The Socialized Medicine Scheme and Health Savings Accounts

The current socialized medicine bill proposed in the house and senate discourages a cost containment method known as the Health Savings Account (HSA).


What is a health savings account (HSA)? Is the HSA a cost containment tool? Is the proposed socialized medicine scheme discouraging the use of the HSA?





What is a Health Savings Account (HSA)?

The health savings account (HSA) is a market based, consumer driven, health-care cost containment mechanism. Through the use of tax qualified deposits to the medical expense savings account and through withdrawals from the account of tax free money (tax free when used for qualifying medical expenses) the consumer is put in the a position of spending their own funds in the wisest manner. (1) (2)

The health savings account is the concept of moving insurance back to the realm of catastrophic coverage. That is, you are allowing insurance to perform its intended use and moving routine items to the sole direction of the consumer. In this way you remove the use of the "insurance mechanism" for everyday expense and/or basic health maintenance issues. (3) (4)

Is the Health Savings Account a cost containment tool?

Health insurance dates back to the artisans of imperial Rome. (5) Health insurance progressed over the years and between 1910 and 1945 the basic medical care expense program was introduced. However, basic medical care expense policies were inadequate against catastrophic accidents and illnesses that required long hospital stays and/or extensive treatment. (6) In extended stay and extensive care cases, the medical expense plan left the insured with large unmanageable bills that were not covered by the basic medical expense plan.

To address the short comings of the basic medical expense plan, Liberty Mutual Insurance Company in 1949 introduced major medical insurance to provide insurance coverage for catastrophic medical events. (7) Today major medical is the most common medical-care coverage available. (8)

However, as with any insurance plan, public or private, there is an inherent problem of the "third party payer system". That is, when a third party pays a bill on the consumer's behalf, the consumer is disenfranchised from the health-care cost and health-care provider. That the third party payer effect leads to the any cost from any provider phenomena. (9) (10) (11)

Major medical health insurance was designed to pay for catastrophes. However, in the recent past major medical has been combined with elements of the old basic medical expense plan with offerings (known as "extras") such as doctor office co-pays, specialist co-pays, prescription cards co-pays and co-pays for emergency room visits. The relatively small out of pocket co-pay with the remainder of the bill subject to the third party payment effect mentioned above, leads to over utilization at a high cost. That is, the cost of the routine expense and the provider of the routine expense are not items that the consumer directly measures in regards to expense or quality due to the third party payment effect.

If you price a typical major medical plan with a $1,000 deductible and include the menu of "extras" as mentioned above, then reprice the plan removing the "extras", you find, as a rule of thumb, a 30% reduction in cost. Further, by increasing the deductible from $1,000 to $5,000, you generally see another 15 to 20% reduction in cost. Hence the proponents of high deductible health plans (HDHP) point to the immediate savings to the consumer of the traditional major medical plan with a high deductible. In other words, taking the major medical plan back to its intended initial use as a "catastrophe plan".

With the removal of the "extras" and the increase in the deductible a major cost savings is achieved. This cost savings is then redirected into the health savings account. The health savings account then gives the consumer the ability to make cost effective decisions about more minor, mundane, everyday expenses such as routine doctor visits, prescription drugs, physicals, etc.. The consumer can shop these routine medical needs and find the best provider at the lowest cost. In other words, the third party payer effect is removed.

Is the current socialized medicine scheme discouraging the use of HSA's?


In both the house and senate versions of socialized medicine the health savings account is discouraged rather than encouraged. (12) Coverage never intended to be included in high deductible health plans are required to be included driving up cost for the major medical portion. Further, limitations on contributions and withdrawals are proposed in both house and senate plans.


The arguments to discourage the health savings account are class warfare based. The typical argument avoids the cost containment feature of the health savings account and concentrates on the class warfare argument associated with the tax qualified status of health savings account as well as the health savings account not being a popular program. (14) (15) However, the critical arguments to discourage HSA's are quickly dispatched as highlighted in a paper by Michael F. Cannon of the Cato Institute as well as other evidence . (16) (17) (18) (19)

Basically the arguments against health savings accounts are that the wealthy and/or high income earner takes advantage of the tax aspect of health savings accounts more often than low wage earners. The argument is the classic class warfare argument and has nothing to do with the main idea of cost containment. The arguments against HSA's point out that HSA's are not popular and have little impact on market share of health insurance. The popularity argument is based on notions and not empirical evidence. That in fact between 2004 and 2010, a mere six years, the HSA has captured 12% of the health insurance market place. (20) (21)(22)

One must take into account that the proposed socialized medicine scheme is nothing more that an elaborate and very complicated price fixing scheme. (23) Fixing prices has nothing to do with cost containment. In point of fact, price fixing schemes have always produced reduced supply. The proponents of price fixing schemes think fixing a price somehow affects basic underlying cost. The results of price fixing is well known within the discipline of economics. Its known to fail each and every time ever attempted. There is not one recorded incident in all of economic history where price fixing ever succeeded. Hence the discouragement of the HSA under the proposed socialized medicine scheme fits the proponents wishes as they are removing a cost containment measure in favor of price fixing.

Summary

The health savings account is a cost containment measure. The health savings account is an attempt to put health insurance back in the realm of catastrophe coverage and make routine medical needs a consumer driven point of sale decision hence creating a cost containment environment. The currently proposed socialized medicine scheme is in fact discouraging health savings accounts as a cost containment measure.


Notes:



(a) the phrase health savings account gets blurred. Many times the phrase health savings accounts (HSA) is used when referring to high deductible health plans (HDHP). Also, the phrase health savings account is sometimes used to refer to the combination of the health savings account and the high deductible health plan.

(b) an excellent source for health savings account information can be found as http://www.hsabankusa.com/.

