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         Satisfaction vs. costs


         Real Health Insurance

         BMI is seriously flawed

Someone once defined politics as 'The art of trying to prevent the inevitable'.

This description fits what has been happening in health care,

which has been treated quite differently from other aspects of our everyday

economic lives. Because the basic problems have not been understood,

the same errors that gave rise to the current problems are the basis

for proposed solutions that will make matters worse.

I hope to show three major factors pushing up health care costs, and

fundamental changes that can solve the problems, including a way to write

affordable health insurance that protects without driving up costs.

Healthcare is Different

Health care differs from other necessary services such as food and heating

oil in only two important respects. First, no one ever suddenly needs twenty times

as much food or heating oil for a year as they did previously. However a small

percentage of families every year will have health care costs far greater than average.

This is why real health insurance, not what is called health insurance today, is


The second difference is that even ordinary or average health care and its

attendant costs are not steady but come in fits and spurts. This means that the

health insurance should be written for a longer period than one year. This will be

discussed further.

Therefore, even though health care, like food and heating oil, is a necessity,

the economics of health care should be handled no differently than the rest of the

economy, taking into account these two differences. The fact that health care has

been handled differently will be shown to be the source of the cost problems.

The Problems

There have been three major contributors to increasing health care costs

which are unique to the way health care has been 'managed' differently from food,

heating oil, furniture, etc. These are:

     1. displacement of patients as consumers of and direct payers for health care by government health plans and private insurance as currently written;

     2. defensive medicine to protect from runaway liability awards; and

     3. application of sophisticated technology, including both hardware and new types of services and occupations to provide them.

     Each of these factors

is impressive by itself. However, each works synergistically with the The others to

make the cost pressures much greater than would occur if the factors worked independently.

I think the above three factors, unique to health care, are the worst offenders. Aging

of the American population, which results in more illnesses that are more severe

and last longer is another factor but can only be remedied by causing people

to die younger and quicker. Two other major problems are inflation and excessive

regulation but these are not unique to health care.

Health ‘Insurance’?

Private health insurance actually started as prepaid surgical care and has almost

never been true insurance. With true insurance, most people would not receive

any money from the insurance company. They would pay their health care

costs directly and keep watch of costs. For those unfortunate enough to have health

care costs substantially in excess of the average, their insurance would cover most

of their extraordinary health care costs.

It is stupid to insure average health care costs. They have to be paid anyway,

the expense of administering the insurance is great, and, most importantly, the person

receiving the care being paid by insurance has no incentive whatsoever to

check on costs. This has been going on since the 1930's.

At the present time almost any hospitalization will exceed the deductible.

Even if there is some co-insurance, the patient has little incentive to watch out for

costs, Because of the low out of pocket cost to the patient there is not only increased

demand for medical services but also plenty of willingness to 'satisfy' this

'demand' by designing treatments, tests, and facilities without much concern for

costs because it will be paid by insurance or paid by government.

For example, there have even been corporations formed specifically to deliver

home care to the elderly—but only those services for which Medicare will

pay! Also, hospital emergency rooms are far more expensive for illness and minor

trauma than are doctor's offices. Why do people go there? Because their insurance

or the government will pay for it.


We have had Medicare, a system which displaces patients as direct payers

for health care, for many years. Because patients pay only a fraction of costs directly

out of pocket, costs have skyrocketed. Imagine if we had had "Foodicare"

which had operated in a similar manner. There might be a $10 deductible each

shopping trip to be paid by the shopper and then the government (or insurance

company or employer) would pay 80% of the rest of each grocery bill.

Almost everyone would have steak and lobster at least daily. Consumers

would show little interest in comparative shopping for the best way to spend their

food dollars. The technology of providing more exotic and expensive foods would

grow rapidly.

Then there would be complaints about the high cost of food, the rapidly

increasing "Foodicare" insurance premiums, and the terrible cost to the government

of "Foodicare" for the elderly. The hue and cry would be for cutting

amounts paid to food providers and for rationing food to consumers. Of course,

this is exactly what has happened with Medicare—except that in health care

there is also a liability problem.


The cost of malpractice insurance is often phenomenal. This cost too has to

be passed on. Yet the cost for procedures done mainly or solely to reduce the liability

risk is probably much greater than the malpractice insurance premiums. A doctor

cannot afford to take a 'wait and see' cost saving attitude in deciding whether

something needs to be done. If he does, it may leave him defenseless in a lawsuit.


Some technology would simply not have developed if most people were

paying their own health care costs directly. While elegant, it is not worth its cost.

Other technology is more useful. If the technology results in faster and/or simpler

diagnosis or treatment, such as a CAT scan versus angiography, then that health

care cost will be reduced. If the technology results in a cure instead of just treatment,

e.g., a new antibiotic where all others have failed, then this also reduces

costs for that illness. But keep in mind that the lowest health care cost is still to die

before you get to a health care facility the first time you get sick. Anything else

adds to health care costs.

