Free Market Illusions (1)


We live in America and like to think that we have a free consumer market. In fact, there is no free market in many areas important to our lives. The finance sector is notoriously not free because of its complexity and control by big corporations.

Let’s focus on health insurance. If you think the market is free, ask any American how much it costs to see a doctor, to get an X-ray, or for one day’s stay in the hospital. You will be amazed that nobody knows or cares to know. Try to get an answer by asking your doctor or the hospital, you will be shocked by their reactions. Despite the fact that you are the consumer of health care, the price is none of your business if you have health insurance. If you don’t have health insurance, you are out of luck and you don’t even have the right to be served. How free can the market be if the consumer is asked to pay and prevented from knowing the price?

Insurance only works if it carries a specific risk that the consumer wants to buy protection and monetary compensation in case the risk occurs. This includes fire, flood, property loss, earthquake, auto accident, travel cancellation, death, body injury and disability. In these cases, the insurance industry figures out the risk represented by a statistical formula (For instance, how many houses out of millions catch fire in a year?) From the statistics, the industry arrives at their cost of compensation. They add a percentage to it as profit. Then they sell the insurance policies to the individual consumers. The insurance companies compete among themselves to get more buyers for their policies. The basic operating principle is that the bigger the market, the smaller is the risk, hence the bigger will be the profit. This kind of “regular” insurance normally results in stable prices due to competition. When an insurer charges a higher premium, another company will come in offering a lower price to snatch the business.

Health insurance is by no means a “regular” one due to the absence of a specific risk factor. For life insurance, the specific risk factor is death. For health insurance, the risk factor is getting sick, which is vague. A consumer can see a doctor frequently for all kinds of reasons, minor or major. If many people behave like that, how can private health insurers make money? They make money through cost and risk control rather than competition to the detriment of the consumers. They engage in the following common practices:
*Keep on raising the monthly premiums.
*Deny coverage to unhealthy and older patients to reduce risks.
*Restrict the coverage of illness and drugs to reduce costs.
*Make the consumers pay more out of pocket (increase co-payments) for doctor or hospital visits, and laboratory tests.
*Delay or reduce payments to doctors and hospitals.
*Encourage consumers to do preventive measures for long-term health, which is only undertaken recently.

In those countries where the government has nationalized health insurance, rising medical costs remain a problem although not as severe. Since the purpose is to provide universal coverage, those governments have less flexibility in raising premiums and restricting access. The result is long lines for non-emergency services to save costs, and burgeoning government expenditures for health care.

While nationalized health insurance brings a stable or expanding market due to universal coverage, American private health insurance is facing a shrinking market due to their short-sighted strategy — increase premiums, and restrict access and coverage. That is why the number of uninsured has grown to 50 million before Obamacare took effect in 2014.

In addition, the younger generation tends to drop out because they think they are healthy enough to take a risk not to buy expensive insurance. The consequence is a shrinking market consisting of older citizens of poorer health. Facing this, the private insurers keep on raising premiums to maintain their profits. This is a vicious circle that will eventually bring down the entire industry due to rising prices and shrinking markets. The insurers fail to realize that they rely on an expanding market where the majority young and healthy subsidize the minority old and unhealthy. This is the same principle as life insurance where the majority living compensate for the minority who pass away.

In America, the private insurers are digging their own graves by reducing their own markets through raising premiums and restricting access. They have invited the government to intervene by creating a population of 50 million uninsured. The result is a big move of consumers from the private to the publicly subsidized health insurance sector (about 10 million in 2014). The trend is gradual moving to subsidized universal coverage which the conservatives like to ridicule as “socialism”. Despite this, the problem of rising medical costs remains unresolved. How will the federal government deal with the looming deficit on health care subsidies? How much can the private insurers continue to raise premiums?

Private health insurance started out in America from affordable in the 1950’s to unaffordable for the middle class in the 21st century. At the same time, the insurers, drug companies and hospitals have raked up tremendous profits. They have created a desperate situation for the middle class and invited the government to intervene. This is a big scam where the supposedly free market has been rigged for over 60 years while conservative lawmakers continue to immerse in the illusion that the free market works. How can a free market work if it leads to runaway inflation, restricted access, and government subsidy for millions of uninsured?

Private health insurance also violates a fundamental principle of price transparency. A free market requires consumers to know the price, and suppliers to compete based on the price. This foundation is destroyed when insurance companies insert themselves as big middlemen between the consumers and the health care providers such as doctors, hospitals and drug companies. When consumers do not know the price each time they see a doctor, they tend to over-consume. Also, the doctors and hospitals tend to overcharge because no complaints will come from the consumers who do not know the price. This gives the insurance companies plenty of excuses to raise the premiums due to rising medical costs. This is an ugly case where economic incentives are turned upside down to the detriment of the whole society.

There are three ways to control medical costs: nationalization of the health insurance industry as practiced in Europe; make medical prices totally transparent as in Japan; government assumes a dominant role in the operation of hospitals and clinics as done in Hong Kong (See my previous article, “Does Health Insurance Work?”)

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