Untouchable fundamental disagreements…

…in the health care reform debate

In the final push for passing his concept of health care reform, President Barack Obama concluded that there is no reason for debating health care reform any further due to “honest and substantial differences between the parties.” Why we should not discuss fundamental disagreements; especially, when a major reform hinges on them? Parallel, one may question the integrity of an attempt of passing a significant political reform by a fragile majority, when the meaningful minority strongly opposes its very concept. One may understand why leaders of the Democratic Party are not eager of getting into any debate about fundamental issues. It is puzzling however, why Republicans are not challenging Democrats into debating the “substantial differences.”

Punching a big cotton ball

During the televised debate on February 25, President Obama and other Democratic leaders frequently used the term “affordable health care.” They brought up examples of personal heart-breaking tragedies that middle class hard working people endured when dealing with health insurance companies. Those examples were mentioned in the context of supposedly excessive profits of insurance companies and inflated salaries of their executives.

The timbre of these arguments resonated with my memories of my young years in Poland, then a socialistic country. With the skepticism of a youngster I used to question the principles of socialism, and every time I pointed out that the numbers did not add up and that logic was flawed, I heard in reply about social injustice, about very few enjoying the extreme wealth at the cost of the suffering of the masses. I used to call these debates “punching a big cotton ball”, because whatever rational argument was phrased showing that in its very concept socialism causes more problems that it can resolve, no one addressed my arguments, but I was instructed how much good government can do in correcting economic injustice.

The February 25 debate was a great example of punching a big cotton ball. For example, as soon as Congressman Paul Ryan finished his deep knockout punches, the cotton returned to its original shape, and in response, we heard about good things done and planned by the government. Somewhere, in passing, as something obvious, the President said, that this is what we have government to do. No one in the room captured this moment to request a halt to the debate about health care and to start a debate on what the role of the government should be.

Is government a solution?

The President is right when he says, “At stake right now is not just our ability to solve this problem, but our ability to solve any problem.” However, we should not close our eyes and minds on the “substantial differences,” and go into legislative wrestling. Before going any further, we should explain to the American people the essence of the “substantial differences.”

When facing fundamental disagreements, it is time to reach back into the origins of the U.S. political system. It was built on the concept of freedom of an individual in pursuing his or her happiness, and on the concept of limited government protecting these liberties. Thomas Paine wrote:

“Society in every state is a blessing, but Government, even in its best state, is but a necessary evil; in its worst state an intolerable one: (…) Wherefore, security being the true design and end of government, it unanswerably follows that whatever form thereof appears most likely to ensure it to us, with the least expense and greatest benefit, is preferable to all others.”

Ronald Reagan summarized this in his famous saying, which begs to be repeated today, “In this present crisis government is not the solution to our problem; government is the problem.”

Why did no one bring this up at the February 25 meeting? Because, they were smart enough to foresee that they could be reminded that for long years when Republicans were in majority, somehow they did not see ever growing government as a problem. Just about three years ago, the immigration reform failed because the majority of Republicans demanded increased government control over the labor market; practically nationalization of a big segment of it. Knowing that immigration would soon be back on the agenda, Republicans resolutely refrained from bringing arguments that could backfire before long.

If limited government is the underlying concept of our political system, then prior to getting the government involved, we should first ask ourselves, if the same could be achieved just by actions of individuals, without the government’s direct participation. If we tune our thinking in this mode, we would soon be surprised how many things could be done better with less government involvement.

Starting from scratch?

Asking to start from scratch Republicans act as if they just arrived from Mars yesterday and were not around for the last year. Democratic proposals, in all versions, arise from the report prepared for President Obama by the Council of Economic Advisers, titled “The Economic Case for Health Care Reform.” Under the pretence of science, this report provides snapshots of the current health care system, with an axiom that the free market failed and the government needs to take over health care in the country. Arriving from this premise, Democrats prepared the original House proposal, then the Senate one, and lastly the President’s version. Even if they do start from scratch a million times over, they will still arrive with the same conclusion, which they put in the overriding axiom to begin with.

Instead of asking to start from a blank page, Republicans should pull out at least a few pages with their analysis of the crisis written on them. They do not even need to write it, just pick up the best analysis from what is already written. A treatise by Professors Charles Kroncke and Ronald F. White, “The Modern Health Care Maze: Development and Effects of the Four-Party System.” could be a good start. In the summary of their analysis they write:

“did it ever really make sense to set up a health care system whereby fourth-party corporate employers purchase health care insurance for their first-party employees from third-party corporation, which in turn pay second-party providers for health care products and services?”

It not only sounds complicated; it is. Hence, Professors Kroncke and White ask:

“Does any other industry insulate buyers from sellers in this way?”

and they conclude:

“the only way to reform our health care system successfully is to destroy the infrastructure that sustains the four-party system. (…) Until we reduce government’s ability to surreptitiously distort the market forces that drive the health care industry, the juggernaut and other dysfunctional arrangements will continue to plague the system.”

Nation in dismay

Health care is just one crisis, besides banking, immigration, education, energy, and almost anything we look at. In theory, we have a free market system. In reality, it is heavily regulated. There is a “substantial difference” in how Americans see and interpret these problems. Some see them as result of unrestrained greed, and look for more government regulations. Others see already existing government regulations as corporate welfare and the source of our problems, and seek improvement in curbing them. Unfortunately, regardless, of which side of the issue they are on, most Americans do not understand the free market concept, and do no know socialism either. Too often, confused, sometimes they opt for more government regulations, sometimes for less, depending on other ideological prejudices.

