Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

27 December 2013

Why “Obamacare” Is Failing, and How to Make It Work


[It must have been the New Year’s champagne, but the original second post below made one of the worst and most obvious errors since I confused Jackie Robinson with Mickey Mantle. No one pays $6,800 per month for health insurance. That would be $81,600 per year—enough to pay for medical care, not just insurance, for all but the sickest insureds. (The most expensive minor surgery that I’ve had so far produced an initial bill of $30,000, which the insurance company negotiated down to around $10,000.)

I’m letting the erroneous parts stand, albeit in italics, to highlight the error, and as an exercise in humility. This blog prides itself on making occasional insights using simple arithmetic. So when my own simple arithmetic is badly in error, I ought to grovel a little. Anyway, health insurance is too important an issue to let big errors stand. We’ve done that for a century now, and it’s about time to start being accurate.

To that end, I’ve also added some more detailed (and more accurate) analysis to show why single payer would still be a very good deal for all insureds. You can find that analysis here.
]

[For a simple, arithmetical explanation why a single-payer system will lower premiums, and how to get there from where we are, click here.]

Introduction
Insurance
Economics
Politics
Can we make it work?
The weak case for mandates
Conclusion

Introduction

The President is happy that 500,000 people reportedly signed up for health insurance on the healthcare.gov website, even before the last “extra” day. But as I wrote in my Thanksgiving message, tech is the easy part. People are the hard part.

Health insurance is hard because it involves three wildly separate fields, all involving people and math: insurance, economics, and politics. As far as I know, no one, including the President or his advisers, has put all three together in a way that makes sense.

This post tries to do that. Because it’s based on a number of my earlier posts, dating back to 2007, I’m going to make it as short and simple as I can.

Insurance

In concept, insurance is a relatively simple business. You just spread the risk as broadly as possible. The larger the pool of insureds (sometimes called the “risk pool”), the lower the premiums. The more people you insure, the lower the proportionate chance of any insured person incurring an insured loss—in this case getting sick or injured. So the lower the premiums insured folks in the pool have to pay.

After a point, increasing the pool size even further may provide only diminishing reductions of premiums. But I don’t think we Yanks are anywhere near that optimal pool size yet.

Why? As compared to single-payer systems, we balkanize our insurance pools in three ways: state by state, employer by employer, and insurer by insurer (or plan by plan). (Once we balkanized in yet another way, but “Obamacare” outlawed cherry picking.)

Nothing in the theory or practice of insurance requires this balkanization. State-by-state balkanization is an artifact of our law and history, including our tradition of regulating insurance at the state level. Employer-by-employer balkanization is an artifact of our immediate postwar history, during which big firms provided stable, lifetime employment with stable benefits. That short-lived “tradition” is rapidly waning and soon will be almost entirely gone. Finally, insurer-by-insurer balkanization is an artifact of our private, for-profit insurance system, in which many private firms offer closely similar “products” (each with its own special “gotchas” buried in fine print) in a ghastly caricature of competitive private “industry.”

Each step in balkanizing the pool cuts down its size, raising premiums. The effect is automatic and arithmetic. It has nothing to do with insurers’ greed or inefficiency. An insurance pool of only ten people, three of whom need heart or kidney transplants, would be unsustainable, no matter how efficient and well-intentioned the insurer.

We Yanks have only four states whose populations compare to those of the smallest of our successful single-payer allies, namely, Australia and Canada (with 2012 populations of 22.7 million and 34.9 million, respectively). In decreasing order of population, they are: California (38 million), Texas (26 million), New York (19.6 million), and Florida (19.3 million). The rest of our states run from about half of Australia’s population (Illinois, Pennsylvania and Ohio), down to about one-fortieth (Wyoming).

Think these facts might have some effect on health-insurance premiums? Our larger states seem to sense the answer. All four of them, even Texas, are trying hard to make “Obamacare” work, some with direct enrollment, bypassing the federal website. They might actually make it work because they have large enough populations to create large enough risk pools.

Having taken all three grossly balkanizing steps, we Yanks in general have an average pool size wildly smaller than the populations of the larger single-payer nations, such as Britain (63 million) and France (65.7 million). Since the administrative costs of our thrice-balkanized system add no more than 25% to 30% to our premiums, most of our double cost, as compared to single-payer systems’, comes from our small average pool size. The rest comes from paying our doctors and hospitals more.

