Health Care, Part 1

Health Care seems to be the main focus of most of our news media for the last little while. While I don’t claim to know all the answers to dealing what are obviously dangerously skyrocketing costs I think it is easy to see that we must do something to get costs under control or Health Care will simply devour what is left of our economy. Add to that the largely unmentioned fact that a greater percentage of our population will be senior citizens in the near future than we have ever known and it is easy to see a confluence of events that are potentially economically devastating.

I find it ironic that what is realistically one of the leading causes of spiraling health care costs is almost always bandied about as if its wider usage will solve the problem. The problem is not the lack of insurance for people who can’t afford it; the problem is that people cannot afford health care without insurance. It is not coincidental that the people who have fostered and profited wildly from this system where insurance in indispensable have also managed to put themselves in a position to further their profits no matter which direction the current debate takes. This should come as no surprise to people who are actually paying attention; it is the methodology that corporate America has used for the last 30 years to guarantee that profits are sacrosanct and the public pays the bill for losses.

Why are health care costs so high? This is actually the only question that we need to consider in order to come to a real solution to the problem; anything else is treating the symptoms without addressing the cause and most any doctor worth his PHD will tell you that is a futile pursuit. There are no simple answers to the problem and there is no silver bullet solution but it is time to start sorting things in a reasonable manner. If you want to find the root causes of anything you must first sort them by some criteria. In this case, let’s sort things by the simplest method; are they contributors to the rising costs or are they part of a solution to lower costs? In a very broad and general way there are many things that will be hard to sort using this methodology but there are some that are glaringly easy so I think we should start with those.

Insurance….. Is it a contributor or a solution? In order to understand Health Insurance and its contribution to the problem we are facing today it is necessary to look at the history of health care in this country. Up until the 1920’s in the United States health insurance was an unknown and unneeded commodity. Health care costs were low comparatively speaking with most families expending less than 7% of their annual income on health care. Insurance companies were also not interested in the idea because they could see no way of guaranteeing its profitability. According to one of the major insurance publications at the time, “"the opportunities for fraud [in health insurance] upset all statistical calculations.... Health and sickness are vague terms open to endless construction. Death is clearly defined, but to say what shall constitute such loss of health as will justify insurance compensation is no easy task". As it turns out, these concerns were largely correct and have been the bane of every attempt at equitable insurance since that time.


Interestingly, several modern European nations at the time were starting down the path of nationalized health care but in the United States there were three major stumbling blocks to such an innovation. The first was the simple fact that since health care costs at the time were not prohibitive there was essentially no push to invest in such a program. Second, doctors who were already organized in the AMA were very much against any sort of organized system which might limit costs or cut into their profits. Third, there were the burgeoning drug companies who were also afraid of regulations which might cut into their profits. Interestingly, these 3 groups have been at the forefront of every battle to fight health care changes since that time and still are today for much the same reason. The AMA, the large drug companies, and the insurance companies contribute huge sums of money to lobbying efforts aimed at keeping costs high and profits at a maximum even today when the costs of health care have skyrocketed to the point that it is a national crisis. Anyone who suggests that any of these groups is not engaged in such practices need only look at the facts of the past ninety years but I will get back to that in a minute.

The first health care plans were actually Hospital Plans. Under these plans a set fee was paid in advance to cover a set number of days in the hospital. These plans were mutually beneficial for consumers and hospitals as it held cost down for the consumer and gave hospitals a fund for operating from that helped smooth over the inconsistencies involved in maintaining a facility that was not full all the time. Hospitals were originally set up, often with state funding help, as a source of emergency care and surgical in- patient facilities. In times of epidemic hospitals had to offer enough beds for emergencies but were usually only 65-70% full. This led to inevitable cycles of profitability followed by loss of profits and the hospital care plans helped to smooth out these cycles by giving the hospitals reliable and predictable sources of income. The consumer gained because it kept him from suffering catastrophic loss of income that could come with an unexpected long hospital stay, thus the first health care programs were actually hospital plans instead of health care plans. By providing hospital care at an individual hospital the plans soon caused hospitals to come into competition for these plans and accordingly drove the hospital costs down across the board with this competition. In response to this pressure, community hospitals began to organize to offer Hospital Insurance and eliminate the need for competition.