Banking on this perplexity about untouchable and not challenged “substantial differences”, the current administration, which has a clear anti-free market, pro-socialistic leaning, has a fair shot in shifting the political system in our country, maybe forever. So far, Republicans leaders failed to challenge Democrats heads on. They do not support abandoning employment sponsored health insurance system in exchange for the free market driven individually purchased insurance. They do not recognize, or are afraid to say it aloud, that individually purchased health insurance would lower premiums, and gradually would invoke market pressure on lowering costs incurred by Medicare. With lower premiums, more Americans would be able to purchase health insurance, lowering the number of uninsured, and those depending on Medicaid. With the revival of the free market, it would be only a matter of time when seniors would ask for the option of buying out of Medicare in favor of commercially available life-cycle health insurance. All these measures combined would lower the burden, which presently Medicare and Medicaid have on Federal and states budgets; Americans would have better health care, and the country would be richer at the same time.

There is only one problem with this rosy picture; with the free market working again, health insurance companies, health service providers, and pharmaceutical companies would finally face real competition, and would need to work much harder to make a dollar. With the November election on the horizon, Republicans are torn apart between their duties to the nation and their fears of ostracizing many lobbyists and major donors.

Republicans entered a risky game, as on one end, they desperately oppose the clearly socialistic health care reform proposal, and – on the other end – they avoid presenting free market based solution, which actually could solve our crisis. All due to fears of losing the coziness of their place in the existing Washington constellation. Apparently, crisis did not reach Capitol Hill yet. Republicans need a shake up by a leader of the Regan caliber. So far, they are afraid of bringing the Reagan name.

The health care reform proposed by the current administration has advanced as much as it did, because Democrats are one-step ahead in comprehending constrains that Republicans put on themselves.

A version of this text was published by Huffington Post

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A better approach to health care reform

My response to the request voiced by President Obama in his State of the Union address.

Dear Mr. President,

In the State of the Union Address, referring to the health care reform proposal, you said: “But if anyone from either party has a better approach that will bring down premiums, bring down the deficit, cover the uninsured, strengthen Medicare for seniors and stop insurance company abuses, let me know.”

As a matter of fact, I do. It is life-cycle health risk insurance.

Prof. Ronald F. White, asked me, what exactly is “life-cycle risk insurance?”, LCHI in brief. My short answer was that it is:

1. Insurance, in its basic understanding, as a form of protection from big unexpected losses.
2. Life-cycle, as it would be a contract for lifespan of a person.
3. Common, as various LCHI programs would cover practically everyone.
4. Non-compulsory, as there would be no coercion into joining any particular LCHI plan, or not joining any at all.

Mr. President, it appears that it was your idea that the health care system reform could be accomplished only by a swift legislative action. In result, you became a hostage of the backroom Washington politics. If Washington politicians were capable to have this issue resolved, they would have it done long before you became President. Hence, the pace of the legislative process in Washington is not the pivotal issue. Having Americans involved and understanding what can and what cannot be done, is. I tried to explain this in my open letter, but judging from some of your remarks yesterday, it looks like that you still did not get it. You rightfully noticed that you did not make enough effort in explaining to Americans what you planed to do. I filled this gap by pointing out that you were promising pears on a willow tree, and by expressing my disbelief in lack of scientific methods in preparing the reform, and in debating it.

However, these are not the main reasons that the reform is facing so much opposition. In my view, shared by many Americans, your health care reform proposal had very little to do with health care itself. Your health care reform proposal appears to be an attempt of using health care crisis to change the American political system; it is not about health care at all. I am still puzzled if it was your conscious decision or it just happened this way; nevertheless, this is how I see it, and I am not alone in this perception. I expect you to address this concern heads on.

Life-cycle health insurance is a concept rooted in American political traditions of individuals’ freedoms and limited government. I worked on this concept in my spare time, without resources available to the Federal Government. Hence, my proposal may need some work before it could become a valid alternative to your proposal. However, it provides a concept proving that our health care issues could be addressed in the different way than politicians in Washington conceptualized it.

I am using terms as “politicians in Washington” with the purpose to underline that for someone far away from Washington, differences between Democrats and Republicans are hardly noticeable. I strongly believe that your health care reform proposal did not fail miserably at the very beginning, as it should, only because Republicans did not have any better ideas ; for the same reasons as Democrats prepared a lame proposal.

Mr. President, it is very important issue. Let us not waste a minute, and start from scratch. Let us ask ourselves what the ideal health care system should be. Let us debate what we can afford. Let us have more than one complex proposal on the table. Let us talk frankly about political concepts behind various proposals. Let Americans decide what they want, and tell it to politicians in Washington.

Six months after you presented your proposal, we have nation more divided than ever on this issue. How much further do you want to go on this path?


Henryk A. Kowalczyk

A version of this text was published by Huffington Post

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Will Republicans ever have a viable alternative to the public option?


The House health care overhaul bill passed not because Democrats prepared a good proposal but because Republicans showed amazing inability in presenting a viable alternative.

In particular, young and healthy people tend to not buy health insurance. However, without their contributions any health insurance system cannot work. Democrats address this issue, yet none of the Republican proposals does. Democrats believe that the government, in its wisdom, should command asocial citizens to purchase health insurance and severely punish those that do not obey. Republicans claim that they have alternative proposals of health care reform, but none of them even touch the subject of creating a system in which the majority of the young and healthy would buy health insurance out of their own will.