Insurers’ private profit contributes an insignificant fraction to our exorbitant health-care bill. Accounting for all that private profit takes a much bigger toll.

When I go to the medical lab, for example, there are four or five technicians taking or testing blood or urine samples, and three clerks out front checking and verifying insurance and filing claims. So at least three-eighths (37.5%) of the visible employees do nothing but account for private profit and handle balkanized claims processing, with its differing and often incompatible computer systems, claim procedures, forms and rules. Next to that effect—let alone the effect of suboptimal risk pools and higher payments to doctors and hospitals—insurers’ private profit is inconsequential, however much it may float stock prices and bonuses and anger the left wing.

Economics

Enter economics. Economists for presidential candidate Hillary Clinton, and later for the President, were not unaware of the benefits of increasing pool size. But none of them appears to have addressed the primary problem: risk-pool balkanization and consequent wildly suboptimal pools.

Instead, they all—including Nobel Prize winner Paul Krugman—focused on increasing the pool size by forcing younger, healthier and usually lower paid workers, who don’t want and don’t think they need health insurance, to buy it.

Thus our economic experts leaned hard toward “mandates.” Most still do.

There were (and still are) two problems with this approach. Both I outlined in 2007 and 2008, when candidate Clinton was for mandates and candidate Obama against them. (See 1, 2, and 3)

First, as an economic matter, mandates are like a regressive tax. They force younger and generally lower-paid workers to pay for the care of older and unhealthier workers, who generally make more money. (Retired seniors are on Medicare or Medicaid, perhaps with private supplements; older people who still work, and who therefore are still covered by private insurance, are at or near their peak earning years.)

Not only does this regressiveness seem unfair on its face. It’s nothing like the single-payer systems in Europe and elsewhere, which our right wing insists (inaccurately) on calling “socialized medicine.” (The vital distinction between insurance and medicine gets lost in demagoguery.)

In single-payer systems, everyone pays, through taxes. But because those taxes are highly progressive, not everyone pays the same “premium.” The more highly paid (in income-tax systems) or the ones who consume more (in VAT systems) pay more taxes and hence higher “premiums.” This approach leaves the young, healthy and worse paid (or less consuming) in a fairer situation: they pay less, and the older, better-paid and likely sicker workers who need more care pay more.

Politics

The second problem with mandates fades into our third topic: politics. We Yanks hate mandates. We don’t want anyone, least of all government, telling us what to do.

This is not a recent phenomenon. Alexis de Tocqueville noticed it when he came to our country in 1830. In multiple blog posts, I pointed out this huge problem in 2007 and 2008, to no avail. (See 1, 2, and 3)

The President, who firmly opposed mandates in his primary campaign against Hillary Clinton, pulled a classic bait-and-switch and supported them once elected president. (I write this as an avid Obama supporter, who thank God every day that he’s our President, especially considering the alternatives. But facts are facts.)

The political result was entirely predictable, and in fact I predicted it. Our right-wing demagoguery juggernaut, which had aimed its big guns at Hillary’s mandates even before the primary campaign had ended (assuming she would win), quickly re-trained them on Obama and so-called “Obamacare.”

That juggernaut has never let up, not for one microsecond. It continued to demagogue long after the Affordable Care Act passed Congress. Likely it will continue forever, even after the law and websites, as many expect, settle down and start to work well for millions of Americans.

The President has a big problem with racism, especially the unconscious variety. But this particular political problem has little or nothing to do with racism. It reflects a deep strain of American culture going back to our earliest days as British colonies.

Colonists and later immigrants came to this country for one reason above all: they wanted to be free, unfettered and independent. Their motives were various, including religion, politics, making money, and just general principles. But the desire to be let be was universal among them. It remains universal among us Yanks today.

Remember that famous colonial-Revolutionary slogan, “Don’t Tread on Me”? It came with a cartoon drawing of a snake. That’s the essence of our Yankee culture.

Step on that snake and you get venom. With his unexpected switch to mandates, Obama got it in abundance. For a man whose empathy, emotional intelligence and political skill are all off the charts, it was an uncharacteristic lapse. Apparently, the President let the economic “experts” subvert his superb political instincts. (That wasn’t the only time. It happened with the bankers, too.)

