Does Health Insurance Work?

Health insurance is the norm in developed countries. Three features stand out — high technology, high complexity and high prices. In the United States where health care is run by private for-profit companies, we have an extra feature which is runaway health care inflation where nearly 50 million citizens could not afford or were denied health insurance. After the reform known as Obamacare that took effect in January 2014, the number of uninsured has been reduced by over 8 million during the first year as a result of government subsidies for lower-income earners to purchase health insurance.

In nearly all developed countries, health insurance is nationalized or tightly controlled by the government. This system involves government subsidizing health insurance premiums and medical fees based on income level. Despite having achieved universal health care, the governments in those countries are experiencing great difficulties in controlling rising medical costs. Why?

I think the fundamental reason is the lack of price transparency that the consumers fail to insist upon, and the government fails to enforce. For instance in America, does anybody know how much it costs to see a doctor, for an ultrasound, or for one night of hospital stay? They only know after they have paid the bills out of their own pockets. They won’t even care if their insurance pays for the expenses. Health insurance and high medical costs tend to go hand in hand because the people keep on consuming more without knowing the prices, and the medical providers continue to raise prices without suffering any backlash. This gives the insurance companies an excuse to raise premiums to maintain their profits. It is a vicious circle that never ends.

Only two places seem to have succeeded in controlling medical costs – Japan and Hong Kong. In Japan, all medical prices are under strict government control. All private hospitals must be non-profit and managed by doctors. The prices for all medical services and drugs are listed in an official document that the consumers can reference. This ensures total price transparency. Doctors, hospitals, drug companies and other medical providers are required by law to charge their fees according to the official document. The prices are determined by periodic negotiations between the government and the health care industry. One result: an MRI of the neck area costs about $100 in Japan as compared with $1500 in the US! This shows that price transparency in Japan makes a big difference. Despite an aging population, Japan spends about 10% of its GDP on health care as opposed to 18% for the US (Source:

In Hong Kong which is renowned for its free markets and low taxes, the surprising fact is that the health care industry is dominated by the government. The government operates an extensive network of some 40 public hospitals competing with 11 private ones. A stay in a public hospital costs $20 a day compared with $2700 in the US! In this way, the government sets the lowest prices for all medical services. The private hospitals are free to compete and charge as much as they want by offering better services. Those who can afford higher prices will choose the private hospitals. The government relies on the low prices they provide to control medical costs. Despite a large public sector, health care accounts for only 8% of total government expenditure (Source:

The most interesting thing is that health insurance is not popular in Hong Kong which has achieved universal coverage because of inexpensive medical prices. People rather pay piecemeal for medical services widely available in the public hospitals or in the private sector. Insurance companies have a hard time selling their policies. The reason is obvious: If a public hospital costs $20 a day, how much can the insurer charge for one month’s premium?

Therefore, we must think critically about private health insurance. It should be evaluated based on three important goals – a safety net for the people, stable prices and universal coverage. Stable prices are most important because without which the entire health system will fall apart. Private health insurance tends to bring the opposite results if the public and the government fail to rein in the prices, as evidenced by the US system.

Japan has shown us that making medical prices totally transparent will achieve the three important goals. Hong Kong has shown us that an active government providing inexpensive health services to its people will achieve the same result without bothering about health insurance. The European governments have shown us nationalization despite some difficulties in controlling prices. All these achievements the conservatives in America like to ridicule as “socialism”. Their ossified thinking guarantees that they can never learn from the good things that other people have achieved.

At the fundamental level, health insurance erects a barrier between patients and doctors, who are consumers and providers respectively. If you have an insurance plan, you are not supposed to ask the doctor or hospital about the prices they charge you apart from the out-of-pocket co-payment. The price is none of your business even though you are the ultimate consumer. Imagine if you cannot ask for the price when you buy something, should it be called a scam? This violates the fundamental principle of free market where the price must be known so that consumers choose and supplies compete. When the politicians in the US talk about free market, they are immersed in delusions. There is no free market in US health care for one simple reason – Consumers do not know the prices.

Health insurance is much more complicated than the others such as auto, travel, fire and earthquake insurance which basically involve monetary compensations when certain specific risks occur. Unlike the others, health care has a wide range of risk which may be minor, frequent or costly like fever, joint pains or cancer. In addition, health care requires compassion on the part of the doctors. The market cannot handle such complexity because it is only driven by money and profits. When the government allows the private market to operate in health care, the results are undesirable as evidenced by high prices, reduced access for the people, impaired doctor-patient relationship, and rising profits for hospitals, drug companies and insurers. The insurance companies make things worse by injecting themselves as big middlemen between the consumers and the providers and creating the biggest problem of price non-transparency.

This entry was posted in 21st Century, Health Care, Inspiration. Bookmark the permalink.

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