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The Scholar Responds

What’s Wrong With Health Insurance in America?

Scott Atlas is a senior fellow at the Hoover Institution and the author of Restoring Quality Health Care: A Six-Point Plan for Comprehensive Reform at Lower Cost. His book is available in its entirety here or for purchase on Amazon.

The video "What's Wrong With Health Insurance In America?" says that health insurance should focus mostly on unexpected or expensive health care costs, not routine or predictable care. But that raises questions about people with pre-existing conditions, recurring expenses, and those who haven’t been able to save enough for out-of-pocket costs.

Q: As a starting point, how should we expect insurance to function throughout our lives? What does a person’s ideal lifetime coverage of health insurance look like?

The picture of ideal health insurance looks like this: when you’re young and healthy, you buy a high-deductible, low-premium catastrophic insurance plan and contribute as much as possible to a health savings account (HSA). That’s because when you’re young, you’re more likely to be healthy and your HSA will grow like a retirement investment account. Over time, your expected care will change, as will the cost and composition of your health insurance. When you’re older and have higher health care expenses, you’ll have a good amount of money saved up to cover your costs.

Having continual insurance means you’ll never be penalized if you develop a chronic illness or pre-existing condition, because the law has traditionally prohibited discriminating against those with chronic illnesses if they had previous health insurance coverage.

Having an HSA with dedicated funds for health care expenses has positive effects on people’s behavior. When people have an asset to protect, they take steps to live healthier lives and engage in effective wellness programs. They also make more efficient spending choices, contributing to lower costs for everyone else in the system.

From a risk pool perspective and the sustainability of reasonable insurance premiums, it’s also very important for healthy people to buy insurance. If the only people who buy insurance are already sick, then premiums become exorbitant, insurers go out of business, and patients ultimately suffer as a result. My plan includes incentives for younger, healthier people to buy insurance, including deregulation to permit cheaper plans with good value.

Q: But low-income Americans can’t afford to contribute to HSAs and purchase the kind of insurance you’re talking about.

My plan – and many other plans out there – would give money directly to low-income Americans to afford private insurance and to build up their own health savings accounts. Those new assets would provide an incentive to stay healthy, and use wellness programs, as has been proven in studies.

My plan would convert Medicaid into a bridge program to private insurance, which sounds scary but would actually offer better care for low-income Americans, with the same doctors and hospitals that other Americans use. There is this assumption that if you have health insurance, you have access to everything you need. But current Medicaid is substandard insurance compared to private coverage enjoyed by everyone else. Half of all doctors in major metropolitan areas don’t take it, and Medicaid patients face much longer wait times, fewer choices of doctors, and worse outcomes. (Office of Inspector General HHS Study and Merritt Hawkins Study)

It is also important to realize that a reformed system marked by greater patient choice, widespread use of HSAs, and more competition would result in price reductions for all care, which would help make insurance and medical care more affordable for everyone.

Q: Doctor’s visits are routine and often cost a few hundred dollars. Are you saying we should expect people to pay for them out of pocket?

My plan, and many other plans out there, includes several routine visits to a doctor a year without additional out-of-pocket costs – just like current plans. Although they are routine, they have positive long-term effects on health and ultimately lower expenses by identifying health issues earlier and encouraging healthy behavior.

Q: What if you have a chronic illness or a pre-existing condition? You won’t be able to afford care.

We’re not interested in moving to a system where you’re left without care if you have a chronic illness.

The ways we have traditionally tried to cover people with pre-existing conditions, however, have led to perverse incentives with negative consequences for everyone else. That is especially true when you make “guaranteed issue” a requirement – the provision that if you want to buy insurance at any time point, then companies must sell it to you without any consideration of health status. While it sounds good in principle, in practice it means that people wait to buy insurance until they get sick and need it. Insurance only works if you have a lot of healthy people in the “risk pool” who partly subsidize the premiums of people who get sick. This leads to what is called the “death spiral” where only sick people buy insurance, leading to higher and higher premiums and ultimately bankrupt insurance companies.

The current system under Obamacare combines guaranteed issue with an individual mandate to buy insurance, but there are currently millions of people who would rather pay the punitive tax than pay the high premiums they face in the current marketplace. Forcing people to buy high-priced insurance caused by the law’s regulations isn’t a sound approach. Instead of paying those elevated premiums, people simply wait until they get sick to purchase insurance due to guaranteed issue.

A fairer and more rational system is to eliminate regulations that caused high premiums, and provide incentives to maintain insurance while still healthy. Then if you get sick, you don’t get punished for it.

Q: Who should have health savings accounts?

Everyone should have health savings accounts. Right now, you’re only allowed to contribute to them if you purchase a high-deductible health insurance plan. Moreover, Medicare patients generally are not allowed HSAs. If we expanded them to everyone, increased their maximum amounts, and broadened their uses, tens of millions of people would become active value-seekers in their health care. We know from studies that when people use these accounts, doctors and hospitals compete for patients, and prices come down significantly.

And as mentioned before, my plan would have the government partly fund HSAs for those with lower incomes, giving them a far greater degree of control over their medical care than they currently have. To fully affect prices and competition, and considering seniors now must save for decades of health care, I would also add HSAs to all Medicare recipients, an important group because the elderly use more health care than any other demographic.