The first Blue Cross plans in the 1930’s were actually organized by the American Hospital Association (AHA) as a means to relieve the pressures of competition and to control prices. Inserting clauses into such plans that guaranteed patients could choose their own hospitals regardless of costs allowed the price of Hospital care to again start to rise where the competition amongst such hospitals before these plans had been steadily driving them down. Then, as now, insurance plans became the middle man that removed the customer from the loop of supply and demand that drives free markets. When the customer didn’t get charged for price differences directly he lost interest in trying to find the lowest price. This has been the secret to exploding health care costs since that time. As long as the Blue Cross plans also received the help and support of legislation at the state level which allowed them to set up such companies as non-profit organizations free from paying taxes they were also exempted from existing insurance regulations that would require them to meet financial reserve and fiscal solvency laws already in existence for all other insurances. The Insurance writers well understood the problems associated with health insurance noted above that had kept them out of the business to begin with and were only drawn into the business by such sheltering legislation by state governments who considered it a public good. This is worth repeating again; Blue Cross originally became a hospital insurance success only because the state governments gave them tax exemptions as well as legal exemptions above and beyond those afforded all other types of insurance operating in the private sector. The states reasoned that the Hospitals themselves were underwriting Blue Cross by agreeing to provide the services in case of any failures on the part of Blue Cross to pay. The state governments had from the beginning subsidized payments for public hospitals by shouldering costs for the indigent care of those who couldn’t afford to pay so it wasn’t that big of a leap for the state governments who were now on the hook only if the Blue Cross Hospital plans collapsed financially.

The American Medical Association was against health insurance from the very beginning. They felt it would take away their rights to set prices and would eventually standardize pricing for medical procedures. This was anathema to physicians who were used to setting priced based upon what individuals could afford to pay them. Price discriminatory practices had been the norm since medical science came to be more well accepted in the late 1920’s and the AMA was determined to protect these practices above all else. However, when Blue Cross plans began to become widespread enough to affect physicians profit margins, they reacted by forming physician care plans of their own. Blue Shield was formed after the AMA set rules guaranteeing the control of physician’s care insurance by the physicians themselves. This would protect their ability to set prices and still give them the ability to compete with Hospital Care plans. By the late 1930’s the AMA and local physicians were lobbying state governments to set up tax exempt companies on the model of the Blue Cross plans. These plans soon came under the control of Blue Shield and were set up as non-profit companies who were tax exempt and also exempt from the same fiscal responsibilities as the earlier Blue Cross plans. State legislatures were anxious to help their constituents deal with rising health care costs. It is worth noting here that both Blue Cross and Blue Shield that were state supported were originally set up in direct opposition to free market competition. As a matter of fact, both were formed and installed specifically in response to free market competition which was in fact driving health care costs down before their formation. Blue Shield plans allowed doctors to charge whatever fees they determined to charge on top of what the Blue Shield plan paid the doctor. This was the driving force behind the AMA’s proposals for the plan to the state to begin with; it allowed doctors to continue to price discriminate based upon individuals ability to pay and avoided set fee schedules that would take this control from the physicians and thereby lower their profit margins.

As medical science continued to improve and health care possibilities expanded the costs associated with health care continued to rise. Blue Cross and Blue Shield’s successes in the market along with the fact that they were steadily driving costs up by eliminating free market principles from health care tempted private companies to become involved in the process as well. Private Insurers had long looked up on Health Care as a dangerous business but by carefully controlling who they enrolled in their programs to begin with it was possible to make the business lucrative enough to overcome their reticence. Worker plans seemed to be the ideal model for profitability as by enrolling only active workers the insurance companies could make sure that most of their customers were healthy enough so as not to be risks for long term expensive medical care. Most employees were young and healthy enough so as not to impose adverse risks and were in fact a new market for health care insurance for the simple reason that most of them would not have been seeking health care insurance to begin with if it weren’t offered through their employer. It was the base that was needed to start the giant pyramid that is actually the core principle behind insurance to begin with. There must be a larger base of paying customers not using health care insurance to pay for the smaller tier on top who actually have need of health care. Private insurers have the added advantage of being able to screen and reject potentially adverse customers based upon pre-existing conditions which the state supported plans are not able to bar from coverage.