Health insurance policies, as we have them now, largely cover routine medical care. We pay a high monthly premium so that when, once a year when we see a doctor due to a bad flu, we pay a small co-payment instead of the full charge of around $100 per visit. This is not insurance at all: it is a health maintenance plan, something similar to the extended warranty plans offered for cars, TVs, refrigerators, etc. Most people do not buy these plans, as it is better to put some money aside and spend it when a major repair is needed than to pay for it in advance. Only a small portion of our current health insurance plans are true insurance, in that they cover the high cost of our major health problems. However, these plans last for only one year. If we acquire a chronic illness, at contract renewal it is considered a pre-existing condition. We cannot buy insurance for it; similarly, as we cannot buy insurance for the repair of a roof that is already leaking.

For people buying health insurance as individuals, the currently offered plans offer practically no insurance in the case of serious sickness. About 18% of the uninsured make more than $75,000 per year. They can afford to buy health insurance, but did not do so since they gain little or no advantage from it. Regardless of whether they buy health insurance or not, in the case of a major chronic illness, they quickly would be priced out of the insurance plan, and end up using government-sponsored programs anyway. Staying uninsured is a rational choice.

Individuals acting rationally in their best personal interest cause a malfunction of the current health care system. We can address this problem in two ways. We can use the government apparatus of compulsion to force young and healthy to buy health insurance, which they would not buy otherwise. This is what the Democrats are proposing. On the other hand, we can change the system in such a way that rationally acting, young and healthy consumers would buy health insurance without any compulsion. This is what the Republicans have failed to propose.

What we really need is life-cycle health risk insurance covering only expensive medical care. It should be common, but not mandatory. This could easily be obtained by giving a hefty tax break to people buying this basic insurance. For example, a two or three dollar tax break for each dollar spent, within certain limits.

This health risk insurance, in essence, would be a catastrophic health insurance, but designed to last for the lifespan of a person. It would step in and cover expenses above some predetermined per-year limits, cumulative limits for consecutive years, and cumulative limits over the person’s lifetime. For minor medical care and for preventive care people could pay as they do now. Some would pay out of pocket as needed. Some would sign up for health maintenance plans. Many would use Health Saving Accounts, which gained popularity in recent years, and would perfectly complement health risk insurance. The poor would continue using Medicaid.

Yearly health insurance contracts, as we have them now, are convenient for accountants at health insurance companies. This approach makes no sense for an individual who is interested in health care for the length of his or her life. The real choice we are facing is: should we use the government’s powers of compulsion to force individuals to comply with solutions well suited to health care industry bookkeepers, or should we spur competition within the health industry so they would provide products suiting the needs of the individuals they serve? Are U.S. citizens for the good of the health insurance industry, or is the health insurance industry for the good of U.S. citizens? This is the question for our politicians.

One might notice that the life-cycle health risk insurance, as outlined here, can evolve naturally into market driven health care for seniors, which could eventually compete with Medicare. Democrats want to constrain the rising costs of government run health care programs by even greater government involvement in the health care industry. Although rightfully criticizing this approach, Republicans have failed to produce proposals introducing private industry products competing with Medicare.

Life-cycle health insurance, as presented here, is just one possible market driven solution. Prof. John H. Cochran from the University of Chicago in his op-ed in the Wall Street Journal proposed Health Status Insurance as an umbrella insurance securing lifetime insurability in case of developing pre-existing conditions. Prof. Uwe E. Reinhardt in his Economix Blog mentioned the need of the life cycle health insurance. Without a doubt, one could find more ideas on how market driven solutions could bring affordable health care for most Americans. However, this is not what the Republicans are looking for. Despite the fact that almost every voice opposing the public option is asking for more free market in health care, there is no beef behind it.

One should not be surprised, judging by Republicans’ stance on other issues. In immigration reform, a topic lingering around the corner, many of those same Republicans are for more government involvement in controlling the labor market, a clearly socialistic concept. They decidedly oppose free market driven immigration policy. In their approach to the free market concept, most Republicans are like most Catholics on the official Church doctrine on sexuality: when convenient, they give some lips service to it, but in their hearts, they do not believe in it and do not practice it. Hence, it is very unlikely that Republicans will ever produce any health care reform proposal bringing free market ideas that worked so well, for example, in transforming the telecommunication industry. However, I wish, I am wrong on this prediction.

A version of this text was published by Huffington Post

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We need life-cycle health risk insurance


Among opponents of the health reform proposal, the public option draws most of their criticism. Pundits speculate whether Obama will drop it or not. All the energy put in debating the public option is futile. It misses the problem.

The problem is that we have 47 million uninsured. When they show up at the hospital door, we cannot turn them away for humanitarian reasons. We end up with many people using medical services but not paying for them. It causes high health insurance premiums for those who still have insurance, resulting with even more people who cannot afford to buy it. As the President once said, it affects all of us, and every one of us is just one job change away from losing health insurance.

What is most upsetting is being denied health insurance based on preexisting conditions. Life is a preexisting condition. We are denied insurance because, for the bureaucrats in insurance companies, a calendar year is a convenient term for an insurance contract. It has no correlation with the human life cycle. Instead of one-year health insurance, we need lifelong health insurance. One may notice that presently insurance companies do not offer policies of this kind. This is the core of the problem.

