<< Back to Part I: How Insurance Works
<< Back to Part II: How Medical Insurance Was Broken

Thanks for sticking with the series so far. I know the last section was long and technical and I appreciate you slogging through it. The next parts should be a breeze in comparison.

In part II we saw how the employer tax deduction for health insurance tied insurance to jobs, transformed insurance from a protection against disaster to a way to obtain all care at a discount, and led to overutilization of care by shifting costs away from patient payments to premiums taken out of paychecks. Tying health insurance to patients’ jobs created another problem. It left retirees out of the tax subsidy that employees enjoyed. As healthcare became more and more expensive there was increased political pressure to extend affordable coverage to retirees.

(Note again how after World War II the language changed from getting patients high quality affordable care to getting them insurance coverage. Insurance became essentially the only way to access care.)

A simple way to even the playing field for retirees and to undo the myriad problems detailed in the last post would have been to eliminate the employer tax deduction. But doctors and hospitals were not keen on giving up their enormous subsidy. So in 1965 the Social Security Act created Medicare (and Medicaid). Medicare provides health insurance to Americans 65 and older and is funded by a payroll tax.

Medicare magnified many of the problems of the employer tax exemption. By creating a whole group of patients whose care was paid indirectly by all employees, costs were redistributed over even more people, further reducing any incentive to conserve. Utilization and costs rose even faster. The cost of Medicare doubled every four years between 1966 and 1980. This explosion in costs further cemented the fallacy in the minds of most patients that care is something that can only be obtained through insurance.

Now, I take care of lots of Medicare beneficiaries, and I can hear some of you objecting: “I might be able to afford to buy insurance if I didn’t have Medicare, but lots of people couldn’t. Have you seen how much medicines and doctor visits cost? Most people just can’t afford that.”

But that’s just it. Medicines and healthcare are expensive because they’re covered by insurance and patients aren’t exposed to the actual cost. There’s no viable business that produces goods and services that no one can afford. If patients paid directly, prices would plummet and patients (not insurance bureaucrats) would have to make the difficult decisions about how much they wanted to spend for the latest drug when a cheaper one is almost as good, or for the latest unproven surgery, or for the latest unproven scan. The point is that different patients would make different decisions, but many would save a lot of money by consuming less care than they do now. Catastrophic insurance would then be inexpensive and rarely used.

There would always be the truly indigent who can not afford any care at any price. They would rely on Medicaid, county facilities and private charities. But like in other marketplaces such as food, housing and transportation, that would be a tiny fraction of the population. Most people could afford their own care. The miscalculation that the insurance industry wants you to keep making is that insurance is what makes care affordable. Insurance, including Medicare, is what makes care unaffordable.

Next week, I’ll propose some changes that would actually help, though they are less likely to happen than that I am drafted by the Lakers.

Forward to Part IV: A Recipe for Reform >>