Memo To Congress: Health Insurance is Not Health Care


“Everyone is talking about Congress repealing ObamaCare and replacing it with something else. How about replacing it with a free market?” – Molly Mulebriar

Memo to Congress When Replacing Obamacare – Health Insurance Is Not Health Care

by SCOT VORSE 14 Jan 2017 Washington DC 2040

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Health care and health insurance are different things.  They are related but different products.  Conflating the two was destined to create one failed product – Obamacare.

On the evening of September 9, 2009, President Obama presented his namesake health plan to a joint session of Congress. He correctly identified the amount spent on underlying health costs (i.e. hospitals, physicians, labs and drugs) as the reason for skyrocketing insurance premiums, statingWe spend one and a half times more per person on health care than any other country, but we aren’t any healthier for it.  This is one of the reasons that insurance premiums have gone up three times faster than wages.”

However, the plan he put forth ignored this fundamental problem and merely addressed health insurance reform, the question of how those skyrocketing health costs were to be financed.  The net result is our nation still spends “one and a half times more per person on health care than any other nation” while the World Health Organization currently ranks us 31st in life expectancy – behind Chile and Costa Rica.

An important impediment to the long-term sustainability of Obamacare was its inability to create and market an insurance product that healthy people (especially young adults) both understood and wanted to buy without relying on tax credits or other government financial assistance.  The Obama administration constantly touts the 22 million Americans that now have insurance because of Obamacare.  However, the overwhelming majority of these 22 million Obamacare enrollees are:

  • People who either receive large tax credits or now qualify for Medicare because of the expanded eligibility under Obamacare. After all, it is not difficult to get someone to buy something if you give it to them for a huge discount. It’s even easier to get enrolleees if you give it away for free. Per table 4 of the March 2016 CBO Baseline Report, only two million of the total Obamacare exchange enrollees are paying the full product cost – not getting tax credits or Medicare;
  • People with pre-existing conditions. It is also pretty easy to get someone to buy something they need but couldn’t buy before, especially at a subsidized price; and
  • People who had lost their plans because of Obamacare and who merely signed up for Obamacare. For these customers, Obamacare is a last resort. All other options had been removed from the market, so they were left with no choice but to buy an Obamacare replacement plan – often at higher costs and worse benefits.

None of the above groups of buyers are participating because they see the product, absent government subsidy or dictat, as a rational choice.  Their choice to enroll was based upon either subsidy (wealth transfer) or government elimination of alternatives.  Consequently, Obamacare has primarily become more of an insurance entitlement rather than an affordable, appealing product people want to buy because it helps address their healthcare needs.  And like most other products dependent on financial assistance to convince people to buy, Obamacare has failed to sustain itself long-term without significant ongoing government financial support.

So why aren’t healthy Americans buying Obamacare healthcare insurance?  Put simply, from the consumers’ perspective, the costs and benefits to buying Obamacare healthcare insurance don’t make sense.  This may be a wise decision or an imprudent decision, but this is the decision that most healthy Americans that don’t qualify for tax subsidies or Medicare have made.

Furthermore, in the process of pushing a failed insurance product that consumers don’t want to buy, Obamacare has destroyed both the healthcare service and the healthcare insurance markets for the other 300 million Americans, and thereby created significant financial demands on the US economy.

The debate thus far has been obscured by the various parties putting forth specific policies, when a first step should be to agree upon principles.  Given the subject matter, policies are necessarily complex, but the policy complexities mask the serious differences in the underlying principles driving each policy idea.  We should demand our representatives first clearly articulate, debate and find bi-partisan agreement on the principles upon which the new replacement policies will be built, then move on to the complex business of implementing those principles in policy.

Going forward, to achieve a sustainable policy that will not require disruptive wealth transfers, elimination of choice, perverse incentives or erosion of care, the new replacement policies for both health insurance and access to quality affordable healthcare should be developed only after establishing a clear set of core free market driven principles –  and not haphazardly slapping together well-lobbied policy prescriptions without core principles which is the genesis of Obamacare.