(c) a very comprehensive discussion of the tax aspects of the health savings account can be found at http://www.irs.gov/publications/p969/ar02.html


(1)http://www.examiner.com/examiner/x-11804-Health-Care-Examiner~y2009m7d27-Health-Savings-Accounts-101-Twelve-reasons-to-have-a-Health-Savings-Account-HSA

(2)http://www.foxnews.com/opinion/2010/01/21/clgray-health-care-reform-obama-massachusetts/

(3)http://www.healthsavingsinfo.com/

(4)http://www.health--savings--accounts.com/hsa-weblog-arch/2009/07/hsa_plan_owners.html

(5)(6)(7)(8) http://www.mrm-mgu.com/sections.asp?sec=42

(9) http://www.healthsavingsinfo.com/

(10) http://www.euclidmanagers.com/downloads/legrev/LRSept04READER.pdf

(11) http://www.answers.com/topic/economics-of-health

(12) http://blog.group-insurance-guide.com/2010/01/14/health-savings-accounts-effects-of-health

(13)http://blogs.wsj.com/wallet/2009/06/26/health-savings-accounts-come-under-fire/tab/article/

(14)http://industry.bnet.com/healthcare/1000865/health-savings-accounts-much-ado-about-nothing/

(15) http://money.cnn.com/2009/09/14/smallbusiness/health_savings_account_HSA_reform/index.htm

(16)http://www.cato.org/pub_display.php?pub_id=6395

(17) http://www.health--savings--accounts.com/hsa-weblog-arch/2009/07/hsa_plan_owners.html

(18) http://articles.moneycentral.msn.com/Insurance/InsureYourHealth/3-health-insurance-blunders-to-avoid.aspx

(19)http://blogs.wsj.com/wallet/2009/06/26/health-savings-accounts-come-under-fire/tab/article/

(20) http://www.healthsavingsinfo.com/

(21)http://www.kff.org/insurance/7672/

(22) http://www.ahipresearch.org/pdfs/2008_HSA_Census.pdf

(23)http://thelastembassy.blogspot.com/2009/12/socialized-medicine-scheme-bending-cost.html

The Socialized Medicine Scheme: Cadillac Health-Care Plans

Proponents of the socialized medicine scheme
want to pay for the $1 trillion price tag of
socialized medicine by levying a tax on so called
Cadillac health-care plans (1). What is a Cadillac
health care plan? Will everyone end up with a
Cadillac health-care plan? Who will pay the tax?
What is the amount of the tax?



Cadillac health-care plans defined

The term "Cadillac" was first used to define a category of health-care plans in the 1970's. The term was used again in the 1980's. Then it was used extensively in the 1990's when Hillary Care was proposed. Basically the term was meant to distinguish the perception of luxury health-care plans.(2)

However, the proponents of the current socialized medicine scheme have arbitrarily defined a Cadillac health-care plan in terms of the level of annualized premium. Individuals have a Cadillac plan if the annual premium exceeds $8,000. A family is deemed to have a Cadillac plan if their annual premium exceeds $21,000. (3)

Will everyone end up with a Cadillac plan?

In order to find the answer to the the question posed above you first need to understand a predominant phenomena of taxation. The phenomena is: when you introduce or increase a tax on an item you will get less of that item. For example, if government levied a $1 tax on a loaf of sliced bread, consumers will demand less sliced bread and hence sliced bread supply will fall as demand for sliced bread falls.

Therefore, if government levies a tax on Cadillac plans, then demand for Cadillac health-care plans will fall hence we will have less Cadillac plans. Employers will buy more modest plans for their employees. (4) In other words, employers will exercise tax avoidance.

However, a problem then occurs for the revenue stream needed by proponents of the socialized medicine scheme. As the Cadillac tax reduces the number of Cadillac health-care plans , then tax revenue will fall as less taxable items exist to in fact tax. Its the Laffer Curve and associated arguments by Dr. Art Laffer. (5) What then?

This problem has been solved by socialists by merely not indexing for inflation the $8,000 individual and $21,000 family thresholds mentioned above. (6)

Looking back in time, an income earner once suffered tax bracket creep. That is, inflation pushed up wages of the income earner and the income earner being also a tax payer, moved from one tax bracket into another tax bracket due to inflating wages. However, prices were inflating simultaneously. Hence the income earner's purchasing power remained unchanged with wages following prices. Yet the income earner's tax bracket changed and the income earner paid more tax thus suffering diminished purchasing power due to tax bracket creep. That is, constant purchasing power as wages follow prices yet higher taxes ended in dimished purchasing power.

Tax bracket creep was deemed unfair and hence the introduction of tax brackets indexed for inflation.

Ah the evil of it all! What is good for the goose is not good for the gander when it comes to tax revenue needed to fuel the $1 trillion dollar socialized medicine scheme. Socialists have merely gone back to the taxation concept of tax bracket creep. In this case one might call it health plan creep.

The Kaiser Family Foundation states that the average family plan premium is $13,375. (7) Kaiser goes onto to mention the average price increase for family health care plans from 1999-2009 was 8.7%. Hence the average family plan will become a Cadillac plan by 2015. (8)

Its rather simple mathematics to see that everyone will eventually have a Cadillac health-care plan.

Stepping back for a moment, and looking at the term "Cadillac" from the perspective of Political-Economy, socialists are simply using the specific term "Cadillac" as a sham. Its merely a term used for a class warfare and misdirect strategy. Socialists are using the term Cadillac to make John and Jane Q. Public think only people with very rich benefits aka Cadillac plans are going to carry the water for the funding of the socialized medicine scheme. Hence John and Jane Q. Public are class warfare baited and their attention is directed away from the fact that John and Jane Q. Public will soon, themselves, have a Cadillac plan. Oops! Oh yes! The dollar threshold of a Cadillac plan is unadjusted for inflation hence through the compounding of inflation everyone ends up with a Cadillac plan.

Hence John and Jane Q. Public's modest benefit plan soon morphs into a Cadillac plan due to inflation. Like tax bracket creep, socialists have now introduced health benefit plan creep. Its merely a matter of time when everyone has a Cadillac plan. Which means its merely a matter of time when everyone pays the tax. John and Jane Q. Public are being duped.


Who pays the tax and at what tax rate?

Another phenomena of tax is that the ultimate payer of any tax is always the consumer. (9) (10)All taxes are passed onto consumers. Hence the concept that the Cadillac tax will be levied against insurance companies is yet another class warfare and misdirect argument to throw John and Jane Q Public off the real subject at hand.


