Wednesday, March 17, 2010

The Price We Pay For Medicare

A new public option idea is brewing, wherein people can buy into Medicare.

Representative Alan Grayson last week introduced a bill which would allow any U.S. citizen the option of buying a health insurance policy from medicare at cost.

Some facts about this proposal:

-It would not cost taxpayers anything. Those opting in would be paying for their own coverage, in addition to the taxes they pay currently.
-It is totally optional. People who like their private insurance are under no obligation to participate.
-It would actually decrease the cost of Medicare by expanding the risk pool to younger, generally healthier people.
-It has no government pork, earmarks, or kickbacks whatsoever. It is a simple, four page bill that anyone can read and understand.

While this idea has some merit, as in the government does not subsidize the cost of the health insurance. However, Medicare itself is in desperate need of an overhaul.

The annual price we pay for Medicare doubles every 4 years. Hardly a success story, and hardly a model we want to expand to everyone in America. Medicare's effects also expand far beyond it as well. Many doctors break even or lose money on Medicare patients, and they must make up this difference by overcharging the uninsured and private insurers. Private insurers then pass this extra cost on to employers. Employers then pass this extra cost on to employees.

In America, roughly 60% of people are covered by employer based health insurance. On top of that, Medicare covers another 15%. That leaves 25% of Americans in the "free" market, including the 15% of Americans who are uninsured. That leaves 10% of people who actually buy unsubsidized insurance on the "free" market. This segment of the population is too small to greatly influence the market, and they bear the full costs of their insurance. This also means that 60% of Americans, those covered through their employer, are thrice removed from the costs of their health care: once by insurers, twice by employers, then three times by the tax exemption.

As you can see in my diagram, institutions like Medicare and private insurers deal most directly with doctors and hospitals, setting coverage and prices. However, these institutions do not have to bear the full cost of these prices, as they are subsidized by tax dollars. Private insurers are further insulated from the market in that they mainly deal with employers, not individual policy holders. As such, a bad decision by a private insurer is not felt by their customer, the employer, but rather by the employee. This is a system ripe for abuse and inflation.

Overall, costs are shifted to the people with the least amount of decision making power, i.e. taxpayers, employees, and individual policy holders. Taxpayers and employees have almost no say in their health insurance choices, and because individual policy holders are such a small group, they are at the mercy of the larger market.

So now you see why it is a misnomer to classify our health insurance system as a "free market," since only 10% of Americans participate in anything that could even come close to being called a free market, as they are the only group who even knows how much their insurance really costs. The rest of the market is the result of a series of subsidies that create a system wherein people with money decide how much to pay other people with money, and the rest of us have to cough up the cash to fund these decisions.

Now, obviously Medicare is not the only problem. The other major problem is the tax exemption employers get when they offer insurance. This encourages the arcane practice of employer based health insurance, which through it's separation from supplier and consumer allows more inflation in this most critical of markets. But Medicare is still part of the problem, and should be reformed before any expansion of government health insurance.

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