Senate Health Care Bill Increases Premiums for Self-Employed

The Washington Post is revelling in the news that the Congressional Budget Office (CBO) has released an analysis of the Senate Health Care Bill, claiming that "the measure would leave premiums unchanged or slightly lower for the vast majority of Americans" (emphasis mine). They'd like you to stop reading at that sentence and assume that this bill does the job of reducing health insurance premiums for those who need it most. But, who is not included in the "vast majority"?

The answer may surprise you. In fact, in my opinion, this legislation does the least to reduce insurance costs for those who can use the most help: the self-employed. According to the CBO, "the measure would have its most dramatic impact on the individual market. Becuase they are not part of a workforce or other group that can pool its risk, consumers tend to pay more for policies with fewer benefits." Moreover, the CBO concludes that "premiums [in the individual market] would be 10 to 13 percent higher, on average, than under current law, climbing to $5,800 a year for individuals and $15,200 for family coverage."

So, while the Democrats in Congress would like you to believe that this report is a victory for their bill, it's really a huge failure. This bill raises health insurance rates the most for those who need the help the most. And, because the self-employed are the entrepreneurs of America, what this bill really does is to discourage the entrepreneurial spirit that contributes to the greatness of America.

Health (Insurance) Reform is Ill-Conceived

Keith Hennessy, Michael O. Leavitt, and Al Hubbard wrote an Op-Ed in the Wall Street Journal that supports the assertion I made earlier this week. in my post Health insurance is the problem. Since all appearances currently indicate that the so-called Government-Option is dead, many of our legislators are scraping the bottom of the barrel to find the policies that have broad bipartisan support, in hopes of passing some type of health insurance reform before the end of the year. Unfortunately, because of the urgency of passing something quickly (so that we all have time to forget what they've done to us before we have to opportunity to throw them out on the street), some of the provisions are subject to little debate.

The Op-Ed explains exactly how two of these provisions, Guaranteed Issue and Community Rating, "would create a massively unfair form of income redistribution and create incentives for many not to buy health insurance at all." (Not to mention that they would lead to dramatically higher health insurance rates for all of us!) Since their explanation is clear and succinct, I'll let you get it right from the horse's mouth, instead of repeating it.

In addition to having a number of unintended consequences, these two policies completely fail to recognize that the widespread use of insurance is part of what keeps health care costs increasing. Until we can separate health insurance from the issue of health care, we can not really achieve the goal of making quality health care affordable for all Americans, which is one of very few of Obama's (stated) goals with which I can agree.

Health Care: Insurance is the Problem

The current debate regarding the future of our health care system in America is inherently flawed. Many of our politicians and the public at-large seem to be overlooking the biggest contributor to escalating health care costs, and as a result, the proposed solutions (from both sides of the aisle) utterly fail to address the source of the problem. Current attempts to reform health care focus on decreasing the cost of insurance* (or changing the source of insurance). But they fail to recognize that, in general, insurance is the problem! A system driven by insurance is a classic example of a Third-Party Payer System. If you're not familiar with the term third-party payer, let me explain:

A Third-Party Payer System exists any time a person paying for a product/service is different from the person who gets (or demands) it. Health insurance fits this definition nicely: After you purchase insurance, you can go to the doctor and pay some pre-arranged co-pay (or percentage of the cost of the office visit). The insurance company pays the remaining cost of the office visit. Thus, the insurance company is the third-party payer. Now why is this a problem? Well, consider the classic Supply/Demand curve from ECON 101. I've prepared a sample for you if you don't remember the beastie:


From the graph, we have this scenario: The insurance company covers your doctor's office visit for a $10 co-pay. At a cost of $10, you would demand 90 "units" of service. If you were paying the full amount for those "units" of service, you would have to pay the doctor $90. Yet, the doctor probably won't get $90. They'll probably accept some reduced compensation (because of a reduced rate negotiated by the insurance company), say $75 -- your $10 co-pay, plus $65 from the insurance company. Yet even at a rate of $75 in compensation, your doctor is only willing to provide 75 units of service -- not the 90 units you demand. Overall, the system is out of equilibrium (if it were at equilibrium, the quantity supplied would be equal to the quantity you demand, which would be 50 units, and you would pay $50 for it.) Because the system is out of equilibrium, and demand exceeds the supply, the price level increases in an effort to reach equilibrium.

Take this to its logical conclusion: because the price level for health care increases, the price level for health insurance is also rising. (The insurance company pays more money out in benefits, so they have to recoup those costs somewhere, typically in premiums.) Thus, we have an expensive cycle of increasing health care costs, and increasing health insurance costs.

Based on this evidence, I believe that Insurance is the biggest reason for the increase in health care costs. When people pay less than market-value for any service, they'll demand more of it, pushing the price up. (This is a principle that is widely accepted among economists.) Only by making the party who demands services also pay for those services (and giving them a means to do so) can we begin to apply downward pressure to the price level of health care (without compromising quality or rationing care). If we can do this, we will have a true market-based solution to the problem.

What do you think? Is my analysis correct, or is there another cause for high health-care costs? Is there another "elephant in the room"? Let me know your thoughts -- I'm interested in having a constructive discussion of the issue that can lead to solutions.

* Note that I am using the word "insurance" which would generally include all types of insurance policies. The astute observer would realize that my argument really only applies to health insurance policies with very low deductibles, or those whose first dollar of coverage begins with little or no out-of-pocket expenses. While I'm using the all-encompassing word, I mean to refer to the aforementioned insurance policies. For purposes of my argument, the term "insurance" does not include plans that have a high deductible (like catastrophic coverage).