When scrutinizing health insurance policies as we have them now, one can almost say that they are not insurance policies at all. A big portion of them cover routine medical care. We pay a high monthly premium so that when, once a year when we see a doctor due to bad flu, we pay a $20 co-payment instead of the full charge of around $100 per visit. For all practical reasons, this part of a typical insurance plan it not an insurance at all. It is a health maintenance plan: something similar to the extended warranty plans offered for cars, TVs, refrigerators, etc. Most people do not buy these plans, as it is better to put some money aside and spend them when the major repair is needed than paying in advance.

Only a small portion of our current health insurance plans are indeed insurance, as they cover the high cost of our major health problems. However, for one year only. If we acquire a chronic illness, we are screwed, as we could be dropped at contract renewal based on preexisting conditions.

What we really need is a life-cycle health risk insurance covering only expensive medical care. After agreeing on this, we can debate if it should it be offered as a public plan or as private insurance. Waging a war over the public option before even agreeing what it should be is like debating something that we agreed to disagree on, without defining what it is. There is no chance for any constructive conclusion.

This health risk insurance would step in and cover expenses above some predetermined per-year limits, cumulative limits for consecutive years, and cumulative limits over the person’s lifetime. For minor medical care and for preventive care people could pay as they do now. Some would pay out of pocket as needed. Some would sign up for health maintenance plans. Many would use Health Saving Accounts, which gained popularity in recent years, and would perfectly complement health risk insurance. The poor would continue using Medicaid.

Lifelong health risk insurance could work only if it were common. However, in order to be common it does not need to be mandatory. We can make life cycle health insurance obligatory and punish those who would not obey, as we currently do with car liability insurance. However, despite the fact that most states require car insurance, we still have a meaningful population of uninsured drivers. Life is never as perfect as envisioned by bureaucrats. Hence, instead of a stick, we might use a carrot and offer hefty tax breaks for people who buy health risk insurance. This would require changes in the tax code, but we would stay within the established practice that health insurance premiums are tax deductible.

Many chronic and expensive to treat diseases are related to obesity, smoking, drug overuse, and generally unhealthy lifestyle. An insurance company providing health risk insurance would make a bigger profit if most of those they insured would lose weight, stop smoking, and start exercising regularly. Hence, they would make policies which promote a healthy lifestyle. The trick in reforming the health insurance system lies not in taking away profits from insurance companies, but in changing the paradigm in such a way that their greed would guide them to provide better health care.

It does not work this way now as too many regulations constrain free market mechanisms, giving too much advantage to those players who can pay their lobbyists the most. Many politicians, when approaching any problem, see additional government regulations as the only possible solution. It never even crosses their mind that some problems could be the result from previously introduced regulations, and that the best solution might be in eliminating some of the existing regulations, not in introducing new ones. Many people see the possibility of resolving or at least mitigating our major health care problems by removing presently existing constrains on competition.

This was not the point of view of the authors of the health reform proposal. Now, when the cards are on the table, support for the public option is fading away as opponents focus their critique on the government’s overreaching. On the other hand, vocal opponents advocate market based solutions; however, none of them has brought any comprehensive proposal as an alternative to the public option. If President Obama would limit the public option to basic life-cycle health risk insurance as outlined here, he can have the last punch in this heated debate. First, health insurance companies do not currently offer lifelong health risk insurance; hence – by definition – the public option would not compete with insurance plans offered by the private industry. Second, the onus in the debate would be shifted onto the opponents of the government proposal, as they would be asked to produce a commercial option for life cycle health risk insurance. Unless this happens, Obama may say, the public option is on the table.

A version of this text was published by Huffington Post

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Stone Age politics in the health care reform debate


Fans of the TV serial House, will notice that every time Dr. House diagnoses a problem he scrawls on a white board. In scientific terms, he creates a decision table.

When approaching any decision, we try to estimate the chances of reaching certain intended outcomes. Then we weigh them against our abilities and the costs of achieving them. In parallel, we try to estimate the costs and risks of unintended consequences. Even a simple decision, with a few variables, can quickly become a complex problem. Just by putting possible options and potential outcomes in writing, and – practically – drafting a basic decision table, we make it easier to comprehend. Wikipedia says it best: “decision tables are a precise yet compact way to model complicated logic.”

Barely anyone questions the need for health care reform; however, reaching a consensus on how to do it seems unobtainable. The debate turned into name-calling and shoving one’s agenda, focusing not on merit but on the loudness of the crowds at town hall meetings. Obviously, it is impractical to draw decision tables when writing an essay, when commenting on the internet, or when sending an email. However, one might expect that each voice would bring some arguments for or against the proposed reform, hence addressing one or more aspects of the decision table that every one of us drafts in our imagination.

At least this is what I thought in my naiveté. In reality, very few incurable optimists like me do it. My email address is on the mass mailing list at Organizing for America; therefore, every few days I receive an email related to health care reform. Some are signed by President Obama, some by his staffers. None of these emails has ever addressed any merit of the proposed reform. They are full of lofty talk about historical mission, about mean opponents spreading lies, and about the need for action. None of these emails explains how the proposed reform would resolve any of our problems. They did not provide me with any information intended to fill up my decision table. Nothing in their emails even indicated that they ever made any decision table when drafting their health care reform proposal.