In response to a thoroughly predictable uproar, the President has now delayed small-business mandates for a whole year, and individual mandates for those who lost policies they liked. And he had to do so long after his once-in-a-century solution already had passed Congress, in order to quell the relentless demagoguery just temporarily and foster a decent chance of the new law’s eventual political success.

In light of all this, Chief Justice Roberts’ decisive opinion on the mandates was not just a neat piece of legal legerdemain worthy of Benjamin Cardozo. It was also politically inspired.

Roberts kicked the policy issue out of the courts and back into the political arena, where it belongs. But by calling the mandates a “tax” for purposes of constitutional analysis, he also subtly reminded us how they do things in Europe, Canada and Down Under, and how much more sense their approach makes, both economically and politically. His judicial restraint, his legerdemain and his subtle suggestion will mark his opinion as one of our all-time greatest on a hugely controversial issue.

Perhaps inadvertently, Roberts’ opinion on “Obamacare” was brilliant for yet another reason: simple arithmetic. If we had a single-payer system based on taxes, as Roberts subtly suggested, we would have a medical-insurance risk pool of 307 million people. With the exception of China and India, no other nation would have a larger pool. (The EU, although it has taken the leadership [last paragraph] in new entries into a society based on the values of the Western Enlightenment, has not yet included health insurance in its transnational portfolio.)

We Yanks lack good data on a vital number: the average risk-pool size that private insurance companies use in their actuarial calculations to determine premiums for their balkanized and multifarious health plans. My guess is that it would be somewhere in the range of ten thousand to a few hundred thousand. If you don’t think raising that number to 307 million would lower premiums, you have trouble with arithmetic.

Can we make it work?

Mandates are a big political problem. They always have been, and they always will be. We Yanks will pay taxes, albeit grumblingly and reluctantly. But we just don’t like being told what to do.

Reckoning with that essential and durable truth of our nature as a people, can we make “Obamacare” work? And, if so, how? The project is worth some thought and effort, if only because we’ve tried as a people to do something about health insurance for a century, since Grover Cleveland.

In all that time, “Obamacare” is the best we’ve been able to do. I don’t think we want to let another century go by without offering our people the security and freedom from fear and suffering that every other developed nation enjoys.

The best solution I can see is to chain the dog that never barked: market and risk-pool balkanization. Don’t just let insurers sell the same health insurance across state lines: encourage or require them to do so, under uniform federal regulation. That regulation could hardly impose greater “mandates” on insurers than “Obamacare” already does, with its specific minimum requirements for bronze, silver, gold and platinum policies.

Anyway, mandates on big corporations aren’t politically incendiary like those on individuals. Corporations deal with mandates and regulation all the time. In a complex and interdependent society, it’s part of what they do.

Only individual mandates provoke the snake to spew its venom. As individual Yanks, we all cherish the illusion that we are wholly free and independent, while we enjoy the most complex and interdependent human society that ever existed. (Contradictions, too, can be part of human culture. Just recall Communism.)

If the President wants to avoid another disastrous Reagan “revolution” and keep young people in the Democratic Party, he’s going to have to reduce or soften the individual mandates. His recent delay in implementing them suggests he finally gets this point.

But mandates are just the political problem. There’s still the rest of the premium math. Even with interstate insurance sales, we would still have the problem of risk-pool balkanization by employer and plan. That’s yet another fundamental economic problem that our insurance system’s unfortunate history foists on us.

Very few employers, if any, have a large enough pool of employees to optimize the size of the risk pool for health insurance, let alone with multiple separate plans. But by encouraging (or requiring) insurers to offer the same plans across state lines, and to combine or create multi-employer plans, the law could increase the sizes of risk pools significantly, and maybe lower premiums. It’s never been done here, and it’s worth a try.

As for mandates, even Nobel Prize winners are not infallible. The key study Krugman relied on to support mandates (at least in his columns) had an obvious alternative explanation: simple supply and demand. As Krugman himself honestly reported, a plan like Obama’s then-proposed plan (without mandates) would have insured 23 million people at a premium of $4,400, while one like Hillary Clinton’s then-proposed plan (with mandates) would have insured 45 million at a premium of $2,700.

