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May 13, 2009

ARTHUR FOULKES: Insurance laws contribute to higher health care costs

By Arthur E. Foulkes

TERRE HAUTE — When people talk about the problems with America’s health care system, they very often end up talking about health insurance. People note, for example, that millions of Americans have no health insurance or that health insurance premiums continue to rise.

American health care and health insurance have been strongly connected since World War II when, because of government-imposed salary and wage caps, employers started offering health insurance benefits as a way to compete for workers. Since then, the connection has strengthened because of the tax-free status of employer-provided health benefits.

Today, thanks to employer- and government-provided health insurance, about 80 cents of every health care dollar spent in the United States is paid by insurance. This is important because it means consumers of health care don’t pay the full price of the goods and services they use, leading them to purchase more health care than they otherwise would.

To see why this causes health care costs to rise, imagine what would happen if insurance payments covered 80 percent of the greens fees at American golf courses. Suddenly, more and more people would be lining up to play, especially at the best golf courses. After all, why play at a modest course when Pebble Beach costs only a little more? Soon, golf courses would start investing in fancier and fancier clubhouses and renting single-occupancy golf carts to attract business since price would no longer be much of a factor for consumers. And the courses could always recoup their added expenses since “insurance” will pick up the tab.

Of course, as golf became more expensive, golf insurance premiums would also rise. Eventually, anyone without golf insurance would be unable to afford to play at all.

A further problem with modern American “health insurance” is that it covers things that are not really insurable. Indeed, the word “insurance” has taken on a whole new meaning under the existing system.

Genuine insurance protects people from big losses caused by unpredictable events, such as sudden illness, a fire or an auto accident. The key is that no one knows in advance who will receive insurance payments and who will not. Many people will pay insurance premiums and never receive a dime back. Others – a minority in most cases – will receive big payments.

But in America today, health “insurance” does not work this way. Rather, health insurance is used to purchase routine medical goods and services, not as a protection against devastating losses.

According to the health insurance industry’s lobby group, the National Association of Health Underwriters, there were seven state-mandated health insurance benefits in 1965. By 2004, that number had grown to more than 1,800. In many states, these mandates include “insurance” coverage for alcohol and drug addiction counseling, routine health screenings and birth control. Some states even require insurance companies to pay for in-vitro fertilization.

All of these medical services are fine, but they are not really unpredictable events and by mandating their coverage, states are simply forcing certain people to subsidize the consumption of others.

It’s easy to understand why people favor providing health care for sick people regardless of their income or ability to pay, but we should also understand that current policies have an effect on health care consumption and costs.

There is a lot of frustration with the American health care system. A 2006 ABC News/USA Today poll found more than half of Americans favored a tax-payer-financed, universal health care system. The same poll found that nearly 30 percent of Americans put off receiving medical treatment due to the costs.

But making health care “free” will simply create new problems. Free health care will require rationing, probably price and wage controls for health care workers. The same poll found many Americans balked at universal coverage if that meant less choice and potentially long waiting lists.

There are other big reasons health care costs are so high in America today, including a longstanding restriction on the supply of health care providers orchestrated by medical lobby groups and state governments, the high price of malpractice insurance and the costs of complying with federal regulations for new drugs and medical devices.

But rather than adopt a government health care system, it would be better to get government-created distortions out of the medical services market. Supply would rise, prices would fall and “insurance” could return to its traditional function of protecting consumers from devastating financial losses.



Arthur Foulkes is a Terre Haute native and longtime resident. The Tribune-Star reporter writes a column on business and economics. He can be reached at (812) 231-4232 or arthur.foulkes@tribstar.com.

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