Wednesday, June 17, 2009

The Dangers of a Government Health Care Option

Before we pass Obamacare it would be useful to explore the impact of government health care programs. The two issues that are raised by the advocates of so-called health care “reform” are: the fact that health care cost have been growing significantly faster than the consumer price index and that there are some 45 to 50 million people in the U.S. without health coverage. Obviously these two issues are linked in that rapidly growing costs have priced insurance out other reach of poor people and small businesses. The advocates see a massive government program with a government run option similar to Medicare as the solution. The government plan is claimed by President Obama to “keep the private insurers honest.” My own observations call this into question.

Several years ago, before my mother passed away, I had the opportunity to see how Medicare operated compared with my employer provided plan. Let’s as an example consider an office visit with a few basic lab tests. This results in a charge of $400 for example. In the case of my private insurance, since I was going to a preferred provider, the plan paid $120 to settle the claim. On the other hand Medicare paid only about $60 for my mother’s visit. If you think that it was the quality of doctors - it wasn’t. My mother was going to a specialist while I was going to a primary care provider. So what is the answer to this mystery?

In the early 1980s the cost of Medicare was growing fast and considered out of control. The government came up with a simple solution. It made a rule that it would set the prices that Medicare would pay for various services. Providers are given the choice of taking this “assignment” for all Medicare patients or not treating any of them. So given that expenses need to be paid the providers simple responded by increasing there rates for everyone else. As the government held down the assignment rates for Medicare, the rates for everyone else soared. So the driving engine of the first problem, rapidly growing costs, is largely the government’s Medicare program.

So when you see the cost of your insurance increase, understand that much of that money is going to cover the costs that are induced by government healthcare programs. Of course there are also the cost due to those don’t have coverage and can’t pay being treated pro bono, increasing malpractice insurance costs generated by our out of control tort system, and the costs of new advanced medical tests and treatments.

Now let’s consider what will happen if we implement the proposed government option for the general population. There basically two possibilities that most be considered. Either we follow the Medicare model and establish an assignment system or let it compete in the market. If the latter case is followed it is most unlikely that government bureaucrats can compete with private insurance companies an even competition. Either they will use the assignment approach from the outset or they will be forced to it eventually in order to save the plan. So ultimately the government will set prices that will undercut and drive the private plans out business.

As I mentioned before, a significant amount of the “fair market” costs of Medicare are already being paid by the inflated costs of the private plans. So if the government plan does the same thing there soon won’t be enough private plan money to support the system. Putting it another way, he government costs for both plans will skyrocket above even the most pessimistic initial estimates. The result will be both massive tax increases, increased premiums for the government plans, and rationing of care, or all of the above.

What we should take away from this analysis is that previous government policies to tamper with the health care price structure are major cause of medical price growth. Any attempt to extend these approaches to the rest of the health care system will only compound the problem greatly.