Most vocal opponents of the health care reform proposal are not any better. It is about name-calling, it is about “death panels”, and it is about socialism. Decision tables are nowhere to be seen. In the country proud to be founded on reason, the major debate of our times is guided by feelings and emotions. In a country claiming world’s leadership in science, the scientific approach is absent in the most important debate about our future.

Talking about health care almost with everybody I can, I encountered someone working at Rockwell Automation. They claim that their Arena simulation software could be used for simulations of possible scenarios of different variants of the health care reform, as it is already widely used by the health care industry. I do not feel competent to verify this claim, but even if it is untrue, I bet that there are experts and simulation software out there that could do it.

Computers have been in commercial use for over half of a century. Among other things, they can easily compute, much faster than we could, the possible consequences of our decisions. Let me ask everybody: why do we not have simulations of the different options of the health care reform run back and forth in the public view, so we all could better comprehend what we are getting into? Why were not simulations run before the current health reform proposal was presented for approval? Why did not the opponents of this reform run these simulations? Why did not they arrive with simulations of alternative health reform proposals? If, in my business, I was faced with a decision of putting $1.3 trillion of my money at stake, I would allocate some time and money to run simulations giving me some insight into the possible risks and benefits of different options. Oops, as a taxpayer, is it not my money? Is it not my country? Is it not my right to see the results of these simulations, before giving my OK to any health care proposal?

When I read speculation about how the Gang of Six might affect the fate of heath care reform, I had to pinch myself to verify the world I live in. It is a world where society makes pivotal political decisions based on arms wrenching in the narrow circle of powerful. It is a world where mobs are called to action and brought to the public square to shout whatever they were told to yell. It is a world where a decision table is an invention thousands of years away from being discovered. It is a world without universities. It is a world where most people cannot conduct even a basic logical deduction. It is a world where Microsoft and Google are galactic distances away. It is a world where fears, prejudices, and other emotions dominate over reason. This is a Stone Age society in action. In this way, Americans decide the future of the health care in this country.

A version of this text was published by Huffington Post

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The debate about health care reform is not about health care

In the report, that the President received from his Council of Economic Advisers, beginning on page 13 and following, we can read:

At a fundamental level, the inefficiencies stem from the fact that health care is very different from conventional goods and services. The markets for health insurance and medical care are classic examples of markets in which asymmetric information is important—that is, where one party to a transaction is likely to have more information than another. In health insurance markets, asymmetric information can lead to adverse selection, whereby individuals who know they are likely to have high health care costs are more likely to seek health insurance. Information asymmetries also lead to moral hazard, where insurance coverage may insulate patients from cost consciousness and promote unnecessary care.”

For those who did not catch the ideological meaning behind this statement, let me explain that scientists noticed that the free markets are never perfectly free. Usually one party of a transaction has better information then the other one. For instance, a used car dealer can hide information about known defects. Car mechanics, plumbers, or physicians usually know better than their clients or patients what the best solution is. However, they might use this information for their financial benefit by recommending repairs or treatments more expensive than necessary. Similarly, a person buying health insurance may withhold information about existing illnesses. In extreme instances, there always will be people selling the Brooklyn Bridge, and they will find buyers. (Bernard Madoff almost literally sold the Brooklyn Bridge many times).

One can calmly look at this scientific observation, understanding that nothing is perfect on Earth. Ultimate perfection is in heaven, but aside from suicide bombers, no one is eager to go there voluntarily. Furthermore, one can see that in a small community the asymmetry of information is a lesser burden, as people learn fast about their dishonest neighbors. In a big city, one can endlessly prey on under-informed clients or patients. For this reason, we have many consumer protection laws. However, even the best legislation cannot protect people from their own negligence regarding getting information before entering into a contract. In the extreme, even if the government would take excessive measures to protect us from buying the Brooklyn Bridge, the con artists would prosper selling the Statue of Liberty.

One may notice as well, that with the internet, the customer or patient can easily find information about car mechanics, plumbers, or doctors. There is always a risk that in an emergency, we may have no chance to verify the information they feed us. However, this is only a small fraction of all consumer contracts, which include medical services as well. Nevertheless, we can complain afterwards, forming community pressure to discourage dishonest car mechanics, plumbers, or physicians from taking advantage of our misfortune.

There are people who do not believe in the free market. Some of them cling desperately to the information asymmetry that always exist in real life free market transactions, and consider this as an evidence of the systematic inefficiency of the free market system. For them it is scientific proof that the free market does not work and government involvement is necessary. At best, this is just a hypothesis that still needs to be verified in practice.

In practice, so far, the wealth and strength of America has been built on the concept of the free market. Hence, if someone wants to reform the U.S. on the opposite concept, that the free market does not work, that person has a lot of explaining to do. This seems not be of any concern of the Council of Economic Advisers. Without hesitation, they write:

In considerable part because of these market failures, government programs and policies play a large role in health care. This means that in many cases incentives are not determined by market forces.”

This report is not about what is wrong with our health care system and how to reform it. It is about using our health care crisis as an opportunity for promoting increased government regulation that would replace the free market, or whatever is still left of it.

There is a whole chapter (beginning page 16) stating that market failures lead to high numbers of uninsured. We know the names of the members of the Council of Economic Advisers. However, none of them put her or his name on the report. None of them wanted their academic credentials tarnished with ignoring the big elephant in the room, by dismissing the opposite view that the free market in health care failed not because of some of its innate shortcomings, but because of immense government interventions. The free market in health care failed not due to information asymmetry or adverse selections but because – for all practical reasons – it does not exist.

