Obama’s Healthcare Reform Follows European Path

Summer break for the U.S. Congress will be over this week. Among the many bills that are under the Senate’s consideration, no doubt the most important ones are the three healthcare reform bills. In the upcoming session, they will be the focus of meetings and public opinions. Listening to what the public is arguing about, what the problems of the American healthcare system are and the principles behind the problems will provide hints to all involved with healthcare reform.

The first problem that Obama’s reform is trying to solve is the excessively high cost of healthcare. The second problem is insufficient coverage. According to a Mackenzie report, compared to the OECD average standard, every year the U.S. overspends $650 billion in medical expenses. Within the expenses, 82 percent is comprised of clinical and prescription expenses. This is the result of the demand-side subsidy policies that have lead to inflation. The majority, 14 percent, of the remaining 18 percent consists of the operation costs of hospitals and insurance companies.

According to this analysis, this section of the healthcare system has unusually high expenses because of the complexity of the American Medicare system, as well as the complexity of insurance policies. In order for hospitals to pay for a variety of insurance policies, they need to spend a large amount on management. On the other hand, insurance companies’ operation complexities and costs are surprisingly high because of policy design, marketing and claim settlements.

One selling point of Obama’s plan is the simplification and standardization of insurance policies, as well as the creation of an insurance exchange for centralized insurance trade. This will reduce costs and the money saved will be used to fund universal coverage. Standardization and centralized trade no doubt can reduce costs. But standardization by means of forced regulation by the government is not getting to the root of the problem. Demand differences and the segmentation of the insurance market are only secondary reasons.

Indeed, because people deal with different health risks and life spans, or people’s value orientations between health and other aspects of life are different, they have different needs and desires when it comes to insurance policies. Although the needs differ, insurance companies have enough incentive to simplify their products: the insurance business model was originally based on the principles of spreading the risk and, therefore, a large customer base is necessary. Under a two-way selection process, on the other hand, the market will eliminate policies that don’t cover enough and standardization will be the natural result of market evolution.

As a matter of fact, product complication is the result of the government’s overregulation, preventing the market from functioning properly. Health insurance has always been an industry that attracts the most regulation, evidenced by the Department of Health, consumer protection laws, labor laws and equal rights laws all having applied strict regulations on health insurance products. Besides the federal government, each state has it own health insurance regulations; insurance companies are forced to design different kinds of products for each state in order to satisfy the regulation requirements. The complexity of the products has been raised two-fold for no reason at all, and this is all applied to thousands of products.

Clearly, the reasonable way to standardize the industry is to remove the overregulation on the state level, but Obama’s plan is running in the opposite direction. His plan is to raise the federal regulation standard and to make the public option the minimum acceptable standard for the insurance policies that enter the trade exchange. Also, it prohibits insurance companies from setting their policy prices based on age and region.

This will standardize the industry to a certain extent, but it reduces the room for personal choice. Those that rely on lifestyle choices or give up some treatments to enjoy cheap health insurance will be forced to share the increasing cost. Although Obama repeatedly emphasizes that personal options will stay, what he says is empty talk. Insurance premiums paid by individuals in the U.S. are small; most of the coverage is paid by their employers. But according to the new bill, after a grace period of a few years, the insurance policies paid by employers must enter the trade exchange and meet the minimum acceptable standard.

Therefore, it is only when you buy insurance out-of-pocket in addition to the insurance that your employer provides that you have actual freedom of choice. Actually, if we take a closer look at the main appeal of this healthcare reform, reducing personal choice is a must.

American liberals’ criticism of the healthcare system is centered on the 45 million uninsured people. These people do not buy health insurance, on one hand, because they have a low income. But the more important reason is that they receive little to no discount under insurance companies’ risk control policies. When insurance companies figure out their potential risk, they get help from related statistical characteristics that are easy to acquire. For instance, low income is usually connected with higher crime rate, accidental injuries, bad habits and frequency of illness; even obesity is related to poverty levels. Market mechanisms will naturally divide the poor-rich hierarchy into different parts. Therefore, to realize comprehensive full coverage, so the poor can afford health insurance, clients that have different incomes and risks must be pulled into the same risk pool so that the price can be reduced. Otherwise, it is either that the poor can afford it or the government will go bankrupt due to over-subsidy.

From this we can see that Obama’s healthcare reform is indeed moving in the direction of the European-style equal distribution of medical resources. No wonder this causes a fierce protest from the conservatives. Protesters not only advocate the defense of personal options, but also point out that the basis for equal distribution was exaggerated: 45 million people that have no health insurance does not mean that they have no medical care. In fact, besides the government’s Medicare and Medicaid, many charity organizations and churches provide free and cheap medical care. Many people stay away from the health insurance system because they feel that it will not bring any improvement to their health. Harvard health economist Katherine Baicker’s empirical study shows that increased coverage is not a good way to improve the medical situation of the poor. Also, the effect of cost spreading is limited and the demand stimulation caused by high coverage will worsen the financial burden.