Health Care Economics

Posted by PITHOCRATES - January 20th, 2014

Economics 101

Because Obamacare Insurance pays for everything Under the Sun it is anything but Insurance

Do you know what the problem is with health care?  Insurance plans that give away free flu shots.  Not that flu shots are bad.  They’re not.  And it’s a good thing for everyone to get one every year at the onset of the flu season.  For it does seem to limit the spread of the flu virus.  It’s because we get a flu shot every year is why insurance shouldn’t pay for it.  Because we know about this expense.  And we can budget for it.  Just like we can budget for our monthly cellular bill.  Which is in most cases more than ten times the cost of one annual flu shot.

When Lloyds of London started selling marine insurance at that coffee shop they were selling insurance.  Not welfare.  Losing a ship at sea caused a huge financial loss.  And shippers wanted to mitigate that risk.  So every shipper paid a SMALL premium to protect against a LARGE loss.  A POTENTIAL sinking and loss of cargo.  Not every ship sank, though.  In fact, most ships did not.  Which is why that little bit from everyone was able to pay the financial loss of the few shippers that lost their ship and cargo.  But that’s all that Lloyd’s of London paid for.  They didn’t pay a dime to shippers whose ships didn’t sink.  No, those shippers paid every cent they incurred (crew, food, rum, etc.) to ship things across those perilous oceans.  Because they could expect those costs.  And they could budget for them.

This is how insurance works.  Which isn’t how our current health insurance system works.  No.  Today people don’t want to pay for anything out-of-pocket.  Not the unexpected catastrophic costs.  Or the EXPECTED small costs that everyone can budget for in their personal lives.  Like an annual flu shot.  Childhood vaccinations.  Annual checkups.  Childbirth.  Etc.  Even the unexpected things that aren’t that expensive.  Like the stitches required when a child falls off of a bike.  Things that would cost less than someone’s monthly cellular bill.  Or things that people can plan and save for.  Like a house.  A car.  Or a child.  Which is why Obamacare insurance is not insurance.  It pays for way too many expected costs that we can budget for.  And because it does it only increases the cost of our health insurance policies.  Which are now anything but insurance.

Free Market Forces and Insurance for Catastrophic Costs will Fix any Problems in our Health Care System

When we pay these things out-of-pocket there are market forces in play.  For a doctor is not going to charge someone they’ve been seeing for years as much as he will charge a faceless insurance company.  Even today some doctors will waive some fees to help some of their long-time patients during a time of financial hardship.  Because there is a relationship between doctor and patient.  And they want to help.  Which is why they sometimes overcharge insurance companies to recover costs they can’t recover in full from other patients.  (Which is why insurance companies are vigilant in denying overbillings).  Especially those things government pays for.  Medicaid.  And Medicare.  Which the government discounts.  Leaving health care providers little choice but to overbill others to pay for what the government does not.

When we pay out-of-pocket doctors can’t charge as much.  Because they need patients.  If they charge too much their patients may find another good doctor that charges a little less.  Perhaps a younger one trying to establish a practice.  These are market forces.  Just like there are everywhere else in the economy.  Even a cancer patient requiring an expensive miracle drug benefits from market forces.  If there was true insurance in our health care system, that is.  Cancer is an unexpected and catastrophic cost.  But not everyone gets cancer.  Just as every ship does not sink.  Everyone would pay a small fee to insure against a financial loss that can result from cancer.  Where that little bit from everyone buying a catastrophic health insurance policy was able to pay the financial loss of the unfortunate few that require cancer treatment.  Even one including a costly miracle drug.  Because only a few from a large pool would incur these financial losses insurers would compete against other insurers for this business.  Just like they do to insure houses.  And ships crossing perilous oceans.

Health care would work better in the free market.  It doesn’t today because government changed that.  Starting with FDR putting a ceiling on wages.  Which forced employers to offer generous benefits to get the best workers to work for them when they couldn’t offer them more pay.  This was the beginning.  Now the health insurance industry is so bastardized that it doesn’t even resemble insurance anymore.  It’s just a massive cost transfer from one group of people to another.  Instead of a pooling of money to insure against financial risk.  For the few unexpected and catastrophic costs we cannot afford or budget for to pay out-of-pocket.

