Software Nerd

Thursday, July 12, 2007

Private Healthcare in the US

Even though private employees are typically covered by private insurance, the key governmental interference here has been has been in allowing employer-paid health premiums to be excluded from personal income tax. While the health system is excellent, this has caused costs to rise.

Administrative costs: It has created a system where health insurance is not insurance alone. Instead, it is a complicated third-party administered bureaucracy. Consider the small and routine expenses, like a few doctors visits and drugs every year. The equivalent would be if your auto-insurance company paid for oil-changes, new tires, tire-rotation, and so on. What ends up happening is that a huge bureaucracy is created to administer and control these routine expenses: "sorry Mr. Nerd, we're denying your oil-change reimbursement because it was only due a week from today".

No cost-control incentive: In this type of system, the individual has little incentive to save. Since, the premiums cover all the routine expenses, this works like a buffet: you've paid, now it's all-you-can-eat. If your tires will last another month, but insurance will pay for new ones today, you have a string incentive to get new tires.

Pre-tax allows one to spend more: Spending pre-tax dollars costs employees less, so -- ceteris paribus -- they spend more on the tax-favored items. Imagine a system where the government allowed employee-cars and their maintenance to be a pre-tax perk. Clearly, in such a situation, the money spent on cars and their maintenance would rise because when you're spending pre-tax dollars, things are that much cheaper. This does not happen directly, because companies make the decision. However, if companies gave people the cash that they now spend on health care, and let the employees decide, chance are that employees will -- on average -- choose cheaper plans with less bells and whistles.

Egalitarianism: Most companies offer fairly uniform plan-options to all covered employees. Some bottom-heavy ones, like Wal*Mart, cannot afford to do so, and I'm not sure how far the tax-rules enforce the egalitarianism. [I know that in 401-K plans, the egalitarianism is enforced by law.] The tendency is for companies to offer plans that have more coverage than an employee would rationally buy, if buying individually. The whole ideology that has been bought by the public is that health-costs are something that people should share For instance, when one has a baby, the costs start around $10,000 and go up from there. The base (say $10,000) cannot be thought of as insurance. It was not something unexpected at all. So, the unmarried guy in one cubicle pays part of the cost for the three babies of the married guy in the next. It's a little bit of Starnesville.

HMOs etc: HMOs have got pretty bad press, but they arose as an attempt to reduce costs, while keeping the bad principles of egalitarianism unchanged. Taking the auto-example, it's as if the insurance company opened their own auto-repair shops and would do repairs there, and at their discretion. The problem is that while the previous system had incentives for individuals to spend more, the HMO-type system had just the opposite incentive: for HMOs to provide as little care as they needed to. [Both these incentive operate "on the margin", but that's detail I'm leaving out.]

Lower provider incentives: The "third-party administered" situation also reduces incentives for good doctors. Imagine a private system where there are two doctors: one charges $50 for an office visit and is very slap-dash; patients often have to wait because he overbooks time-slots, his office is a little out of the way. Another doctor charges $70 for an office visit, but he does not overbook, he spends more time exploring things a patient may have forgotten to mention, and so on. In a nutshell, the second doctors is somehow giving some type of extra value to his patients. Now, in a third-party system, the insurance company will not pay a different rate to the second doctor. (Today, some are trying to add some measures of quality... but it's still a small component, and it's some third-party judging the quality.) So, the "good" doctor has to accept the $50 insurance payment. The "good" doctor has one less economic incentive to deliver higher-quality service. Many doctors stayed out of HMOs -- in my experience, the HMOs have the worse doctors. Some confident ones have still stayed out of the PPOs, because they have loyal patients who will pay them over and above what the insurance pays. However, the HMO/PPO system is becoming more pervasive and the economic incentives do not favor such doctors.

Summary: The key change the government needs to make in private healthcare is to give exactly equivalent tax-treatment to employee health-care costs paid for by the employer, as it does to those paid for directly by individuals.

Other problems: There are other problems to the current U.S. system. A quick survey:

* The huge spending on Medicaid/Medicare
* Litigation rules, that raise costs
* FDA rules and drug-effect litigation that withhold options and raise costs
* Licensing rules that disallow cheaper treatment options
* Immigration rules that prevent many doctors from coming to the U.S.

Super-summary: Every problem with U.S. healthcare can be traced back to government controls.


  • Off topic, I see that you posted on the Forum today. Now according to Diana Hsieh's statement, you can't post a comment on Noodlefood. And you're sympathetic to her side! It's absurd.

    By Blogger Myrhaf, at 4:52 PM  

Post a Comment

<< Home