The Difference Between Health Care and Health Insurance

The Difference Between Health Care and Health Insurance
December 10, 2012

Benjamin Domenech

Benjamin Domenech (bdomenech@heartland.org) is a senior fellow at The Heartland Institute. Domenech... (read full bio)

Consumer Power Report #353

An excellent article from James Huffman at the Hoover Institution on the difference between health care and health insurance is well worth your time.

What is insurance, and how does it work?

People face two kinds of future costs in their lives – those they can count on and budget for (or choose not to incur) and those that may or may not arise, depending on circumstances at least partly beyond each person’s control. We know we will have to pay for things like food, rent, transportation, movies, and booze. We cannot know ahead of time precisely how much those costs will be, but we know we will incur them and we generally have a good estimate of what they will be.

Other costs, like getting sick from food poisoning or being injured in an auto accident, are unpredictable both as to magnitude and frequency – they are risks, in other words. I can know with reasonable certainty what it will cost to take a vacation next summer. I cannot know whether I will incur the costs of an accident along the way, or what those costs will be if they do arise.

It makes sense for individuals to insure against the latter, unpredictable costs. It makes no sense to insure against the former costs, which, by the way, include birth control.

Faced with the risk of uncertain future costs, people can: 1) save, in advance, enough cash to cover future costs should they arise, 2) borrow in the event the costs are incurred, or 3) purchase insurance. Saving (we might call it self-insuring) is not a good option for most people because it ties up resources that could be employed for other purposes (opportunity costs), not to mention the impossibility of knowing how much to save and the high likelihood that the possible future costs will not be incurred, meaning the opportunity costs will have been needlessly borne. Borrowing after the costs are incurred is also not a good option for most people because they are unlikely to qualify for a loan, particularly after suffering a significant loss, and because, from that point forward (if they can get a loan), they will experience the opportunity costs of having to service their debt. For most people, insurance is the best alternative.

So much of the problem with today’s rising medical expenses is due to consumers’ inability to discern the difference between these two types of costs and built-in incentives on the part of providers, pharmaceutical companies, and government bureaucrats to disguise the difference between them. Providers and pharmaceutical companies seek to raise consumption of their product – something easily done with incomprehensible bills and life in the third-party payer economy. Hospital groups just want to see more people covered, you see. Government bureaucrats seek to retain and maximize their power both to direct the marketplace at large and to direct the lives of people who presumably don’t know what’s good for them – another approach best achieved where the money is hidden from them. And they are very good at it.

Locked in a constant tug of war between these forces, insurers seek to survive through constant deal-cutting and scrimping in ways that affect the fewest people – and typically, therefore, the most in need – and are incentivized to avoid taking on sick patients, particularly the chronically ill. They target the only area where they can raise prices – on privately insured people – again and again for rate increases to offset the demands from government and providers. Thus the self-employed and small employers, lacking the size to self-insure, end up suffering the effects the most.

We can end this cycle: Either we return to a definition where health insurance means insurance, where billing is transparent and honest with employees and employers, or we choose the path to single payer and perpetual surrender to government-run health insurance – which turns out to be decent when it comes to cost, but particularly disappointing when it comes to care. But these trends are surely coincidental.

-- Benjamin Domenech


IN THIS ISSUE:


SEVEN REASONS STATES SHOULD JUST SAY NO TO MEDICAID EXPANSION

Merrill Matthews runs through seven reasons states should not expand their Medicaid programs. Here are the first four:

Currently, nine states have rejected the Medicaid expansion and six are leaning against it; 13 have said yes and four are leaning toward it. For states that are still undecided, here are several reasons they should reject the expansion.

1. Medicaid Is Bad Coverage – Medicaid is the worst health insurance coverage in the country, and yet ObamaCare did nothing to fix its many problems. Take access to physicians. The Texas Medical Association published a survey showing that the number of Texas doctors willing to accept new Medicaid patients has declined from 42 percent in 2010 to 31 percent in 2012, in large part because Medicaid pays doctors so little. For various reasons Medicaid beneficiaries often go to the emergency room instead of a family doctor. In addition, Medicaid drug formularies limit the poor’s access to many beneficial drugs.

