 ($2,000 if married).

The premise of forcing everyone onto a blue ribbon health insurance plan is pure socialism. And I don’t mean this in a disparaging way. By making a 25-year old male pay for a policy that includes coverage for in vitro fertilization, couples who actually need the service will pay less for it. You can make up your own mind about this attempt to spread the wealth.

Here’s where this idea of MCC drives demand. Prior to the Massachusetts health care mandate, people bought affordable insurance from a number of sources for far less than the $14,000 per year that I mentioned earlier. No, the plans weren’t rich, for sure, but at $400 or $500 per month, they provided a fallback in case of a catastrophe.

At that price, and because of the deductibles these plans place on their policyholders, people watched their health care spending and thought of the insurance similarly to how they thought of automobile insurance. You don’t decide to crash into another car just because you’re insured.

Now that these low cost policies are unavailable in Massachusetts, we are all paying over $1,000 a month for a family plan (before your employer’s subsidy, if you have one). Some of my clients are paying $2,000 a month.

You can’t fool human nature. At $400 or $500 per month, a health insurance plan was a necessary cost of living most people could deal with. When paying upwards of $2,000 a month, you’re damn well going to use it. This generates more demand on our health care system. In effect, the high cost of premiums is directly responsible for premiums going up even higher. Where does it stop?

Conclusion

I offer these observations to the people who write laws in this state and to their advisors. In all of the articles about how to control the ever increasing cost of health care, nowhere do I see simple suggestions for balancing supply versus demand, such as revamping the MCC with the recognition that not everyone can afford a Cadillac.

A recent article stated that reducing the cost of our health care delivery system is “a task of mind-boggling complexity requiring cooperation among doctors, hospitals, insurers, regulators, state lawmakers and the administration.”

I tend to disagree. Reducing the cost goes back to following the tenets of Economics 101. Implementing government control over the cost of our health care system, on the other hand, will prove to not only be mind-boggling but unwise.

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Other articles I've written about health care issues:

3-step process to single-payer health care
America's consolidation of healthcare by outlawing options (ACHOO)
Health care reform: This Edsel just might fly

Copyright 2010 Randy Hunt

2 comments:

  1. You say: "A recent article stated that reducing the cost of our health care delivery system is “a task of mind-boggling complexity requiring cooperation among doctors, hospitals, insurers, regulators, state lawmakers and the administration.”"

    The way I would like to explain it to Ms. Murray is to suggest she write a law to fix the price of tomatoes and see what it does to the price of marinara sauce. The problem is that the people that write out laws in the state have absolutely no business background or experience. Maybe put it to her in a food analogy.

    ReplyDelete
  2. Randy, you are brilliant again. However, you can expand this to include tort reform as it drives costs up too. Cheers, D

    ReplyDelete

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