What is the tax rate? Try 40%. (11)

Summary
Within a very short period of time, all consumers of health care insurance, through health benefit plan creep, via non-indexed thresholds and inflation, will have a Cadillac plan and the consumer of health benefits will be taxed at a 40% rate.



Notes:

(a) the picture above is the Titanic beginning sea trials 04/02/1912. Seemed appropriate.

(b) the Cadillac tax has been proposed by politicians through expert analysis and confirmation by MIT economist Jonathan Gruber. However, it has been uncovered that Gruber has a major conflict of interest. Please see the following post by Donald Luskin of Trendmacro entitled Where's the Outrage:
http://www.poorandstupid.com/2010_01_03_chronArchive.asp#3413284275177039725
References:

(1)http://www.nytimes.com/2009/10/13/health/policy/13plans.html?_r=1&hp

(2)http://www.slate.com/id/2232434/

(3) http://www.nytimes.com/2009/10/13/health/policy/13plans.html?_r=1&hp

(4)http://www.healthbeatblog.com/2009/12/fact-check-the-cadillac-controversy.html

(5)http://en.wikipedia.org/wiki/Laffer_curve

(6) http://www.nytimes.com/2009/09/21/health/policy/21insure.html

(7)Ibid

(8) http://www.nytimes.com/imagepages/2009/09/21/business/21insure_graphic_ready.html

(9) http://www.sweethomenews.com/article/20284-consumers+pay+tax+hikes

(10) http://www.heritage.org/Research/Taxes/cda04-12.cfm

(11) http://www.nytimes.com/2009/10/13/health/policy/13plans.html?_r=1&hp

The Socialized Medicine Scheme: Medicare is a popular government-run program?

An argument put forth by proponents of Socialized Medicine is that Medicare is a popular government run medical program. (1) That the Medicare program is popular among participants.

Is Medicare popular or is it popular as no alternative medical plan is available to participants? Is Medicare popular with suppliers of medical services? Is Medicare popular with participants as the price paid by participants (tax levied) is too low in regards to benefits derived? What part does Medicare's monopolistic price controls forced upon suppliers of medical services and the consequential subsidization of price through private insurance have to do with popularity or satisfaction of Medicare?



Medicare is a popular government-run medical program?


The argument supporting the popularity of Medicare among participants and hence a popular government run health-care program points to a 2007 CAHPS survey (2). In the survey 51% were satisfied or very satisfied when asked how they rated their health plan (Medicare).


The survey question that yielded the above results is as follows: "Using 0 to 10, where 0 is the worst possible and 10 is the best possible, how would you rate your health plan?" A glaring problem exists in regards to the survey question mentioned above: how can a survey respondent rationally judge satisfaction regarding Medicare when the survey respondent has no other alternative regarding their health-care? How can any survey respondent, in any survey, regarding any product or service, rationally rate satisfaction when no other choice(s) are presented to the survey respondent?


The survey question was posed to another group that in fact have alternate choices and can rationally judge satisfaction. Reviewing the results of the above mentioned survey regarding private insurance yields a result of 40% satisfied or very satisfied. However, in this case the survey respondent has many alternative private health plans available to base their response upon. Health plans in the private sector cover the entire spectrum from basic scheduled medical indemnity plans, to traditional major medical plans, to health savings accounts, to plans with expansive coverage with low out of pocket costs. Hence if the survey respondent has a health plan but perceives an alternate health plan as more desirable, would the survey respondent score his/her current plan with less satisfaction merely because they desire another alternative plan?


Therefore, since Medicare represents a monopoly on health-care for survey respondents, would the existence of alternate plans for the survey respondent to choose from have caused the survey results to vary? If the survey respondent was not faced with a monopolistic provider (Medicare), would alternatives, if available to the survey respondent, seem more or less satisfactory to the survey respondent than the zero choice alternative provided by the monopoly known as Medicare?



What about Medicare's popularity among suppliers of health-care?


The survey question and survey results mentioned above are purely a demand side examination. That is, the survey is only examining those that receive health-care or in other words, the demanders of health-care supply.


What about the popularity of Medicare on the supply side of the equation. How satisfied are suppliers of health-care regarding the health insurance plan known as Medicare?


Suppliers are completely dissatisfied by Medicare. More and more doctors are no longer accepting Medicare recipients. (3) Medicare services providers as well as medical care device makers are forced into accepting an artificial below market price from Medicare. This artificial price is being rejected by some while other consequences of the artificial below market price are doctors not investing in the latest technology as well as medical device supplier not investing as quickly in advancements in devices.(4)


Hence in this particular demand and supply segment of health-care you have the demanders 51% satisfied and the suppliers so dissatisfied they are more and more opting out of providing health-care through the Medicare mechanism of monopolistic price controls.


A scenario of satisfied demand and completely dissatisfied suppliers can not last long as the suppliers will find a better use for their resources. In other words, resources will be employed in a more productive manner, likely in other indusrties with no price controls, by those making up the current health-care supply.



Medicare's artificial price affects satisfaction for both Demand and Supply


Medicare is going bankrupt. Imminent bankruptcy is around the corner. On the demand side of the equation Medicare recipients are being charged an artificially low premium. The artificially low premium (tax levied) for Medicare is unsustainable as medical-care expenditures are greater than receipts. When expenditures are greater than receipts over an extended period of time, such as the Medicare case, then insolvency is the eventual result.


Receipts or premiums in this case is the tax revenue for Medicare. The imminent bankruptcy of Medicare is in large part due to underfunding (tax receipts). Had current Medicare recipients been charged a higher tax rate and/or been taxed on larger amounts of income, would the Medicare survey mentioned above yielded a different satisfaction percentage? Did an artificially low tax rate during the working years of current Medicare recipients affect the satisfaction level of the survey mentioned above?


On the Supply side of the equation, artificially low payment rates forced upon Medicare suppliers creates dissatisfaction. Any supplier forced to take a payment below market rates will always be dissatisfied. Price controls always create supplier dissatisfaction.



Artificial Medicare prices and the Private Insurance Subsidy


Given the Medicare program is facing bankruptcy, and with Medicare artificial pricing affecting satisfaction in regards to Demand and Supply, what is holding the plan together on a current basis? Medicare is on life support through subsidies from private insurance.

