Saturday, December 18, 2010

Health Care and Choice

Shortly before the passage of new health care bill the Washington Post reported a stinging, sustained broadside against health insurance rate increases by President Obama.

A health insurance industry spokesman was quoted as saying “All health plans are in the same situation in trying to deal with the steadily increasing costs in the delivery system, which are not sustainable.” In other words the health insurance industry is only responding to cost increases beyond its control.

To the individuals and families who pay the premiums for insurance, their premiums cover costs that include the delivery system and the burden of supporting separate industry bureaucracies with a separate set of transactions. Outside of the health care industry in other sectors of the economy, bills tend to be a two party transaction between a customer and a vender, but seldom so in health care.

One illness or injury starts a billing shuffle through separate bureaucracies at hospitals, laboratories, clinics, imaging centers, Preferred Provider Organizations(PPOs), Independent Panel Association’s, but also private insurance companies, independent billing agencies and bureaucracies at Medicare, Medicaid, Social Security, workmen’s compensation or the Veterans Administration. Medicare, Medicaid and workmen’s compensation are federal programs with federal bureaucracy, but also administered by the states through 50 separate bureaucracies.

Private insurance companies accept premiums paid into a risk pool that generates a reserve fund to pay losses. Insurance companies analyze actuarial data on accidents, sickness, disability and other risks to construct probability tables that will determine the premiums that will generate reserves to pay future losses.

Otherwise though insurance companies do not provide health care; that is left to doctors, hospitals and medical venders. All those separate entities in medicine have an incentive to bill higher amounts; all the insurance companies have an incentive to pay lower amounts. The two sides maintain bureaucracies with staff to argue and negotiate over the bills from millions of transactions nationwide.

But we can ask our selves what does the insurance industry do that the health care industry cannot do for itself?

The actuarial data for health insurance policies comes from the medical industry so they could employ their own actuaries and do the necessary risk assessment without insurance companies. If the medical venders were organized together as regional or metropolitan entities setting their own premiums to provide their own health care, then millions of transactions would be eliminated, along with the perverse incentives to overcharge and underpay.

If the health care industry was organized with its separate components brought together into comprehensive health care providers, the insurance industry would be unnecessary. It would become a redundant component.

You may recognize the combination I mentioned above as an HMO, or a health maintenance organization, but that is the rub. Many Americans have the idea, aided by the health insurance industry, that health maintenance organizations restrict choice or might deny treatment, even though they have the facility and staff to provide it.

The private insurance industry exists because enough people believe private insurance gives them more choices and better choices. It is a very expensive choice, which is why President Obama is going easy on the health insurance industry when he attacks their increase in premiums. If he was going to get tough he would tell us how we can rid ourselves of the health insurance industry.