Because our Health Care System is the Most Expensive in the World it is the Best in the World

The American health care system is the finest in the world.  When you have a serious health care issue and you have the wherewithal there’s only one place you’re going for your medical care.  The United States.  And the best costs.  And it’s because it is so costly that people enter into the health care industry to do wonderful things.  Such as pharmaceutical companies.  Who many rail against for charging so much for the miracle drugs only they produce.  It’s a free country.  Anyone could have created that miracle drug.  All they had to do was to spend a boatload of money for years on other drugs that were losers.  Until they finally found one that wasn’t a loser.  That’s all you had to do.  Yet few do it.  Why?

Because creating miracle drugs is an extremely expensive and often futile endeavor.  Which is why we award patents to the few who do.  Which is the only reason they pour hundreds of millions of dollars into research and development and pay massive liability insurance premiums for taking a huge risk to put a drug onto the market that may harm or kill people.  They do this on the CHANCE that they may develop at least one successful drug that will pay for all of the costs incurred to develop this one drug, the costs for the countless drugs that failed AND provide a profit for their investors.  Who took a huge risk in paying their employees over the many years it took to come up with at least one drug that wasn’t a loser.  Their investors do this only because of the CHANCE that this pharmaceutical will develop that miracle drug that everyone wants.  But most don’t.  And investors just lose their investment.  But it’s the only way miracle drugs become available to us.  Because of rich investors who were willing to risk losing huge amounts of money.

This is what the profit incentive gives us.  The best health care system in the world.  Why the countries based on free market capitalism have the finest health care systems in the world.  And why North Korea, Cuba, the former East Germany, the former Soviet Union, Venezuela, etc., have never given us miracle drugs.  There never was an economic incentive throughout the economy to do so.  Like there is in countries with free market capitalism.  Where everyone at every level pursues profits that result overall in a pharmaceutical industry that produces these miracle drugs.

There is an expression that says you get what you pay for.  Our health care system is the most expensive in the world.  And because it is it is the best in the world.  Trying to inhibit the profit incentive for research and development and forcing medical providers to work for less (steeper Medicaid, Medicare and now Obamacare discounts) will change that.  Because you do get what you pay for.  And those who live/have lived in North Korea, Cuba, the former East Germany, the former Soviet Union, Venezuela, etc., can attest to.

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Abject Ignorance of things Economic is Destroying our Health Care System

Posted by PITHOCRATES - January 18th, 2014

Week in Review

The problem in America these days is the mass ignorance of the people.  Thanks to a public school system that does not educate but programs our children to be good Democrat voters.  Higher education taken over by the leftist radicals of the Sixties that forever changed the curriculum to teach our children to distrust capitalism and love government.  When controlled by Democrats, of course.  And people who are for some reason respected for their economic prowess who are absolutely clueless on things economic (see The Daily Show Nails Why Healthcare Will Never Work As A Free Market by Christina Sterbenz posted 1/18/2014 on Business Insider).

Steven Brill, author of Time’s in-depth healthcare analysis “Bitter Pill,” appeared on The Daily Show this week to discuss his opinion of Obamacare.

Brill’s work exploded his career into a love-hate relationship with Obamacare, now leading to a book. Speaking with Jon Stewart, Brill certainly made his criticisms known but we also feel like he pinpointed exactly why healthcare just can’t work as a free market.

Brill told the story of a cancer patient forced to pay $13,700 out-of-pocket, up-front for transfusion of a drug. And that cost only constituted part of a greater $83,000 payment. Brill claims, however, the drug only cost the pharmaceutical company $300.

Stewart came back at Brill with the typical, conservative argument — creating a free market for healthcare where patients pick-and-choose their coverage to create competition and therefore, better options.

“Everyone says, well it’s a marketplace. That guy [the cancer patient] has no choice in buying that drug. His doctor told him, ‘This will save your life. You don’t take it, you’re gonna die,'” Brill responded.