One way to get around Medicare price controls forced upon suppliers is for suppliers to make up the below market payments by over charging another group. Medical-care suppliers have raised prices they charge for goods and services to Private Insurers hence subsidizing Medicare. (5) (6)


The current Socialized Medicine proponents want to eliminate or strongly reduce private health care. If you eliminate private health insurance where will suppliers of medical-care find the revenue lost from over charging the segment known as private health care?

Summary


Proponents of Socialized Medicine, pointing to Medicare as a popular Government run plan, are using a highly flawed argument.How can any survey respondent, in any survey, regarding any product or service, rationally rate satisfaction when no other choice(s) are presented to the survey respondent?


Basing an argument on the the demand side of health-care without regard to the dissatisfaction of the supply side is an incomplete argument. That price controls by the monopoly known as Medicare is creating artificial satisfaction on the demand side of health-care and price controls are directly creating dissatisfaction on the supply side of health-care.

That the looming bankruptcy of Medicare due to underfunding is a direct result of insufficient tax revenue. With Medicare recipients paying an insufficient tax for benefits provided, would a sufficient tax in the past (higher tax and/or higher tax applied to more income) have impacted the current Medicare recipients satisfaction regarding the survey result?


Finally, the survey results are an attempt to argue for Socialized Medicine and the abatement of private health-care. The argument does not account for Medicare's monopolistic price controls causing suppliers to make up the deficient price mandated by Medicare through higher prices charged to private health-care. The elimination of private health-care would then cause suppliers to seek alternative uses for their resources as the price controls of the monopolistic provider Medicare could no longer be subsidized by private health-care.



(1) http://news.aol.com/article/government-run-health-care-is-already/809178


(2) http://yglesias.thinkprogress.org/archives/2009/07/the-popularity-of-government-run-health-insurance.php


(3) http://shrinkwrapped.blogs.com/blog/2008/06/government-run.html


(4) http://www.heritage.org/research/healthcare/wm2381.cfm


(5) http://online.wsj.com/article/SB10001424052970204884404574362543878647858.html

(6) http://www.lesjones.com/2009/06/23/are-medicare-cuts-being-subsidized-by-private-health-care/

The Socialized Medicine Scheme: Bending the Cost Curve

Diagram of Marginal Cost

Proponents of the socialized medicine scheme offer a talking point entitled Bending the Cost Curve. Sounds impressive does it not? However, is the talking point put forth of bending the cost curve merely price controls in disguise?



Definition of Cost Curves:


(1) Short run and long run average cost curves are U shaped,

(2) Short run cost curves are U shaped because of diminishing returns,

(3) Long run cost curves take on a U shape because economies and diseconomies of scale. (1)


Shape of the Cost Curve?

Bending the Cost Curve, that "U" shaped curve in the diagram above, can surely be a different shaped "U". However, the shape will always be "U". Which means marginal cost rises. (2) (3)

Its not about Cost Curves

The concept of a cost curve is being hijacked by politicos when they use the phase "Bending the Cost Curve". That is, there is a complete disregard for the economics of the cost curve itself and merely a catch phrase has been developed that sounds as if sound economics are being applied.

The vast majority of those using the talking point Bending the Cost Curve have no earthly idea what a cost curve is nor the economic theory surrounding the cost curve. In other words, in the current heath-care debate, bending the cost curve is not economics nor political-economy. Its pure politics. Its political speak.

Serious Discussions of Changing the Cost Curve of Health-Care

There are serious discussions on how to lower costs within the realm of health-care. Sound strategies exist that pertain to cost factors such as more efficient organization, physician supply, institutional factors, comparative effectiveness of research, reform medical liability, etc., etc.. In other words, strategies that directly effect a cost curve. (4), (5), (6).

There is a sea of research on how to effectively reduce health-care costs. Ideas and procedures that really do address the concept of a cost curve.

Enter the Politicos

With the political speak talking point of Bending the Cost Curve firmly in hand, politicos merely take the path to price controls. In other words, when politicos say bending the cost curve they really are talking about price controls.

Politicos want votes not real results. Rather than addressing the true problem associated with cost, its more politically expedient to merely apply price controls. Politicos end up with a price argument even though they began with a cost argument. Remember, we are going to bend that mean old cost curve. Forget that, attack price.

The political argument for price controls is articulated with sub-talking points such as the percentage of Gross Domestic Product the USA spends on health-care in comparison to other economies (argued that total price is too high), affordability (argued as price being too high), that the uninsured are uninsured do to price, etc., etc. The point being the politicos make a price argument not an argument for strategies regarding cost factors i.e. bending the cost curve gets thrown out the window in favor of a price argument.

The economic disconnect is that final price is made up of a series of costs. That if you concentrate on cost factors, and truly bend the cost curve then you will have materially changed final price.

However, if you attack final price, and make price a political issue, then somehow artificially reducing price will affect cost? That's the cart before the horse.

Price Control Strategy

You are going to be very hard pressed to find one case in economic history where price controls have ever worked. (7) (8) Then why use price controls? Because really bad economic ideas never die they merely get recycled and sold to the gullible.

What the politicos want you to think is that they have a concern with cost (don't forget that bending the cost curve mantra) but in fact their argument is price and the solution is price controls.

What do Price Controls Produce?

Price controls always end with the same result: depressed supply of the item. Supply falls and rationing of the item occurs.

Sure seems like the rationing argument crops up over and over again within the health care debate. Odd huh?

Price Controls with Increased Price?

As mentioned above, really bad economic ideas such as price controls never die. However, really bad economic ideas can be made even worse. Really? Sure! Why not increase the price first, add some taxes to further increase the price, take the increased revenue produced by the increased price and redistribute to millions of uninsured and make them insured hence creating a demand shock, then slap on price controls and have a real mess. Sounds like a plan!

No Price Control Scheme is Complete without Big Government

When you discuss price controls you are talking bureaucracy. If you are going to control price, you will need plenty of rules and regulations. No rules and regulation manual is complete without an army of government bureaucrats. The current health-care legislation creates upwards of 110 new government departments. Now that's bending the cost curve!

