How Health Insurance Affects the Health Care Market
The effect of health insurance on the heath care market really depends upon how broad and encompassing the health insurance is, how much it covers versus how much of the cost we bear outside of insurance.
Our current approach to health insurance, which is to seek out coverage that covers as many conventional health care expenses as possible, ideally all of them, is pretty broad indeed, and therefore the impact of health insurance will be pretty broad as well.
Health care markets, by their very nature, are pretty inelastic, which means that the demand for things aren’t going to be affected as much by price as we normally would see with other goods and services.
Food is another very inelastic market, at least food in general, and without eating, we will die. Particular markets within the food market, certain types of food, are going to be more elastic, and if a particular type costs too much we can just buy something cheaper, but we’re going to have to buy at least enough food in general to survive.
This is the case at all with health care costs, although there are distinctions here as well with certain things that may be needed for our survival like eating in general is and other things which may be more optional or for which an acceptable substitute exists, including foregoing the treatment.
People generally do not like to explore other options to recommended treatments though, and it’s as if someone told you that you had to eat so many servings of a particular food and you just obey the advice without thinking too much about it or exploring alternatives or even the wisdom of the advice.
This effect is what drives the demand for conventional health care spending more than anything, and while insurance does have an enabling effect upon this process and does allow for more spending in many cases, if we’re looking at the demand for health care spending, it does involve more than just the fact that people have the means to spend so much.
With the very strong demand that is created from the medical advice people get, people then need to figure out a way to pay the costs of following it. This demand is strong enough that people will generally seek these things out to their capacity, or close to it, with or without reimbursements.
So, it’s not that health insurance really affects demand for health care that much, if demand is to be understood as the desire for something, it’s more like they do give more people the means to satisfy the demand they already have for health care expenses, or do without.
How Health Insurance Affects Price
Whenever we have a larger amount of demand that can be satisfied, this will normally have an upward pressure upon prices and overall expenditures. This is the case with health care expenses enabled by health insurance, but only those which are enabled.
If you were going to pay a visit to your medical doctor, you may want to do so anyway whether or not this was covered by insurance, if you really needed to go that is. If you were paying for this out of your own pocket, the threshold of need may indeed be higher, because this can be a lot like an all-you-can-eat buffet, where you’ve bought the buffet and how much you eat has no bearing on cost.
In this sense we can say that more frequent visits than one would otherwise make without coverage would have the insurance enabling more spending. We also see the same thing with treatments that we would not otherwise be able to pay for but the insurance is picking up the tab and this also creates more spending.
On the other side of the coin, insurance companies at least have the potential to offset this by putting downward pressure on overall costs by using their buying power to negotiate better prices.
How this all comes out is going to depend on how much enabling we have, how much that puts the price up, and how much insurance companies can negotiate better prices to offset this.
Medical costs, to a large degree, are driven by technical factors, for instance the billions of dollars that are spent to bring a new drug to the market need to be made back, or very expensive equipment has to be purchased for certain medical procedures. A lot of what makes up the costs of medical care are non-negotiable.
However, we do see that overall costs are reduced with public health care, where the insurer, the government, has a lot more power to negotiate, and while there may be and indeed often are qualitative differences between the care in a public and private system, there is at least the potential to bring down costs overall with a public system.
This may have a lot to do with the higher tolerance level of purchasers of private insurance versus that of governments, but we do know that a completely private system costs a lot more and we have clear data to support this.
Therefore, in the case of a public system, this power can be used to bring down costs more, but how does this compare to an uninsured state? We know that public systems cost a lot more than ones without health care insurance, because once again, we only need to look at per capita health care spending and it’s a lot lower among the uninsured.
It is true that these people do tend to have low to very low incomes, and they really cannot afford much health care on their own, but we do know that people use public health care very liberally and therefore we may expect that much more will be spent than if people had to bear the costs themselves, even those with enough money to afford to buy all they really need.
In all cases then, it is reasonable to conclude that the availability of health care insurance drives up overall health care spending, and while we don’t really want to just ditch it, as it does have its place, this does provide us with opportunities to look to make our spending on health care more efficient and especially not enable spending that is of fairly dubious value overall.
Further Efficiency Concerns of Health Care Insurance
Another major issue when we look at the efficiency of health care insurance is its effect from a qualitative standpoint. This involves looking at the effect of the insurance on quality of care and especially looking to get more value out of it.
People with private insurance will often boast that the private health care system provides them access to a better standard of care than public insurance does, and to some degree this may be true, where the market is more efficient from a service standpoint and the longer to much longer wait times that we often see with public health care tend to be much improved.
More expensive does not necessarily mean better care though, although sometimes it does, at least when we’re comparing the same type of care, one conventional approach versus another, where better practitioners are on hand along with better equipment.
Since private health care is not under the same rigid constraints as public health care is, this additional money that can be spent can indeed result in an improvement in quality of care, but not necessarily, and in many cases, there may not be all that much of a difference, especially with commonplace matters.
This all really comes down to the value that we desire and perceive, and with some people, just knowing that they can access the best care out there can matter a lot.
The proper scope of health insurance should really be to only cover the more serious things, the ones that actually do cost enough money to bring it into the realm of events we need to insure against, although health care insurance goes way beyond that and this is the major problem with it in fact.
We lose efficiency whenever we insure anything, and we really need to make sure that we aren’t insuring the wrong things, like commonplace health care spending, but we do.
When we take this and combine it with the fact that health care insurance limits people to a particular form of medical care, accepted conventional treatment, whatever inefficiencies present in this medical treatment will be amplified by the insurance.
Conventional medical treatment is actually relatively inefficient as it turns out, both in terms of its costs and its effectiveness, and given that the goal is to only treat symptoms and to only step in when disease is already present, when people become so encouraged to rely on such a system as substantially as they do, this will end up lowering both cost efficiency and health care efficiency.
In a more ideal world, we would be spending a lot more effort on looking to prevent illness as well as treating it at earlier stages, and when we do become ill enough to merit the attention of conventional medicine, we would do far better to seek to address the root causes and heal ourselves rather than just looking to suppress symptoms and so often see our conditions so often deteriorate in spite of all the money we spend on treatment.
It is not that conventional medicine isn’t concerned at all with prevention, or that they do not make positive differences with certain treatments, but prevention plays such a small role in this world, and they do not do particularly well with managing chronic diseases, and the incidence and costs of treating them are exploding of late.
If health care insurance is going to act like blanket health care coverage, as it seeks to do, then it does need to broaden its scope and pay much more attention to avoiding claims rather than just looking to lower their costs when they occur.
The goal should be to lower spending overall, as this is in the interests of both the insurer and the insured, to make the health insurance system more efficient by driving more efficiency in health care itself. Insurers have the potential to make a lot of difference here, much more than they currently do.
Editor, MarketReview.com
Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.
Contact Robert: robert@marketreview.com
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