  1. Free markets – which drives competition and thereby lower costs – must be the fundamental driver (but not only driver) behind healthcare policy and be applied to both the sale of insurance products as well as pharmaceutical, physician, hospital and lab services. America cannot abandon the system that has worked so well for such a large and important part of its economy.
  2. Beware of unintended consequences. Focusing on insurance as if it represents the totality of health costs has backfired creating unintended consequences, counter-productive incentives, inefficiencies, no real service cost transparency and total dysfunction in both markets. For example, a provision of Obamacare requires health insurers to spend roughly 80 percent of premiums on medical costs. This was supposed to help control insurance costs. However, now the only way insurers can increase profits is by paying more for medical bills. A doubling of underlying medical bills permits a doubling of premiums and, therefore, a doubling of the 20% amount that can go towards insurer profits. This policy which creates conflicts for insurance companies explains why patients have been reporting they can negotiate cash prices far below what their healthcare providers would be paid by their own health insurance.
  3. Insurance should insure.  Insurance should insure or provide protection from significant financial risk – not be a mandate to pre-purchase a potentially needed basic service, for example birth control.
  4. Some products are not worth buying regardless of the price. Since the launch of Obamacare approximately 40% of enrollees do not enroll the following year. Furthermore, only 20% of the enrollees in any year pay do not receive a subsidy.  This implies that, even if every non-subsidized enrollee did not renew the following year, many subsidized enrollees are still not renewing. This response suggests that Obamacare insurance policies with such high deductibles do not provide an insurance benefit despite a large subsidy.
  5. Differentiate the service from the payment mechanism. Providing healthcare insurance is not the same as providing healthcare service. Although both healthcare insurance and healthcare service affect a consumer’s eventual cost, they are different products with different providers and marketplaces. The fundamental objective is to provide affordable healthcare service – Obamacare does nothing to lower physician, hospital, lab and pharmacy costs while providing insurance with much higher deductibles and premiums than pre-Obamacare policies. Therefore, any healthcare policy must first create a free market for healthcare service independent of healthcare insurance. Specifically, we must stop what Steven I. Weissman, a former hospital president, calls Predatory Healthcare Pricing where “Billing is determined by how much can be extracted from each patient on a case by case basis. Because billing rates are not set, the industry is able to prey on patients at their most vulnerable. And if you are out of network or uninsured, you pay the highest rates.”  Instead, doctors and hospitals can set their own rates but each patient must be charged the same rate.
  6. Transparency of the actual medical service cost is essential – Disclosure of healthcare insurance policy co-payments and out-of-pockets is not only confusing but not transparency of the medical service cost. As Weissman also states, “Rates must be published in a uniform format such as industry standard CPT codes or a percentage of Medicare rates. Every citizen would be empowered to search any medical procedure online and see pricing for all providers within X miles. It would be as easy and familiar as checking the price of any other goods or services.” Disclosure of the medical provider’s prices (not the agreement that a conflicted insurance company has negotiated) will create the free market forces and true price transparency necessary to force competition among healthcare providers.
  7. After defining the service, let the free markets insure them. After a true free market cost for healthcare service is established, a free market insurance product should kick in to protect against significant financial risk. Furthermore, create an environment of competition and incentives to lower the overall healthcare cost for everyone else (cross-border competition, medical savings accounts, etc.).
  8. Yes, we need a safety net.  Establish a safety net of healthcare (not healthcare insurance) for only true indigents (limiting taxpayer exposure to only the needy).

Obamacare was not the answer. It failed both on a political level, dividing our country because it was passed as a loyalty test on a party-line vote of a mysterious package no one understood, but also on a rational test at the consumer level. What is needed first is bi-partisan agreement on the guiding principles, and then implementing policies for each of the two related but independent markets and products (healthcare service and healthcare insurance) resulting in rational consumer-level choices that Americans want to buy and that providers are willing to sell at a reasonable profit in a competitive marketplace.  Products based on common sense and easily understandable benefits and incentives for all parties.

A program that forces people facing tough budget choices to purchase a product they don’t want or face horrendous penalties is a coercive train wreck in the making. When we foster a free market in healthcare services with real, legitimate published prices, everyone in our society will benefit from increased access to affordable care, especially low income families. The time has come for Oblimination — the full-scale dismantling of Obamacare and replacing it with a system based on free market principles that actually work.