Summary

Politicos are using a the slogan "Bending the Cost Curve" with no real understanding of the economic theory of cost curves. (9) That politicos want you to feel they are concerned with cost when in fact their strategy boils down to price control.

(1) http://www.economicshelp.org/blog/economics/diagrams-of-cost-curves/

(2) http://www.economicshelp.org/microessays/costs/diminishing-returns.html

(3) http://csob.berry.edu/faculty/economics/CostCurves/CostCurves.htm

(4)http://content.healthaffairs.org/cgi/content/abstract/28/5/1260

(5) http://www.kaiserhealthnews.org/Daily-Reports/2009/July/17/CBO.aspx

(6)http://www.brookings.edu/reports/2009/0901_btc.aspx

(7) http://freedomkeys.com/pricecontrols5.htm

(8) http://austrianeconomics.wikia.com/wiki/Price_controls


(9) http://www.politico.com/livepulse/1009/CBO_Bend_the_cost_curve_what_does_that_even_mean.html

Socialized Medicine Scheme: Universal Coverage does not equal Universal Access

The socialized medicine scheme is based in part on the premise that universal coverage creates universal access. What would be the true costs of universal coverage if it truly created universal access?

Defining Terms

(1) Universal Coverage: health insurance coverage for all persons in a state or country, rather than for some subset of the population. It may extend to the unemployed as well as to the employed; to aliens as well as to citizens; for pre-existing conditions as well as for current illness; for mental as well as for physical conditions. (1)


(2) Universal Access: universal access can be defined as access for all to quality health services if need be, with social health protection. Universal access is not, by itself, sufficient to ensure health for all and health equity. The roots of health inequities lie in social conditions outside the health system’s direct control, to be tackled through intersectoral collaboration. Universal access however is the necessary foundation within the health sector on the road to health for all and health equity. (2) (3)

Universal Coverage and Universal Access

From the definition above one can see that universal coverage is on the demand side of the equation. Demand for health-care products and services would certainly increase with universal coverage.

From the definition above, Universal Access is related to supply. Supply of health-care products and services would need to adjust to the increased demand caused by universal coverage.

The Missing Determinant

The missing determinant of universal coverage in relation to universal access, is price. That is, to achieve universal coverage a price (cost) must be paid for those currently uninsured. To achieve universal access an incentive price must exist for supply to accommodate demand.

Price/Cost
To achieve universal coverage a price/cost must be paid. To fully insure the entire population, income and/or wealth must be redistributed. The political class attempts to make the moral argument that redistribution of income/wealth must occur from the producer class to the recipient class as the recipient class is uninsured in large part due to price/cost. That is, the uninsured are in large part uninsured due to affordability of health insurance.

However, the price of health insurance is directly related to the cost of producing/providing health-care. In other words, in the free market, the demand for health-care intersects the supply of health-care, at point price. The price point of health care is known and hence the "price" becomes the cost of health insurance. That is, the risk of facing the price of health-care is then a major component of determining the cost of health insurance.


Price Controls

In the scheme of socialized medicine the argument routinely put forth is that the price to provide health-care is too high. That is, even though demand and supply produce price, the price point is too high. In other words, the natural or true price created by demand and supply becomes a socio-economic argument. As the argument goes, the price is too high because only a certain percentage of Gross Domestic Product (GDP) should be allocated to health-care. That somehow and some way, if the percentage of GDP allocated to health-care was lower, then the subsection of consumers uninsured would find coverage affordable. The argument goes on to compare costs in one country to costs in another country and/or percentage of GDP spent on health-care in one country to another country (one economy compared to another economy). Note that it is a price argument.

Welcome to artificial pricing. In a command and control economy "price" is set artificially regardless of demand and supply. Price can be set artificially too high or too low in a command and control economy. In the socialized medicine scheme argument, "price" is artificially set below the price produced by the previous free market for health-care.

Arguments for artificial pricing are artificial by nature. If consumers value an item then they demand the item. For example, if the Chinese economy demands rice, and rice makes up 20% of GDP, why is 20% wrong and 12% right? Price controls always backfire. (4)

Artificially Set Prices in the Socialized Medicine Scheme

As previous pointed out, in a free market, demand and supply intersect at price. The price point can be afforded by most consumers but a subsection of consumers can not afford price due to their particular command of resources (income). For example, the demand and supply of 42 inch flat screen TV's produce price (p). Price (p) attracts certain consumers while other consumers do not have the resources to allocate to a 42 inch flat screen TV.

In the realm of socialized medicine the political class argument is put forth that in order for the subsection of consumers to afford price, income and wealth (resources) needs transferred to to this subsection of consumers (redistribution of income and wealth). However, the producer class resists the redistribution to the recipient class. Further, the redistribution causes the producer class to have less disposable income to pay for health-care. In other words, the price point of health-care then becomes unaffordable for some producer class members due to the redistribution of income. That is, some of the producer class now slips into the recipient class due to redistribution of income and wealth.

Enter political-economy. If price is artificially set below the free market price, then the redistribution of income and wealth from the producer class can be set low enough to cut resistance and to stop the slippage mentioned above of producer class members falling into the recipient class.

The Effects Producing Universal Coverage through Artificial Pricing and Redistribution

When universal coverage is achieved through artificially pricing and redistribution of income the proponents of socialized medicine then promote that they have given the masses universal access. That universal coverage is the avenue to universal access.

However, access is supply driven. If Price is distorted (artificially set below the market) the supply, which is the summation of suppliers, now faces a disincentive in the form of an artificially low price.

Existing suppliers now have to decide to stay in the health-care field or allocate their resources to other ventures. If price is too low, some suppliers leave the market place. Further, with price set artificially low, many other potential future suppliers e.g. future doctors, nurses, medical device makers, pharmaceutical research companies, etc. shift their resources to other more profitable fields where price is set by the free market. However, other supplier will enter the health-care field but enter on "cost". That is to say, the cost sensitive supplier offers cut rate services, service quality below service quality that was available at Price (p) set by a free market. (5)

Hence artificially low prices set by command and control then causes supply to dry up and/or become of lower quality. The ability to access health-care is then diminished for the entire group of universal coverage participants as demand engulfs supply. Price (p) can not function as the rationing agent as it has been set artificially. Therefore, among an array of rationing agents, time (t) becomes a component of rationing. For example, at artificial price (aP) the supply of hip replacements is 1000 per day. However, universal coverage has created a demand for hip replacements of 5000 per day. Time must pass before the hip replacement can occur for the majority of demanders due to restricted supply.

