Insurance problems with small scales
RE: rising costs of healthcare
feklr - Your last post proposed an interesting non-profit solution to part of our healthcare crisis. However, I think that there are a few caveats that make it less viable than it sounds on paper as a solution to this problem.
(1) Consider what we know of "insurance" schemes in general. They are less costly the larger the number of people insured, and they tend to cost less to the insured when there is no profit motive involved (for obvious reasons).
(2) These simple assumptions lead to a natural conclusion: That larger, non-profit/government insurance schemes deliver better benefits at a lower price for the insured.
(3) The key difficulty here lies in the fact that in most areas of the economy, although larger operations can become more efficient (scale efficiencies) or less efficient (bureaucracy, overhead) the assumption is that organizations with a profit motive tend to be more efficient. This because they supposedly have an incentive to increase productivity.
(4) This has actually been refuted specifically in the field of healthcare by numerous studies (Woolhandler S, Himmelstein DU. Costs of care and administration at for-profit and other hospitals in the United States. N Engl J Med. 1997;336:769-774.) of the overhead efficiency of private healthcare providers versus that of Medicare and the Canadian Govt.-run system(s). The average overhead as a percentage of total costs for these organizations were as follows:
Clearly, the increased paperwork and the proliferation of different and ever-changing rules systems is one huge problem with privatized healthcare systems, but another webpage lists some other problems endemic to private healthcare delivery, namely:
Returning: For your small-scale non-profit co-op idea, I think the benefits would be:
No cost advantage: However, you will notice that cost is not one of the advantages I see. That is because I think that its small scale (low number of participants) means it cannot spread nearly as much of the risk around as a larger operation. I'd be very skeptical that it could outperform either corporate or Government-run systems on the basis of cost/person over the long-term, although it may tend towards being more stable in cost variation than a corporate system.
Cherry picking problem: The other obvious problem is that making this small-scale operation work cheaply requires cherry picking. That is, you have to discriminate among who can be allowed to join your cooperative insurance scheme, because if you choose too many people with costly lifelong ailments or you choose to keep people with terminal illnesses alive as long as possible, then your costs skyrocket for the group.
Low bargaining power: Another issue is that smaller groups have exponentially smaller amounts of bargaining power for prices with larger healthcare organizations that you have to deal with, including -- especially -- pharmaceutical companies and medical specialists. Since the trend of healthcare is, more and more, towards using drugs and medical specialists to treat patients, this means that you will be last in line for bargaining on prices. A larger company can threaten to pull its millions of patients from an agreement if prices go too high, but your small co-op will have no such power to cry.
A key example of this can be witnessed in Canada's experience with prescription drugs. Since the government controls healthcare in the provinces at least at a monetary level (actually there is a significant amount of localized control in Canada, but that's for another day!) they bargain on drug prices for all Canadian citizens. If the drug companies charge too much, they potentially risk losing tens of millions of customers -- a large market! Hence, prescription drugs in Canada are offered at much lower prices, and there is more price stability in general. And the drug companies still make a profit in Canada.
Moving Forward: If you have big objections to some of this thinking, please respond accordingly; otherwise I'd say use comments to point out smaller queries or criticisms. What I'm getting at is the economic reasons I think government-run healthcare has flat-out worked in countries where it has been implemented correctly, and especially the fact that we have myriad examples to choose from in implementing such a system here, even if it were only an expansion of Medicaid to cover those not covered by private healthcare. So if you accept most of this critique, I'd say start criticizing the only system I have left uncriticized: government-run healthcare.
If we can agree that a government-run system would not significantly lower costs to patients at the same relative level of care quality, then we can only agree to small level improvements of the existing system. However, I'm stating here that what I have seen so far in terms of data suggests otherwise. Have at thee!
feklr - Your last post proposed an interesting non-profit solution to part of our healthcare crisis. However, I think that there are a few caveats that make it less viable than it sounds on paper as a solution to this problem.