So more people would have bought the cheaper plan than the plan with a 63% higher premium. Isn’t that just what the law of supply and demand predicts: the cheaper the product, the more people buy it? It sure looked (and still looked) that way to me.

The other salient question is whether the aggregate premium payments would have covered the aggregate costs of health care. For reasons explained below, I doubt that anyone had the necessary data—including accurate differences in aggregate health-care costs by age—to answer that question reliably.

If you just lop off the pool’s lower age quadrant, or 25%, you get a premium increase of about the same amount, not 63%. So the study self-evidently assumed a much higher medical bill for older people. And it did so, apparently, without considering the fact that youth might buy (and in the real world would buy), cheaper policies with catastrophic coverage only, possibly including low caps and high deductibles for routine care.

What’s more, the actual premiums in that study didn’t make much sense. You can’t buy much health insurance for $4,400, let alone $2,700 a year. Around the same time, my own health insurance cost over $6,800 a year. And that was just for myself; my wife had her own insurance.

This discrepancy reveals another possible improvement. Apparently, even the “bronze” plan under “Obamacare” is priced over $2,700. If so, the reason is obvious. The law doesn’t allow young, healthy people to buy cheap insurance against just catastrophic loss. It wants everyone to have fully comprehensive insurance, although it costs more.

That’s another unfortunate aspect of the law’s politically problematic mandates: not only forcing people to buy insurance in the first place, but telling them what kind they must buy. It’s a kind of paternalism wholly gratuitous to “Obamacare’s” primary purpose, namely, getting more people who want insurance but can’t find or afford it insured.

In this aspect, as in others, “Obamacare’s” striving for the best became the enemy of the good. Bare-bones policies that cover only catastrophic risk (perhaps with some prevention and acute care) are probably no good for families and seniors. But for young, single, healthy people, why not?

Get healthy youngsters into the system and upgrade them later. Isn’t that the entry-level strategy used by every business that sells anything, from cars to computers and software?

The weak case for mandates

During the big debates of 2007-2009, I read every column that Paul Krugman wrote. I never read anything approaching convincing proof that the system would collapse unless we forced young, healthy blue-collar workers to pay for older, sicker, better-paid people’s health care. I saw a lot of conclusions and assertions, but no credible numerical evidence. Not even a credible outline.

I did see credible evidence that we needed to make health insurance better and more affordable for people who actually wanted it. As I wrote at the time, the lesser and more politically freighted problem of young, healthy insurance “refuseniks” could wait for another day. As it turns out, that analysis appears to have been right, at least insofar as concerns “Obamacare’s” immediate chances for political success. Without mandates, the right-wing propaganda juggernaut would have a lot less ammunition.

Not every older person gets sick or injured. Many people live to a ripe old age and die suddenly of a heart attack or stroke, or less suddenly of a bout with pneumonia or the flu. Many die quietly in their sleep for no obvious reason. All those people don’t stress our health-care system much, although they have paid premiums or (for Medicare and Medicaid) taxes for most or all of their long lives.

My stepfather was like that. He never got so much as a flu until he was over 90. When he died, he went quickly, at the age of 92, with little fuss or expense. He was a net contributor to our health-care system, big time.

So maybe the whole idea of having to coerce young, healthy, mostly blue-collar workers to make “Obamacare” work is nothing more than a sophisticated urban myth, promoted by credible experts (like Krugman) on the basis of obscure studies made by others, not themselves. Maybe Krugman just lent his Nobel-Prize credibility on trust, not verification.

More to the point, I can’t see today, and I didn’t see in 2007, how the detailed and highly structured data needed to prove or disprove the case reliably could even exist.

In order to prove or disprove the point conclusively, you would have to have detailed data on all 307 million of us, and on what illnesses and injuries occurred to each at every age. Not only that. You would have to have detailed data on the cost of diagnosing and treating each such illness and injury, and who paid it.

Just collecting that vast data would make the NSA’s much-lamented phone-call-record collection look like child’s play. After all, each NSA record is just two phone numbers and two times (call initiation and duration). The necessary medical data would cover each citizen’s entire lifetime health history, with a detailed and itemized cost accounting.

Do those data even exist for people over 50, whose medical histories began long before the digital revolution? Or did their paper records, must less detailed and specific than today’s, long ago decompose in trash heaps somewhere? And even if these old data still existed, did they adequately reflect the cost impact of the recent technological revolution in medicine?