Q: Do we really expect people to shop around for health care when they’re unconscious or have a medical emergency?

Of course not. But the bulk of all medical care is routine and non-emergency (Annals of Emergency Medicine). People are absolutely capable of shopping around for the care that suits their needs – and many do.

What do we mean by that? Here’s a simple example.

Imagine you hurt your knee and you think you need an MRI. You’ll have to pay for some of it through a co-payment or coinsurance arrangement. An MRI performed at one hospital may be equivalent as one done at another, although radiology expertise varies considerably. You discover that the MRI facility used by your personal doctor charges much more than another option within driving distance. In an effort to keep you and other cost-conscious patients using their services, your hospital decides it is worth it to lower their MRI price. . That’s competition, proven to occur in the MRI market as well as in many others in current medical practice, and the result is reduced price of MRIs for all patients.  That’s how markets work when consumers have choice over how they spend their money. More people shopping around for non-emergency care will bring down the price of emergency care.

Here is a 2014 paper by Wu et al. in Health Affairs that shows the effect of shopping on MRI prices.

Frequent Comment: Health care is too important to be left to the free market.

The fact is that if we eliminate the market for health care by centralizing everything and removing decision making from individuals, we’re all going to be left with far worse access and quality of health care. We don’t have to guess at that – we see the proof in those countries with the longest experience of government-controlled systems, including the United Kingdom and elsewhere. In those government-centralized systems, patients have far worse access to care, including unconscionable wait times for even the sickest, less access to important medications and safer medical technology, and worse outcomes compared to Americans.  This is all thoroughly documented in the medical journals (and reviewed in my book In Excellent Health). 

On the other hand, when people have a reason to shop for value - when they have savings in health savings accounts - the cost of care comes down, and the quality of care goes up (Haviland et al 2012 and Haviland et al. 2011). That’s how competition works. Instead of arbitrary prices, prices reflect what people value for their money, which is why free markets work best for consumers.

We know prices actually come down in health care using evidence from existing high-deductible plans with HSAs: patients have a reason to care about value. They spend less without any negative impact on their health. Beyond spending for medical care, people with HSAs are more likely to use effective wellness programs and live healthier lives.

A common complaint about health care in America is that prices vary widely and aren’t visible. I’d predict that as HSAs become more prevalent and patients actually have a reason to care and pay directly, prices (and indicators of quality) will become much more visible. After all, in today’s typical bloated coverage, your insurance company pays for nearly all medical care. Why should you see a price tag, or even demand to know, when you’re not the one paying?

Q: Part of the problem is that insurance companies are out to make money, and any solution needs to get money out of health care.

We already know what happens when the government controls insurance and the health care system. We look at the National Health Service (NHS) in England, often cited as a model for single payer care, where supposedly everyone is “guaranteed health care.” From the objective data, we see that that system, now over sixty-five years old, has massive and unconscionable waiting lists for even the most serious care, poor access to modern technology and innovative drugs, and worse outcomes for every serious disease.

Although unknown to most Americans, single payer systems are increasingly turning to private health care to ease their patient burdens, using tax dollars to pay private clinics and hospitals.  In addition, citizens in those systems are buying private health insurance above and beyond the substantial taxes they already pay to get their service they can’t get through their national health insurance. Our mostly private system has better outcomes, superior access to care, and more choices for all Americans.

Yes, insurance companies are profit-driven companies. And that has resulted in the greatest advances in so many goods and services, including health care. Don’t forget, America leads the world in health care innovation, including medical devices, diagnostic technology, and new drugs. But we don’t want the government to control markets or prices. Food and shelter are basic human necessities, but we certainly don’t want the government running the market for food and housing. The private sector alone shows the type of ability to respond to what people want. When people are empowered with their own money and the ability to make their own choices, the free market responds with what they need and want.. The superiority of free markets has been proven by history, and maintaining otherwise is simply ignoring fact.

Q: But health care is too complicated to be navigated by everyday Americans.

This couldn’t be further from the truth. If you can shop for a computer without knowing how it truly operates, you can shop for your health care.  Indeed, some people already do shop for health care and insurance coverage. The growth of HSAs coupled with choices like high-deductible plans offers plenty of evidence that when people are allowed more control over their choices, they pick plans and behave in a way that maximizes their satisfaction.

A common comment people make is that health is too important to leave to insurance. That’s not true, but the logic actually applies here: People have an enormous incentive to figure out the best health care that works for them. I and other advocates of free markets trust Americans to make their own decisions, to spend their money for what they value. There is no better way to determine a fair price or to determine the appropriate amount of availability of a good or service, especially for something so important and as personal as health care.

Q: Any closing thoughts?

If you want high quality and lower cost, the only way to do that is to have a system where the providers of care must compete with one another. The same goes for more choice and rapid access to top specialists, technology, and procedures. Other countries that have government centralized health care systems are demonstrably worse when it comes to health outcomes, choice, and the features of health care that Americans care about.

If the government issues top-down decrees, including price caps and barriers to entry, in an attempt to force down prices and costs in the short run – just like they have done in other countries – that comes with reduced quality and restricted access to care, including the drugs and technology responsible for so many of the gains in health during the past half century. Competition, incentives, and consumer empowerment are the best way to improve quality, increase access, and provide the type of system that Americans demand.

For more, you can read Scott Atlas’ comprehensive reform plan here and here.