As more and more people began utilizing health care insurance and therefore removing the system from the laws of supply and demand that drive all free market systems, costs inevitably began to spiral. Private insurers began to leverage their way into the market because they had another advantage over state supported plans such as Blue Cross and Blue Shield. Private insurers could offer rates based upon the relative risk associated with groups of workers. In other words, while state supported plans offered one rate for an area that included all customers, private insurers could offer lower rates for lower risk, healthier customers and higher rates for those considered to be higher risks due to age, physical condition, and hereditary factors. By the early 1950’s private insurers had a larger share of the market than state supported plans but both groups were beginning to pare back services for high risk patients.

Lest anyone think that private insurance companies operated in a free market system beyond that of the state supported plans, it is worth noting that government early on began to subsidize these plans as well. During the war years of the 1940’s the federal government passed several acts attempting to hold wages in check. Health insurance plans were exempt from these acts and companies began utilizing such plans to keep workers on staff and to lure them from competitors. This was followed in the fifties and sixties with federal exemptions from income taxes for employers who paid money into their employee’s health insurance plans and for monies that employees themselves began to pay into such accounts as well. The federal government, by the judicious use of tax exemptions, encouraged health care insurers to gain an even firmer control of the market. At the same time, Insurers with the help and complicity of the AMA and AHA, helped drive costs up by removing any semblance of competition in the market. This was done in full view of the customers themselves who noted exorbitant cost jobbing on the part of the medical industry but didn’t complain because it wasn’t coming out of their pocket. The only problem was that it did come out of their pocket indirectly through higher premiums which translated into lower take home wages. Still, as long as the economy was booming and wages were increasing the rising standard of living could absorb the costs.

By the mid seventies some 75% of the people in the United States had some sort of health care plan, whether it be government sponsored Medicare or Medicaid, state supported Blue Cross and Blue Shield, or private insurance company plans. As health care costs have skyrocketed it has become an absolute necessity for families to have some sort of health care coverage. One serious accident, one prolonged stay in the hospital, or one serious illness is financially catastrophic in this day and age. Medical bills are by far the largest cause of bankruptcy in this country today. A 2005 study by Harvard University showed that over half of all bankruptcies filed in 2001 were directly caused by medical costs that the victims could not pay but this is not the end of that story. Over 75% of the victims in the study had health insurance of some kind at the start of the illness or hospital treatment that led to the high medical costs but lost it as some point during the ensuing medical procedures. Many were unable to work and could not afford to keep their medical insurance and others were simply denied coverage for pre-existing conditions. The last thing someone with cancer can afford is a lawyer to fight an insurance company who drops their coverage and insurance companies are well aware of this fact.

Since its inception in this country health insurance has been one of the leading causes of rising health cost. By removing the laws of supply and demand from the medical industry it has fostered an explosion in costs that we simply cannot afford anymore. As I have noted so far, all the major advances in Health Coverage have been precipitated by the desire to eliminate competition from the field. The AMA, the AHA, and private insurers have contributed to this unnatural growth in costs for one simple reason; to increase profits. The only way to make Health Insurance a practical necessity is to make health care costs high enough that you cannot afford to be without it and with the support and collusion of the medical community insurance carriers have succeeded admiringly in doing just that.

The abbreviated history of Health Care Insurance above points out one thing with absolute certainty; insurance is more of a cause of the present problem than a solution. In every instance it has worked against the free market system that controls prices in every other aspect of our society and it will continue to do so for the simple reason that it is obscenely profitable to do so. The idea that we need more insurance of any kind to control health care costs is in direct opposition to the facts. We need to control the cost of health care by placing health care costs back in the free market which is directly opposed to what Health Care Insurance has historically done. We cannot expect the people who have fostered such a profitable business by removing the laws of supply and demand from the system to be the leaders in reducing costs, nor can we expect the AMA who has at every instance worked against competition in the medical industry to lead the way.

In my next post I will discuss the AMA’s collusion in the current mess more fully as well as the further introduction of Medicare and Medicaid which have been band-aid measures when what we actually need is a complete overhaul of the system and a return to what it has not been since the 1910’s; a free market system.