He further argued free markets must host two aspects — a balance between buyers and sellers and secondly, knowledge — neither of which the current U.S. system offers.

“That cancer drug has a patent. That is a monopoly that the government has given the drug company. There is no other drug. That’s the drug,” Brill said.

Jon Stewart is a comedian.  So one can almost forgive his ignorance.  But you’d think a person writing for a publication with the word ‘business’ in its name would actually understand business.  But the author hasn’t a clue.  It’s not her fault.  It’s because of the politicizing of our educational system.  As her dual degrees in journalism and public affairs would have taught her squat about the classical, Austrian or the Chicago school of economics.  Instead filling her head with Keynesian nonsense.  The one economic school embraced by power-hungry governments everywhere that has a proven track record of failure.  For it was Keynesian policies that gave us the Great Depression, the stagflation of the 1970s, the dot-com bubble and recession of the late 1990s/early 2000s and the Great Recession.  Where massive government spending did not pull the economy out of recession but only made things worse.

Why does this pharmaceutical company have a patent?  Or perhaps a better question would be why do we have this one cancer drug?  Why is it that this one pharmaceutical company developed a cancer drug that works that no other pharmaceutical company or government developed?  Because of that patent.  The only reason they poured hundreds of millions of dollars into research and development and paid massive liability insurance premiums for taking a huge risk to put a drug onto the market that may harm or kill people.  They do this on the CHANCE that they may develop at least one successful drug that will pay all of their past costs for this one drug, the costs for the countless drugs that failed AND a profit for their investors.  Who took a huge risk investing, giving this pharmaceutical company the money to pay all of their employees over the years it took to come up with at least one drug that wasn’t a loser.

Does the author of this article work for free?  No.  Of course not.  She has bills.  As we all do.  Even the people working at pharmaceutical companies.  Who don’t work there for free.  Even if the vast majority of their work produces nothing that their employer can sell their employer still pays them.  Thanks to their investors who give them the money to do so until they can actually sell something.  But their investors do this only because of the CHANCE that this pharmaceutical will develop that miracle drug that everyone wants.  A miracle drug that would never come into being if it weren’t for investors who were willing to risk losing huge amounts of money.  Something only rich investors can afford to do.

Health care worked as a free market before General Motors made it an employee benefit thanks to FDR’s ceiling on wages.  Once people stopped paying for what they received all free market forces left the health care system.  And costs began to rise.  This whole “healthcare just can’t work as a free market” is a product of the dumbing down of our educational system.  One that produces people who don’t know the difference between insurance and health care.  Insurance protects our assets against a catastrophic and UNEXPECTED loss.  Like when Lloyds of London started selling marine insurance at that coffee shop.  Every shipper paid a small premium to protect against a POTENTIAL sinking and loss of cargo.  A POTENTIAL financial loss.  Not every ship sank, though.  In fact, most ships did not.  Which is why that little bit from everyone was able to pay the financial loss of the few that did.  For the ships that didn’t sink the shippers paid every other cost they incurred to ship things across those perilous oceans.

This is how insurance works.  Which isn’t how our current health insurance works.  Where people don’t expect to pay for anything out-of-pocket.  Not the unexpected catastrophic costs.  Or the EXPECTED small costs that everyone can budget for in their personal lives.  Childhood vaccinations, annual checkups, flu shots, childbirth, etc.  Even the unexpected things that have a low cost.  Like the stitches required when a child falls off of a bike.  Things that would cost less than someone’s annual cellular costs.  Or things that people can plan and save for (like a house, a car or a child).  When we pay these things out-of-pocket there are market forces in play.  For a doctor is not going to charge someone they’ve been seeing for years as much as a faceless insurance company.  Even today some doctors will waive some fees to help some of their long-time patients during a time of financial hardship.  Because there is a relationship between doctor and patient.