The problem highlights a serious misunderstanding among Democrats pushing the legislation: Access to health insurance is not the same as access to health care. ObamaCare goes to great strides, and even greater expense, to ensure people have coverage. That does not mean they will be able to get care.

While Medicaid is better than having no insurance, expansion only exacerbates Medicaid’s many problems. Coverage for the poor should not be synonymous with poor coverage.

2. The Exploding Medicaid Population – Medicaid currently covers more than 70 million Americans, and ObamaCare increases that number by an estimated 17 million almost immediately. In addition, those designated as disabled are eligible for Medicaid, and that population has grown at unprecedented levels since Obama became president, from 7.5 million to 8.8 million. Since Medicaid is a welfare program, ObamaCare becomes the biggest expansion of the welfare state since Lyndon Johnson’s War on Poverty. And considering the growing numbers, we apparently lost that “war.”

3. The Woodwork and Crowd-Out Effects – Those Medicaid growth projections are likely low, as eligible people [are likely to] “come out of the woodwork” to join the program. For example, an estimated 25 percent of the uninsured are eligible for Medicaid but not enrolled. More importantly, employers with a large number of low-income workers who offered some type of basic coverage may drop it or shift some employees to part time, making them eligible under Medicaid’s new eligibility standards. That’s known as the “crowd-out effect.” Wal-Mart, the country’s largest employer, recently announced that it would take that step. And a small number of low-income workers buy their own coverage. They will likely drop it and shift to “free” Medicaid.

4. The Cost to State Budgets – Medicaid spending has been growing at about 8 percent a year, compared to economic growth of 1 percent to 2 percent. But ObamaCare puts Medicaid on growth hormones. Total Medicaid spending (state and federal) is projected to grow from about $400 billion to about $900 billion by 2020.

At 23.5 percent, Medicaid has become the biggest budget item for most state budgets, surpassing K-12 education. We are already at the point where other state priorities are suffering because of money being sucked up by Medicaid; and that problem will only get worse.

Expansion advocates claim that the federal government will absorb most of the cost of the newly eligible Medicaid enrollees – 100 percent for a few years, dropping to 90 percent by 2020. That’s much larger than the average 57 percent share the federal government now pays. What a deal!

But those advocates sound like the spendthrift spouse after a shopping spree who boasts about all the money that was saved; what the fiscally responsible spouse wants to know is how much money was spent. Expanding Medicaid will still cost states billions of dollars, even at the reduced state share. And taxpayers are still paying for the coverage; the taxes – actually, borrowed money – are just coming from the feds rather than the state.

More about Medicaid in this interview with Rick Perry about Obamacare.

SOURCE: Forbes.com


YES, INSURANCE TAXES RAISE PREMIUM COSTS

Whoops.

Insurance premiums could increase by thousands of dollars because of a new tax in President Obama’s healthcare law, according to a study commissioned by the insurance industry.

The healthcare law imposes several new taxes, including a tax on the insurance industry. The amount the government will collect will rise each year, and is expected to raise $100 billion over 10 years.

The health insurance tax will raise families’ insurance costs by as much as $7,000 over a decade, according to a study conducted by the firm Oliver Wyman on behalf of America’s Health Insurance Plans (AHIP), the insurance industry’s leading trade group.

Premium increases will vary from state to state, Oliver Wyman said. But on average, the cost of a family plan sold through a large employer could [be] about $7,200 more over 10 years – about $720 per year.

“With full implementation of the ACA a year away, the focus needs to be on making coverage more affordable,” AHIP President Karen Ignagni said in a statement. “Taxing health insurance will have the opposite effect by making it more expensive.”

Insurers have pressed Congress to repeal the tax, saying it’s part of a series of policies, set to take effect at the same time, that will cause [a] dramatic spike in premiums.

More from AHIP here.