Summary

Universal Coverage through redistribution of income and artificial pricing leads to a universal access that is rationed through time and the Universal Access is generally of lower quality. That the only way to create un-rationed universal access is to allow the free market to determine price through demand and supply.

However, if price is allowed to be the determinant, price set by the natural forces of demand and supply in a free market, then un-rationed universal access would have a price tag of redistribution of income and wealth that would break the back of the producer class. (6)

Hence universal coverage, with price set artificially low, as proposed by proponents of the socialized medicine scheme, actually leads to rationed universal access for the entire group of participants.

(1)http://www.mondofacto.com/facts/dictionary?universal+coverage

(2) http://www.becausehealth.be/becausehealth/PDF/seminar2009/becausehealth_140509_concept_bc_ws.pdf

(3) Advancing and sustaining universal coverage. In: Primary health care: now more than ever. The World Health Report 2008. Geneva, World Health Organization, 2008. http://www.who.int/whr/2008/whr08_en.pdf

(4)http://www.ncpa.org/sub/dpd/index.php?Article_ID=8146

(5) http://www.dailymail.co.uk/news/article-1234276/Britain-sick-man-Europe-Heart-cancer-survival-rates-worst-developed-world.html

(6) http://www.dailymail.co.uk/news/article-1234660/Pre-Budget-report-Clobbering-middle-earners-national-Insurance-raid-mean-40-000-find.html

The Socialized Medicine Scheme: Distortions in Risk Management and Pure Risk Transfer

Does The socialized medicine scheme, through mandated one-size-fits-all health care coverage, distort the individuals ability to deploy risk management and consequently distort the pure risk transfer mechanism ? In this article we explore the following questions:

(1) are the individuals decisions regarding risk avoidance, risk reduction, risk mitigation and risk retention being distorted by mandated coverage and the distortions leads to the immediate pure risk transfer aka purchase of insurance?

(2) does the socialized medicine scheme of mandate coverage reverse the proven process of insurance theory and practice and require the immediate transfer of risk (purchase of insurance) with risk management deployed after the fact via through tax disincentives ?

(2a) does the reversal of the proven process of insurance theory and practice lead to risk management becoming a cost item rather than a cost reduction item?

Defining Terms
(1) What is pure risk? A category of risk in which loss is the only possible outcome; there is no beneficial result. Pure risk is related to events that are beyond the risk-taker's control and, therefore, a person cannot consciously take on pure risk. (1)

(2) What is risk management? Risk management is the application of tools and procedures to contain risk within acceptable limits. (2)

(3) What is insurance? A promise of compensation for specific potential future losses in exchange for a periodic payment. (3)


Risk Management
Its well established within insurance theory and practice that one needs to review and employ risk management concepts and techniques before the consideration of the transfer of pure risk (insurance).

Risk management techniques reduce the need to transfer portions of pure risk. The less pure risk transferred means the lower the consideration paid (premium) for the transfer of risk. Hence risk management lowers costs.

Risk Avoidance

The first risk management technique one needs to explore is risk avoidance. This is simply avoiding the risk all together. For example, if you never want to sustain a football injury, then do not play football. However, risk avoidance has it limitations as not all risks can be avoided.

Risk Reduction
If the risk can't be avoided or you want to benefit from an endeavor that involves pure risk, then you need to go to the next step of risk reduction. That is, can one reduce the chances that pure risk might occur.

For example, risk reduction of operating and/or owning a motor vehicle includes taking drivers education, taking an advanced defensive driving course, reducing/combining trips to reduce miles driven, owning snow tires,etc.. Hence the pure risk of an auto accident can be reduced through safety.

Risk Mitigation

Risk mitigation is an exercise in risk management. Since the pure risk exists, and if the pure risk occurs, we need to mitigate the loss. Fire does occur. Owning a fire extinguisher, being trained in the proper use of a fire extinguisher, and placing the extinguisher in fire prone areas can mitigate the scope of the loss if fire occurs.

Risk Retention

Risk retention is the concept that if pure risk exists, and given the other risk management techniques have been deployed, then how much of the ensuing potential financial loss of the pure risk can you reasonably absorbed? This differs per individual. If the maximum potential loss is $100,000,000 can you retain $1000, $5000, or $10,000 of the risk? That is, given an individuals financial situation, what portion of a loss can be financially absorbed before it becomes financially disabling?

Therefore, before one ever explores the transfer of a risk (aka the purchase of Insurance), one must go through the risk management process to access risk avoidance, risk reduction, risk mitigation, and risk Retention.

The Transfer of Risk

Only after you exercise the steps of risk management can you intelligently determine that a particular pure risk exists and how to financially treat the risk. That you can or can't avoid the risk, that you have determined how much you can reduce the risk, that you have determined how much you can mitigate the risk, and a determination has been made on the amount of pure risk that can be financially retained.

Once you have passed through the risk management steps, and determination has been made that X amount of pure risk needs transferred then at this point one must attempt to find a ready market to transfer the portion of the risk that one can not retain i.e. purchase insurance.


The Dynamics of Risk Management and The Transfer of Risk Regarding the Individual
Applying risk management and determining the need to transfer pure risk is going to yield many and varying results among differing individuals with differing circumstances. For example, John Q. Buffet can likely retain the majority of pure risks whereas on the other end of the pure risk curve Jane Q. Public needs to transfer the majority of pure risk. Between John's situation on one end of the spectrum and Jane's situation on the other end of the spectrum are an endless series or risk management and pure risk transfer scenarios.