When we pay out-of-pocket doctors can’t charge as much.  Because they need patients.  If they charge too much their patients may find another good doctor that charges a little less.  Perhaps a younger one trying to establish a practice.  These are market forces.  Just like there are everywhere else in the economy.  Even a cancer patient requiring an expensive wonder drug would contribute to market forces if there was true insurance in our health care system.  Cancer is an unexpected and catastrophic cost.  But not everyone gets cancer.  Everyone would pay a small fee to insure against a financial loss that can result from cancer.  Where that little bit from everyone was able to pay the financial loss of the unfortunate few that receive a cancer diagnosis.  Because only a few from a large pool would incur this financial loss insurers would compete against other insurers for this business.  Just like they do to insure houses.  And ships crossing perilous oceans.

Health care would work better in the free market.  It doesn’t today because government changed that.  Starting with FDR putting a ceiling on wages.  Which forced employers to offer generous benefits to get the best workers to work for them when they couldn’t offer them more pay.  This was the beginning.  Now the health insurance industry is so bastardized that it doesn’t even resemble insurance anymore.  It’s just a massive cost transfer from one group of people to another.  Instead of a pooling of money to insure against financial risk.  For the few unexpected and catastrophic costs we could not afford and budget for to pay out-of-pocket.

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Health Insurance Premiums and Deductibles

Posted by PITHOCRATES - October 21st, 2013

Economics 101

The Requirements of Obamacare force Insurers to Cancel their Less Costly Policies

We buy health insurance to protect our financial assets in case of a catastrophic health problem.  Such as a bad accident requiring costly hospitalization and rehabilitation.  Or a costly disease.  Like cancer or a heart attack.  As bad as those things are the good news is that most people don’t suffer from these health problems.  Which allows us to use insurance to protect our financial assets.

People in an insurance pool pay a small premium to pay for a potential loss.  Such as a catastrophic health problem.  Because not everyone in the pool will suffer from a catastrophic health problem the insurance premium can be much smaller than the cost of medical care for the few that do.  A premium small enough that individuals and families can budget this amount and rest comfortably knowing that a catastrophic health problem won’t cost them their home, their kids’ college fund, their retirement savings, etc.  A system that has worked well.  Until we started using insurance to pay for everything under the sun.  Which has caused insurance premiums to soar.  And Obamacare just doubles down on this trend and turns insurance into welfare.

Premiums before and after Obamacare R1

Obamacare raises the coverage requirements for all insurance policies.  To a ridiculous extent.  For example, couples whose children are grown adults still need pediatric coverage.  Obamacare requires a lot of standard coverage like this that is virtually impossible for some people to use.  Thus greatly raising insurance premiums.  In our example our fictitious insurance pool contains 10,000 individuals and 10,000 families.  To include everything the Obama administration wants to include raises individual premiums 240%.  And family premiums 257%.  Which causes a problem with President Obama’s promise to the American people.  That thing about keeping your current insurance if you like your current insurance.  As insurers have no choice but to cancel their less costly policies.

The Affordable Care Act makes Premiums Unaffordable by Requiring Insurers to Cover More

That promise was, of course, a lie.  Because you can’t buy more for less money.  You just can’t get more for less.  So if the policies cover more they cost more.  If they cover a lot more they cost a lot more.  Well, that creates a bit of a problem for the optics of the Affordable Care Act.  When you make the existing health care system ‘affordable’ you really can’t raise the cost of insurance by over 200%.  Even if you are giving more insurance coverage.  Because if it’s just too expensive people won’t have the money available to pay for it.  So they brought the premiums down from what they would need to be to do what they want them to do.  To something a little more affordable.  Like this.

Premiums before and after Obamacare Adjusted R1

Which brings the increases to 80% for an individual policy.  And 129% for a family policy.  These are still steep price hikes.  But with the more these policies cover and subsidies for those who need them they are an easier sell.  Of course, there is another problem.  Selling these policies at these lower prices won’t bring as much money into the insurance pool.  Which will limit what this pool can pay for.  Leading to rationing.  And longer waiting times.  As health care providers will have to tell patients ‘no’ because the insurer denied the treatment or procedure.  Which sort of defeats the purpose of Obamacare.  Affordable health care for everyone.

