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Self-Interest And Health Care Incentives

By Da King Published: October 14, 2009

People always act in their own financial self-interest. Ditto for organizations. For instance, let's say you have a choice between two competing health care plans with the same coverage. Company A offers the plan for $200 per month, and Company B offers the plan for $400 per month. It's pretty obvious you'd choose Company A, and Company B wouldn't make any sales. Organizations act in exactly the same way. When the Senate Finance Committee passed a health care reform bill that taxes medical devices at a rate of $39 billion over 10 years (raising the cost of health care), lobbyists for the medical industry descend on Washington D.C. to fight for their self-interest, against those taxes. When the Senate health care bill imposes a $6.1 billion fee on health insurers (raising the cost of health care), lobbyists for the insurance companies descend on Washington D.C. to fight for their self-interest, against those taxes. When the Senate health care bill imposes 40% taxes on so-called "Cadillac" health care insurance plans, the lobbyists for the unions descend on Washington D.C. to fight for their self-interest, against those taxes. When the Senate Health Care bill cuts $100 billion from Medicare Advantage programs (lowering the cost and quality of health care), lobbyists for the insurers who provide those plans descend on Washington D.C. When the Senate Finance health care bill has a provision to create a commission to oversee cuts in Medicare (lowering the cost and quality of health care), lobbyists for doctors descend on Washington D.C. to complain that their Medicare reimbursement rates are being cut.

This is one of the difficulties in passing something as large as health care reform. We have an array of varied business concerns all bargaining in their own self-interest. They all agree somebody must be taxed, they just don't want it to be them. You can't blame any of them, really. They are just looking out for their own financial well-being.

There is another organization that I believe is looking out for it's self-interest in the health care debate as well, but nobody talks about it. It's a very large organization known as the federal government. In my last post, I wrote about how the government is so deeply in debt that it will ultimately destroy the American economy. The government is fully aware of this, though they seldom mention it, and seldom seem to prioritize it unless it's around election time, after which they forget all about it, and continue merrily spending us into oblivion. The government, like every other self-interested concern, doesn't want to cut the size of government. They don't want to rein themselves in by cutting government spending. They want to increase government spending, and boy, do they. That's what a big portion of Obama's stimulus package was for, to keep the government from having to make the painful cuts that every other business concern in the country had to make during this recession. Government is the one organization that has actually grown during the recession. When the government says things would have been even worse without the stimulus package, this is mostly what they mean. The stimulus package was largely a bailout of government, unpaid for and added to the national debt. The taxpayers will have to make up that money at some unspecified future point.

This leads me to the health care reform bill(s), and the incentives included therein. Health care reform started out as a moral mandate to achieve universal health care coverage, but that goal has been abandoned. Instead, we have a mandate from the government that employers and individuals must purchase health care insurance or pay a penalty (tax) to the government. President Obama continues to say that nobody will be "required" to change their health insurance if they like it. The word "required" is key. The President is correct, nobody will be required to change their health insurance, but what will they be incentivized to do ? In other words, what will be the response of employers and individuals according to their own self-interest ? To understand that, all we have to do is look at the size of the penalty tax versus the cost of health insurance. It's also vitally important to keep in mind the reason everybody doesn't have health insurance now. It's because THEY CAN'T AFFORD IT, or they just choose not to buy it. Here's how Business Week describes the individual penalties:

In the bill approved by the Senate Finance Committee on Oct. 13, there are no fines at all the first year it goes into effect, in 2013. In 2014 individuals would have to shell out $200 in annual penalties if they choose to forgo insurance, and by 2017, the number jumps to $750. That's starting to sound like a meaningful sum. But consider that the average yearly insurance premium for an individual policy is around $5,000. For just a few hundred dollars during the first years the law is in place, a healthy person might decide to forgo the costly security of insurance

Paying a fine of $200-$750 to the government, as opposed to shelling out $5,000 in health care insurance premiums seems to incentivize many people to just pay the far smaller amount to the government. Good for the government, because it raises their revenues, but not so good if universal health care is really the goal. I'm against the whole idea of government forcing people in the first place, but if they are forcing people, shouldn't they at least force them in the right direction, instead of setting up a system that incentivizes people to just pay more in taxes ?

The incentives for employers are even worse. The Senate Finance health reform bill would require employers with 50 or more employees to cover their employees or pay a fine of up to $400 per employee. That's far less than the actual cost of health care insurance, so employers would be incentivized to drop health insurance coverage for their employees altogether and just pay the penalty tax instead. That would be in the employers self-interest, and again, the government cashes in with more tax revenue. Then all those uncovered employees are required to buy their own insurance or pay the individual penalty, and the government cashes in one more time.

In conclusion, I ask, who is the government really looking out for - you, or itself ?

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