Even if this vast mass of data existed, were current, and could be collected, you would have to analyze it with a series of mathematical correlations that, in permutation and combination, would be nearly endless. Good luck.

So for me, the assertion that economic math requires mandates on the young recalls Alan Greenspan’s recanted insistence that sick markets cure themselves. That wrong idea, too, was based largely on faith, not sound math. However would you prove it mathematically, anyway? We Yanks must learn to be especially skeptical of quantitative experts when they make assertions incapable of sound quantitative proof.

Conclusion

Simple arithmetic suggests that youthful refuseniks, if important at all, are just the tip of the insurance-pool-size iceberg. Cut off the entire lower-fifth cohort of the age spectrum, or even a fourth, and you reduce the pool size by just 20% to 25%. In comparison, state-by-state balkanization, all by itself, decreases pool size, on the average, by 98%, because we divide our national pool among fifty states, reducing the average pool to 2% of our nation’s.

The quantitative effect of employer-by-employer balkanization is similar, although less dramatic. Just count the number of participating employers in any state. Suppose ten is a reasonable minimum. If each has its own insurance plan, you have cut average pool size to 10% of the whole, for a reduction, on the average, of 90%. Insurer-by-insurer balkanization has a similar effect.

If refuseniks’ 20% to 25% reduction of pool size raises premiums, what do you think these factor-of-fifty and factor-of-ten average reductions do? Shouldn’t we work on the arithmetically bigger problem before the little one? Older folks’ probably greater need for health care certainly factors in, but do you think it compensates for these huge arithmetic differences? Only detailed analysis of non-existent detailed data could prove that point, and valid proof seems unlikely.

Anyway, the real proof of the pudding will be in the eating. Right now, only the grand experiment of “Obamacare” can prove or disprove the alleged economic need for mandates. And even that experiment might not be conclusive, depending on how long it runs.

While we wait for the experiment to finish, or to succumb to political angst, we can improve its chances for survival by simple, common-sense measures. We can reduce risk-pool balkanization, thereby increasing pool size and reducing premiums directly.

The effect will be similar to mandates’, but without the individual coercion and with a greater numerical chance of success. Corporate insurers probably won’t need coercion to increase their customer bases.

And we can encourage now-mandated insureds not to become refuseniks by offering them cheaper policies covering only catastrophic risk, prevention and maybe acute care. After all, we don’t want those young, healthy people becoming vectors for the next pandemic, do we?

Longer term, we can reduce the huge administrative expense of accounting for all of our multiply balkanized system’s private profit. We can do so using simple common-sense measures: standardizing computer-system interfaces and claim forms and procedures. Let separate private insurers compete on their actuarial prognostication, their pricing, and their plans’ special benefits above basic requirements. There is no need to let our exorbitantly inefficient Tower of Babel in claims processing continue—let alone on cumbersome paper—in the digital/Internet age.

Just cutting this Gordian knot alone could save around 25%. Doctors and hospitals would welcome the cutting, just as they welcomed our government providing a lingua franca of standardized codes for various diseases, diagnoses and treatments. Insurers would grumble at first; but they would soon see the light as their administrative expenses dropped dramatically.

“Obamacare’s” mandates have produced far more heat than light for far longer than any recent political issue, including immigration reform. There’s a good reason: mandates touch a political nerve native to our Founding and our culture. When you consider also that their necessity is at best unproven and at worst doubtful, you come to a simple conclusion.

“Obamacare” can increase its chances of working well by softening, reducing or even eliminating mandates and instead enticing insurance refuseniks into the system with a greater variety of lower-cost insurance plans. To avoid more vulnerable people taking unnecessary risks, the system could limit the barer-bones plans to healthy young people, by age or even by gross health history.

At the same time, pols can increase the likelihood of reducing premiums by focusing on means of broadening risk pools far more effective than just forcing young people in. They can begin to break down the historical balkanization barriers that split risk pools by state, employer and plan and therefore by big whole integers, not just the small fraction of healthy youth.

These are common-sense, bipartisan expedients for which both parties might take credit. If our pols support them, they just might improve their dismal and well-deserved reputations for yelling at each other, in incomplete ignorance of real chances for improvement, while letting their constituents’ lives, health and hopes languish.