So what to do?  To cover everything under the sun requires hefty premiums.  But hefty premiums are not affordable.  There appears to be a paradox here.  And that’s because there is.  Because you can’t get more for less.  But Obamacare has a workaround for this paradox.  At least for the optics of Obamacare.

The Ultimate Goal of Obamacare may be to Fail to Clear the Way for Single-Payer National Health Care

There’s another part of health insurance.  The deductible.  The out-of-pocket portion of our health care expenses.  When insurance was truly insurance we paid for our routine health care expenses out-of-pocket.  We took our kids to the doctor for their vaccinations and the doctor billed us.  Then we paid the bill.  Using our insurance only for those catastrophic health problems that we couldn’t plan for.  Or budget for.  And it’s the deductible that makes Obamacare look more affordable than it is.  By making their deductible far exceed their premium.  So a lot of people pay into the pool but never collect from it.

Claims Individual and Family R1

In this example we look at some claims.  The money the insurance pool pays out.  The above numbers are net of the deductible.  So the annual claim per individual and family is money from the pool paying their bills.  Most people get little.  While the breakout with the fewest members have a catastrophic health care problem.  The total claims for this pool for both individuals and families come to $159,750,000.  While premiums total only $123 million at our adjusted premiums.  That’s a $36,750,000 shortfall.  Well, insurers can’t pay out more than they collect so they need to find another $36 million or so without making this affordable health insurance appear unaffordable.  So where can we find another $36 million?

By raising the deductible, of course.  If we raise the deductible for both individuals and families to $7,500 those claims at $7,500 or less are out-of-pocket.  They don’t come from the insurance pool.  If we add up the claims that become out-of-pocket they total $57,250,000.  More than enough to cover the shortfall.  As well as provide subsidies for the poor.  And all those new government jobs to run Obamacare.  With these higher deductibles AND higher premiums people will be paying far more for their health care than they did before.  Perhaps more than they can afford.  Thus making the Affordable Care Act unaffordable.  Which may be the ultimate goal of Obamacare.  To fail.  So the government can blame greedy insurers who the people will hate even more.  And setting the stage to get the people to acquiesce to a single-payer system.  Or national health care.  Which the left wanted all along.

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Cost of Health Insurance

Posted by PITHOCRATES - May 27th, 2013

Economics 101

Making Health Insurance a Fringe Benefit removed Market Forces from the Equation

The reason why health insurance is so expensive is because it is not insurance anymore.  It’s more of a welfare program.  Where other people pay.  Whereas insurance mitigates financial risk.  People pay a small premium to insure against a large financial loss.  They may pay $250/year to insure something that may cost $25,000 to replace.  For something they may own for 10 years.  Because they would rather spend $250 each year (for a total of $2,500 over those 10 years) than have to replace it by paying another $25,000 should something happen.  Insurance reduces the amount of money you can lose.  In this case the greatest financial loss is reduced from $25,000 down to $2,500.  This is insurance.

Health insurance used to be like this.  When we paid for it ourselves.  But things changed when it became an employee benefit.  Where we no longer saw the true cost of that insurance.  This happened during World War II.  As FDR put in wage caps.  Why?  With all the men in the military and wartime production through the roof there was a shortage of labor.  And the last thing FDR wanted on top of the inflation they were causing by printing so much money to pay for the war was wage inflation.  Hence the wage caps.  But the problem with wage caps is that employers could not entice the best workers to come work for them by offering them higher wages.  So to entice the best workers to come work for them and get around FDR’s wage caps employers began offering fringe benefits.

This is the cause of all our health care woes today.  Making health insurance a fringe benefit.  For it removed market forces from the equation.  People receiving the benefit had no idea what the benefit cost.  And did not care.  Which wasn’t a problem at first.  But then the Sixties came around.  And women stopped having as many babies.  Causing the population to start getting older.  Worse (from the perspective of paying for health insurance), people were beginning to live longer.  So when a person retired from a company they lived a long retirement.  So companies who offered these generous fringe benefits began to suffer under the cost of them.  Between pensions and health care costs retirees were costing some companies more than their active workers.  Because they were living so long into retirement.  (Just as these long retirements are straining Social Security and Medicare).  And modern medicine just keeps pulling them back from the brink of death.  Prolonging this crushing financial burden.

