Shooting Old Yeller: Why It’s Time To End Health Insurance

Our focus on health insurance is destroying health care.

I was six years old when my parents took me to see the movie Old Yeller. I’d just recovered from Bambi, and now here was another Disney tear-jerker, where the cost of the ticket was nothing compared to the years of therapy needed.

Most know the story. Old Yeller was a loveable mutt who came out of nowhere, was adopted by a farm family, protected its owner through multiple scrapes including a bear attack, but finally had to be put down after contracting rabies from a raccoon and turning on its owners.

 

Old Yeller is the perfect allegory for America’s experiment with health insurance. The very concept of health insurance came unexpectedly out of nowhere and did a lot of good, but it’s now “contracted rabies,” has turned on its owners, and needs to be put down. “Mending not ending” won’t work. “Repealing and replacing” is insufficient. Someone needs to grab a rifle, take it out to the woodshed, and put the chained and snarling beast out of its misery. Permanently.

Doing so is the only way we’re ever going to make health care affordable again, in America.

The story of Old Yeller begins in the 1860’s, but America’s story with health insurance begins during World War II. Before then health care was no big deal. If you needed a doctor, you made a phone call and a doctor would show up with a large black bag. I’m not making this up, it really happened. I have memories of a doctor with a black bag coming to my house. The doctor would charge something quite reasonable, and you’d pay it.

Before World War II, few people even had health insurance. I’m not sure it even existed. But here’s what happened. The war generated a large increase in demand for labor, and wages began soaring. We didn’t have a minimum wage law back then, but the government—worried it wouldn’t be able to afford the factory workers to build airplanes and ships—created a maximum wage law, reprising a very bad idea from 14th century England.

Jeff Goldblum’s character in Jurassic Park, when told the dinosaurs couldn’t reproduce because they were only females, responded with the prophetic observation: “[But] life finds a way.” Likewise, employers “found a way” to get around the onerous maximum-wage laws of World War II by adding a sweetener: free health insurance.

It was at that moment that our health care system suffered the poisonous bite from the rabies-infested raccoon. Old Yeller went a full month before symptoms appeared, but our health care system went over half a century before starting to foam at the mouth as its doing today. Health insurance premiums are going up an average of 25% in just one year alone, and in some places, over 100%. That’s the health care equivalent of “foaming at the mouth.”

Even though the most extreme symptoms are only now being felt, nonetheless it was the creation of health insurance—free health care paid for by a third party (the third-party part is important)—that injected the toxins into the system’s blood stream.

How could merely offering health insurance cause such a calamity? Because it destroyed the foundation of the health-care marketplace. It removed price from the equation which, as I discussed in an earlier blogpost, is a form of shooting the messenger. Price is critical in a functioning marketplace because it constantly sends signals (messages) to consumers and producers. It’s what keeps supply and demand balanced. And most importantly, it’s what enables competition, which keeps prices low. If price is removed from the marketplace, all hell breaks loose.

“Healthcare-via-insurance” built a wall between the consumers of health care (patients) and the payers of health care (insurance companies.) And it was actually a double wall. The insurance companies themselves were further separated from patients via the corporation that was the purchaser of the health-care policy for its employees.

In the old days, the doctor would come to your house and charge a fee. If the fee was too high, you be outraged and switch doctors. Thus the doctor (health-care provider) was incentivized to deliver care at the lowest possible price. The patient (health-care consumer) was incentivized to use only the care actually needed, and to always be looking for less expensive alternatives.

Those benign effects occur automatically in a normal marketplace. But when the price mechanism is not allowed to function, they don’t happen, and the result is chaos. A perfect example of that chaos is what’s happening today in Venezuela, where market-based prices for everything have been made illegal. Another place it’s occurring is the health-care system in America, where the discipline of the marketplace has been destroyed by third-party-provided insurance.

Here’s precisely how it happened. The moment health care became something you didn’t have to pay for, and came free from your employer, the incentives all changed. The consumer of health care was no longer incentivized to use only the care that was really needed, and to constantly be shopping for lower prices. Why? Because the consumer wasn’t paying for it.

Consider if you went to a grocery store where a benign philanthropist had arranged to pay for everyone’s grocery bill at checkout. You’d buy large quantities of expensive food, and not care what the prices were, right? In fact, the grocery store probably wouldn’t even bother to list the prices, since the shoppers wouldn’t care. (Generally, in today’s world, health-care providers don’t list their prices either, and for exactly the same reason. No one cares.)

Meanwhile, the incentives for the health-care providers were not to find ways to become super-efficient and keep costs low, but to do the opposite: find ways to charge the most you can, based on what the insurance company has agreed to cover. The insurance companies themselves, meanwhile, were focused primarily on landing big corporate contracts where they could spread the risk among zillions of potential patients. Who cares if a hospital charges $10,000 a day and $200 for each Aspirin tablet, if you’re spreading the risk among 10,000 healthy employees?

More importantly, it actually works to the benefit of the insurance companies for health care providers to charge high prices for their services. The insurance company negotiates a discount off list prices, and thus make its own services to corporations look that much more valuable. In a world where it costs $10,000 a day for a hospital visit, who can afford to not have health insurance? And that’s just what health-care providers want you to think. Because if you’re consumed with the urgency of obtaining health insurance, you probably don’t have time to ask yourself: “Why the heck does it cost $10,000 a day to be in a hospital? The finest suite at the Hyatt Regency on Maui doesn’t cost that much!”

And even the corporations that are writing the checks for those health-care plans are pleased, because the “discounts” they negotiate for employees increases the value of the “sweetener” they are providing. Again, if health care prices were reasonable, it wouldn’t be so critical to have your employer pay for everything.