Now is a good time to mention that a tremendous improvement in American health at

little or even reduced cost could occur by lifestyle changes. Think of just the health improvements

from changes in smoking, alcohol and other drug consumption, sexual practices,

eating, physical activity, and accident avoidance. Of course, these people would

then live longer to become older to get into other illnesses related to aging which have

higher costs, etc. So better health care increases costs both now and later.

However, there is still a problem of balance as to which technologies should

be carried forward. A technology may be horrendously expensive and benefit only

a few people, and even those people for only a relatively short time. It might be

better to spend the extra cost on something entirely different that would help more

people in other ways.

Yet there is no rational way (a single logical solution) to decide these things

any more than there is a rational way to decide once and for all how much of each

type of food to produce. The way to decide in the matter of health care technology,

as in the food example and all other economic areas, is to let health care consumers

and providers, the people directly involved, decide. This is what will occur if

most people pay their health care costs directly. It is called a "market". That really

is what freedom in economics is all about—people exchanging their resources, always

limited, for satisfying their most urgent wants.


Now we must consider the synergism in the way the previous three cost

factors accentuate each other. (Synergism is when you add 2 of this and 2 of that

and the effective result is 7 or 9 instead of 4.)

You fall on your arm and it hurts. You go to your doctor. There is a tender

spot on your arm but when he presses above and below that point the tenderness

is not increased. If you had broken your arm, pushing above or below the sore

spot would tend to move the ends of the broken bone and cause pain. Nowadays,

the doctor will take an Xray even though he doesn't need it because if the arm

turns out later to have a minor fracture, he may be sued for a substantial sum,

even though he may have splinted the sore arm, which is all that a cast does for a

minor fracture anyway.

And, since your health insurance is paying for this emergency, you won't

question the cost of taking an Xray in this situation. In fact, if your doctor even

brought up the question of the cost of this Xray which your insurance is paying

for, you would probably bad mouth him to your friends—perhaps even change

doctors. Hidden deferred cost (through insurance, government program, or employer),

liability, and high technology have teamed up synergistically to force up

the cost.

These are three problems of health care costs, probably the major ones.

Let us look at solutions.

Reasonable Liability

To solve the health care cost crisis we must get rid of the liability problems

and the defensive medicine costs that go with it. There is a solution to this problem

which is generic to all the ‘tort’ problems, such as personal (e.g., auto accident)

liability and product liability, as well as the malpractice problem.

The gist of this solution is simple enough. Families show how much they

are willing to allocate to protecting themselves from the results of their own errors

or negligence through the life and disability insurance they purchase. Then, by

what right do American families think that others who inadvertently wrong them

through error or negligence should pay them hundreds or thousands of times what

American families carry in insurance to protect themselves from their own mistakes

and accidents?

In other words, the limits of liability must be brought down into the range in

which people freely insure themselves. If someone is concerned about this not being

enough if others injure him then that person can carry extra accidental death

insurance or other insurance to cover such events. Perhaps "trip" insurance to the

hospital covering untoward outcomes would be offered similar to flight "trip" insurance.

Getting this huge monkey off the backs of health care providers would

mean that when paying patients ask if something can be done less expensively, at

least on the first try the provider can respond to their wishes. An Xray of the arm

in the previous example need not be done. If the arm continues to hurt, then an

Xray can be done. If headaches don't improve in a reasonable time on medication

for sinusitis or whatever else seems to be the cause, then a CAT scan can be done

to rule out a brain tumor on only those few people who didn't respond to the other


Your Furniture Came from Whom?!

One of the ideas offered concerning the current health care system is actually

one of the main problems. This is the idea that the consumers of health

care are employers, insurance companies, and government. Consumers (patients)

must be the consumers of health care, just as they are for food, calculators,

furniture, and automobiles.

You wouldn't pay money to an 'insurance' company to go into the marketplace

to provide you with these things where the company, using your money,

decided which food, calculator, furniture, and automobile you were to have.

What if you did not like their choices? Is it possible that, after a while, the providers

of those items might be more concerned about satisfying the company (or

government) buying those items from them than about satisfying you?

The only real solution to the problems of providing health care is having

most people pay their own health care bills directly, rather than through their employers,

health insurance companies, or taxes as is done now. Employers, insurance

companies, and government consider the provision of your health care a

"problem". You probably consider providing yourself health care an "opportunity"

to avoid death, disability, and/or suffering.

When most people pay directly for their health care, then they will decide,

through the resulting market pressures, what is more desirable and what is less

desirable in health care, just as they do in food, cars, furniture, and heating oil.

Health Care, 'Rights', and the Poor

Health care is often spoken of as a 'right' but it cannot be. A 'right' to health

care means that if I don't provide it for myself, then you have to provide it for me.

