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Health Insurance Is Bad for Your Wealth

National health insurance is not so healthy.

by Lance Thompson

During the second presidential debate of this campaign, Senators McCain and Obama were at pains to explain the merits of their respective health plans. Obama seeks to bring all people under one plan to capitalize on economies of scale. McCain plans to bring market forces to bear on medical costs by giving consumers a tax credit to apply toward any medical plan they choose. Though McCain’s plan is marginally more sensible, neither addresses the root cause of high medical costs, which is medical insurance.

Imagine a small community of twenty or thirty people. In this community there are two doctors. Each charges his patients for each service as it is rendered. The doctors are roughly equal in skill and experience. Obeying the law of supply and demand, the doctor who charges less for his services gets more business, and thus forces the doctor who charges more to lower his prices to compete for that business.

An entrepreneur in the community decides to start his own business. He tells people that none of them can be sure when a costly medical visit will be required, and that none of the other members of the community are responsible enough to put money aside for such an emergency. But he offers an answer–medical insurance. Instead of paying the doctors on the occasion of requiring medical service, residents pay the medical insurance provider a fixed amount each month, allowing them to add medical costs to their monthly budgets. When a medical service is required, the insurance agent will take money out of the funds he has collected and pay for the service.

Several consequences result from this arrangement. Since medical costs are the same to the patient whether he uses them frequently or infrequently, demand for medical services increases. Since medical costs are the same to the patient whether he avails himself of elaborate procedures or simple, he chooses the more elaborate. Since medical costs are the same to the patient, whichever doctor he chooses, each doctor may raise his rates without fear of competition from his colleague. The two doctors, wishing to maximize the revenue from their practices, can raise rates without driving away business.

The insurance agent, however, wishes also to maximize his own profit, and seeks to reduce the amount of money he pays for medical services. He may try to force the health providers to lower their rates, but he is dependent upon them for his livelihood. The doctors can in return threaten to cease providing services, which would put the insurer out of business as well.

So the insurer seeks relief on the other side–from the insured. He must either raise the rates of insurance or limit access to the health services covered. In the first event, the consumer, who can exert no pressure on the costs of health care, must pay more. In the second instance, the consumer may not be able to gain access to certain services at any cost.

More importantly, the health care expenditures of the small community, which once supported two doctors whose prices were kept down by competition, now supports two doctors and an insurance agent who are free of market pressures, and can raise their rates at will.

Likewise, in the larger world we live in, Americans’ health care expenditures must not only support health care providers, but also a vast, multi-billion dollar health care insurance industry. This industry does not provide care, produce medicine, or perform medical procedures of any kind. It is merely a processor of fees, but the hundreds of thousands of people and hundreds of companies which provide health insurance or administer managed care are all part of America’s health care costs.

The appeal of medical insurance is that each person is protected from extraordinary health care bills, and instead pays a set amount each month. But if such bills are inevitable as an individual ages, and all patients will eventually need expensive care, then the insurance agency must charge enough so that those costs can be passed on to each customer. Thus the insured will still fully pay those costs, in addition to an amount which pays for the vast insurance industry, and allows that industry to make a profit.

If only a limited percentage of health care customers will require expensive care, then those who will not require such care will be subsidizing those who will, and health care for those people will be an unnecessary expense. And if healthy lifestyle choices such as diet, exercise, and environmental factors can reduce the chances of requiring expensive medical services, then Americans would be better off incorporating those choices in their lives, and opting out of paying insurance premiums inflated by those who do not make those choices.

Eliminating health insurance and managed care, and allowing Americans to pay for their health services as required will eliminate the cost of a vast industry from health care bills and further reduce costs by allowing the free market and competition to keep prices down. Doctors who provide better care will be able to charge more; those with lesser qualifications will be forced to charge less. Access to health services of all kinds will be guaranteed, with those who require the highest level of service compelled to pay the highest prices.

Nationalizing health insurance, as Obama advocates, or finding new ways to pay for health insurance, as McCain would like, will fuel the continuing increase in health care costs and reduce the array of services available to health consumers. This is the path both presidential candidates have chosen to follow. It is a placebo whose psychological benefits are certain to wear off shortly after the election.

http://www.lowdowncentral.com/feature-article/2008/10/13/health-insurance-bad-for-your-wealth.htmlLance Thompson writes for LowDownCentral.com

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