State of Mankind

A New Way Of Thinking

Government Math

I love government math.  Whenever they mess with the free market, it’s always about saving you money.  And it almost always has the opposite effect.  Today we look at the part of the Healthcare Law that requires insurance companies to spend 80% of your premium on medical care.  Sounds good doesn’t it?  Big Brother is saving you some money.  Considering that in the past this number has been around 70%, he’s out to save you about 10%.  Here’s the way the Ministry of Truth puts it:

http://www.healthcare.gov/news/factsheets/2010/11/medical-loss-ratio.html

Now we’ll burst the bubble.  The reason that these government controlling private industry systems can’t work, at least not well, is the reaction of the industry.  Let’s take a theoretical $100 claim.  In the past, the doctor got $70 and the insurance company got $30.  Now the law says the insurance company can only get 20%.  The company is used to operating on $30.  30 is 20% of what number?  Oh, yes, 150 is the answer for the quick calculating guru.  Therefore, the new law (supposing the Supreme Court doesn’t strike it down) creates an incentive for higher medical costs.  Think the insurance company is going to complain about a $25 band-aid?  No way, that’s money in their pocket.  Do we really believe they are going to try to get the best deal for their customers?  It would be counter to their own interests.

On another level, prices always go up when the groups responsible for paying have no real interest in controlling costs.  In the past, The medical provider charged whatever the insurance company would pay.  The more they charged, the more their profit.  The insurance company didn’t care much what the medical provider charged, they just passed the costs on to the employers, which provided the only partial control on costs.  The employee or user just payed their $20 (or whatever) copay and also had no worry about the real costs.  Now we have a system where there is an incentive for the insurance company to push for higher prices to cover their own losses.  This can only make bad go to worse.  Even if the insurance companies tighten their belts, they would still need prices to go up somewhat.

Is this analysis correct?  According to the government link provided, this started on November 22, 2010.  Has your cost for medical insurance gone up or down since then?

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