Universal Health 'Insurance': Not
Jeffrey L. Smith, Ph.D

When Shane asked me to provide a counterpoint to the Universal Health Insurance (UHI) siren song, I knew my burden was heavy and my chances of influencing prevailing opinion nil. Like the sirens of ancient legend, UHI offers irresistible charms to its admirers, likewise blinding them to the implications of pursuing their infatuation. One of the primary appeals of UHI is its simplicity. Apparently, it cuts through incredibly complicated issues and problems surrounding health care. The government becomes the insurer and guarantor of health for everyone. Problems associated with uninsured citizens disappear. The present confusing patchwork of for-profit insurers, HMOs, hospital corporations, etc., is replaced with a single non-profit government agency. Doctors can concentrate on serving patients, needing to deal with only one insurer whose rules are the same for all.

But just as the beauty of the sirens was only skin deep, so the truths of UHI are hidden beneath the surface. UHI is nothing more than a chimera that addresses only a small subset of today's important health care issues. Not only does UHI fail to address the most significant problems associated with health care today, it makes them significantly worse.

But saying this raises a critical question. Just what are the most important issues facing health care today? While we all can list dozens, do we have any consensus on their relative and absolute importance? If we don't agree on the problem, we surely will have difficulty agreeing on the solution.

Most advocates of UHI offer the kinds of benefits just mentioned: eliminating the uninsured, reducing corporate profits and simplifying and reducing the costs of insurance administration. No doubt, uninsured patients do cause significant problems for the health care system and insurance for all would greatly alleviate these problems in addition to improving the health of some uninsured. Other benefits of UHI may likewise be significant.

However, are these really the primary health care issues facing the nation? What about the fact that health care currently consumes 16% of the total GDP of the country, increasing from just 4% in 1972 and showing no signs of slowing down? On Tuesday the National Health Statistics Group at the federal Centers for Medicare and Medicaid Services projected that health care will consume 20% of GDP by 2015. How about the fact that the average cost of health insurance for a family of four now exceeds the entire gross annual income for a minimum wage earner? Clearly, current trends in health care are unsustainable in that they are approaching the limits of the nation to be able to continue to produce and pay for health services. I believe this is the fundamental health care problem we face. We should evaluate UHI with respect to its impacts on this problem.

So if we want to reduce the rate of growth in health care costs to a manageable level, it would seem important to understand the sources and causes of recent rapid cost increases. In this I am no expert, but we all are aware of commonly offered explanations: an aging population; rapidly rising prescription drug costs; new, improved diagnostic equipment and treatments; rapidly increasing chronic disease rates; increased obesity; etc. I am certain every reader could add important items to this list.

Nevertheless, I would assert that very little of the secular increase in health care costs is due to increases in corporate profits or insurance administrative costs or results from increased services to the uninsured or the negative side effects of the uninsured. I believe that by far the most important drivers of health care costs are the increases in quantity and quality of medical services provided to patients, at least if we measure those services by the quantity and cost of tests and therapies performed. Thus, to control future health care cost growth it is necessary to (1) reduce the growth of health care services consumed per person and (2) to increase the efficiency of providing such services.To accomplish these objectives it is essential to examine critically each of the numerous health care cost drivers, such as those mentioned above, looking for ways to reduce their use and cost. For example, as discussed in an article in the LA Times last week, doctors are reexamining the benefits and costs of various aspects of the annual checkup, which consumes a huge fraction of current health care services.

But the purpose of this brief article is to ask whether UHI would promote the dual objectives (1) and (2) above.

Put bluntly, I believe that these objectives are best achieved if the consumer of health care services not only is involved whenever possible in health care decisions, but also is responsible for paying for them. Now I can hear the howls of protest over the many important cases where this is impossible. I lived through the slow deterioration in the health of both my elderly parents before their deaths, and agonized over their loss of clear thought and decision-making capability, including about their own health. And for others the costs of illness or accident overwhelm their ability to pay and sometimes to make decision for themselves. In these and other examples it is essential that family, friends, and, as a last resort, governments provide both decision making and financial support.

Private health care insurance is also important. Unfortunately, the prevailing private health policies today combine true insurance against low probability/high cost events with highly subsidized prices for ordinary health services. These low prices encourage excess consumption of health services and discourage the health care consumer from careful use of services.

Of course, just as private health insurance subsidizes health care services, so does government health care insurance. Since a huge fraction of the population is all ready covered by such government subsidy through Medicare and Medicaid, including most of the sickest people, we are close to providing everyone with fully subsidized ordinary health care services! No wonder the demand is growing like crazy. The same would happen to any service we decided to provide at little or no cost.

So this is why the move to a single payer system is a move in exactly the wrong direction. It would exacerbate and accelerate the all ready unacceptable growth rates in demand for and costs of providing medical services. The inevitable result would be to substitute government rationing, and rationing by waiting list, for market based rationing. For an example look to Canada which is currently struggling with the need to "de-list" services because they can"t afford the current list, to fill a shortage of doctors (you can guess the reasons), and reduce the long waiting times for health services that drive many Canadians to the US or elsewhere to buy them at full price. In a stunning decision last June, the Supreme Court of Quebec struck down a provincial law that banned private medical insurance and ordered the province to initiate a reform program within a year. The Supreme Court decision ruled that long waits for various medical procedures in the province had violated patients' "life and personal security, inviolability and freedom," and that prohibition of private health insurance was unconstitutional when the public health system did not deliver "reasonable services." (NY Times 2/20/2006)

What we need is reduced subsidization of ordinary health services for all who can afford to pay (myself included!). Not only is this the single most important reform needed by our health care system, it is the only way that the demand for health care services can be brought into balance with our ability to provide them. Thus, we need to move away from subsidizing health care provision, for example by raising annual deductibles, while retaining the true insurance aspect of today's policies to protect against substantial and catastrophic loss.