A Yankee Path to Single Payer

Will we ever have single-payer health insurance in this country? Or will we continue to pay twice, on the average, what our single-payer developed-country allies pay, with statistical health-care outcomes near the bottom of the pack? In other words, will we continue to have the best health-care system in the developed world for the very rich, and the worst for the rest of us?

Oddly enough, there is hope. Even more oddly, “Obamacare” might be a step on the path to success. But before we can see how, we have to understand one vital fact. Health insurance is a natural monopoly, much like home-to-home distribution of water and electrical energy or the “last mile” of telephone landline service.

A natural monopoly

What’s a natural monopoly? It’s an industry or economic sector in which—contrary to the usual rules of market economics—competition is counterproductive. The more competitors you have, the less efficient and more wasteful such an industry or sector gets. That’s natural monopoly.

Consider getting water to homes. Would it be efficient for several competitors to build and maintain separate water mains and supply lines to each home? Of course not. So home water distribution is a natural monopoly. So are electric-energy distribution and cable TV distribution.

Don’t believe it for health insurance? Well, consider the following bit of simple arithmetic. It’s well known that our entire health-care sector accounts for about 14% of our national economy. Since our national economy runs about $15 trillion, health care accounts for 14% of that, or about $2.1 trillion.

Now suppose every single American paid health-insurance premiums to a single insurer. What would the tab be? Just divide the $2.1 trillion tab by our population, 307 million, and you get the answer: less than $7,000.

That’s an annual bill. [Note: as explained above, the following material, now italicized, was in error when originally posted. The bold-faced material that follows provides the correct analysis.] When I last had private health insurance, my bill, for myself alone, was over $6,800 per month. So a single-payer health-insurance system would reduce our health-care premiums by nearly a factor of twelve. A family of four would pay four individual premiums, for an annual total of $28,000, or $2,333 per month.

Most families of four today would kill for that low a premium. It’s even lower than the $2,700 per year individual premium that Paul Krugman proudly cited (back in 2009) as a projected product of Hillary Clinton’s proposed mandates
.

The italicized (and erroneous) material above was based on the absurd notion that I once paid more than $6,800 per month for health insurance. The actual figure was over $6,800 per year, or just $567 per month, and my employer paid part of that figure. That’s not much more than many people pay per month to finance cars.

But here’s why single-payer, with its slightly higher $7,000 annual tab, would be a better deal still. My insurance then was the best available from my employer, but it paid only 80% of most medical claims. The other 20% was a co-pay, which came out of my pocket. In addition, there were annual and lifetime caps on benefits, as most health insurance had at the time, before “Obamacare” outlawed them.

So I had another, excess major medical policy, which cost an additional $1,400 per year. It had a $3 million lifetime cap and a $25,000 deductible. With these two policies, I felt secure. Even if I needed multiple heart transplants (as long as the total tab was less than $3 million), I would be out of pocket, at most, $25,000. But my total annual insurance bill was $6,800 + $1,400 = $8,200, or 17% higher than the putative single-payer bill.

But that’s not all. The single-payer plan would be all-inclusive and all encompassing, since it divides our total national health-care bill among all of us. It would have no 20% co-pays and no deductibles, in addition to none of the “gotchas” that “Obamacare” now outlaws: annual and lifetime caps and pre-existing condition exclusions.

So not only would single-payer provide (automatically) all the benefits that “Obamacare” now provides by regulation, including outlawing pre-existing condition exclusions. It would also eliminate deductibles and co-pays, which the regulatory requirements for “Obamacare’s” bronze, silver, gold and platinum policies still have. In other words, it would provide real, total security, not just reduce the possible tab.

For a family of four, that $2,333 per month tab would still hold. But that’s where progressive taxation comes in. Through it, older, generally sicker, and higher-earning families would subsidize the younger and lower-earning families, rather than vice-versa, as under the current system (and even under “Obamacare,” with its mandates).

So which system would be fairer and more efficient? You decide. And we haven’t even mentioned the 25%-plus extra that single payer would save by eliminating the Tower of Babel in claims processing among dozens of separate insurance companies, all using different computer systems, interfaces and plans, rules and procedures for processing claims.