Enter the Socialized Medicine Scheme
The socialized medicine scheme proposed in the US House of Representatives and Senate imposes a one size fits all risk management and transfer of pure risk scenario which minimizes the incentive for risk management. The known dynamics that exist within risk management and pure risk transfer among differing and varying individuals are disregarded through the use of one-size-fits-all pure risk mandated coverage. The mandated coverage requires a relatively low set deductible and relatively low set out-of-pocket cost. The proposed plan also includes ancillary coverages such as relatively low doctor office co-pays and relatively low prescription card co-pays. The predetermined coverage with relatively low deductibles and co-pays causes little room for risk management. The predetermined mandated coverage design pigeon holes all risk management although its well known that individual risk management needs vary widely.

Consequently, the theory of risk management and pure risk transfer is violated by predetermined mandated coverage. The process of risk management immediately leading up to determination of the transfer of pure risk is minimized .

What are the Consequences of Minimizing the Risk Management step?
Inefficient Allocation of Resources

One very important consequence of minimizing the risk management step is the inefficient allocation of resources for individuals. For instance, why would John Q. Buffet want to allocate $10,000 per year for the transfer of pure risk when in fact he would rather retain the risk? The $10,000 is now transferred from other activities John Q. Buffet values to an activity John does not value. This becomes an inefficient allocation of resources for John Q. Buffet. The same inefficient transfer of resources cascades across the entire spectrum as the vast majority of individuals would have chosen deductible and plans different than the mandated plan and deductibles.


Incentives created to Minimize Risk Management Techniques

Another aspect of a one-size-fits-all approach which consequently minimizes the risk management step immediately prior the determination of pure risk transfer, is the effect on risk management techniques. When risk management becomes a minimized procedure so do the risk management techniques become minimized. Assume for a moment that John Q. Buffet wanted to retain the entire risk while Jim P. Public wanted a very high deductible major medical plan and retain a relatively large portion of the risk. John and Jim are now required to outlay resources they had allocated elsewhere in the past. This is an additional cost to John and Jim. John and Jim are now incentizised to minimize rather than maximize risk management techniques they otherwise would have employed in the past.



The risk management techniques, that would have been paramount when retaining an entire pure risk or retaining a major portion of a pure risk, are now minimized by the relatively low deductible mandated coverage. John and Jim now have an incentive, through low deductible insurance, to minimize risk management techniques. That is, John and Jim don't deploy risk management techniques as they have in the past.

John and Jim rigorously deployed risk management in the past when they were retaining all or large amounts of pure risk. The retained risk is so low under mandated coverage that John and Jim have no incentive to rigorously deploy risk management. Lets say John always wanted to sky dive. However, as a risk management techniques John avoided sky diving. Why not sky dive now as the risk of injury is covered by insurance on a relatively low out of pocket dollar basis. It boils down to the following sarcastic comment you have surely heard in the past when a person is questioned about a risky endeavor: "...why not, I have insurance"!

Incentives Introduced to Recover Cost (to over utilize)

Another item creeps into the realm of pure risk when insurance is mandated and risk management is minimized: return on the dollar invest in insurance. The theory of insurance clearly points toward buying insurance for the catastrophe. When insurance is purchased for everyday items, consumers of insurance then have an incentive to maximize what they perceive as cost/benefit. In other words, if a consumer is forced to buy insurance with a low deductible, with plenty of benefits, but at a perceived high cost, then the consumer will attempt to recover cost through utilization of benefit.

Attempts to Deploy Risk Management After the Fact via Tax Disincentives

In the socialized medicine scheme an attempt is made to deploy risk management after the fact. As discussed above, the mandated coverage of the socialized medicine scheme creates an incentive to minimize risk management techniques. From the consumers point of view, all the risk management in the world will not reduce the cost of the relatively low out of pocket cost under mandated coverage.



Proponents of socialized medicine attempt to deploy risk management through a cost increase to mandated Insurance consumer. Rather than risk management being used as a cost reduction technique for the consumer of health-care, they use risk management as a cost increase item for consumers of health-care.


The proposed Soda Tax is an excellent example. Proponents of socialized medicine believe the consumption of soda leads to health problems. Hence to reduce consumption of soda they propose a tax. Hence risk management suddenly becomes a monetary increase in cost to the consumer rather than a monetary reduction in cost to the consumer.


Many proponents of socialized medicine also support taxes on fast food. That fast food leads to weight gain and hence is unhealthy. Enter the tax as a risk management technique to reduce fast food consumption. Once again we have a back door, after the fact, risk management method that increases cost to the consumer rather than decreasing costs through traditional risk management.

Summary

Risk management has been distorted and minimized as a proven step in the determination of pure risk transfer through mandated coverage. Hence the method of deploying risk management after the fact becomes a cost increase rather than a cost decrease method.



(1) http://www.investopedia.com/terms/p/purerisk.asp


(2) http://msdn.microsoft.com/en-us/library/cc500392.aspx


(3) http://www.investorwords.com/2510/insurance.html

The Administrative Cost Argument of the Socialized Medicine Scheme

Proponents of the socialized medicine scheme (aka single payer, public option) make an argument that "administrative costs" would be lower under a socialized medicine scheme vs. private insurance. Is this a valid argument or are terms and conditions skewed? Are the mathematics/statistics of the argument presented incorrectly? Are monopolistic pricing powers being confused/included within the term "administrative costs"? What about the item dislocated labor markets?


Administrative Costs Defined

First of all what are "administrative costs" within the field of insurance? One needs to know the terminology.

The "load" is the term that refers to administration cost in the field of insurance. "Loading" is the addition of the administration cost to the pure cost of insurance. Here are two widely used definitions:

(a) addition to the pure cost of insurance that reflects premium taxes, administrative costs associated with putting business on the books, and contingencies,

(b) the amount included in the premium to meet liabilities beyond anticipated claims payments to provide administrative costs and contributions to reserve funds and to cover contingencies such as unexpected losses or adverse fluctuations. (1)

Socialized Medicine Administrative Cost Argument

One of the arguments put forth by proponents of socialized medicine is: the "administrative costs" will be lower with socialized medicine vs. private insurance. The problem is that proponents of a socialized medicine scheme have shaped their arguments around differing definitions of "administrative costs" none of which match insurance theory or practice.


