Tuesday, October 6, 2009

The Socialized Medicine Scheme: Puzzle Palace on the Potomac

Within the field of Health Insurance, its well known that the cost of Health Insurance is a direct reflection of the cost to provide Health Care.

Conversely, you can argue that the existence of Health Insurance creates a third party effect where you have the effect of spending someone else's money as in the Four Ways Money is Spent put forth by Milton Friedman. (1) The existence of Health Insurance clearly does create inefficiencies in expenditures.

However, at the end of the day, the cost of Health Insurance is more directly related to the cost of providing Health Care.

Looking back several months, the conversation in Congress was “Health Care Reform”. That discussion morphed into “Health Insurance Reform”. Regardless of the title of the discussion, its clear the buzz phrase is “rein in costs”.

One must further remember that Legislators are not students of the Field of Insurance. The most glaring example of insurance naivety of politicos, showing they have no grasp of the concept of Insurance, is the discussion leaving “Health Care Reform” and becoming a discussion of “Health Insurance Reform”. It’s the classic case of the-cart-before-the-horse. That is, reforming Health Insurance does absolutely nothing to address the buzz phrase “rein in costs”.

Think of it another way: since the cost of Health Insurance is a direct reflection of the cost to provide Health Care, then the cost driver (providing Health Care) is overlooked in “Health Insurance Reform”. You are trying to reform the final result of a formula without reforming/changing the components of the formula. Hence, Hospital Costs, Doctor Costs, Drug Costs, etc. are directly related to Insurance Costs. How do you reform Insurance Costs without reforming the components that yield Insurance Cost?

Its not to say that increased competition among private insurers and more policy/coverage choices for consumers through deregulation of state required benefits would not yield price competition. But the competition among provides and more affordable coverage choices can only go so far in reducing costs. Its reducing costs at the margins.

Another question arises: is the cost to provide Health Care actually the direct reflection of the Demand and Supply for Health Care. In other words, its very, very possible that the price of Health Care is an accurate reflection of the market. If the cost is accurate, regardless of the outcries that Health Care is too expensive, then your only recourse is to again reduce costs at the margins. That is, the “core costs” can’t be reduced.

Enter the wonderful world of Price Controls, Regulations, Bureaucracies, and homogeneous product. These four horsemen of failure have already been proposed. When Politicos can’t solve a problem that they set out to solve, and when the results of the market place are not to their tastes, they love to repeat the failure of Price Controls and its cousins Regulations, Bureaucracies, and single product for all. (2)

Price Controls always end in miserable failure. Further, when Demand and Supply are not allowed to meet at Price, when Price is set at an artificial level, then price is not the allocation agent. Rationing becomes the allocation agent of Demand and Supply.

The thousand tangent discussion occurring at the Insurance Puzzle Palace on the Potomac needs to be immediately stopped. Erase the chalk board. Start over again as the debate is completely off track and completely off target in regards to "reining in costs".


(1)
http://bartsblogg.blogspot.com/2008/10/milton-friedman-4-ways-money-is-spent.html

(2)
http://www.rasmussenreports.com/public_content/politics/current_events/healthcare/october_2009/fear_of_losing_private_health_insurance_trumps_public_option

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