A suggestion for health insurance reform

The lamento is the same everywhere. Health insurance costs are rising, the system is over-burdened, and how can we reform healthcare to create affordable coverage for everyone?

We don't need to look too far north to see how it should not be done - more government intervention, we observe in Canada and Europe, reduces the quality of health care. Why? Because the decline in healthcare comes in several distinct steps, each one a compelling consequence of the previous one. Here is an explanation of the sequence of events that happen when the government increasingly controls the health care system - a study based on current developments in Germany.

Step 1 Insurance premium is dictated by the government Insurance companies are no longer able to determine the premiums according to economic requirements
Step 2 The government increases the premiums, but this increase is based on political considerations, not on economic ones. Health costs (and the premiums that cover them) have a tendency to rise because:
  1. life expectation increases
  2. progress in medicine increases costs
  3. the government has the tendency to use the income from premiums to cover health costs for people who paid little or no premiums (social component)
Step 3 The increased premiums are insufficient to cover healthcare costs The government cannot increase premiums as needed because the necessary increase would conflict with political goals: a higher premium is always considered by the voting public as socially unjust and jeopardizes a possible election majority
Step 4 Cost control, part 1: the insured can no longer choose their plans, they are no longer allowed to change the insurance healthcare provider Coercion to pay for the healthcare plan determined by the government
Step 5 The link between premiums and amount of coverage is severed Now the government can reduce coverage without having to increase premiums
Step 6 Decline of health care coverage combined with constant or even rising premiums Consequence from Step 5
Step 7 Cost control, part 2: reduction of hospital recompensations and doctor's fees These cost control measures become feasible because (1) healthcare coverage is controlled by government-issued scale of fees, and (2) a cap for total expenses for doctor's fees and other healthcare expenses is introduced.
Step 8 Doctors are compelled to increase "efficiency" by working faster and less thorough Healthcare providers have to cover constant or increased costs
Step 9 The number of healthcare professionals declines Healthcare careers become less attractive; doctors move to other countries
Step 10 Cost control, part 3: Healthcare professionals are forced to work without compensation if the cap is exceeded This may sound incredible, but is a fact in Germany: countless doctor's practices close the doors towards the end of a fiscal quarter and are unavailable for reasons of "accounting" or "stocktaking" - for weeks! In reality, of course, doctors simply close their practices to evade work without compensation as their recompensation caps are exceeded.
Step 11 Individual doctors disappear and are replaced by impersonal health care centers By supporting large-size healthcare centers, the government tries to overcome the imminent shortage of points-of-care (Step 10), a shortage that predominantly starts in rural areas
Step 12 Cost control, part 4: Reduction in coverage for drugs and other remedies This means: the insured have to pay an increased share for drugs and other remedies on top of their insurance premiums
Step 13 Patent protection is eased to reduce costs for medication Decreased revenue forces pharmaceutical companies to reduce invenstment in research
Step 14 Pharmaceutical companies lose the ability to invest in research and development General decline of progress in medicine and health care
Step 15 Goverment assumes control over medical research and development Medical R & D is governed by political, not medical, needs, with an eye on election results
Step 16 Now, healthcare coverage becomes fully government-controlled and benefits are provided according to "societal needs". Those not meeting the societal need criteria get progressively fewer benefits "Societal needs" means a high-to-low priority scale for: Government functionaries, the military, active labor force, possibly derated by age. Disabled and elderly are progressively barred from medical treatment (even today, the assigment of kidney transplants is based on these criteria). For the severely ill, palliative treatment is deemed sufficient.
Step 17 Realization of a new health care policy which contains elements of government-sancioned euthanasia Individuals who appear to remain a constant burden for the socialized systems may be disqualified from treatment "in the interest of the younger generations"

Do you recognize any similar trends in the USA? Oregon, maybe? Clearly, this is the wrong direction. Instead, less government intervention is needed, and market forces should be allowed to act in a price- stabilizing manner. How can this be done?

