Insurance is the problem, not the solution
I could start with some anecdotes about high pharmaceutical and medical-procedure prices in the USA, and about much more reasonable prices that I and many others have encountered abroad. But why bother? Every American knows that healthcare-related prices in the US are insane. This crisis needs no introduction.
I should point out, though, since many Americans seem to have forgotten, that this crisis originated long before the risibly named Affordable Care Act took full effect in 2014 (ostensibly to help fix the situation). Thus, any enduring solution needs to cover not only the problems the ACA a.k.a Obamacare added, but also the more fundamental problems that have been festering for decades.
Some of the reasons for America’s grossly inflated healthcare prices are obvious. A law from 1986, for example, forces most hospital emergency departments to provide screening and stabilizing care regardless of patients’ ability to pay—which means that paying customers foot the bill via higher prices. In an environment where many patients don’t pay, hospitals also deliberately inflate prices so that even selling medical debt “cheaply” to debt collectors allows them to recoup most/all of their actual costs. The cartel-like organization of American doctors, and the American tort system with its lottery-like jury awards, have clearly made their own contributions to healthcare price inflation.
But there is one feature of American healthcare that towers above all others as a driver of high prices. I am referring to health insurance, which generations of Americans have been gaslighted into seeing as a critical necessity.
Insurance makes sense in principle as a way of protecting against rare and extreme costs. In reality, Americans long ago got into the habit of using insurance to cover even minor and routine healthcare. That gross overreliance on insurance has allowed the entire structure of healthcare prices to drift ever-upward.
Insurance inflates prices by inserting insurers, with their bureaucracies and need for profit, into what should be relatively simple cash transactions. It creates situations of costless consumption once out-of-pocket limits have been reached. Worst of all—by far—it erodes buyers’ sensitivity to cash prices by replacing those prices with streams of smaller premium payments. (Via the same behavioral mechanism, credit-based purchasing has lifted the cash prices of houses, cars and higher education.) Employer and government/taxpayer subsidies for health insurance premiums reduce buyers’ sensitivity further. Again, Obamacare has worsened this mess in various ways, but didn’t originate it.
Essentially, America’s healthcare system tries to make healthcare affordable by spreading costs around, but fails utterly because the method it uses for cost-spreading removes the natural, market-based brakes on prices.
That failure, by the way, entails not only a huge amount of financial stress on the tax-paying, premium-paying Americans who have to support the whole thing, but also a correspondingly stupendous undeserved windfall on the provider side.
That the current system is defended fiercely by its beneficiaries—including hospital chains, Big Pharma, insurers, and politicians who use the federal healthcare bureaucracy to buy votes—is to be expected. Unfortunately, their gaslighting is made much easier by commentators, including “expert” health economists, who continue to encourage the assumption that insurance is the only valid basis for modern healthcare. (The only clear attack on insurance-based medicine I’ve ever seen was published in 2009 by a TV-industry executive.)
As a straightforward reality check, though, consider what would happen if insurance and all other forms of cost-spreading and cost-hiding were banned in healthcare markets, so that patients and providers had to revert to simple, transparent, cash-on-the-barrel transactions. If you run a drug company that has been charging hundreds of thousands of dollars for a course of some drug treatment, or if you run a hospital that has been charging similarly exorbitant amounts for a few days of inpatient care, would you keep your prices up at those levels, where almost none of your customers could now afford them? Of course not—you would now be in a normal, competitive market situation, where survival requires making products and services affordable. And by the way, roughly a million American “medical tourists” every year fly to foreign countries where cash payment for private healthcare is still the norm, prices are much lower, and quality of care is often superior.
A better way
That part of the solution is obvious, then. But what about Americans who could not afford even the dramatically lowered prices of a de-insurancized, market-based healthcare system?
Until modern developments including Medicare and Medicaid made them largely redundant, charity hospitals were ubiquitous in the US, and often were supported not by government budgets but by private philanthropists and even community funding drives. Some of these hospitals had endowments large enough to keep them going indefinitely without further external funding.
How much would it cost to convert 20% of US community hospitals—roughly 1,000 of them—to fully endowed, free-care status? The annual operating cost for an average, 150-bed US hospital has been estimated at about $250 million. For a no-frills charity hospital, an estimate of $200 million annually is probably conservative, and could be outright excessive if costs come way down with the elimination of insurance. In any case, multiplying that $200 million by 1,000, then dividing by a standard 5%-of-endowment-per-year expenditure assumption, suggests endowments totalling $4 trillion. That one-and-done cost, though it might seem huge, is only about twice the annual cost of Medicare/Medicaid/Obamacare—and of course it is just a tiny fraction of the philanthropic potential of America’s wealthiest.
Again, if a network of charity hospitals were to be endowed to this extent—or if all hospitals had endowments allowing the same proportion of free and/or subsidized care—little or no further support would be needed to keep this charity-care system afloat. Charity hospitals and market hospitals together could replace the current Medicaid/Medicare/Obamacare systems, removing entirely those gigantic taxpayer burdens, and no one would ever have to worry about their insurer’s willingness to cover a treatment.
Important details would have to be worked out, including how to confine charity care to those who really need it, and how to transition to the new system. But overall and in the long run, it could hardly fail to be a significant improvement over the current arrangement—an arrangement that is not only unreasonably burdensome and stressful, and a major driver of socioeconomic inequality, but also an ever-present reminder to citizens of the inadequacy (thus illegitimacy) of their government and elites.
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