American Health Care – If You Were To Ask, You Can’t Afford It…

Houston, we have a problem…

There are many problems with American healthcare well documented in the popular press, but it seems that the main issue is the availability and (if it is available) the high cost of health insurance.

Let me begin by saying that the most common option in American health insurance system tied to employment is very weird. If you have a job that offers a group insurance plan, then you can join regardless of your current health and preexisting conditions. However, if your employer does not offer a group plan, or you’ve been laid off, or you are self-employed, or an entrepreneur, then you have to buy insurance on your own. In that case, you better be in excellent shape, with no preexisting conditions, because if you have health problems, then your premiums are going to be extremely high, or your particular condition is not going to be covered, or you may forget about insurance coverage altogether (if you have something really serious). This makes you think twice before switching jobs, or striking it out on your own.

I think that fixing the American health care system is, perhaps, the key issue for securing America’s economic future. As America cannot compete on wages or low-cost mass manufacturing against new vigorous economies like China or India, it is paramount to maintain America’s true competitive advantage. It is the entrepreneurial spirit and the propensity to efficiently innovate that put America in the forefront of the world’s economic development. The current system of health insurance locks people into jobs with particular insurance plans, thus inhibiting the entrepreneurial spirit of people trying new ideas and starting new companies. A truly portable health insurance independent of employment would provide the necessary mobility of talent and labor that underpins effective innovation and gives America an edge in global competition.

Who’s to blame for high cost, or what is good for me, good for society?

Paradoxically, the high cost of American health care is a testament to its success in coming up with more advanced and effective drugs and procedures. These procedures help, but they are also much more expensive than the “good old ways.” Patients love these procedures (remember, they do help), and they do not cost that much out-of-pocket (even with all the co-pays, patients still pay pennies on a dollar). Doctors love performing these procedures, as the more advanced the procedure is, the higher their pay. In the end, insurance pays if the procedure helps a patient. As a result, the cost of American advanced medicine is shared by all. This is a classic moral hazard problem – everybody insured has all incentives to seek the most expensive treatment available, since the cost is shared by all.

Still, why do so many Americans even need these advanced treatments? I think a good illustration would be comparing German and American cars. German cars have many cool features, but you really have to read the car manual to find out about them. Germans like to read manuals, and then properly use and maintain their vehicles. American cars have “intuitive interfaces” with big buttons – it is not necessary to read a manual to figure out how everything works. Americans don’t like to read manuals, as it does not work with their busy lifestyles. It seems that Americans take the same approach to their personal health by neglecting basic care, and then demanding cutting edge procedures to fix long-term damages.

In the end, who is to blame for the high cost of health care? It is us, requiring cutting edge medicine as a universal answer to all health problems, and agreeing to pay for it through insurance, thinking that it is someone else’s problem. The result is the high cost of health insurance for all. It is already so high that many individuals cannot afford it, and soon we won’t be able to afford it as a society.

Where are we now? Mirror, mirror on the wall…

In the Soviet Union, if there was a problem (any problem), people just looked to the government to fix it. Over the years, people in Russia got so accustomed to the totalitarian way of solving problems, that a democratic way of solving society’s problems is still pretty foreign to them. In Russia, ordinary folks still think: “why bother with personal involvement, let the folks in the government figure it out” when it comes to any major problem facing society as a whole.

Unfortunately, the current public reaction to Obama’s health care reform plan reminds me of my early years in the Soviet Union. We just expect Obama’s plan to take care of it, and make everything better without any personal involvement on our part. Furthermore, nobody wants to give up anything, while asking for more…

What we now need as a society is to take a close look in the mirror and to admit that what we see is not pretty. What we need is an honest and open discussion of the underlying causes of the problem, and then making tough choices. The sad truth is that there is no painless way to fix American healthcare – all of us must feel the pinch, and there is no magic reform that would fix the problem if we don’t change our ways…

Is there a way out?

I admit that I do not have a recipe for fixing American health care, and, at best, I can offer some observations of what may or may not work.

First, I do not think that we can rely on free market forces to pressure insurance companies to compete, as insurance companies rely on massive market frictions (e.g. employees locked in with their group healthcare plans, preexisting conditions, geographic restrictions), and misplaced incentives (insurance companies have incentives to serve companies with group plans, or only insure healthy people, which is a classic adverse selection problem).  What we have in healthcare is a classic oligopoly case with a highly segmented market, and de facto local monopolies in each segment, hence competitive forces are extremely weak. Opaque pricing structure in the health care industry further inhibits market competition (good luck trying to figure out a price of a particular procedure at a particular doctor for two different insurance plans for comparison purposes).

Second, we may consider taking a hard look at which medical services are absolutely essential, and which ones are “lifestyle improving”. Then implement some sort of universal insurance for essential services, and also create a competitive framework that eliminates frictions for optional private insurance for additional services.

Third, it turns out that government can efficiently run healthcare insurance business, as Medicare customers are the most happy with their insurance coverage and services provided. A Gallup Poll in late July 2009 found that only 20% of Americans over 65 say a health care overhaul would improve their health care, which was the lowest showing of all age groups. Hence, government may alleviate the adverse selection problem by providing some form of universal insurance (say, the essential part from the previous point).

Finally, take a look at prescription drug coverage. Since most other countries have government price controls, Americans de facto have to pick up other countries’ tab for the cost of developing new drugs by paying higher prices at home. We may consider introducing price controls on drugs, or limiting coverage on new most expensive drugs; however this would result in fewer new drugs being developed. This alternative does not sound great, but can America still afford subsidizing ever growing R&D expenses for cool new drugs?