Health-care debate with J.E. Hill, part 4

JCB's responses to previous statements made by J.E. Hill, a writer for The Skeptical Review:

JCB's previous statement:

There are no direct subsidies to the health-insurance companies, as far as I know. The subsidies I was referring to are the enormous sums of money paid to health-care providers by Medicare, Medicaid, and other similar programs. The reason for the huge cost and spending increases we're seeing in the health-care arena is the market distortions caused primarily by the government subsidies, as well as by various ill-advised regulations.

Hill's previous statement:

That's not what you said or "referred to". I'll remind you: "However, I would say that it is among the most heavily-regulated/subsidized."

As a matter of fact, the health-insurance industry doesn't receive one cent of subsidy from the government.

The "subsidies" you are referring to are not subsidies either. They are payment for services. There is a big difference. A subsidy is monetary assistance granted by the government to a person or private commercial enterprise, such as the Community Development Block Grant, or farm subsidies where the government gets nothing in return. In this case there are services rendered and that is what is being paid for.

So, the health-insurance industry is not subsidized contrary to your previously statement.

Correct?   Yes or no.

JCB's response:

No. Although it's true that (as far as I know) the private, for-profit portion of the health-insurance industry is not subsidized, an ever-increasing percentage of health-care costs in this country are being paid by the government, through programs such as Medicare and Medicaid. See the graph at top of page 10 in this Rand Corporation publication:

http://www.rand.org/pubs/corporate_pubs/2005/RAND_CP484.1.pdf

Medicare and Medicaid are government-run providers of health insurance. The premiums people pay the government for the health insurance they receive through these programs fall far short of covering the cost of the benefits received in the form of payments for medical services. This is what I was referring to as government subsidization of health insurance. If you wish, you may choose not to refer to this as government subsidization of health insurance. But it doesn't affect my argument. Whether or not you choose to call it a subsidization of health insurance or something else, the reality is that the government is paying a large portion of people's health-care-related expenses and that this is creating severe distortions of the health-care market. These market distortions are a major reason that health-care costs are rising so much faster than the overall inflation rate. And, of course, increases in health-care costs inevitably lead to increases in premiums for insurance provided by the private, for-profit sector of the health-insurance industry.

Portion of JCB's previous statement:

Your explanation, on the other hand, is that costs have increased due to unbridled greed on the part of the health-care industry, including, presumably, the health-insurance industry. (At least that's my understanding of your view. Please correct me if I've mischaracterized it in any way.) If that's the case, why aren't we seeing similarly skyrocketing costs in most non-health-care-related industries?

Hill's previous statement:

Oh, you mean like the financial sector?

JCB's response:

I'm not exactly sure what you're referring to here. I personally haven't noticed any significant cost increases in the financial sector. My checking accounts and savings accounts are still free. I believe that costs paid by consumers for products provided by the financial sector predominantly take the form of interest charges, and interest rates are currently at historically low levels. In fact, my wife and I are thinking of refinancing, even though we already have a really low-interest (5.5%) fixed-rate mortgage. One exception may be interest rates on credit cards, which I believe I've heard have gone up somewhat in the past year or so. But I don't know of any long-term inflationary trend in the financial sector that's even remotely comparable to the decades-long trend of health-care costs increasing at a rate higher than overall inflation. If you have data showing that such a long-term trend exists, I'd be interested in seeing it.

Hill's previous statement:

Greed is certainly a factor, but probably more so is the fact that people get sick more often than they buy cars. The biggest factor is that health insurance is its own worst enemy. By reducing their client pool by rejecting claims, they have to keep increasing premiums to keep the profits rolling in and Wall Street happy.

JCB's response:

I'm glad to see you're distancing yourself from the view that greed is the primary cause of our health-care woes. However, I'm not sure I fully understand your two new theories. The first of these theories is that the enormous cost increases we've experienced for decades in the health-care sector are due to "...the fact that people get sick more often than they buy cars." I agree that people get sick more often than they buy cars, at least if you count minor illnesses, such as colds and athlete's foot. But the cost of the resources (i.e., raw materials and labor) required to treat a typical cold or case of athlete's foot are far less than that required to build a car. So I'm not sure why the fact that we get sick more often than we buy cars is relevant. It's also true that, on average, we take showers more often than we get sick. So, by your theory, shouldn't we also be experiencing even more economically-unsustainable price increases for soap, shampoo, and conditioner than we're experiencing for health care?