SOURCE: The Hill


FEDERAL EXCHANGE IMPLEMENTATION AND THE SEBELIUS COVERUP

Interesting stuff from Jeffrey Anderson:

HHS has contracted with a subsidiary of a private health care company to help build and police the very exchanges in which that company will be competing for business. The person who ran the government entity that awarded that contract has since accepted a position with a different subsidiary of that same company. An insurance industry insider (speaking on the condition of anonymity) says that HHS, in an attempt to hide this unseemly contract from public view until after the election, encouraged the company to hide the transaction from the Securities and Exchange Commission.

According to my source (the basis for most of this account), in January, HHS awarded Quality Software Services, Inc. (QSSI) what the Hill describes as “a large contract to build a federal data services hub to help run the complex federal health insurance exchange.” At that time, the director of Obamacare’s newly established Center for Consumer Information and Insurance Oversight (CCIIO) – which the Hill describes as “the office tasked with crafting rules for the national exchange” – was Steve Larsen. Larsen had been the insurance commissioner for Maryland when Obama’s HHS secretary, Kathleen Sebelius, was the insurance commissioner for Kansas, and the two are reportedly close. The CCIIO awarded the Obamacare exchange contract to QSSI while Larsen was the CCIIO’s director, and he played a central role in planning the construction of the exchanges – although it’s not known whether he made the decision to award the contract to QSSI or not.

Under the contract that it signed with HHS, QSSI’s power would be substantial – as QSSI would shape, run, and affect companies’ ability to compete to sell insurance through Obamacare’s federal exchanges. The Hill writes, “A draft statement of work for the contract awarded to QSSI states the contractor should provide services necessary to acquire, certify and decertify health plans offered on a federal exchange.” Moreover, “It stipulates the contractor should monitor agreements with health plans, ensure compliance with federal standards and” – somewhat strikingly – “take corrective action when necessary.”

QSSI, apparently realizing what a valuable asset it had in the contract, started shopping itself around. Meanwhile, Larsen left the CCIIO and took a highly paid position with Optum, a subsidiary of UnitedHealth Group, in June. Sometime this summer, UnitedHealth Group bought QSSI.

A roundup of the final rules issued pursuant to the ACA is here.

SOURCE: Weekly Standard


GOVERNMENT DATA-GATHERING TO BEGIN FOR EXCHANGES

The potential Obamacare privacy nightmare.

By mid-December, the federal government is planning to quietly enact what could be the largest consolidation of personal data in the history of the republic. If you think identity theft is a problem now, wait until Uncle Sam serves up critical information on 300 million American citizens on a platter.

Hyperbole? Unlikely. Here’s why: As the Patient Protection and Affordable Care Act lurches toward full implementation on Jan. 1, 2014, only a handful of states (California, Massachusetts, Maryland, Oregon and Washington) are likely to be truly ready to operate state exchanges by next October. These exchanges are supposed to be the primary mechanism for giving federal subsidies to uninsured, low-income Americans. Without state exchanges, ObamaCare runs into trouble.

ObamaCare’s fail-safe mechanism is the creation of a federal exchange the administration has quietly put in motion. If the plan were simply a Travelocity-style portal for choosing different insurance products across state lines, we would support it. In fact, the federal government already has similar exchanges for Medicare Advantage plans and Part D prescription drug plans.

ObamaCare’s federal exchange, however, will be very different from these earlier efforts or emerging private exchanges such as eHealthInsurance.com. In order to determine eligibilty for health insurance subsidies, the new exchange has to bring together information about you and your family from the Treasury Department and IRS, the Department of Homeland Security, the Department of Justice, as well as your Social Security number – all coordinated by the Department of Health and Human Services.

More on how data breaches cost healthcare entities $7 billion annually. FreedomWorks has set up a page to oppose exchange implementation here.

SOURCE: USA Today

Benjamin Domenech

Benjamin Domenech (bdomenech@heartland.org) is a senior fellow at The Heartland Institute. Domenech... (read full bio)