Monday, April 14, 2008


“The assumption seems to be that insurance – rather than the service delivered by doctor to patient – is the important commodity.” —Jonathan Kellerman

The main problems in the U.S. health care industry are rising costs and diminishing service. The most prevalent diagnosis of these problems seems to be that Americans are inadequately insured. Largely missing in health care discussions is that the real culprits are expanding bureaucracy and parasitical rent seekers that have overtaken the industry.

Clinical psychologist cum novelist Jonathan Kellerman argues in this WSJ op-ed that almost everyone would be better off if most people paid for medical services out of pocket. Kellerman appears to be out to make enemies with the powerful insurance industry, likening health insurers to the Mafia. Kellerman claims that insurance companies are actually worse because they “systematically suck the lifeblood out of the supply chain with obstructive strategies.” He writes:

“You don't need to be an economist to understand that any middleman interposed between seller and buyer raises the price of a given service or product. Some intermediaries justify this by providing benefits, such as salesmanship, advertising or transport. Others offer physical facilities, such as warehouses. A third group, organized crime, utilizes fear and intimidation to muscle its way into the provider-consumer chain, raking in hefty profits and bloating cost, without providing any benefit at all.

“The health insurance model is closest to the parasitic relationship imposed by the Mafia and the like. Insurance companies provide nothing other than an ambiguous, shifty notion of "protection." But even the Mafia doesn't stick its nose into the process; once the monthly skim is set, Don Whoever stays out of the picture, but for occasional "cost of doing business" increases. When insurance companies insinuate themselves into the system, their first step is figuring out how to increase the skim by harming the people they are allegedly protecting through reduced service.

Insurance is all about betting against negative consequences and the insurance business model is unique in that profits depend upon goods and services not being provided.”

Some point to problems such as these to justify greater government involvement in health care. But Kellerman contends that “the consequences of any insurance-based health-care model, be it privately run, or a government entitlement, are painfully easily to predict. There will be progressively draconian rationing using denial of authorization and steadily rising co-payments on the patient end; massive paperwork and other bureaucratic hurdles, and steadily diminishing fee-recovery on the doctor end.”

This is now evident in Massachusetts (see AP article), where bureaucrats contend that their forced health insurance system is a success, despite soaring costs and declining service levels. Cato’s Michael Tanner says that the Massachusetts system “has been an unqualified failure” that has achieved neither of its goals of achieving universal coverage and lowering costs. (Also see Tanner’s 1/29/08 SLTrib op-ed.)

Some contend that the most significant health care problem is unequal levels of service. But the fact is that the only proven way to achieve service equality is by forcing substandard care on everyone and prohibiting the purchase of higher quality care.

Kellerman argues that everyone deserves a minimum level of care. He claims that if health care providers were to “liberate themselves from the Faustian bargain they've cut with the Mephistophelian suits who now run their professional lives,” costs for most services would become affordable through market pressures. Most people would need only catastrophic insurance. And “government-funded county facilities” could serve the “small percentage of indigent individuals [that wouldn’t] be able to afford even low-cost procedures.”

Most Utahns are completely unaware of the state health care task force that is currently ramping up. The task force’s prime directive is to figure out how to ensure that all Utahns get health care coverage. The task force will not and cannot address the real problems in health care because it starts from the wrong premise and is stacked with people representing those groups that stand to gain the most from expanding the existing protection racket. Unless the task force ultimately decides to do nothing, which is highly unlikely, any decision it makes will ultimately exacerbate the problems.

The answers to our health system woes rest, writes Kellerman “on a radically different approach: fewer people insured” rather than more. I would extend that to say that solutions lie in less government involvement in the system; not more. We need eliminate the parasites and return the focus to the most important aspect of the health care system: the direct relationship between the service provider and the patient.


Cameron said...

It's open enrollment time and my company offers Health Savings Accounts. It seems to address, at least partially, some of what you have written here. It would make me responsible for my own health care costs up to a certain dollar level, after which the insurance would pay 100%. Plus, I get to save money for those health care costs tax free. The problem is that I still have to pay a monthly premium, and while it's less than the conventional plan's premium, it's not enough less in my opinion. Because of that I have spent this past weekend pondering the idea of a catastrophic plan.

Anyway, I like how you've pointed out the middle man nature of insurance, and that the emphasis should be on how to get better care to more people, rather than how to get more insurance to more people.

I've often noted however, that one important role that insurance plays is as a patient advocate when it comes to unnecessary tests or procedures. The insurance has doctors on the payroll who check the procedures and tests done on the patient, and if there are extra tests run for example, they won't pay for it. This effectively prevents doctors and hospitals from slipping extra CT scans onto the bill.

Scott Hinrichs said...

Many HSAs are nothing more than a plan with a somewhat higher deductible plus a small investment incentive. For example, my company's HSA offering makes no economic sense for my family.

You overestimate the value of the insurance company gatekeeper role. The main role of the gatekeeper is to maximize insurance profits, not to prevent the care provider from charging for unnecessary services.

Besides, when the patient is the customer, the patient is the gatekeeper. Patients are far better gatekeepers than any insurance bureaucrat doctor (that is usually someone that can't run their own practice and often does not hold a current MD license).

Tom said...

Well done; a thought-provoking article.

To push against your previous comment, one of the effects lowering costs is to reduce unnecessary services. It can be helpful to have a third-party to provide suggestions. A patient can only be a good gatekeeper if they are well-informed. But can any of us be well-informed without medical training? (The answer, I think, isn't yes or no, but somewhere in the middle.)

It's a bit too much to suggest insurance companies add no value, but it is certainly worth considering whether the value they do add is worth the cost.

As an aside, one of the strengths of HSAs (in aggregate) is reduced costs because consumers become more cost conscious at the front end. The solution of providing less insurance captures that advantage.

Anonymous said...

Great post and a great op-ed as well.

Using Kellerman's "insurance monkey" metaphor, it seems that many politicians would like to replace the insurance monkey on the backs of health-care providers with the insurance gorilla called big government.

Anonymous said...

I forgot to mention an interesting fact I read in a Cato Institute white paper by John Goodman called "Health Care in a Free Society".

In it, Dr. Goodman points out that plastic surgery is one of the few medical procedure whose costs have risen at a lower rate than inflation. It's also a medical procedure that's almost never covered by health insurance.

Scott Hinrichs said...

Tom, I do believe insurance has a role to play. I just believe that it is currently playing a far larger role than is warranted, and that efforts to expand that role are like squirting fire extinguishers in an attempt to combat a flood.

Patients today are not the customers of medical services; they are the product. If patients were the main customers, you would see a lot more services aimed at helping the customer get the most bang for her/his buck. Instead, we currently have systems that obfuscate and hide information.

Dave, thanks for the tip. Links to the referenced CATO paper (dated 1/27/05) can be found here. Goodman's arguments in favor of "increasing patient power" instead of increasing government power are very provocative.