posted on:  10/9/2006     revised: 3/10/2010

It often seems that politicians have a tough time grasping the basic economic principle that simply shifting costs from one payer to another payer does not reduce the total cost to society. Certainly there has been no lack of trying to tackle economic problems this way. Health care regulators have tried and tried again to obtain a different outcome but, lo and behold, year after year, state after state, health care costs continue to be climb at n uncontrolled pace. This may seem like a simple economic issue but I am amazed that otherwise intelligent financial reporters and politicians continue to buy into the false notion that regulating insurance will somehow make health care affordable. The latest example is the talk about creating a commercial health reinsurance pool in states like New Jersey with the most restrictive insurance laws.

The reinsurance concept basically goes like this: current health insurance programs are not working since primarily unhealthy people buy health insurance. Too many healthy people opt out of the most expensive types of health insurance.  Since about 80% of all medical costs are attributable to about 20% of people who cannot afford to cover their own medical care,  let's add another layer of insurance called "reinsurance" to cover those big costs. Then we can raise everyone's rates by the cost of the reinsurance and then split the costs more evenly among more people. Maybe the total cost of the two programs together will somehow be more affordable than one alone. Crazy, right?

Fortune Small Business recently reported on this issue and the author seemed to support the proposition that simply by removing the costs associated with adverse selection in current programs, that health insurance could somehow become affordable. Maybe it is a faith in new math. One plus one equals less than two.  In my neighborhood, it still adds up the old way. Cost shifting will never fix our health care problems.

The Fortune article also makes the other sucker mistake of assuming that the 20 million uninsured Americans would benefit by a move toward reinsurance (even if it did miraculously work to lower health insurance costs). The fact is that most uninsured Americans are in a temporary life change situation (like graduation, job change or recently self-employed) and the availability of low cost health insurance is not a significant factor when they opt to be uninsured. Certainly some would benefit from stabilized insurance rates, but not enough to really get excited about. Let's learn once and for all that the issue of uninsured Americans is not primarily an affordability issue. Other factors are far more important. (This topic is covered in much more detail in some of my other publications). The bottom line is that the uninsured issue is only remotely associated with the affordability issue. These are entirely different topics that should not be confused.

What really works to control health care costs? Pure harsh market competition.  Plain and simple.  Remove the legal barriers to offering different kinds of health care - insurance and non-insurance plan alike - and watch the supply and demand principle take over.  Our national medical care payments would drop like a rock.  Of course, there would be horror stories. Cute babies whose insurance would not cover the latest lifesaving technology would die on national TV.  Health care would largely be allocated out (God Forbid!) according to socio-economic class and the ability to pay for it.  Somewhere, somebody would actually put a dollar value (gasp!) on extending a human life.  That is the reality of market competition in health care - cruel but effective. Yet despite this obvious potential solution staring us in the face virtually every major health care reform proposal is designed to block the effects of natural market forces.  It is clear that our political leaders simply do not accept natural market forces as a possible solution to out health care affordability problem.

If it sounds like I am losing patience; I am. After 20+ years of covering health care finance and public policy, I am tired of seeing policymakers accept the same politically acceptable but economically ridiculous proposals. Frankly, I am tired of writing in politically acceptable language about this topic. It is that time we grow up and accept our medicine. We can fix the health care affordability problem simply by being honest about the economic realities. It is time for brave politicians to take up the challenge.

keywords:   Health care reform, New Jersey, reinsurance

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Copyright 2010 by Tony Novak. Originally produced and published for the "AskTony" column syndication prior to 2007. Edited and independently republished by the author in March 2010. All rights reserved.