Something The Affordable Care Act Got Right

There are many things in the Affordable Care Act, the legislation that radically changes how health insurance will work, also known as “Obamacare,” that should be changed.  There are provisions that discourage companies from expanding and hiring such as the requirement that companies provide health insurance to all employees if they have 50 or more employees, but not 49.  There are also provisions that will make health insurance unaffordable for many people, such as the requirement that all health insurance cover a whole list of procedures that many people don’t need and that all health insurance have no limits on coverage.  The provision that requires the young to pay more than they will likely use to supplement the old, who pay less, is also unfair and discourages young individuals from signing up at all, causing the actuary tables to be out of balance.  This will lead to big increases in rates next year.  But still, there is one thing the act gets right.

The central reason that healthcare costs so much isn’t the medical advances, lawsuits, buffet mentality, or fraud.  While those factors all cause healthcare, and therefore health insurance to cost more, they are not the drivers of the outlandish prices seen.  The real cause of high prices is that most people are paying far less for their care than the cost.  This leaves the few that do pay with a much higher bill than they would otherwise see.

Imagine if only one out of ten people paid for their meals at McDonald’s, yet the restaurant had to feed everyone who went there.  The restaurant would still need to pay their costs and make a little profit – without any profit at all what would be the reason to stay in business and how would the owners pay for their needs?  They therefore would need to charge the one person who did pay enough to cover the cost of providing the meals for the other nine who did not.  The meal of burgers, fires, and a coke would cost $70.  The problem would then only get worse as more people were not able to pay, perhaps decreasing the ratio of payers to non-payers to 20 or more.  That’s one pricey Big Mac.

In healthcare, many people pay little or nothing.  Even Uncle Sam is somewhat of a deadbeat when it comes to medical bills.  Anyone who has looked at a repayment schedule for Medicare or Medicaid will see that they pay very little of the total bill and usually far less than you would pay if you walked in with cash.  This leaves everyone else paying way more than they should.  $10 for an aspirin.  $800 for ten minutes of a doctor’s time in an emergency room.  $3000 for a CAT scan.

To see this, just look at the difference between the prices at the doctor’s office and the ER.  Seeing your doctor for 15 minutes at his office is usually around $50 if you pay cash (if you use insurance, they’ll normally charge $80, but the insurance will pay about $35 and you’ll pay a $15 co-pay).  See that same doctor in an emergency room, and the price will be $500 or more for that same 15 minutes.  It isn’t that the doctor’s expenses are higher at the emergency room or that the service is radically better or something.  It is just that there are a lot of people at that emergency room who go there to get a prescription for cold medicine since it is free that way, where they would need to pay a drug store if they bought an over-the-counter medicine.  They pay nothing, so those who do pay more.

One of the requirements of the Affordable Care Act is that everyone get health insurance or pay a fine.  If everyone did get insurance, most people would be paying their bills, which would cause prices to fall.  The issue though is that the ACA includes all of the issues described in the first paragraph of this article.  It also includes a lot of subsidies, meaning many people will not actually be paying their bills – the taxpayers will be picking a good portion up through their taxes.  The amount given out in subsidies will increase as the incentive for businesses to reduce their staffes and the incentive for individuals to drop out of the workforce causes fewer people to work and more to be receiving subsidies.

A better solution would therefore be to require people to put money away in private accounts for medical care and purchase a high deductible insurance policy for when they have a major accident or illness.  In this way they would have the money to pay their bills when needed, causing costs to fall.

We also need to change the way people feel about paying for medical care.  Most people would refuse food stamps if they could pay themselves, but most people are perfectly happy to have the government pay for their doctor’s visits.  Why should a hospital bill be any different from a grocery bill?  The secret is to reduce the costs by making sure most people are paying and to ensure people have insurance and are saving regularly for their healthcare costs before they pay their cell phone bill or go on vacation.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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