Reprint from Open Salon.
As seen at the recent Health Care Summit, the United States is not out of the woods about reforming the manner in which health care is delivered for all its citizens. The political parties are, as expected, at opposing ends of the ideological spectrums on this issue. Throughout these discussions, one point that President Obama was trying to hammer in was about ensuring that every citizen should be covered by medical insurance, which is in his words the "moral thing to do." A point he reiterated in his latest weekly radio address on Saturday. Despite this important premise, there are many (e.g., mainly members of the GOP and people on the right) who believe that providing everybody with medical insurance would significantly increase health care costs. As documented elsewhere, the U.S. currently has the most expensive health care system in the world on a per capita basis. Yet, the health care system is ranked at the bottom of the list amid the top industrialized countries for health care delivery. According to some experts, the U.S. health care system is actually on the verge of bankruptcy.
A few months ago, I wrote a post about the concept linked to spreading the risk in health care. This concept is used in such diverse businesses as the insurance industry and casinos. It assures that as the number of people in a given group or pool gets larger, a company or governmental agency can more easilymanage the risk (that would be the risk of a payout) among the pool of participants. They can therefore better estimate the average cost (or payout) per person in the event that one or even several members of the group are victims of a catastrophic event (e.g., cancer or severe injury), hence minimizing losses (and costs). The characteristics behind risk sharing are in fact more complicated than what I described above, but we'll leave that matter for another day. Let's not forget that this concept is the primary force behind the single-payer health care system.
Recently, I was discussing this topic with a blogger on another news website. This person was arguing that spreading the risk, hence the single-payer system, in fact increases costs because of what we referred to as a "third party payment." We can already assume that this person doesn't believe in the "moral thing to do" motto. In essence, the blogger was claiming that it is cheaper, on a per capita basis, when everyone pays from his or her own pocket. In theory, this statement cannot be disputed. Third party payments may include the services provided by a bank or insurance company. In truth, not using a third party payment works well for small expenses, but is certainly not applicable for large expenses, such as buying a property (house), a car or paying for cancer treatments from your own pocket. A good example can be seen here, where a significant fund raising activity is currently under way to help someone pay for treating a rare form of cancer. As a matter of fact, the society asks that its people get insurance for certain activities in order to reduce third party losses, confirming that not everyone can pay for their own expenses. This is not to say that some very rich dude may not be able to pay for the items listed above in cash, but most of us can't.
Following my discussion with this blogger, I decided to perform one of my interesting and enlightening analyses for your benefit. The hypothetical example below will also help demonstrate why the single-payer system, or a variation thereof, is the way to go.
The plans proposed by both parties, especially the one from the GOP, can therefore go into the trash tin.
The characteristics of the proposed example are as follows:
- The society has a population equal to 1,000,000 people (1 million).
- There is a 1% chance of being struck by cancer and if it does, the medical cost is $50 000 per person. Without the treatment, the cancer is assumed to be fatal, whereas with the treatment, the person is assumed to have survived the bout with this serious illness.
- To replicate the health care system in the U.S., we'll have 10,000 (private) insurance companies each insuring a pool of 100 people. This is to show that even when everyone is initially covered via a medical insurance plan, things can go wrong. We'll touch on this one again further below. I know this seems a little bit extreme, but this is not that far from reality, given the fact some health insurance companies have pools varying between 5,000 and 10,000 people. Remember that the U.S. is populated by more than 300 million people.
- Finally, we'll also assume an initial overhead cost equal to 10%, aka as a third party payment.
I'll present this hypothetical example using various steps:
1. When we have a pool with 100 people, it is expected that 1 person will be hit by cancer for a total cost equal to $55,000 ($50,000 x 1.1). This means that each person within the pool needs to shell out $550 to cover the medical expense for that single person.
2. Now, under a single-payer system, we have a single pool equal to 1,000,000 people. With this, it is expected that 10,000 (or 1%) will have cancer for a total cost equal to $550,000,000 (including the 10% overhead). As expected, the cost per capita is $550, the same as for the 10,000 pools.
3. Let's assume that the risk for getting cancer was found to be equal to 1.1% rather than 1%. This means that 11,000 people are expected to be stricken by cancer out of 1 million people.
5. Still with me? Let's assume that we randomly distribute these 1,000 extra people among the 10,000 pools: 1 more person for 1,000 pools. For these 1,000 pools, the cost perperson actually doubles to $1,100 (2 x 50,000 x 1.1 / 100)! In other words, each person in the thousand pools needs to shell out $1,100 instead of $550 to cover two people who have cancer. As a side note, I'm wondering how many people would be happy to see their premiums double in this manner.
6. Then, it is estimated that every time the premiums increase above $1,000, at least 15% of the people cannot pay their full premiums (we do not know who, a priori). In this case, two scenarios are possible:
Scenario 1: the people who cannot pay more than $1,000 are still allowed to stay within the pool. If this happens, the overhead cost should increase to account for additional expenses (correspondence, legal fees, etc.) to handle the folks who can't pay the full premium; this also means that 85 people out of the 100 now need to pay $1,117.67 rather than $1,100. A more important question: would the participants who pay their dues agree to cover the costs for those who don't? I think we already know the answer to that question (why would President Obama reminds us about the moral thing to do, eh?), which leads us to the second scenario. It should be noted that smaller insurance pools always have higher overhead costs, as documented here (see also footnote 1).