11 Ways Government Intervention Has Made Healthcare and Health Insurance More Expensive
Since open enrollment in individual health insurance plans will be starting up again in November, I thought I would provide some backstory to the perennial rise in health insurance premiums everyone’s stomachs should be used to churning over by now:
1. Inflation of currency is always a factor when discussing a rise in prices but holds especially true to goods and services that have an inelastic demand (when demand is relatively stable regardless of price) and is where one would expect to see rising costs occur foremost under the pressure of inflation, namely healthcare. Inflation of the US dollar is mainly derived from the buying of treasuries by the US central bank (the Federal Reserve) in order to keep interest rates low.
2. Extensive licensure and education requirements have been in place since the early 19th century that create barriers of entry to those who would like to practice medicine in the United States. By one estimate, the cost to attend medical school including lost opportunities exceeds $800,000.
3. Beginning in the 1930s, government granted the Blue Cross/Blue Shield organizations tax-exemptions on premium, thus inventing a new standard model of health insurance. These organizations transformed health insurance away from a policy like auto insurance where the insured still pays the body-repair man directly into a third-party payer system where the insurance company pays the doctor up-front and any relationship of the doctor and their patient negotiating on a fair price was dismantled.
4. With the advent of the Blue Cross/Blue Shield organizations came the government requirement that health insurance companies rate premiums based on entire geographical regions rather than simply based on individual factors like age, sex, and medical history. This requirement took away an important incentive for individuals to act in ways to reduce costs of healthcare.
5. In 1942, when the government froze wages and decreed insurance premiums to be a tax-deductible cost of business, this caused a major shift from many individual health insurance policies to much fewer group policies, thus amplifying the bargaining power of those larger insurance companies left.
6. As the US population began to age, the community rating system began to operate at a competitive disadvantage to those companies who were not part of such a system and could charge lower rates on the healthier young and higher rates on the unhealthier elderly. This prompted the lobbying for and subsequent establishment of Medicare in 1965, thus removing anyone over the age of 65 from the private sector’s insurance pool and improving insurance company profits. Medicare created a single-payer system in which those over 65 could now receive medical care regardless of cost, thus driving up demand and prices dramatically.
7. Medicare and subsequent government price controls created shortages in supply. The eventual outcome was a new regulation in 1986 called EMTALA that placed new and substantial liabilities on healthcare providers in order to prevent them from denying service or transferring patients to other hospitals. Especially affected was the emergency room which was transformed into an overcrowded safety net for the entire healthcare system. Further expansion of these emergency room liabilities were made in the 1990s and has resulted in cost-shifting off of those with no intent to pay to those who do intend to pay (e.g. a $150 bill for a Tylenol).
8. In the 1990s, a new regulation called E&M (Evaluation & Management) greatly expanded the necessary coding and documentation of all outpatient services if the doctor was to be properly reimbursed. This was another failed attempt at price controls that only resulted in an expansion of healthcare bureaucracy and a more complex (and thus costly) visit to the doctor.
9. The Food and Drug Administration (FDA) was established in 1906 to determine which prescription drugs (among other products) were safe for market. Whenever bad drugs are approved and then discovered, the FDA comes under scrutiny and criticism. Unfortunately, the resulting incentive is for the FDA to make the application process exceedingly costly (billions of dollars) and lengthy (8+ years) for getting drugs to market, not only drastically driving up costs for these drugs but causing harm to those people who would have otherwise benefited (and lived) from the drug’s use had the FDA’s barriers not been in place.
10. Intellectual property laws also come into play in the field of health care devices and equipment but are especially visible in the world of pharmaceuticals (e.g. seeing a $200 drug become a $15 generic drug overnight). Artificial scarcity is enforced by the government when a monopoly is granted to the original inventor of a product so that they are the only ones to rightfully see profits from the product’s sale (contradicting actual, non-scarce property rights when someone else wishes to make a version of that product from his own raw materials). This allows the monopolist to charge a price free from the downward price pressures of competition.
11. And finally, the Affordable Care Act (ObamaCare) passed in 2009 to establish universal coverage, ensuring that no one could be denied health insurance due to a pre-existing condition. It also relied even further on the communal rating system and more restrictive HMO networks to try to keep costs down, and required new essential health benefits. As we have seen in the past couple years, the new system has not been a profitable development for health insurance companies and has unsurprisingly done nothing to slow down the increase of healthcare costs or insurance premiums due to the increase in demand from those using the insurance with pre-existing conditions.
Likely, in the not-so-distant future, Americans will be faced with a decision. One path will be to continue with further government intervention into a single-payer system in which prices cannot function properly (sellers charging whatever they like to the single buyer, the government) and thus will result in shortages and rationing of service. The other path will be to retract these interventions of government and to once again allow for the freedom of market prices, competition, and negotiation to take hold and improve the efficiency of the healthcare system.
If you want to learn about some of these points in more detail, check out the book by economist Robert Murphy and Doctor Doug McGuff, “The Primal Prescription: Surviving the Sick Care Sinkhole”.
– Jordan Inman, health insurance agent and content creator at yaddlezap.com