I worked for a state run health care fund.
One day I asked the all important question: What is the incentive for pooled insurance to control costs?
I asked the question to everyone I could.
Generally the response was moral platitudes. We keep costs down because we are public servants charged with seeking the public good.
The closest that anyone came to a systemic argument was that they had to keep costs low or the agencies insured would seek coverage from private pools.
It is true that, to an extent, competition among pools helps keep prices low. Insurance companies do not want their product undercut by other insurance pools.
There is a systemic fault in this argument. It is this systemic fault which is at the root of our health care woes.
The fault is that pools are concerned with relative costs. Their concern is with costs in relation to other pools … their competition.
They are not concerned with baseline costs.
Pooled insurance is a numbers game. Insurance companies calculate the cost of delivering a service. They then add a percentage on top of that.
The insurance industry has a very perverse set of incentives. Yes, they want the cost of their product to be low in comparison to other pools, but they want the baseline cost of healthcare to increase each year because their profits are calculated as a percent of total costs.
Let's say there is a market where expected health care costs are $10B a year. Insurance companies compete for this market with the promise that they will help people avert risks and even out costs. For this service the insurance companies charge 10% and make a $1B profit.
If something happens in this market that increases expected costs to $20B, the insurance companies will see their profits double to $2B.
Don't you see? The profits of insurance companies increase with baseline costs.
As such, insurance companies benefit from anything that can increase that baseline costs.
For example, big malpractice claims increase baseline costs. Insurance executives might grumble about malpractice claims by they benefit from them at multiple levels. High malpractice costs force doctors to buy extremely expensive insurance. The insurance companies make a percent on this market. The high cost of malpractice insurance increases the baseline cost of health care. This increases the profits insurance companies make on health care insurance.
I worked in public health care. Artificial increases in the cost of health care increased the amount of money flowing through the department which increased our budget.
The perverse incentives apply to both government and privately owned insurance pools.
These perverse incentives work directly against the needs of the people. As the baseline of medical care increases, the more insurance companies save by denying care to individuals.
I emphasize that the flow of care follows the flow of money. As our health care dollar currently flows through pools, the expenditure of money is optimized for the benefit of the pool.
Were we to switch the system so that money flowed through individual accounts, then the system would become optimized for the needs of the individual. Which, as Adam Smith pointed out some two centuries ago, would improve the Health of the Nation.
The only way out of this trap is the creation of a medical funding system that returns control directly to the people. Individuals will seek out the best care for their dollar. If we were to switch from insurance to Medical Savings and Loans we could break the incentives of the insurance companies to keep jacking up prices.
Unfortunately, the MS&L has to reach a critical mass before it can accomplish its task.