Problems with health care - their root causes...

I was at a BBQ at a friends house not too long ago.  A bunch of friends got together and at some point the topic of health care had arisen.   It was interesting not really participating and just listening to each person put in their two cents.  Each person focused on one particular thing, starting their sentences with, "Well, you know what the problem is..."  Some pointed to corrupt politicians and others pointed to the high cost of service and others also pointed to the insurance companies.

I knew I couldn't really get involved because they were focusing simply symptoms of the problem.  Examining root causes requires re-evaluating things you hold true and I knew no one in a party setting was ready to do that.  I felt very much like the Oracle talking to Neo.  When you're ready, you will ask the right questions.  No one wants to answer the questions why politicians become corrupt or why prices are high or why insurance companies play such a huge role.

When people say, "The problem is..X, Y and Z" they are really saying that are problems X, Y and Z are things that have no solutions they can figure out.  Usually the next thing that comes out of their mouth is "We need a law to fix X, Y and Z."  It's a bit egotistical when you think about it.  The person who has this line of thinking must believe that if they can't find a solution, no one can.

But I'm going to lay out the root causes for the problems in our health care system.

1. The Great Depression ushered in two concepts that affected the health care industry.  The first was when the federal government issued wage controls on employers during WWII.  Since employers could no longer compete by offering more attractive wages, they offered more benefits which included health benefits.  The second was hospitals, with their fixed costs, lacked the flexibility to lower prices during this time-period and turned to insurance plans to guarantee a steady cash flow.

2. In 1929, Baylor University Hospital was the first to offer a group of 1500 school teachers a pre-paid monthly fee in exchange for health care services should they need it.

3. The Baylor University Hospital model started to catch on with non-profit hospitals and they started to group together to offer multiple plans to make them more attractive to subscribers.  This was a crucial turning point in history because the word 'insurance' no longer meant a hedge against unforeseen risk for consumers as it would in any other area.  It really meant a safety net for hospitals from going out of business.

4. Blue Cross and Blue Shield - In 1932, BCBS modeled their business off the multiple-hospital version of the original Baylor University Hospital plan.  The inherent flaws in this model, if left alone, would have fixed themselves over time but that never happened.  The AMA (American Medical Association) and the AHA (American Hospital Association) lobbied Congress for BCBS to be exempt from the normal insurance regulations at the time in addition to the tax exemption status as a non-profit business.  This essentially granted BCBS near-monopoly status in the market since they had this special privilege.  For nearly 50 years, BCBS's share of the market place never dipped below 40%.

5. Introduction of 'Cost-Plus' - In 1965, the Blues introduced a reimbursement procedure called 'Cost-Plus' which allowed physicians to be reimbursed according to "reasonable and customary" charges, and hospitals were reimbursed on a percentage of their costs which included equity and working capital.  This allowed all health care providers to basically charge whatever they wanted.  Combine that with the consumers not caring since the costs were carried by a third-party, the healthy supply and demand curves were hijacked from doing their jobs by keeping prices in check.  As a result, prices soared.

6. The IRS - The IRS ruled that providing health insurance to their employees, employers could deduct the amount from their taxable business income.  Employees were also allowed to exclude the value of the benefits when calculating their taxable income.

7. The Unions - the unions started to leverage health benefits in their collective bargaining agreements.  Not only did more union members had coverage, they also negotiated the percentage the employer must pay.  In 1945, only 10% was paid by the employers.  By 1950, that number rose to 37%.  In one particular case in 1959, United Steelworkers Union ended their 166-day strike until the steel companies paid the entire premium for health insurance.  By 1961, the big 3 autos (GM, Ford and Chrysler) also followed suit.

8. First-Dollar Coverage - First dollar coverage refers to paying for expenses related to routine care.  This was the result of both employers and employees maximizing their tax exemptions.  The concept turned the idea of insurance completely upside down.  Insurance was to cover the rare but extremely expensive medical event and everything else would be out-of-pocket.

9. Medicare and Medicaid - By the time the 60s hit, there was a push to expand health care to those who were unemployed, poor or old.  Thus, Medicare was born and who did they model after?  You got it, the BCBS model.  Since they were so "successful."  All this did was amplify the flaws and inflate prices to never-seen-before levels.

10. In 1992, the Resource Based Relative Value Scale (RBRVS) was in effect which is basically the government's idea of determining prices, instead of using supply and demand.  Basically this scale would try to measure how much resources it would take to perform a medical procedure and determine prices that way.  This alternative to the pricing mechanism simply ignores supply and demand and simply indoctrinates the Marxian concept of the labor theory of value.

As you can see, the history of how health care is muddled with government intervention in the form of protectionism, tax exemptions and countless more indirect involvement like protection of unions and wage controls.  This is hardly the result of the free-market.  It's a classic case of government failure and then blaming the failures on the free-market.

All these examples I cited is still secondary to the real root of the problem - government.  Until we address the violent nature of government, the root cause will always be invisible and we will be swimming - lost in the sea of symptoms.