Why Medical Insurance is a Major Contributor to Healthcare Costs

Health Insurance (Medical Insurance) is one of the major contributors to high healthcare costs.  If it weren’t for insurance, many of our medical costs would be much less.

There are three categories of insurance:  property and casualty insurance, life insurance, and health insurance.

Property and casualty (P&C) insurance pays you when some specified unlikely event happens.  Some of these unlikely events are:  your house burns down, your car crashes, a neighbor slips on your icy front steps.  This is good insurance because its costs are relatively low, and if the unlikely event happens, you could be severely financially impacted without insurance.  By making small monthly payments, you insure against a large, although unlikely, loss.  You do not want to collect on P&C insurance.  You would rather not experience the unlikely event.

Life insurance, on the other hand, pays when you die – an event that is guaranteed to happen.  Although it is eventually certain, the date on which it happens is uncertain.  Insurance companies calculate the premiums you need to pay based on their calculations of when you will likely die.  You have no choice about dying, but you hope that it will be a long time before you collect on life insurance.  Life insurance is good for replacing lost income or adding liquidity to your estate.  If you can afford it, and need it, it is good insurance.

Health insurance, on the third hand, insures against things that are guaranteed to happen and happen frequently.  It pays for regular doctor visits, prescriptions, major and minor surgeries, etc.  You know that you will collect benefits from health insurance.  In fact, if you have health insurance, you make sure that you collect as many benefits as you can without risking pain or loss of life.  It is the only class of insurance that the insured wants to collect on.

Health insurance companies charge the same premium to everybody in the same class.  If you have group coverage with your employer, you pay the same premium as all your coworkers.  Naturally, you want to get the most for your fixed premium, so you get that annual checkup, take the kids to the doctor at the onset of a cold, have an x-ray if you stub your toe, etc.  If you actually had to pay out-of-pocket for these expenses, you might decide that some of them weren’t worth it.

Health insurance is bad insurance because the people who receive the services don’t pay for the services.  Health insurance companies pay for your doctor visit at very little extra cost to you.

Let’s look at two research-intensive industries:  consumer electronics and pharmaceuticals.  Although both invest in lots of research and have relatively inexpensive costs of manufacturing, electronics keep getting cheaper and drugs keep getting more expensive.  Why?  Because the users of electronics have to pay for the products themselves.

When you buy a television, you have to decide just how fancy a TV you can afford.  You shop around for a good price.  Stores who sell TVs have to compete for your business and keep their prices down and their costs under control.

When you go to the pharmacy to fill a prescription, you don’t ask what it will cost.  It doesn’t matter what the drug company charges, because you will pay the same small amount regardless of the price.  You choose your pharmacy for convenience, not because of their prescription prices.

When you have the flu, you don’t say “I know I will eventually get over it, and the doctor charges $250 per visit, so I’ll just stay in bed and drink water.”  No, you go to the urgent care clinic and see a doctor.  You don’t shop around.  You don’t even know what the doctor will be paid.  You don’t care; it’s taken care of.

Now the evil of insurance is spreading to veterinary medicine.  Both veterinarians and insurance companies are pushing the idea.  A pet owner might balk at paying $700 for a pet’s operation, but they will willingly pay $30/month.  Now pet healthcare costs can increase because the owners of healthy pets will pay the bills for the owners of sick pets, just as in human healthcare.

Veterinarians will charge more and make more.  Insurance companies will make profits, and pet owners will get the infrequent expensive operation paid for by insurance.  What a deal!  Just wait fifteen years.

Without health insurance neither doctors nor drug companies could charge as much as they do now.

What about the high cost of medical school?  Don’t doctors have to charge more to pay for that?  My answer is, if doctors want to see you more often than in life-and-death situations, they will have to charge less.  Maybe there will be more nurse practitioners than doctors.  Maybe pharmacies will keep a doctor on salary to attract customers and charge a small examination fee.  In any case, the market would work it out.

An engineer with a PhD requires about as much education as a general practitioner doctor.  You don’t have to be any smarter to be a doctor than an engineer.  However that engineer thinks that $100,000 per year is an adequate salary.  A doctor would probably make about the same.

You might have fewer doctors or lower-cost education.  You might have fewer drugs or more natural remedies.  Patients might go to nurses rather than doctors.  You don’t know all the possibilities that could happen if market forces were at play.

I do think that catastrophic health insurance is good.  This insurance only pays for events that are less likely to happen, but would be a big financial burden.  Examples are open heart surgery, cancer treatment, car crash injuries.  This is insurance that nobody wants to use.  It is good insurance, and it could be affordable.

People I know in the healthcare field tell me that insurance companies don’t pay them enough.  They say that insurance companies, in their evil pursuit of profits, are paying them a pittance.  They bill $195 for a visit and only get paid $175 by the insurance company.  They should be glad that the patient isn’t charged $175, or they would have fewer visits.

So what can we do about this problem now?  Unfortunately, I don’t have the answer.  In the case of veterinary medicine, the insurance scam is just beginning, and we can refuse to buy it.  In human healthcare, the disease may be too advanced to cure.  The payments doctors expect for service have been carved into stone.  Drug companies are entitled to high prices for new drugs.  The whole cost structure of healthcare has been built based upon the costs being paid for by healthy people rather than the people actually receiving the care.

Here is where you, dear reader, can contribute.  What do you think can be done?  I may not post every comment, but I will post the best ones.

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Wednesday, October 27th, 2010 Healthcare 4 Comments

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I am not a registered financial advisor. I only offer opinions, and sometimes these opinions veer off at weird angles from conventional wisdom (That's probably why you are here). My advice is, "Don't take my advice." Read my sidelong glances at economic issues and form your own conclusions.

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