What Kills American Healthcare

Naked Economics: Undressing the Dismal Science by Charles Wheelan is an absolute page turner of a book, amazing since it’s a book about economics. But before even finishing the entire book, I needed to stop and write down a couple thoughts.

(A) It should be required reading for everyone but especially those who feel the need to express opinions about politics or public policy. The book dives into the secondary impact of hot topic policy decisions such as free trade, tax rates on various income levels, and brand power.

And (B), the book will provide a better understanding on the macroeconomy which will improve your investment decisions and provide general market understanding. A better understand about macroeconomics creates better invest decisions (ie higher returns) by identifying trends and what the impact of policy decisions will be. This information will help you retire sooner (and seem smarter to your dumb friends).

The book discussed in plain English all of the normal economist hot topics including:

  • The power of markets
  • Why incentives Matter
  • The Government and the Economy
  • Economics of Information
  • Productivity and Human Capital
  • Financial Markets
  • The Power of Organized Interests
  • Keeping Score
  • The Federal Reserve
  • International Economics
  • Trade and Globalization
  • Developmental Economics

One of my favorite pet issues is Free Trade, specifically the complete lack of understanding of the issue by the general populace which is then used by politicians to peddle fear and promise to build trade barriers to “protect” domestic jobs. That idea is complete nonsense. Still, I don’t want to rant on that here. I haven’t even made it that far in the book yet. But you can expect a rant about that topic later.  

In the chapter titled “Economics of Information” the market for insurance is discussed. It details the relationship between each party in the transaction and who has access to what information. Specifically, the healthcare industry is rife with situations involving asymmetrical information. These are transactions where one side has more information than the other. Examples of this would be someone that has a drug or drinking problem or engages in some other kind of highly risky behavior.

An asymmetrical market is different than the strong market theory that is the prevalent theory in the stock market. Theoretically in a strong market, all available information is baked into a stock’s price.

The asymmetry of information in healthcare puts the insurer at a disadvantage when pricing policies. The insurance companies therefore have to charge a higher premium to insure against what they don’t know and to ensure profits.

This should immediately be of a major concern to any American not just because of their physical health but also because of their financial health. Medical bills continue to be the leading cause of bankruptcy in America.

I even have a personal story of my retired mother at age 72 having to pay $60,000 of her own money (not the bill to the insurance provider) in a single year for dental bills. Fortunately in her case it did not cause bankruptcy but it was a significant portion of the savings she spent a lifetime accumulating as a public school teacher.

Mr. Wheelan’s simplifies the entire healthcare market:

Here are the relevant economics: (1) We know who is sick; (2) increasingly we know who will become sick; (3) sick people can be extremely expensive; and (4) private insurance doesn’t work well under these circumstances. That’s all straightforward. The tough part is philosophical/ideological: To what extent do we want to share health care expenses anyway (if at all), and how should we do it? Those were the fundamental questions when Bill Clinton sought to overhaul health care in 1993, and again when the Obama administration took it up in 2009

This passage should seem dated to us since the book was last updated in 2010 but sadly, none of these issues have been resolved. Politicians on the right are still campaigning on promises of overturning Obamacare after they win. Politics, especially at the campaign level are nonsense however, so I’m really not interested in the rhetoric.

Depending on how much research you’ve done into the healthcare issue in the past, Wheelan’s items 1, 3, and 4 will not be new ideas to you. In economics these factors together are what is called adverse selection: if given the choice, only the sick will pay to get insurance. They would wait until they were sick and then run out and purchase some to pay the doctor’s bill.

Insurance doesn’t work if everyone in the insurance pool is sick. If still forced to provide insurance, insurance companies will realize the costs and charge the participants in the pool rates close to what the cost of the treatments cost plus a profit margin. There would be no point in buying such a policy, it would be cheaper just to pay the bills yourself to avoid the processing fees and profit margins the insurance company charges. Insurance only works in a large pool of participants with risk characteristics which are predictable within a range but uncertain enough for each individual participant to not know if they will need it or the insurer to know who exactly will need it.

The pooling issue is the basis of Obama’s “personal mandate”. This feature is required for any form of insurance to work. Although controversial and interesting, the personal mandate still isn’t where I want to discuss because Wheeler’s most interesting thoughts revolve around #2 of his four point summary (although I feel the mandate is MUST to make it work).

Wheeler’s hypothesizes what will ultimately doom “private” insurance is not out of control fees or political interests (which would have been my answer) but instead it will be the scientific developments in the field of genome mapping. According to genome.gov, gene testing and screening can already:

  • Diagnose disease
  • Identify gene changes that are responsible for an already diagnosed disease
  • Determine the severity of a disease
  • Guide doctors in deciding on the best medicine or treatment to use for certain individuals
  • Identify gene changes that may increase the risk to develop a disease
  • Identify gene changes that could be passed on to children
  • Screen newborn babies for certain treatable conditions

The information gene screening will be able to provide is set to expand exponentially over the next few years. It will have revolutionary changes for both how diseases are treated and for the insurance industry. Insurance companies are going to have a financial interest in knowing who is going to be sick and when, gene sequencing will tell them.

The writing is on the wall and some people are already reading it. In 2008 the United States federal government adopted the Genetic Information Nondiscrimination Act (GINA). The goal of GINA is to prohibit employers from using the results of genetic testing for hiring or compensation purposes and health insurance companies from results to make underwriting (rate) decisions.

So you do you think it will work? If so, I have a bridge in New York and some slightly damp investment property in Florida to sell you. Insurance companies have such a strong incentive to use this information it’s doubtful regulation will prevent them from doing so. In the end, they will either find a way to get the information directly or a way to tease it out of other data sets and exclude candidates based upon known risks. When this happen, you’ll see exactly what Wheelan predicts, a complete collapse of the current private insurance system and a need to shift to a universal single provider system.

What concerns me is we’re not discussing this very known risk now. It needs to be a public conversation and move towards a system that works in this brave new world? It’s frustrating the government is going to wait until enough people fall through the cracks before acknowledging the problem. In the time it will take for public opinion to reach its crescendo of frustration could take years and in the meantime hundreds if not thousands of citizens could either die or go bankrupt from medical bills.

Whatever you believe, read Naked Economics: Undressing the Dismal Science by Charles Wheelan. After reading it you’ll have a better understanding of the world around you and be better able to explain your opinions on the geopolitical matters that affect your money.

What do you think? Are you worried about health care? Do you think our current year is all that it’s cracked up to be?

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