But none of this dysfunctionality happened immediately. It’s taken decades for the poisonous toxin to work its way through the health-care system and create a world where health care is so expensive that no one can afford to pay for it.

Wait, you may say. It’s also true that the technology of health care has become vastly more sophisticated. Hospitals now must invest in super-expensive equipment like MRI scanners and other high-tech devices. That’s why hospital stays are so costly, and that’s why health care in general is so expensive.

Oh really? Because of technology? If technology is driving up the cost of health care, how do you explain the fact that your iPhone has more computing power in it than existed on the entire planet fifty years ago? Technology, in normal, properly-functioning marketplaces, continuously gets both better, and less expensive. Moore’s Law even suggests the rate at which a doubling occurs: every two years. Technology shouldn’t be driving the cost of health care up, it should be making it plummet. It certainly has in every other field it’s touched, such as food production, printing, cad-cam, communications, and even entertainment. Why is it only in health care that technology has driven prices up? Because it is only in health care that the poison of third-party payers, shielding consumers from price, has been working its way into the bloodstream of the marketplace.

Another factor you might think drives up health care, and it does, is the high cost of training health-care providers. But again, it comes back to a poisoned system. If health care were a normally functioning sector of the economy, you’d be able to earn an MD degree as a four-year college major. Registered nurses would be trained six months out of high school. But how is that possible? Isn’t the world of medicine vastly more complex than it was 100 years ago? Don’t medical experts need far more training, in today’s world? Of course not. They need far less. You can make a case that they barely need to be trained at all. Computers are increasingly doing everything. That most critical physician skill, diagnostics, is now almost completely done on line. In fact, increasingly patients are doing it themselves: Googling the symptoms, and finding out what disease they have via their laptop.

The reason we’re doing it backwards, and spending more and more time and money training health-care workers, is because of another broken part of the marketplace: guilds. Think of guilds (such as the American Medical Association) as another bite from the rabies-infested raccoon. The guilds—desperately seeking to keep their members’ wages high—work with government to constantly increase the barriers against competition. It is because of the guilds that it takes something like ten years to become a general practitioner, when it should probably take ten months. Or less. To practice medicine in the 21st century, all you really should have to do is load the “General Practitioner” app on your iPhone, and follow the instructions. I’m oversimplifying, but not by much.

The goal of our health care system should not be to ensure that everyone in society has access to some third-party payer to cover outlandish health-care costs. The goal should be to eliminate outlandish health-care costs.

And nothing could be easier. Health-care costs will plummet, drop by orders of magnitude, the moment two things happen: (1) the guilds are reined-in, along with their handmaiden, oppressive government regulations which the guilds orchestrate, and (2) health insurance is made illegal.

Now, it wouldn’t have to be made actually illegal, although that would help. A simple change to the tax code would achieve much the same thing. Make health-insurance costs non-deductible for corporations. Make health insurance (and health care) costs deductible for private citizens. The moment you did that, every corporation in America would drop its health-care coverage for employees, and would increase employee wages by precisely the same amount so the employees could buy the insurance directly. Corporations would have to do this, or their employees would leave. And they could afford to do it, because it would be cost-neutral. So they would do it.

When that happened, every consumer of health care would be the one paying for health care (either directly, or via health insurance that they would purchase.)

The health care industry, kept blissfully isolated from the free market for over fifty years, would suddenly be exposed to the full force of price competition. Look at the price savings Uber has delivered to taxi customers, and what AirBnB has done for hotel patrons. Both of those innovative companies are fighting major wars against the guilds, but they’re winning.

If the health care industry were likewise exposed to competition, how long would it take for the cost of that hospital stay to drop from $10,000 a day, to $100 a day? For an emergency room visit to drop from $5,000 to $50? Or for the most expensive medical procedures to drop by two orders of magnitude across the board?

Not long, and we know this for a fact. How? Because those prices have already dropped in countries where the health-care system is functioning like a normal marketplace. Compare prices for medical procedures in a place like Thailand, to prices in the United States. It’s about two orders of magnitude less expensive for everything. Which, duh, is why there’s suddenly a huge boom in health-care tourism to Thailand. The market…finds a way.

Sure, the most sophisticated and difficult health care is still going to be pricey. Brain surgery and liver transplants are not going to be available for the price of dinner and a movie. But most everything else will be. And the cost of the insanely expensive stuff, which most people will never need, could be handled by society in any number of ways—probably most easily by an expansion of Medicaid. Remember, Medicaid itself would benefit most of all by plummeting health-care prices. Medicaid and Medicare would suddenly have more cash than they knew what to do with if health-care pricing dropped precipitously. Creating a government fund for the super-expensive stuff might be a reasonable approach. Or, health insurance could still exist for catastrophic illnesses. But those would be so few, and needed so rarely, that such coverage would quickly be priced in the marketplace at perhaps $100/month. Probably less.

In any case, the critical first step is to re-connect supply, demand, and price in the health care industry, where it has been missing for sixty years. Eliminating employer-provided health insurance would accomplish that. Eliminating all health insurance would accomplish it even faster. And with prices for health care dropping to reasonable levels, no one will even need health insurance, any more than they used to before the rabid raccoon “bit the system.” Do we have grocery insurance? No, because groceries are affordable. Health care isn’t. That’s what needs to change.

America can have the best and least expensive health care in the world. We can build on the ashes of the present system as long as we kill employer-provided health-insurance first. Old Yeller had to be shot, but his puppy survived, and eventually took his place. And the family lived happily ever after. (Without health insurance.)

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