Our health care is heavily regulated, because our government cares about us. After all, health care is important. As a result, the health care industry became a quasi-monopoly, entangled with the government. Simultaneously, they enjoy both, the power of the wealth of private industry and the political strength of the government, as government is the largest client, paying for 46% of all health care in the country.

When complaining about the excessive profits of health insurance companies, about their greed, about denying service or dropping for pre-existing conditions, President Obama conveniently forgets that they do it because they can, as they have no competition offering better service. They do all these evil things because their lobbyists paid heavily for regulations allowing them to do so, free from competition. As government is the largest payer, the lion’s share of the money that lobbyists spend comes from overcharging the government at the first place. Just in the second quarter of this year, they spent $133,271,660.00 for lobbying. I did not spend a dime. How much did you spend? Our interests in Washington are represented according to these numbers. We can have our interests protected only by the free market, as the fewer government regulations we have, the less influence lobbyists can buy.

Alternatively to an increased government role in the health care industry, we may select the path similar to what we started in telecommunication in 1983 by breaking the monopoly of AT&T, and the deregulation of the industry that followed. With very limited government regulations, prices went down, quality improved, and affordability reached every nook of society. Should we at least consider using the same approach in addressing our health care crisis?

Just by reading the opinions presented at Huffington Post, one sees that many Americans distrust the free market and prefer more government intervention in the economy. In the health care reform debate, so-called liberals or progressives are for more government regulations, when the so-called conservatives are against it. However, in lingering around corner immigration reform, the many of the same conservatives are for more government involvement in controlling the labor market, which is clearly socialistic, when liberals are for less government control. This observation alone can raise suspicion that people voice their opinion for or against more government regulation not based on the good understanding how the free market operates, but based on ideological prejudices.

Observing people’s behavior, one can see that greed is a basic human trait. Most political systems around the world are built around a noble concept that greed of an individual should be circumvented for the good of the society as a whole. The American political system is an exception; it is built on the concept that the good of the society as a whole would be achieved the best when individuals have the freedom to pursue profits. This is how America became America. This is why our ancestors built such a powerful and rich country.

The debate about health care reform sometimes becomes so much irrational because it is not about health care at all. (Similarly, as the debate about immigration reform is not about immigration.) It is about the underlying concepts of our political system. Do we want to stick to the concepts that made America strong and rich? Or, do we want abandon them, and experiment with new political concepts? Do we want more of the free market or less of it? To the best of my reading of opinion polls, Americans are split half-and-half between these two options. This is our most important problem.

President Obama is right that the health care crisis can lead our nation to financial collapse. The bad news is that this is not the worst dilemma we face. Even worse is that no one is addressing our main problem directly.
A version of this text was published by Huffington Post

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The promise of pears on a willow tree

One week after posting my open letter asking for a concept in the health care reform bill, I received an email from President Barack Obama.

Several hours before my letter showed up on Huffington Post, I forwarded it to the White House, using the “contact us” form on their website. I thought that it would be nice to let them know about the letter before making it public. In the process, I revealed to them my personal email address. At this email address, I received a generic mailing from President Barack Obama a week later, with the subject line “What health insurance reform means for you”. Adding my email address to the White House spam list appears to be the only practical outcome of my open letter to President Obama.

At almost exactly the same time, I received an email from my acquaintance commenting on my text. Actually, he forwarded to me the same spam email from the White House with a comment, “Seems ok to me, what’s all the fuss about? It’s about time we check and take away control from the free market thugs who could care less unless you give them money.”

This email prompted me to look again at the message from Mr. President. Let us cite it here:

  • No discrimination for pre-existing conditions
  • No exorbitant out-of-pocket expenses, deductibles or co-pays
  • No cost-sharing for preventive care
  • No dropping of coverage if you become seriously ill
  • No gender discrimination
  • No annual or lifetime caps on coverage
  • Extended coverage for young adults
  • Guaranteed insurance renewal so long as premiums are paid

On a surface, it looks good. Actually, it sounds like a promise of Christmas every day of the year: too good to be true.

A pledge of no discrimination for pre-existing conditions prompted me to look into encyclopedias for definitions of insurance. It is a way of managing risk of unexpected losses. Therefore, by definition we cannot buy insurance to cover the repair of a roof after that roof began leaking. Trying to do this would be a fraud. One might expect that a Harvard Law School graduate knows it. Nevertheless, this is what Mr. President is promising us in his email.

Health care as an entitlement
In the first approach, health care for people with high treatment costs is secured by the government, and paid for by taxes. We have it partially now, as Medicaid pays for medical treatment for poor people. For others, it is a so-called “community benefit”, which mostly means hospital care for people who do not pay. We all pay for this later, in increased rates for people covered by Medicare or private insurance. If we select to continue this path, we could formalize what we now pay anyway, and agree that everyone should receive medical care in instances where the cost of treatment goes above some predefined levels that we would accept as being above affordability for most Americans.

When agreeing on this, we could notice as well that many serious health conditions could be dealt with better in their early stages. Hence, we would conclude that good everyday basic health care could save us a lot of money otherwise spent on emergencies and advanced stage illnesses. The final conclusion in this path of reasoning would be that health care should be a basic right of every American the same way as education is. This way we would end up with a health care system similar to the one in France now, where everyone receives health care when needed without worrying about any payments, as the government there pays doctors and hospitals as our government supports teachers and public schools.

