There is also a perverse incentive for private insurers to spend large sums of money to select only health rate payers and to avoid making large health care payments. None of the money going to those places is used to cover health care costs themselves. That's why America has the highest per capita expenditure for health care with outcomes that are significantly worse than other industrial nations have.
Here is Paul Krugman's excellent explanation why we can't leave health care to the vagaries of the unregulated economic free market.
There are two strongly distinctive aspects of health care. One is that you don’t know when or whether you’ll need care — but if you do, the care can be extremely expensive. The big bucks are in triple coronary bypass surgery, not routine visits to the doctor’s office; and very, very few people can afford to pay major medical costs out of pocket.This is based on Kenneth Arrow's discussion of the issue. The name Kenneth Arrow is one that is immediately recognized by anyone who has studied Macroeconomics at the graduate level because he has made so many critically important contributions to the field.
This tells you right away that health care can’t be sold like bread. It must be largely paid for by some kind of insurance. And this in turn means that someone other than the patient ends up making decisions about what to buy. Consumer choice is nonsense when it comes to health care. And you can’t just trust insurance companies either — they’re not in business for their health, or yours.
This problem is made worse by the fact that actually paying for your health care is a loss from an insurers’ point of view — they actually refer to it as “medical costs.” This means both that insurers try to deny as many claims as possible, and that they try to avoid covering people who are actually likely to need care. Both of these strategies use a lot of resources, which is why private insurance has much higher administrative costs than single-payer systems. And since there’s a widespread sense that our fellow citizens should get the care we need — not everyone agrees, but most do — this means that private insurance basically spends a lot of money on socially destructive activities.
The second thing about health care is that it’s complicated, and you can’t rely on experience or comparison shopping. (”I hear they’ve got a real deal on stents over at St. Mary’s!”) That’s why doctors are supposed to follow an ethical code, why we expect more from them than from bakers or grocery store owners.
You could rely on a health maintenance organization to make the hard choices and do the cost management, and to some extent we do. But HMOs have been highly limited in their ability to achieve cost-effectiveness because people don’t trust them — they’re profit-making institutions, and your treatment is their cost.
Between those two factors, health care just doesn’t work as a standard market story.
Look at those key points. 1. When health care is needed it comes as a surprise both regarding to cost and regarding timing. It cannot normally be anticipated. So it must be insured for. But that means that 2. the choice of what is paid for and how much is paid must be surrendered to the insurer.
The inherent problem with this is that in the free market the insurer is motivated only to make a profit, while the purchaser is buying protection, not using the product to similarly create revenue and a profit. That leads to point 3. If the insurer is to make a profit and still sell insurance at a competitive price he has at least two major methods of doing so. He will have to refuse to insure high risk individuals (however they are determined) and he will have to work to limit payments for claims and they have a strong incentive to cancel policies sold to individuals who submit large claims. An independent rule setting agency with strong enforcement powers can limit by not totally prevent those profit-making tactics.
So most of the major problems of current health insurance are based on the very nature of the free market for health insurance. They cannot be prevented.
What are the symptoms we see in the failing health insurance market? Two of the biggest problems are a growing number of uninsured and limitations created by insurers on how much they will pay and what treatments they exclude. The insurers actively search for indicators of increased medical risk and work hard to refuse to sell or to cancel policies to individuals who they decide are increased risk. That is the reason for the Preexisting conditions limitation on sales. It also is the reason for refusing to cover or raising the copay expensive medications. It is also the reason for raising the price for so-called out-of-network treatments or treatments which they deem to expensive so they label them "Experimental."
Those and other cost limiting and cost-shifting tactics by health insurers create a large pool of uninsurable individuals. That pool must exist if health insurers are to sell policies at competitive prices and still make a profit on those policies they sell. Those problems will always exist as long as there are insurance companies that are allowed to skim the healthiest individuals out of the overall pool of potential insurable individuals and thus throw the costs of paying for health care for the ill and those likely to need health care onto those individuals or on the remaining groups of more high risk insurable individuals.
In fact it becomes very profitable to spend large sums of money on careful selection of who is insured and on lawyers who are paid to defend cases where the "insurance" company reneges on paying for high cost treatments. Those high costs of selection, cancellation and limitations of the amount the insurer pays so that the so-called insured has to pay more of the cost go directly to profit for the insurers but are removed from the money available for health care treatment. Profit making private health insurers make their biggest profits by shifting the cost of health care away from themselves.
The only way to stop the waste of health care dollars that are siphoned off away from actually paying for health care services is to create a single pool of insurable individuals and to stop all renegade organizations from collecting the insurance payments but skimming off only the healthy or avoiding actual payment for needed health care. As long as there are private for-profit insurers in the system, they will be motivated to cheat by shifting the cost away from themselves and onto the individuals themselves or onto any other health insurance payer.
The last problem of the current health care payment system is the runaway costs of health care. These are also resolvable is there is an overall health care system that redirects the efforts of health care providers to more efficient and effective ways of using the various procedures and tools for improving health care. This can be done by changing what insurers measure and pay for. The result becomes an example of the power of the free market to encourage innovation. How?
Dr. Michael Porter presents the case for stopping the runway costs of American health care. His argument is that they are primarily caused because we have an insurance system that encourages payment for individual medical services but no system in place for measuring the health care outcomes for the patients receiving those services.
If health care providing organizations and individuals are paid based on outcomes in health and patient satisfaction instead of the number and cost of services provided then the profit motive will be redirected to innovative and lower cost treatments and also better patient outcomes.
This is not a system of changed regulations. It is instead a system of changing how information on patient outcomes is collected and how health care providers are reimbursed.
Dr. Porter's discussion can be found in a video at this link.