Just as doctors must sometimes recommend treatments and tests (e.g., colonoscopies!) the patient doesn't like, so this prescription for our health care system is as necessary as it is unpleasant.

Some further dissection of health "insurance" in the US can illuminate how it operates to subsidize and promote consumption of medical services. I am covered by Blue Cross PPO insurance with a $500 annual deductible. Almost 20 years ago I hurt my lower back playing squash and was diagnosed with a bulging, but not herniated, L4/L5 disc. Since then I have found that chiropractic treatment was most effective at maintaining movement and relieving pain without need for other medicine or treatment. However, from experience I can predict that I will need between 10 and 20 chiropractic adjustments per year, although I would like not to be dependent on it.

My chiropractor bills Blue Cross about $80 for each treatment, but because my chiropractor is a Blue Cross member clinic, Blue Cross unilaterally reduces the amount I pay for each adjustment by 55%! That is they instruct me to pay the chiropractor $36 (until I meet my deductible) and give me a 'patient savings' of $44.

How can they do this? Since Blue Cross insures a large number of patients, health clinics have a strong incentive to become Blue Cross affiliates. Otherwise, they will lose their Blue Cross patients who would face much higher prices. So clinics are forced to either accept low reimbursement rates or forgo large chunks of business. However, if I walk in as an uninsured patient I am billed $80 and am legally required to pay the full amount. All large insurers have similar market power to force hospitals, doctors and clinics to accept reduced reimbursement rates. This is the mirror image of the market power exercised by monopolists (who use market power to increase the sales prices of their products), and is referred to by economists as monopsony: the exercise of market power to lower the cost of inputs to a production process.

Lowered cost of services provided by health insurance monopsonists is a primary benefit of health "insurance" to the insured. Likewise, lack of monopsony buying power is probably the largest source of increased costs of health care for the uninsured. However, monopsony is just as distortive of competitive markets as monopoly and has the same harmful effects, only those effects occur in input rather than product markets. By driving the prices of health provider services (reimbursement rates) below market clearing prices they reduce the supply of such services. For example, many doctors restrict the number of Medicare/Medicaid patients they serve because of low reimbursements. But because insurers pass the lowered prices through to the insured, they increase demand for the service, thereby simultaneously creating a shortage of providers and an excess of demand, i.e., queues.

If a monopoly has sufficient market power to raise product prices by 20 % above competitive prices, economist consider this to be a powerful monopoly. But medical insurers appear to routinely exercise monopsony power sufficient to lower input prices by more than 50%! Such power is likely to result in serious market distortion and efficiency loss.

However, my tale is not yet over. Consider what happens when I arrive at the chiropractic clinic for my first few treatments of each year. As I leave and am settling my account, the clerk asks: "have you met your deductible?" Why is this important? Because if not then I am responsible for paying $36 and they would like to collect at least this amount from me.

But what if I have all ready paid a total of $500 for covered services for the year-that is, I have met my deductible? Well, in that case I'm only responsible for 20% of the $36, or $7.20. At this point the cost of all my health services is subsidized at rates approaching 90%--they're almost free.

Note that neither of these benefits of health insurance (monopsony bargaining power and direct price subsidies) is included in traditional types of insurance, such as home and auto insurance, which provide coverage only for low probability/high cost events. While health policies also provide insurance against catastrophic loss, this benefit is swamped by the benefits to the insured of reduced prices for health services.

Furthermore, this subsidization of health care prices is clearly valued highly by health care consumers. One of the easiest ways to reduce the costs of health insurance is to raise annual deductibles. But consumers strongly oppose even modest increases in deductibles.

However, raising the annual deductible until it exceeds expected total annual health care costs has an important effect, even though the consumer might not like it. It means the consumer has a good chance of not meeting his/her deductible for the year, so the prices paid for all or most services will not be as heavily subsidized. When deductibles are low they provide no incentive to save. Since I know I will spend at least $500 each year on health services, I don't really care when it happens-the sooner the better. But if my deductible were $5000 instead of $500, I would reasonably expect to pay $36 for all my chiropractic treatment, thereby reducing the effective subsidy. Also, since I probably won't spend $5000 in a year, I might as well try to spend as little of it as possible. Thus, high deductibles provide incentives to the consumer to reduce health care spending.

With high deductibles the consumer gives up the expectation of substantial direct price subsidies, while retaining the benefits of monopsony buying power and also paying significantly lower premiums.

From a policy perspective this has the salutary effect of reducing demand since the consumer pays more for ordinary health services.

While important, higher deductibles alone are not sufficient. Much more substantial reform is required, especially with respect to the costs consumers face for expensive medical procedures such as joint replacement, cataract removal, etc. We need to move to a system where those who can afford it pay a substantial portion or all of the costs for surgery and other procedures. Only these and similar reforms throughout both private health insurance and Medicare/Medicaid can bring the explosive growth in health care costs under control.