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Health Care In The U.S. Is Gravely Ill

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Health Care In The U.S. Is Gravely Ill by Michael S. Falk, CFA, CRC

The following is based on chapter four of Michael Falk’s new book, Let’s All Learn How to Fish… to Sustain Long Term Economic Growth, available from the link above.[i]

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

We really do not have health care as much as sick care since the focus is on treatment versus prevention. But our sick care is in serious condition. For those individuals who do not have employer coverage – which is not a small number – its condition is critical. While I am steadfast in my thoughts on how a healthcare system could be designed and work for everyone, the current condition of our sick care is making me sick.

We – yes, the plural we – chose to remain in a multi-payer system over a single-payer system. A multi-payer system with some forms of risk rating and individual responsibility is proper. As I wrote in my book:

Why make the individual responsible? Consider… car insurance; the driver’s prior experience affects the cost of insurance. If individuals are allowed to eat and drink as much as they want, not exercise, smoke, and participate in dangerous activities (such as skydiving or motorcycle racing) yet have the same costs as their healthy contemporaries, then why not just enjoy ourselves[ii]? Such a free-rider scenario increases the costs for everyone but less so for the individual free rider.

Without a multi-payer system, we will experience what’s known as the “Ringelmann effect” in spades. This effect essentially says that when everyone is responsible, nobody is responsible. For example, if younger, healthier individuals don’t buy health insurance, then costs will rise for everyone who purchases coverage since usage rates will rise based on only relatively older and sicker buyers.

Let’s consider how the younger, healthier individuals were or were not incented to buy coverage:

  1. There’s a penalty if they don’t. But, the penalty for not buying coverage is significantly less than the cost of the insurance coverage, and collection is no simple matter for the government since the IRS cannot assess and collect on the penalty.
  2. The maximum disparity in insurance rates was capped at 3-to-1 to help subsidize the costs of older individuals. Consequently, this meant that younger, healthier individuals face artificially higher costs should they purchase coverage.
  3. Those who don’t have coverage and need care could obtain services and coverage without any additional penalties or historical coverage costs.

The not-so-shocking result is that too few young, healthy individuals purchased insurance to help subsidize the insurance companies for those older, sicker individuals with coverage. Hello, adverse selection[iii]. So, some (private) health insurance companies no longer wish to be part of state health exchanges – goodbye, adverse selection – and the numbers of these insurers will rise if the alleged financial losses are real. Whether or not the insurers’ claimed losses are real is immaterial, the result is reductions in choice[iv] on the exchanges and higher costs for everyone. On a separate note, does it seem odd to require someone to do business with a for-profit, private business? After all, the same businesses don’t seem to be required to offer coverage on the exchanges.

While the off-exchange, private insurance plan market is “open” (and pricey), the federal subsidies for low-income individuals are only available from plans offered on state exchanges. Cue the increased demand for and a significant step towards a single-payer system. Assuming that single-payer coverage would become mandated, how would the system be financed? And, how would the Ringelmann effect not become bigger or, worse, intractable?

So, if single-payer is a less than good answer – and it is – then how does our sick care recover from its current condition? Here are two steps that seem to make sense:

  1. Raise the penalties of not having coverage to be similar to the costs of having coverage.
  2. Give the IRS or state-taxing systems an ability to collect penalties if and when appropriate.

Of course, these simple two steps only make sense if the current system’s structure is desirable, which it is not. Nevertheless, this assumes that individuals can afford today’s sick care coverage, which is not a safe assumption. Sadly, this augurs – at least directionally – for a single-payer system. It’s enough to make conspiracy theorists think the government planned this all along since the incentives to bolster sign-ups were nonsensical, dysfunctional and destined to fail. Should we all just swallow hard (gulp!) and accept the necessary tax increases to “pull the plug” on today’s sick care system?

Or, should we all shout enough, pull the plug on today’s sick care system and begin a proper dialogue on a multi-payer health care system? Here’s what I wrote in my book:

Read the full article here.

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