Why does competition in health insurance raise premiums, rather than lower them? The primary reason is that it splits the risk pool, lowering the number of insureds in the pool that each insurer covers. It thereby raises the average premium, automatically and arithmetically. A secondary reason is that having multiple, differing computer systems, interfaces and forms, rules and procedures for claims processing is incredibly inefficient. In fact, it’s much like having duplicate water mains or copper telephone wires to each home—reasons why home water distribution and “last mile” landline telephone service are natural monopolies.

As I’ve outlined in another post (and as is a noncontroversial conclusion of classical economics), competition can’t improve natural monopolies because competition in natural-monopoly sectors is wasteful. The only ways to handle a natural monopoly properly are to nationalize it (a bad idea because politics and economics don’t mix well) or to keep it private but regulate it. These are the sole solutions to making natural monopolies work that capitalist economics has come up with in the three-plus centuries since Adam Smith.

Whether you nationalize or regulate the natural monopoly in health insurance, it’s still single payer. As our bit of simple arithmetic shows, it could lower our health-insurance premiums by something between a factor of four and a factor of twelve. There’s no magic or sleight of hand in that reduction, just simple arithmetic.

Getting there from here

So how do we get there from here? Paradoxically, we open our thrice-balkanized health-insurance markets to competition. We allow and even promote interstate, Internet sales of health insurance. We encourage, if not require, insurers to offer multi-employer plans. We give them every incentive to broaden their risk pools as much as possible, whether by seeking new customers directly or by acquiring other insurers.

Then we sit back and watch. As usual in a capitalist system, winners and losers will emerge. The winners will acquire the losers, and the game will go on.

If we don’t intervene and stop the mergers (remember, in this game, competition is bad!), eventually one or just a handful of insurers will emerge. We will have achieved single-payer system, or a close approximation of one. And we will have gotten there naturally, through market forces, without coercion or “mandates.” In fact, we will have gotten there by encouraging free competition (and free acquisition!) among insurers, in a uniformly regulated national market.

How “Obamacare” can help

The trouble with any natural monopoly is that it’s a monopoly just like any other. And as classical economics tells us, monopolies (in general) produce higher prices, lower output, less product variety, lower rates of innovation, and less customer satisfaction than competition.

If you have only one seller, there are no alternatives. So you have to take whatever price and terms it offers. In theory, a private single-payer health insurer could charge $15,000 per month for individual insurance and make an astronomical profit.

Enter regulation. Whenever a monopoly is “natural,” and competition would be inefficient and unwise, we regulate it so that (1) it won’t price gouge, but will accept a “normal” profit and (2) won’t do socially undesirable things. That’s what we do right now with non-municipal water and power distribution and cable TV.

The only known alternative to regulating natural monopolies is government ownership, or (at the federal level) nationalization. Many municipalities do this with their water and electric-power distribution. But government ownership is generally undesirable because even the best politicians are not good business people. Politics and business are two different skills. (Do we need a reminder after healthcare.gov? Even its name is inapt: it should be “healthinsurance.gov.” No one gets medical care from a Website, at least not yet.)

The Affordable Care Act already outlaws most of the socially undesirable things that private insurers have done. It outlaws cherry picking, pre-existing condition exclusions, annual and lifetime caps on claims, and dropping health insurance or raising premiums when people get sick. It even outlaws dropping kids from family policies until the age of 26.

With these “no-nos” for insurers and its minimum requirements for bronze, silver, gold and platinum policies, “Obamacare” already has the structure of national qualitative regulation needed to keep health insurance rational and socially acceptable as the industry consolidates into its natural monopolistic form. So we’ve already got a good start.

Only two things would need adding. First, as the health-insurance sector consolidated and winning competitors achieved greater and greater market power, regulators would have to introduce price regulation, just as they have done for water, electric-power and cable TV companies, to prevent gouging. They would have to have rate-making hearings that ultimately allowed the single payer (or an oligopolistic handful of firms) a reasonable profit, but no more.

Second, to reduce the exorbitant cost of accounting for private profit in a balkanized and consolidating system, the regulators would have to standardize computer-system interfaces and forms, rules and procedures for claims processing. As my simple medical-laboratory example above suggests, such a uniform system and rules could save from a quarter to three-eighths of our premium expenses as soon as implemented, compared to the present sheer economic waste of our present Tower of Babel in claims processing.

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