Sometimes in order to get to a different place, you need to upset the norm. People will continue to sail in a leaky rowboat indefinitely, bailing while their shoes get wet, so long as the boat doesn’t actually sink. Sometimes it takes someone to come along and knock a big hole in that boat before people will get out and construct a better boat. President Obama and the Democrats have certainly knocked a big hole in the healthcare boat. Unfortunately some may drown before we build a more sea-worthy craft.
It’s clear that we can’t (and shouldn’t) return to the system we had. While those of you on employer-based healthcare probably haven’t seen any big changes yet, be ready to be thrown into the water with those who currently buy their health plans in the individual market. They have seen their rates doubling while deductibles have risen dramatically to the point where the chances of the insurance company ever paying anything for most people is remote. The reason many employer-based plans are staying in place is that implementation of the employer mandate portion of the Affordable Care Act (ACA) was delayed by (a questionably legal) Executive Order. Next year when the mandate starts to kick in, requiring employers to expand what they cover, and making many existing plans “illegal,” expect many employers to opt to pay the $2,000 per employee fine and send you packing to the exchanges. Many employers may provide a little money to help with premiums when they do, but don’t expect that assistance to keep pace with premium increases in the future. Worse still, many employers may simply lay people off or cut their hours to part-time (29 hours or less) to avoid the fine. It is expected that about 150 million Americans will lose their coverage when the employer mandate starts – nearly half of the population.
Before about 1960, most individuals just paid for their healthcare and there wasn’t any great burden. I don’t know how many doctors actually took chickens or preserves for payment in the early twentieth century, but certainly they charged rates that their patients could generally afford. If not, they would have gone out of business quickly. Likewise, while there can be no doubt that a long hospital stay would burden a family even then – both because of the loss of income and because of medical expenses – I doubt that the fees were anywhere near the $2000 emergency room visits we see today. I would put the fair price of a night in the hospital around $150, given the cost of the building and the nursing staff. I doubt that is anywhere close to what a hospital’s list price is for a night.
The pre-ACA method of healthcare payment grew out of the auto industry where the automakers started paying for employee healthcare rather than increase wages to the point the unions were demanding. This practice spread to other industries and became an expected benefit of working. At first people used little healthcare, so the cost was relatively low and the companies would cover it fully. As people discovered that their cost was the same no matter how much healthcare they used, however, and as the population aged, the norm urning from twenty-something invincibles who rarely go to the doctor to fifty and sixty-year-olds who use a lot of healthcare, healthcare usage increased and so did costs. This caused employers to start requiring their employees to pay a share of the cost, which then caused employees to use more healthcare since they were now “paying for it anyway.”
The ACA does have one thing right – it requires everyone to start putting in money for healthcare through the individual mandate which requires that everyone get health insurance. By having everyone who could pay for their own care do so, it would eliminate many situations where individuals need healthcare but have no money to pay for it. The ACA has three fatal flaws, however:
1) It is really a huge, unaffordable tax on the middle-class, where those who make about $60,000 and more pay for those who make less. This makes health insurance rates skyrocket and benefits fall since those who are actually paying are paying not just for their own healthcare, but for several others who don’t pay. Many of the individuals who the system wants to enroll – those who are young and healthy, and who therefore will use little healthcare – will wisely look at the cost of buying the new health insurance versus paying the fine and opt for the fine. This makes perfect economic sense since for the cost of the premiums they could easily pay for their medical expenses and have a lot left over for emergencies (if they actually saved). Some may also choose to make less income to avoid the fines as well.
2) The ACA is a pre-pay, Ponzi scheme-like system, much like Social Security. Young, healthy individuals pay for elderly, sick individuals with the assumption that when they are elderly others will pay for them. This is very risky for the young individuals since it gives up control of a critical necessity in their lives and makes them hope the ACA turns out better than Social Security, where excess proceeds were spent by the government and now the system is running out of money.
3) The ACA does nothing to address the critical need, connecting individuals with the cost of their healthcare so that they can make better choices and bring down costs. Instead it tries to bring down costs through regulation on healthcare providers, who will either find ways to make up the losses elsewhere or simply leave the profession. Would you rather have a Summa Cum Laude graduate with 12 years of training taking care of you, or a C-student with a four-year degree from the community college? The regulations will chase the best and brightest out of the profession.
Expect the ACA to collapse as sick people pile in and healthy people opt out. Ironically, this does what could not be done before: Change the system where the norm was for people to pre-pay for healthcare, largely through work, and then have medical expenses paid through those health insurance plans, into one where most individuals will be paying for things directly out-of-pocket. The question is whether we as a nation will choose to continue on that path or choose instead to make the government the insurer, pay for healthcare through taxes, and then have a single-payer system.
The first path – paying for things as individuals – leads to a much better place. By simply enacting a couple of reforms: 1) requiring individuals to put aside a portion of their pay to save for healthcare and 2) allowing insurance companies to again offer major medical plans that pay for expensive medical procedures that most people will likely not need in any given year, we can move to a system as I outlined in A Better Plan for Healthcare in America. Under this plan the cost of healthcare will drop since the cost of insurance billing and other wasteful procedures will vanish and healthcare providers will seek out efficiencies to compete for customers. There will always be some people who are either unfortunate and won’t be able to pay for their healthcare, or those who behave foolishly who will need to be rescued, but the costs for these individuals will be manageable since most people will be saving and paying.
The second path – a single payer system – will create what any government-run system creates: Higher costs, lower quality, poor customer service, and fraud and abuse. While there are certainly many ethical and well-intentioned individuals in the government, it is impossible for any centrally managed system at a scale of the national healthcare system to do a good job of meeting the needs of citizens in all sorts of different localized situations. Instead, a set of one-size-fits-all policies are created that only work for a small percentage of the population. The inability to police at the local level will lead to abuse, which will lead to scarcity and administrative barriers (hoops to jump through) that don’t stop the fraud but make it very difficult for honest individuals to get the services they deserve. This in turn will lead to bribes and political favors, as does any system which does not work if the rules are followed (see getting doing business in Russia or legally immigrating to America, as examples).
Let’s hope people choose the path that leads to prosperity and excellent healthcare for all. To get there, request 1) mandatory personal health savings accounts, possibly subsidized for low-wage workers and 2) remove rules requiring insurance companies to cover routine care and restricting where insurance can be sold.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.