Economic goods cannot be a 'right' because one person's 'right' becomes another

person's 'slavery' to provide those goods. Health care is an economic good just like

furniture, dry cleaning, transportation, accounting services, houses, and food, and

must be treated that way to avoid very serious problems such as shortages, excesses,

or dislocations.

What about health care for the really poor? Why not ask, “What about food

for the really needy?" "What about heating oil for the really destitute?"

Private charity helps protect people from starving or freezing and can and

does give health care. Government programs also operate in these areas. Health

care for the poor can be modeled along similar lines. In the case of other necessities

like food and heating oil, prices and goods and services offered are determined

mainly by the market forces generated by the majority of paying consumers and

providers, not by the effects of programs for the poor. Health care can and should

operate the same way.

In Russia, food, as well as many other things, was treated as a 'right'. The government

took control of the provision of this 'right' for the people. The result was that Russia, formerly

an exporter of food, suffered the most incredible climatological phenomenon in

man's recorded history. There were over 70 straight years of bad weather causing crop

failures. The government controlled food costs.

The Medicare program currently pays far less than my 1984 fees for anesthesia

services and, by law, prevents me from charging the difference for those who can pay.

Most other physicians are in the same boat. Do you suppose there might eventually be a

parallel here?

True Insurance

While most people should be paying their medical bills directly, just like

their food and furniture bills, insurance will be needed for catastrophes. Like any

insurance, health insurance should not cover most health care costs, only extraordinary

health care costs. The majority of families should not collect on their health

insurance, just as you don't really want to collect on your life or home fire insurance.

The insurance is only there to protect you in case of disaster.

The deductible should be set so only about 15-20% of families will exceed

the deductible and collect on their health insurance during the time period. Then,

the insurance could pay most of the excess cost beyond the deductible without

causing much cost increasing pressure because prices would be determined mainly

by the 80-85% of people paying directly for their health care.

When patients are paying most health care costs directly, they, as consumers,

will be watching and controlling costs. This is the same as the fact that the

price of 2 x 4 lumber is determined much more by the demand of house builders

than by the effects of insurance payments reimbursing for home fires.

As mentioned earlier, the need for health care generally occurs in fits and

spurts. Therefore, the period of time the insurance covers needs to be greater than

one year. Five years might be good. This insures that usual hospitalizations won't

automatically go over the deductible. Presently almost all hospitalizations exceed

the deductible so patients pay little attention to costs.

An Insurance Proposal

To summarize this point, health insurance should be written for perhaps 5

years, with a single deductible for the entire period large enough that about 80-85%

of famIlIes will not collect anything from their health insurance during the five

years. After the deductible is exceeded the insurance company could pay 85%, or

even more, of the excess cost. This can easily be worked out by insurance actuaries.

This means that most patients will be watching costs and while some families

will pay more than average during the five years, really high 'catastrophic'

costs to insured families will be prevented. If defensive medicine costs are eliminated

by solving the liability problem, the majority of patients paying their bills

directly will reward physicians who provide good care at lower cost and most

other physicians will emulate them out of necessity.

A budget and loan provision added to such a true insurance plan could take

care of high costs incurred early in the plan. Monies not used would be savings

returned to the patient, not the insurance company, keeping the cost reduction incentives

with the consumer of the services, the patient.

The Correct Value of Technology

The problem of increasing technological costs cannot be 'solved' by central

planning. Under a normal free market system, people spending their own money

for health care will determine how much of the Gross National Product goes for

health care costs, just as people spending their own money determine how much of

the GNP goes for food vs. cars vs. furniture vs. movies. Central Planning was the

system of the communist Soviet Union and we all know how well that system did.

Furthermore, people spending their own money will determine what health

care technology is worth developing and what is not. If a technology well serves a

lot of people or it serves fewer people extremely well, it will develop. Otherwise,

that particular technology will languish and another health care technology which

the consumers consider more useful (as judged by their support of it with their own

money) will develop to better serve patients. This is no different than air conditioning

in cars (which caught on) and TV sets in the back seat of cars (which didn't until



While some medical care will need to be purchased or donated as a matter

of charity, we must in general get government out of the provision of medical care

and third parties (health insurers) out of providing routine care. Government, business,

and insurance companies displacing patients as 'consumers' of health care,

extra costs related to liability risks, and increasingly complex technology are factors

that raise health care costs substantially. Together these factors act synergistically

to cause far greater cost increases than they would individually.

To avoid government rationing and coexisting skyrocketing costs, provision

of health care will require a viewpoint grounded in basic economies where

most people pay directly for their health care, just as they pay directly for other

necessities, and insurance protects those with catastrophically high health care

costs. Otherwise we will have health care with the efficiency of the post office,

the cost containment of Congress, and the compassion of the IRS.

Another article by the author covering health insurance in more detail appeared in the

March 1979 issue of the El Paso Physician entitled “There Is No Health Insurance”.

Increase Health Care Satisfaction, Reduce Costs

by Sherwood R. Kaip, M.D. 1992

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