Health Insurance is more Expensive than it once was because it now Pays for Routine Medical Expenses

Compounding this problem is how health insurance is no longer insurance.  Instead of a small premium insuring against a large financial loss people expect health insurance to pay for everything.  And get righteously indignant whenever they have to pay anything out of pocket.  From a prescription co-pay.  To a small co-pay at a doctor’s office.  This is not paying a small premium to insure against a large financial loss.  This is demanding a free ride.  If health insurance was actually insurance it would look something like this:

Health Insurance Cost - Insurance

This assumes a health group with 100 participants.  Of this 100 five people suffer a serious accident in one year.  Incurring a large and unexpected hospital expense of $6,000 each.  While three people suffer a serious illness that same year.  Incurring a large and unexpected hospital expense of $4,500 each.  The total for these large and unexpected costs is $43,500.  If we divide this over the 100 members of the group that comes to an annual health insurance premium of $435 each.  Or $36.25/month.  Or $8.37/week.  Which isn’t much.  If you were one of those suffering a serious accident you didn’t have your personal finances wiped out by an unexpected $6,000 hospital bill.  Instead you only paid a manageable and budgeted $435 each year.  In other words, spending $435 saved $5,565.  Not a bad deal.  This is insurance.  Because it only paid for the unexpected.  Not our routine health care expenses that we should pay out of pocket.  If we add these routine expenses into the health insurance formula we can see how they increase the cost of health insurance.

Health Insurance Cost - Welfare

Assume each person consume $750 in routine medical costs.  For office visits.  Allergy shots.  Vaccinations for the children.  Flu shots.  Seeing the doctor when you have a cold.  Annual checkups.  Physicals.  Cancer screening.  Prescriptions.  Etc.  Those things that can be reasonably expected each year.  When our health insurance policies pay for these routine medical expenses note the large increase in the annual insurance policy premium.  Going from $435 to $1,185.  An increase of 172%.  Everyone will pay $1,185.  Whether they consume $750 in medical costs or not.  Also, of the three things health insurance pays for (serious accidents, serious illnesses and routine medical) routine medical is the biggest of the three.  Explaining why health insurance is now so much more expensive than it needs to be.

It was the Pension and Health care Costs of Retirees that Bankrupted General Motors

This is why it is better to pay out of pocket for these routine costs.  Because if you’re really healthy one year and never see the doctor you will not consume $750 in medical costs.  So if you normally pay these out of pocket but don’t you would only spend $435 that year for real health insurance.  Not the $1,185 that pays for everything.  Whether you use it or not.  This is where market forces come in.  Instead of paying for a costly doctor’s visit when you have a cold you may just buy some over the counter cold medicine from the drugstore.  This is how we behave when we pay for stuff.  But when you introduce a third party it alters our behavior.

“Whether you use it or not.”  When people can get something more for no extra money they are going to take it.  Like going for seconds and thirds at an all-you-can-eat buffet.  It doesn’t cost anything more for the second and third plate.  In fact people will feel cheated if they don’t go for plates 2 and 3.  Because all-you-can-it is pretty expensive if you only eat one plate.  Because that one price pays for 2, 3, even 4 plates.  If you can eat that much.  It’s this mentality that causes people to go to the doctor when they have the sniffles.  So they can get ‘free’ antibiotics.  Because it doesn’t cost anything more.  Since their health insurance is already paying for it.

But it does cost more to those who are paying for it.  A lot more.  So much more that small business owners can’t afford to provide health insurance for their employees.  Because to do so would require that they greatly increase their selling price.  Which they can’t do and expect to stay in business.  Because the market sets the price.  Not them.  It’s up to them to figure out how to sell at a price the people will pay.  And if they raise it too high to pay for health insurance for their employees the people will stop buying from them.  Putting them out of business.  Even bigger businesses struggle with this.  For it was the pension and health care costs of retirees that bankrupted General Motors.  Which was one of those companies that started offering health insurance as a benefit during World War II.  Giving us all our health care woes today.

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