Perhaps you're simply trying to say that the demand for health care has risen too fast for the health-care industry to keep up. If that's the point you're trying to make, I think you're correct. Due to the increase in both the size and the average age of the population, the demand for health care has risen fairly rapidly over the years. And our health-care system has not responded efficiently to this increase in demand. The crucial question is: Why hasn't it responded efficiently? Is it because we have too much of a free market in health care? If so, then how do you explain what has happened in other more-free-market industries in which demand has increased rapidly over the years? Take the personal-computer industry, for example. Due to it being a much newer industry, we've had a much greater increase in demand for PCs over the past few decades than for health care. When I was a child, no one had even heard of PCs. In those days computers were enormous, expensive machines that took up whole rooms and could only be afforded by large, wealthy organizations. And the capabilities of those machines were pathetically poor by current standards. Now it seems like almost everyone has at least one PC. Many people I know have three or four. And we have a much freer market for PCs than for health care. At the very least, I don't see how anyone could plausibly argue that the PC market is less free than the health-care market. Yet the long-term trend in the PC industry has been for prices to continue dropping dramatically, while the capabilities (e.g., disk size, amount of memory, speed, software sophistication, degree of miniaturization, etc.) have dramatically improved.

Your second theory is that the health-insurance industry has to increase premiums to make up for a reduction in its client pool due to a rejection of claims. Presumably, the clients who are being eliminated from the pool would mostly be the sickest clients. It would not make any economic sense for insurance companies to take actions that would cause them to lose their healthiest clients, since it is these clients that make them the most money. Since the sickest clients are the ones the insurance companies lose money on, one would think that eliminating them would increase profits, rather than reduce them. Thus it does not appear plausible to argue that elimination of clients through claim rejection would lead to higher premiums. If anything, the opposite would seem to be the case. Even if it were true, your theory would only explain increases in health-care premiums. It wouldn't explain the unsustainable increases we're experiencing in the cost of health care itself.

JCB's previous statement:

Are those industries simply less greedy? Why would they be? What is it about health care that attracts unusually greedy people? Also, why wouldn't cost increases be even worse in industries that are less heavily bridled (i.e., less regulated) than health care? Take veterinary care, for example. I think most people would agree that veterinary care is far less regulated than health care. Americans love their pets almost as much as they love their friends and relatives. Even more so, in many cases. So why aren't we seeing even more serious cost increases in veterinary care than we are in health care?

Hill's previous statement:

Not a real good example.

JCB's response:

I thought it was a pretty good example of an industry operating in a relatively free market that provides quality service while efficiently controlling costs. At any rate, it was better than the examples you've attempted to give of industries in relatively free markets that are as economically dysfunctional as health care. But that's really not your fault, since I don't believe there are any valid examples of such industries.

Hill's previous statement:

If you really want me to take the time to deconstruct this I will, but it's really a waste of time to do so.

JCB's response:

If you're willing to waste your time deconstructing it, I'm willing waste my time deconstructing your deconstruction.

JCB's previous statement:

Or, consider forms of insurance other than health insurance. If greed is causing the price increases we're seeing in health insurance, why is it that we aren't experiencing similarly mind-boggling increases in premiums for life, homeowner's, or auto insurance? Are the non-health-care-related insurance companies less greedy for some reason?

Hill's previous statement:

Oh, my homeowners insurance has been going up...about 10% a year and never a claim.

JCB's response:

Really?! That seems a bit anomalous. For how many years has it been increasing at that rate? Maybe you should shop around for a new policy. Our homeowner's insurance has gone up 10.9% in the past 5 years (11/2004 - 11/2009), which averages out to 2.1% per year. The consumer price index has gone up 13.3% during that same period, or 2.5% per year:

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

I tried to find some statistics on rates of increase in homeowner's insurance premiums, but wasn't able to. But it's hard to believe that homeowner's premiums have been increasing over the long term anywhere near as fast as health-care costs. If they had been, it would have been big news.

Hill's previous statement:

But the short answer is it's all actuarial and (this is very important) they all have to compete for my business and I can switch companies anytime I want.

JCB's response:

Right! In other words, there's a relatively free market in these other forms of insurance. This results in vigorous competition, which keeps costs under control. Unfortunately, we have much less of a free market for health care and health insurance. For example, due to the fact that health-insurance costs are deductible for employers but not for employees, the choice of health-care provider available to most people is--for all practical purposes--limited to the few options their employers happen to offer.

Hill's previous statement:

Competition is a wonderful thing. This is why the health-care industry don't want it from the government or other insurers. But if you have claims or are a bad risk, they'll still insure you but it'll cost an arm and a leg. With health-insurance, I don't have choices. If you were just asking this because you really didn't get this part, I am not so sure we need to continue. I don't mean to be abrupt, but this is really basic stuff.

JCB's response:

Yes! You're right that competition is a wonderful thing! You're probably also correct in your belief that many in the health-care industry like the fact that competition in their industry is severely limited. As great as competition is for the economy as a whole, it rarely seems quite so wonderful when it's directed against one's own efforts. A lack of competition is, of course, a well-known characteristic of a market that isn't very free. Thanks for helping me make my point.

Hill's previous statement:

It really seems like your big issue is with government regulations, since subsidies are now off the table.

JCB's response:

Despite your semantic gymnastics pertaining to this issue, the unavoidable fact remains that health care in this country is heavily subsidized by the government and has been for many years.