Health Insurance Reform - New Solutions

Before we turn health insurance reform onto another huge government bureaucracy, lets look at some basic principles. We will start where nobody seems to start, with the question: How did health care get so expensive? Add to that: Why does the cost go up faster than inflation while new technologies in other industries drop in price?

To understand both of these we can make an imaginative leap and suppose that all health insurance was outlawed. That's right, what would happen if nobody was allowed to buy health insurance - if everyone had to pay for every bit of their own medical care? You don't need much analytical ability to see that prices would immediately begin to fall. People would search for the cheapest decent doctor or hospital and so to get that business those hospitals and doctors would have to compete on price.

Now, I'm not suggesting that we make health insurance illegal, but when we look at it that way we clearly see that much of the current cost has to do with the fact that after people satisfy their small deductibles (in January for most), they have no real concern about the price. In fact, ask people what their various hospital stays and medicines costs and most will tell you they don't even know. "It was covered by insurance," they'll answer.

This system in which prices become irrelevant to the actual consumer allows for the medical industry to be wasteful and non-innovative in reducing costs. After all, they just bill the insurance companies - and the more they do to or for a patient, the more money they make.

In addition to that, when people don't directly pay for something, they tend to want more of it. If you're not paying, why not go to the hospital for that sniffle? Now, if the cost to the consumer gets close enough to free, demand grows even more. I have seen friends take their children to the hospital or doctor dozens of times per year, in part because they had Medicaid to pay for it all.

Who wouldn't line up for something valuable and free? The only way to realistically limit that demand is to ration care, directly or indirectly. This is why in countries where there is government-run health care there are long waits for many procedures. No country can afford to give people unlimited anything. It has to be paid for by someone after all.

This suggests that if we do have a government system for all those who don't have private insurance, it will be much more expensive that anticipated and there will be long waits. We cannot afford anything better than that if we give away health care. One way to avoid that problem then is to make sure that people pay. Even low-income families should pay for part of their health care.

If people are struggling financially and really need help, it is better to give them general welfare so they still have to shop and make decisions about health care. Look at the example of food right now. With a welfare check or food stamps people still price shop because they can get more or spend less and use the money for something else. That, in turn, means that Wal-Mart and other grocery stores still try to lower prices to attract these customers. In other words, because the decision making and cost is directly on the consumer, the market is not distorted so much like our current medical system is.

In any case it is silliness to think that those who spend a couple thousand dollars annually for groceries and perhaps even a thousand dollars for cable television cannot pay the first thousand of their medical bills each year. In addition to that we should continue to pay a portion (maybe 20%) of costs up to a certain amount. In this way we have a stake in the price of services and we naturally limit our demand for care that may not be necessary.

In fact, while politicians are speaking about high-deductible policies as though they are a crime, that is exactly what we need to control costs. This is not an argument for or against health insurance reform as a government matter. That's a separate issue. But if there is a government insurance plan, we should at least make it something that the economy can support and that doesn't result in long lines for effectively rationed health care.