Health care as a product
In the second approach, we would assume that health care is a service, similar to our home or auto repairs. This is how our current private health insurance works now. Unfortunately, it works imperfectly.

If we look closely into our current health insurance plans, at their core they are not insurance at all. Mostly, they are health maintenance plans: something that we could compare to an extended car warranty. They cover unexpected high-cost medical treatments, but only for the duration of the contract, usually one year. Therefore, if a bus would strike someone insured, all medical expenses, within agreed limits, would be covered. If someone would get a stroke, it would be covered as well. However, if such an event would result with a need for ongoing health care, this would be excluded form the renewed policy as a pre-existing condition, or would be covered by the policy collecting in advance an estimated cost of such medical care. People working for the government or large corporation would be more fortunate, as by a virtue of being a part of a large group, they would not feel the increased cost due to their preexisting conditions, as it would be dissolved in the large pool. Nevertheless, their rates gradually would go up as well, and eventually their employers would ask for larger co-payments. Small businesses would have premiums raised at the next policy renewal.

Sticking to the concept of health care as a commercial service, we can overcome the problem of preexisting conditions only by implementing a new product: a lifelong insurance against instances of catastrophic health deterioration. With the risk, that an insurance company might go bankrupt, people would buy this long term insurance only if it would be guaranteed by the government, in a similar manner as our currently government-guaranteed bank deposits.

Insurance companies issuing health risk insurance would notice that they would spend less for the treatment of the seriously ill if people would have better preventive and basic medical care. Consequently, they would be financially interested in promoting health maintenance plans, similar to those called now “health insurance.” Furthermore, recognizing the importance of health care, the government would continue its policy of tax deductions for buying health insurance, and could structure its policy in such a way that not buying health risk insurance would mean higher taxes. This way, without a mandate, we could have the prevailing majority covered.

What is better?
I have no intention to hide that, based on my understanding of how things work, I am convinced that we could have better health care at lower cost when treating it as a product, not as an entitlement. However, I have to acknowledge that systems built on the opposite concept can provide satisfactory results. For example, the World Health Organization named the French health care system as the best in the world.

My point is that these two approaches are not compatible. It is as with driving on the left or on the right side of the road. I have heard opinions why one is better than the other However, we cannot have both at the same time. President Obama claims that those Americans that are satisfied with their current health insurance would be able to keep it when others would go with the public plan. This promise boils down to the pledge that with his health reform proposal, some vehicles would be allowed to follow the right side road rule and some the left side rule.

We may debate endlessly which option is better. However, trying to combine them is the worst of the worst. It creates the monstrous apparatus with the wealth of the private industry and the political strength of the government. This hand in hand work of the government with the health care industry is the main reason for our current health care crisis at the first place. However, naming the problem is not an objective for President Obama.

It is striking that in the email from President Obama quoted above, we do not see a former university professor who could outline to us the essence of the problem, present the viable options, and tell us which one is better. Instead, we have a voice of an every day politician promising as usual what people want to hear, or – as a Polish saying goes – pears on a willow tree.

A version of this text was published by Huffington Post

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Where is the concept?

An open letter to President Obama regarding health care reform

Dear Mr. President,

I agree with your assertion that the health care crisis is an economic issue. We have the best doctors, the best hospitals, and the best drugs; however, they are out of reach for too many Americans. Costs have spun out of control. I commend your audacity in declaring this state of affairs as unsustainable, and your determination to reform it.

Three pages missing
I could not afford to read every line of the 1018-page document; nevertheless, I read the chapters deemed essential, and as many reviews as I could. I found three pages missing. Of those three pages, I expected the first to summarize your diagnosis of the current crisis, with an itemized list of the key causes. On the second page, I anticipated an outline of the solution that you selected. On the third page, I sought an explanation of why your solution is better than others. Instead, you threw at me 1018 pages of legal lingo, knowing that it would be physically impossible for me to comprehend all the provisions of this proposal before Congress will vote on it. I cannot speak on behalf of other taxpayers, but I found it disrespectful.

What is health insurance, and what should it be?
In my spare time, I conducted some personal research on the problem. In line with my engineering background, I tried to define the subject of my inquiry as a first step. To my surprise, I could not find a definition of the term “health insurance” in any U.S. government-issued document. I found definitions of “health insurance coverage,” “health benefit plan, ”and “health insurance issuer,” but the definition of health insurance itself was nowhere to be found.

In other words, Mr. President, you are initiating one of the largest social reforms of our time, putting about $1 trillion of taxpayers’ money at stake, on a venture that has an undefined subject. This puts you in the same camp as your predecessor, who in a similar manner, without defining the subject, started wars in Iraq and Afghanistan. In your defense, most of your opponents do not care to define health insurance either.

For the insurance industry, “health insurance” means covering claims within agreed limits for the term of one year. What is the value of this offer for a healthy individual who barely uses medical services? If after buying this insurance for twenty years, this individual will develop some chronic illness, this person will be priced out of the system due to preexisting conditions, unless he or she works for a large corporation or the government. What is the value of health insurance that will not cover a sickness when it becomes serious? It is no wonder that many people gave up on paying a premium for health insurance as it is now.

Thus the question is, what should “health insurance” be? The only health insurance that a reasonable person would like to have is lifetime health risk insurance. This insurance would include what we now call catastrophic coverage, would pay for expensive treatment of chronic diseases, and cover end-of-life care if needed.

