The big debate in Congress is now the health care. A number of months ago I posted another option and will repost that again in the next few weeks. The current discussion in Washington, however, is largely absent of facts and details with an appropriate understanding of the underlying economics. It is important that everyone understand a few basic truths before deciding where they stand on the federal government entering the health insurance business. Those supporting a public health insurance option point to a couple of important points to make their case, the first is that health insurance companies make a lot of profits and that competition from government will help to reduce costs. Both of these are misnomers. Now, before everyone castigates me for taking the side of the health insurance industry, make no mistake, I do not care about health insurance companies and if I were King for a day and could implement my own health care reform, insurance companies would not be part of my system (but neither would the Federal Government).

I strongly dislike insurance companies for the same reason that I strongly dislike the idea of the federal government getting into the health insurance business. As I have stated many times before, there is no fundamental difference between the federal government bureaucracy and large public companies. Both are disingenuous to their customers and both are managed based on revenue and cost and both the federal government and public insurance companies will deny coverage to people for the same reason; they are trying to control costs to match their revenue. For every story you can trot out about someone being denied coverage or medical help by an insurance company you will be able to trot out just as many people if not more people that will be denied coverage or medical help from the federal government. And either way, when you want to complain you are going to have to talk to some person in another state that does not really care about your individual circumstances. Again, there is no discernable systematic difference that would cause one to be better than the other.

In terms of the profits of health insurance companies, the accompanying slide shows the revenue, net income and profit margin of 3 large health industry companies. Although one can look at the net income (or profit) line and say they are making a lot of money, the profit margin is very low. The fact is that the health industry is already very competitive with hundreds, if not thousands, of companies providing a wide array of services and costs. The health industry is on par with the grocery industry in terms of profit margin and it is tough to argue that the grocery industry needs more competition to bring down prices. The health insurance industry does not have excess profits to cut back on based on their historical profit margins so any reduction in price is going to come from one of a few areas. It is unlikely they will be able to cut back on staff and/or salaries to employees. Basically, a cut in profits is going to translate into a reduction in investments in the future. All of the talk about savings from hospitals or the insurance industry or government is really about reducing the investment in our health care industry. This will translate into fewer new hospitals, fewer hospital expansions, less purchases of new medical equipment, less hiring of doctors and nurses (which means existing doctors and nurses have to help more people). All of these will lead to more difficulty in getting care and ultimately lower quality care. It is great to talk about reducing the cost of health care, but it is important to ask how exactly costs will be saved. The reality is that there is no free money to give back in the health care industry so fewer services have to be provided or less investments made in new technology and increased capacity.

Sidenote: Some people tout the high cost of overhead with insurance companies and that money can be saved there, they then highlight the low overhead of Medicaid. There is no doubt money that can be saved across the board from reducing overhead, but nothing in the current health care reform will address that or cause overhead to change.

In terms of the government providing increased competition which will in turn reduce cost is like saying we need additional gas stations in Bellingham because the price of gas is too high. There is already a tremendous amount of competition as can be seen by the large number of insurance companies and the low profit margins. The Federal Government entering the industry is not going to change the competitive landscape at all, just like adding another gas station is not going to change the dynamics of gas prices either. That argument only works when there are only a few companies and you are close to a monopoly, then competition would bring down prices. For the government to be substantially cheaper it would have to be subsidized by taxpayers and compete on an uneven playing field, which is not really competition, nor is it sustainable.

Let’s not pass another major reform, which no lawmaker has read, that will make a few people feel good but not do anything to fix the problem. Health care is a tough issue, but it is solvable in the right way if everyone is prepared to set aside preconceived notions and work to find real solutions to some fundamental issues. It is disconcerting to hear politicians talk about the importance of doing something at any cost, versus doing the right thing and actually solving the problem. How do we get everyone covered with actual medical services without having to worry about how they will pay for it?

This blog only addresses a small part of the overall issues and hopefully over the next couple of weeks we can address some of the other pros and cons of the current proposals.