Economix: Eric Fruits revisits “health-care crisis”

{safe_alt_text}It’s easy to fall into the trap of thinking that all of today’s crises are new. In fact, the U.S. has had a health-care “crisis” since before Barack Obama was born.


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{safe_alt_text} BY ERIC FRUITS

“One of the foremost family economic problems of the day is the cost of health care. This fact is recognized by both those who pay for and those who provide health care services.”

John Edwards campaigning in the 2008 primaries? Nope. Hillary Clinton? Nope. Barack Obama? Nope. Those are the words of the Health Insurance Association of America. In 1960.

It’s easy to fall into the trap of thinking that all of today’s crises are new. In fact, the U.S. has had a health-care “crisis” since before Barack Obama was born.

One part of the crisis has been the rising cost of health care and health insurance. For years, the cost of health care has outpaced inflation. In turn, the costs of health insurance have risen rapidly, taking a toll on businesses and their employees. Another part of the crisis is the number of uninsured. Last year, Oregon’s governor tried to sell voters a huge tobacco tax increase by pointing to an estimated 117,000 uninsured children in Oregon. These parts of the crisis are related and were born out of the growth of the third-party payer system of covering health and medical costs.

The third-party payer system grew out of World War II wage and price controls. During the war, the War Labor Board froze wages. Soon after that, heavy industries began losing employees. In order to attract and retain labor in these war-essential industries, the board excluded health insurance for workers from the wage freeze and allowed businesses to claim the payment of workers’ health insurance as a tax-deductible business expense.

For workers, the choice was a no-brainer: Tax-free, employer-paid insurance was cheaper than buying their own insurance with after-tax income. Between 1941 and 1956, the number of people with medical insurance grew 14-fold.

Third-party health insurance grew popular for the same sort of reasons buffets are popular. When you walk into the buffet, you pay up front, grab a tray and get eating. You only finish when you are full. Same with health insurance. Your employer pays your tab — or at least part of it — and you visit the doctor with every sneeze. That increases the demand for medical services.

Basic economics tells us that an increase in demand results in an increase in price. Thus, the generous benefits offered by many insurance plans are part of the reason that health-care costs are so high.

Oregon health insurance is especially expensive because of regulations mandating that insurers cover specific conditions, procedures or treatments. Last year, Oregon began requiring insurers to pay for mental health and chemical dependency treatment, as well as birth control pills. Consumers cannot opt out of the mandated coverage. It is as if the state mandated more and more items be placed on the buffet table. Bigger buffets charge higher prices, and bigger benefits lead to higher premiums.

Advances in medical technology are also to blame for rising health-care costs. Every year introduces new technology that improves the quality of medical services. The new technology often represents years of research, development and testing. Even though the incremental costs of actually using the technology can be trivial, the up-front costs can be astronomical. The only way such technology pays for itself is by intensive use that can be billed to insurance.

The proliferation of expensive technology has been driven in part by the third-party payer system. Consumers never see the full bill for the service and treat the service as if it were free or almost free. Doctors are reasonably certain that insurance will pay for the service.

They also know that additional tests reduce their chances of being sued for malpractice. Insurers pass on additional costs through increased premiums.

Surely the relatively high cost of health insurance has a lot to do with the number of uninsured. But cost does not explain it all. Approximately 60% of Oregon’s uninsured children qualify for taxpayer-funded health care through Medicaid and SCHIP. Why don’t they sign up, even though it is free?

A simple answer is that most children do not get sick. Even among children with insurance, approximately one out of six children do not visit a doctor at all in a year. If someone believes they do not or will not need health care, then they are less likely to sign up for health insurance.

Another reason why qualified children go uninsured is because their parents are uninsured. Adults who do not have health insurance tend not to get it for their children. That is true of employer-based programs as well as taxpayer-funded programs. If a parent does not qualify for Medicaid, then the children will not get signed up, even if the children qualify.

Last year, the state of Oregon set up the seven-member Oregon Health Fund Board to design a plan for a health insurance pool. Next month, the board will issue an interim report. The board will be challenged to come up with a plan that has not already been tried, tested and discarded in the previous 50 years of our ongoing health-care “crisis.”

Eric Fruits is a contributing columnist to Oregon Business and a senior economist at ECONorthwest. He also is an adjunct professor at Portland State University.

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