Administrative costs arguments put forth by socialists:

(1) in argument number one Administrative Cost are the traditional costs of the broad concept of general paper work administration,

(2) in argument number two administrative costs are more comprehensive including advertisement and claim administrative costs, screening of applicants, general paperwork, billing,

(3) in argument number three, which appears to be their most common argument, they define administrative costs the same way as in one and two above, then leave the realm of administrative costs, and include within the argument, the monopolistic pricing power of a socialized medicine scheme. In other words, they add in an exogenous variable monopolistic pricing power related to the pure product which has nothing to do with administrative costs,

(4) none of the arguments add in contingency costs,

(5) all arguments rely on a statistic from medicare pointing to the low cost administration of Medicare,

(6) all arguments exclude service level/service value and the consumer's ultimate satisfaction with "administration".




Reverse of the Original AT&T Break Up?


Looking at the subject of administrative costs from a historical perspective, and given history is always a good teacher as well as a good story, let us discuss monopolist powers.

Atlantic Telephone and Telegraph was the only "provider" of telephone services 30 years ago. For those of you under 45 years of age, imagine a time when there was only one Internet Service Provider (ISP).

The consumer received one and only one menu of choices and the one and only one customer service from exactly one provider known as Atlantic Telephone and Telegraph.

Bonus: you received one and only one price.

Say for instance you thought there should be more choices or better customer service. Sorry. one choice and this is how it is.

The consumer got fed up with one choice and authoritarian customer service. In the 1970's everyone complained about "the phone company". If you are under 45 years old, everyone hated the one and only ISP.

Along the way, the one and only provider, Atlantic Telephone and Telegraph, became administrative fat. Oh yes! Pork and Union diet only. Why not! There was no competition!

When the AT&T break up occurred, the new competitors ate AT&T's lunch. The biggest lunch plate item? Oh yes, AT&T's administrative costs.

Welcome to the telephone competition of today. You have an endless menu of options from multiple providers. Providers that offer good customer service (or you have the choice to change providers). Providers who run very lean operations and administrative costs in comparison to AT&T before the break up.

In other words, from an economics perspective, after the break up of Atlantic Telephone and Telegraph you received choice at a lower cost vs. monopolistic powers.



Monopolistic Administrative Costs Argument of Socialized Medicine

The argument for monopolistic administrative costs of socialized medicine is articulated by Erza Klien in his June 8th article in the Washington Post. (2) He summarizes as follows: "Moreover, public insurance is simply more efficient. Medicare holds costs down better than private insurance".

Senator Bernie Sanders argues for monopolistic administrative costs of socialized medicine by stating "...you have to deal with the enormous amount of waste that is currently within the private health insurance industry. The estimate is about $400 billion a year in administrative costs, billing, in profits, CEO compensation, in advertising--all of these things which have nothing to do with the provision of health care..." Senator Sanders goes on to say "In California, my understanding is that 1 out of every 3 dollars of premium goes to administration". (3)

What about the Medicare administrative cost argument? Is it true or false? False. Medicare administrative costs are higher, not lower, than for private insurance. (4) (5)

What about the 33% administrative costs as asserted by Senator Sanders? False. California Private Insurers average 12.7% administrative costs .(6)


Monopolistic Pricing Power of the Pure Product

One must note that the argument put forth that socialized medicine would have lower administrative costs purposely becomes entangled with monopolistic pricing. That is, the argument leaves the realm of administrative costs and attempts to include in the argument the exogenous concept of pricing the pure product.(7) The argument is invalid as administrative costs are items you add to the pure cost of the product.

In Klein's article he states "...act as a public insurer. To use market share to bargain down the prices of services much as Medicare does". Monopolies do not bargain. Monopolies set the price suppliers will be paid. Take it or leave it. In other words, Medicare is basically a monopoly and sets the price it will pay for services. Either accept medicare patients at price "X" or don't accept Medicare patients.

What in the world does the exercising of monopolistic pricing power to suppliers of the components of the pure product have to do with administrative expenses? Nothing. The argument is a separate argument unrelated to administrative costs.


Impact on the Labor Market of Monopolistic Administrative Costs

Exactly what is the labor demographics of the private sector health insurance administrative mechanism? (8) By and large the administrative labor force is female. Would this largely female work force be dislocated by a monopolistic administration within socialized medicine? Yes, large labor dislocations at an enormous cost. (9)

Hence we dislocate hundreds of thousands of predominantly female non-union workers at an enormous cost, and replace these workers with a unionized government labor force. Does that sound like administrative cost savings? What about the start up costs for the new government unionized administration? (10) What about the ensuing chaos of untrained administration workers, with a new procedural manual, in a newly formed bureaucracy, that now needs to provide service to millions and millions of people. Chaos is an understatement.

Also, many of the private sector female administrators are telecommuters. That’s right, they are mom's that work from home. Its a cost saving tool for private insurers and the workers like the idea. What about the indirect cost to the family of dislocating these workers? Do government workers telecommute? Largely no. Only 6% telecommute. (11) Why does the government not use this cost saving and labor satisfying technique?


Summary

The argument that a socialized medicine scheme would have lower cost is incorrect. That monopolistic pricing of the pure product is out of place in the administrative cost argument. That the socialized medicine scheme would create a monopoly in administration with unintended consequences for consumers. Finally, the socialized medicine scheme argument for monopolistic administration would dislocate hundreds of thousands of workers at an enormous cost and replace a largely female non-union work force with a high cost unionized government work force.

(1) http://www.answers.com/topic/loading

(2) http://voices.washingtonpost.com/ezra-klein/2009/06/health_care_reform_for_beginne_3.html

(3) http://www.thenation.com/blogs/edcut/440938/a_seat_at_the_table_for_single_payer">

(4)http://www.heritage.org/research/healthcare/wm2505.cfm

(5) http://www.wellsphere.com/healthcare-industry-policy-article/rhoads-what-administrative-savings/598029

(6) http://www.lao.ca.gov/2008/hlth/sb840/SB840_analysis.pdf

(7) see (1) above

(8) http://www.dllr.md.gov/lmi/industryclusters/financedemographics.pdf

(9) and (10). see (6) above

(11)http://www.wharton.universia.net/index.cfm?fa=viewArticle&id=918&language=english