Let us start with the goals for an affordable and universal healh care system.

  1. Health insurance should be available for anybody who elects to be insured. Note that uninsured individuals would have to cover health-related costs from other sources. Society cannot be forced to pay for individuals who voluntarily opt out of the insurance system.
  2. Health insurance should be affordable
  3. Insurance companies must provide a clear contract and adhere to it. Insurance companies cannot - in general - terminate a contract. This is the insurance company's risk.
  4. An insured individual should be able to choose a suitable insurance company and a suitable insurance model. To enhance competition, it must be possible for an insured individual to change the insurance company to convey dissatisfaction with the service. This implies that a large enough number of insurance companies must exist.
  5. Insurance companies must have the potential to be profitable. This is the only feasible way that a higher number of insurance companies is founded.

Clearly, the government has to provide suitable legislature. Should the government control health care? If we examine the state of the health care system in Canada and many European countries where the government plays a major contolling role, we can with certainty say no. A government-controlled insurance - following the demand-supply model - severs the connection between price and demand and therefore either causes an uncontrollable price spin or a dramatic drop in healthcare services and healthcare quality - or both.

It is therefore necessary to examine approaches based on the principle of the free market. The key elements for a free market-based insurance system is (1) competition between potentially profitable companies, and (2) a negative feedback loop between supply and demand (meaning: higher healthcare demand raises the cost - because otherwise demand would rise uncontrollably). How can this be achieved?

Let us review the price-stabilizing feedback mechanisms. First, the insured must have the option to choose between insurance companies and insurance plans - the insured individual decides about benefits and premiums based on offers made by insurance companies in competition for customers. Second, hospitals offer their services in competition with other hospitals and both insurance companies and insurees decide which service to use at what price.

Two important questions remain. What happens with those individuals who did not opt to obtain health insurance, and what happens with those individuals who simply cannot afford healthcare or who would not obtain insurance coverage under today's contracts due to pre-existing health conditions?

First, those who did not elect to cover their health risk generally bear that risk themselves. In some cases, it may even be profitable for the individual to start putting aside money for later healthcare expenses. This person could keep the profits that an insurance company would make. However, the unexpected may strike at any time, and such an individual may find himself in need. Clearly, this risk cannot be assumed by the taxpayer, because this pseudo-solution would discourage individuals from covering their healthcare risk - collectivizing the risk is never a good idea. Instead, insurance companies should accept such an individual - at higher premiums and with a long-term contract. The effect is two-fold. First, the health problem is normally transient, and after that, the insurance company bears the normal risk. Second, the individual has instant access to insurance services and can pay for health care, albeit at a higher monthly price. The long-term contract is a key feature in this component, because a short-term contract may entice individuals to buy insurance coverage, let the insurance company pay for the cure, and then terminate the contract - at the expense of those with a long-term insurance. Again, a negotiable balance between insurance premiums and the term of the contract can be found on an individual basis.

It is very hard for people with pre-existing conditions to find insurance coverage. However, an acceptable healthcare system should provide health insurance even for those individuals. One option is to use transient government funds to introduce people with pre-existing conditions into the system the thereby reduce the insurer's risk of providing those policies.

Finally, there is a small percentage of low-paying jobs (less than 1% of all employees get the minimum wage) which don't allow for a reasonable health care insurance. The solution to this problem will likely be a partial government subsidy. A direct government payment for basic insurance, to be applied towards healthcare premiums only and upon verifiable need and ideally under the terms of a loan, similiar to education loans. Deductibles and copayments apply none the less to maintain the link between supply and demand. Deductibles should be adjusted according to healthy behavior of the individual.

Clearly, this is the opposite of the present trend. However, if we closely observe all trends, causes and consequences, we can already see the tailspin trajectory described in the table above. We already have too much government control. We already bear the consequences of rising healthcare costs and declining healthcare quality. This trend needs to be reversed rather sooner than later.

How this is accomplished is for the voter to ponder.

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