(1) Consider what we know of "insurance" schemes in general. They are less costly the larger the number of people insured, and they tend to cost less to the insured when there is no profit motive involved (for obvious reasons).
(2) These simple assumptions lead to a natural conclusion: That larger, non-profit/government insurance schemes deliver better benefits at a lower price for the insured.
(3) The key difficulty here lies in the fact that in most areas of the economy, although larger operations can become more efficient (scale efficiencies) or less efficient (bureaucracy, overhead) the assumption is that organizations with a profit motive tend to be more efficient. This because they supposedly have an incentive to increase productivity.
(4) This has actually been refuted specifically in the field of healthcare by numerous studies (Woolhandler S, Himmelstein DU. Costs of care and administration at for-profit and other hospitals in the United States. N Engl J Med. 1997;336:769-774.) of the overhead efficiency of private healthcare providers versus that of Medicare and the Canadian Govt.-run system(s). The average overhead as a percentage of total costs for these organizations were as follows:
- Private: 15-25% (varies based on companies, area of the country)
- Medicare: 2-3% (varied estimates in this range by several studies)
- Canadian: ~1% (all near 1%)
Clearly, the increased paperwork and the proliferation of different and ever-changing rules systems is one huge problem with privatized healthcare systems, but another webpage lists some other problems endemic to private healthcare delivery, namely:
Advertising expenses; duplication of equipment and services; promoting and providing unnecessary treatments; the administrative costs created by multiple payers, with many different payment plans; and the need to provide dividends to their shareholders
Returning: For your small-scale non-profit co-op idea, I think the benefits would be:
- Very efficient, low overhead
- Easier to control and adapt to serve the insured
- No profit motive; more money towards service instead of Wall Street
No cost advantage: However, you will notice that cost is not one of the advantages I see. That is because I think that its small scale (low number of participants) means it cannot spread nearly as much of the risk around as a larger operation. I'd be very skeptical that it could outperform either corporate or Government-run systems on the basis of cost/person over the long-term, although it may tend towards being more stable in cost variation than a corporate system.
Cherry picking problem: The other obvious problem is that making this small-scale operation work cheaply requires cherry picking. That is, you have to discriminate among who can be allowed to join your cooperative insurance scheme, because if you choose too many people with costly lifelong ailments or you choose to keep people with terminal illnesses alive as long as possible, then your costs skyrocket for the group.
Low bargaining power: Another issue is that smaller groups have exponentially smaller amounts of bargaining power for prices with larger healthcare organizations that you have to deal with, including -- especially -- pharmaceutical companies and medical specialists. Since the trend of healthcare is, more and more, towards using drugs and medical specialists to treat patients, this means that you will be last in line for bargaining on prices. A larger company can threaten to pull its millions of patients from an agreement if prices go too high, but your small co-op will have no such power to cry.
A key example of this can be witnessed in Canada's experience with prescription drugs. Since the government controls healthcare in the provinces at least at a monetary level (actually there is a significant amount of localized control in Canada, but that's for another day!) they bargain on drug prices for all Canadian citizens. If the drug companies charge too much, they potentially risk losing tens of millions of customers -- a large market! Hence, prescription drugs in Canada are offered at much lower prices, and there is more price stability in general. And the drug companies still make a profit in Canada.
Moving Forward: If you have big objections to some of this thinking, please respond accordingly; otherwise I'd say use comments to point out smaller queries or criticisms. What I'm getting at is the economic reasons I think government-run healthcare has flat-out worked in countries where it has been implemented correctly, and especially the fact that we have myriad examples to choose from in implementing such a system here, even if it were only an expansion of Medicaid to cover those not covered by private healthcare. So if you accept most of this critique, I'd say start criticizing the only system I have left uncriticized: government-run healthcare.
If we can agree that a government-run system would not significantly lower costs to patients at the same relative level of care quality, then we can only agree to small level improvements of the existing system. However, I'm stating here that what I have seen so far in terms of data suggests otherwise. Have at thee!
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