Simple Economics and Health Insurance: a Perversion of the Free Market

Setting aside all the nitty-gritty specifics of the various bills running through Congress, it seems to me that reestablishing some baseline facts on health insurance is in order. In writing this post, I am setting out to prove that there is not, in fact, any such thing as a free market economy where insurance is applied to a given industry. To demonstrate this, I’ll build on a few Economics 101 concepts that we all know and love. The point of this exercise is to establish that any economic structure which employs for-profit insurance is endemically doomed to fail.

Economics 101: Supply and Demand

In the capitalist marketplace – in its purest form, what we call “Free Market Economics” – there are two fundamental building blocks of the system: supply and demand. There are those who produce goods and services and there are those who require or want those services. It is the interplay between those two building blocks that determines price, quality and availability.

More specifically, the Marketplace requires an Educated Consumer and an Honest Producer. The educated consumer is not necessarily a college graduate; the education I’m referring to in this case is the knowledge of the product or service that the consumer is buying. In the Free Market, if I require an appendectomy, I check with local hospitals and doctors, patients and consumer groups to determine which doctor or medical facility performs this procedure with the greatest success rate, greatest customer satisfaction and lowest price. Basically, I bargain shop for the best deal. This process, multiplied over all the people in my area seeking appendectomies and other procedures, forces producers to keep honest about what it costs to perform their duties to the best of their abilities. Hence the price and quality of medical services is kept at a balanced level, relative to the ability of consumers to pay.

This is a concept upon which every economist agrees, as do the rest of us who took seventh grade business math. There is no doubt that this concept, like Bernoulli Principle in physics, is a quantifiable, predictable force on our economy. But what happens when, rather than paying for services directly, we pay insurance companies to provide that service?

Enter the Insurance Company

In our current health care market, things work a bit differently. As consumers, those of us fortunate enough to have insurance pay insurance companies a monthly fee, in conjunction with our employers, to have constant coverage for our medical needs. When we require medical services, we go to a doctor, get the work done, get a prescription for whatever pain or antibiotic medication they deem necessary, pay a copay for the service and be on our merry way. But the important point is this: we do not pay our health care provider and we do not consider cost when choosing that provider.

Right off the bat, without much thinking or digging, we find that one of the fundamental pillars of the Free Market is eliminated from the equation. There is no Educated Consumer in this scenario, because we as consumers have no idea whatsoever what a given service costs, what a prescription costs, what the total of the bill will be. What’s more, we really don’t care because as consumers of insurance products, there is an expectation that we will get what we paid for.

With no educated consumer, only unrestrained need, there is nothing to control medical costs. As medical costs rise, so too do insurance premiums. Of course, this is what happens in a supply and demand economy when the cost of supplies goes up without a correlating change in demand. There will be no change in demand, because we all need medical attention from time to time, no one can afford it on their own and thus we all actively pursue jobs with health benefits. The inevitable result is that insurance companies – who have a profit motive and will not simply go bankrupt on moral grounds – need to lower demand the only way possible: cutting off services.

Let’s Stop There

We could go farther with our example, citing case after case where the above scenario is currently in effect and speculating where it heads next. We could continue to expand on how the imbalance of insurance surrogating the Demand side of the equation is continuing to erode our medical security in this country. We could discuss the effects of the uninsured and the Hippocratic Oath that compels doctors to treat them. But while in doing so, we could come up with much that is demonstrably wrong with our current system, we would stray further from the central point and in my opinion, the most critical for a serious discussion of health care reform in this country. That point is to say that there is no scenario in which the unfettered health insurance industry – free of government reform or a public option – will arrive at any other result than the one we find ourselves with now.

It is an important concept which cannot be ignored: we are not in a health care crisis because of a few bad apples; we are not where we are because we need some new laws passed. We are in our current dire straits because our current system is fundamentally, systemically flawed at its core. The solution is to introduce a new player to the field; one which can arbitrarily change the rules of the game to fit the best interests of the American people.


Hey! Let’s Bail Out the Insurance Industry, Too!

The House of Representatives is often called the Thinking Man’s Keystone Cops, and yesterday, we got to see why.  House Republicans are now floating the idea – in a desperate attempt to do anything, anything, anything but admit their entire financial premise of “Adam Smith is God” is mere folly – that instead of the U.S. government paying to bail out the financial sector, private insurance companies swoop in and insure the bad debts instead.

Did anyone ask the insurance industry what they thought of that?

To begin at the beginning, insurance companies are a bit like casinos, inasmuch as insurance is basically a bet that you won’t need as much money out of the insurance company as you put into it.  You pay $200 a month (no shit, it’s really that much, ask your employer) for health insurance and probably won’t use any of that for most of the years you’re paying into it, barring some doctor’s and dentist’s appointments and the occasional bottle of pills for something or other.  What you don’t spend is what they use to pay off the bills of sick people who actually need the money at the moment.

But if there are more people taking more money out of the system than are paying into it, the whole thing collapses.  And in fact, the insurance industry is so overwhelmed with expenses that they’re actually ditching people once they do get sick.  Because of course, like casinos, they’re not in the business of enriching your life.  You may have seen Sicko, yes?

So, with all that said, how many insurance companies out there are going to take on billions of dollars of debts already proven to be bad ones?  Probably as many as casinos who admit people with their own sets of loaded dice.  And if they are willing to take on the failed debts, what are we to provide them in exchange?  Because no company does anything for free – nor should they.

Finally, if it’s not already obvious enough, AIG just went into the shitter, itself.  AIG is the nation’s and the world’s largest insurer.  So, not only did the Great White Hope of the Republican Free Market Solution just go the way of sheep intestine condoms, but so did a huge investment trust of the insurance industry.

Because the insurance industry is really just another expression of the financial marketplace, dealing in risk just like stock brokers do.  In order to insure people, they need reliable “value stores,” as is the phrase I keep hearing whilst paying attention to this crisis.  In other words, the insurance industry has no money to pay so long as the financial industry has no capital to give them.


Healthy New York? Really?

I have a friend who just lost his job and is in need of medical insurance because of existing conditions.  He was checking into Healthy New York and discovered something that should raise more than a few eyebrows out there: HealthyNY does not cover mental health.  At all.

So, after all those television commercials featuring our former governor Pataki, where does one go to get mental health issues covered if they’re out of work?  Even better, our supposed lifeline for health insurance in this country also goes on in its website to state the following:

Pre-Existing Condition Limitation

Coverage under the Healthy NY program is subject to a pre-existing condition waiting period. This means that if the applicant has a medical condition that they have been either diagnosed with or treated for in the last six months, services for the treatment of that condition may be excluded from coverage for up to a year.

Republicans and Conservatives can say what they want about the government not getting involved in people’s lives.  But I think a big question we all have to ask ourselves is: if they’re going to get involved, what are we going to get for our tax dollars?

More coverage to come. . .