Most presently sold health insurance plans include routine medical care. An average person sees a doctor once in a while due to a bad flu, skin rash, toothache, or cut finger. Those routine doctor visits are part of daily life, similar to our other unexpected expenses. Once a while, our refrigerator breaks and in short order we need to find some way to pay for the repair or replacement. Some of us buy extended warranty plans that pay for the repair in advance, and some pay for the repair when the refrigerator breaks. Similarly, some of us might prefer to buy health maintenance plans that pay in advance for those minor every day medical routines, some might prefer to pay out of pocket when the need arises.

One may notice that presently sold health insurance plans are a combination of one-year catastrophic coverage and a health maintenance plan for routine medical care priced accordingly to the health risk on the individual or a group. One of the ways of resolving our health care crisis is in separating these two products and treating them differently.

Why do some people not buy health insurance?
For people buying health insurance as individuals, the currently offered plans offer practically no insurance in case of serious sickness. About 18% of the uninsured make more than $75,000 per year; they can afford to buy health insurance, but did not do so since they gain little or no advantage from it. Regardless of whether they buy health insurance or not, in the case of a major chronic illness, they would be priced out of the insurance plan, and end up using government-sponsored programs anyway. Staying uninsured is a rational choice.

In your interview with Dr. LaPook, you stated that you would introduce an individual mandate, forcing those who could afford it into buying health insurance. You did not seem very concerned with the reasons why they did not buy health insurance in the first place. It took you only six months in the Office to acquire an attitude that our essential problems could be resolved by using the powers of the federal government to force Americans to do things that they do not want to do of their own will.

Freedom of choice or compulsion?
As a society, we decided that it would be inhumane to leave a sick person with no care. Out of compassion, we provide charitable care, which in the end increases the price of health insurance premiums (for those who buy health insurance), and the cost of government-run healthcare programs. Now, we have reached a point that where all agree that something needs to be done about it.

There are two schools of thought for obtaining social goals. One is in using the power of the government to mandate what is believed to be the right thing and then enforcing this under the compulsion of the government apparatus. You seem to be leaning toward this approach.

I prefer a different method, based on finding out what people want and then letting them do it by eliminating obstacles. I might be wrong, but it is my assumption that most uninsured Americans would like to have the comfort of carrying decent health insurance. Furthermore, the minimum they really want is health risk insurance, providing lifelong coverage in case of accidents, chronic illness, and end-of-life care. Jumping ahead of your possible answer, we do not need a government run insurance company. People would gladly buy this kind of insurance from existing insurers as long as the government could guarantee portability of these sorts of plans in the case of the insurer’s bankruptcy. Therefore, there would be a role for the government, albeit very limited; this is rather as the Founding Fathers preferred.

This health risk insurance would form a legal framework for what we already do: subsidize health care for the poor, unfortunate, and socially misfit. With this understanding, Americans would accept so-called “community rating” for this very basic insurance, meaning that the wealthy would subsidize the poor, the health conscious would pay more to cover for the higher health risk of the obese, drunks, and smokers.

Statisticians can calculate the probability that I will live healthy until the age of a hundred and then one day not wake up, incurring no medical expenses. Similarly, there is some probability that tomorrow I may acquire some medical condition that would require expensive medical treatments for decades to come. Somewhere between those two extremes, there is a number of dollars per insured person, which the insurer would need to have on hand in order to stay solvent. Health risk insurance would build a cash-accumulating account associated with an insured individual, intended to cover the costs of expensive medical care. If the funds are not used during that person’s lifetime, they become available for use by others in the pool, whose costs of medical care exceed the money accumulated in their accounts.

When providing someone with health risk insurance, the insurer would be interested in keeping the insured in good health, so it would offer health maintenance plans suitable to preexisting conditions of a person or a group. Furthermore, the insurer would be interested in invoking more health-conscious behavior in its reckless customers. If an insured person decides to switch his or her health risk plan to another provider, the cash associated with his or her account would go with that person. Before letting this cash go, insurers would make an extra effort to find a health insurance plan suited to the situation of that person.

By giving a tax credit matching the health care premium of a current decent health insurance plan, there would be no need to mandate the purchase of health risk insurance. In fact, not buying this rudimentary health risk insurance would mean a cash loss for most taxpayers. Those who are too poor to pay income tax would receive a voucher for health risk insurance.

This approach would leave room to downsize, and maybe even phase out completely, the current government-run health care programs, releasing some of the cash needed to underwrite the start-up of the health risk insurance plans.

Additionally, the health risk insurance plans, as outlined here, would create mechanisms pushing down the costs of health care. However, more factors cause costs increase.

Why have health insurance premiums become so high?
With many healthy people not buying health insurance, the premiums go up for those who buy. However, this is just one, but not the main, reason for the skyrocketing costs of health care.

Currently, whoever gets health insurance as a job benefit or government entitlement (Medicare, Medicaid, VA or TRICARE), milks it to its limits, as he or she does not feel a connection between the price and service obtained. Third parties pay 86% of the medical costs of people with health insurance. Neither those who receive nor those who deliver health care are concerned about the price. With the pool of people holding good health insurance shrinking, doctors and hospitals are inclined to get busy providing whatever profitable treatment they can justify when they seize a patient with a good health insurance. Skyrocketing health care costs are the obvious and logical consequence.

When criticizing the current system, some say that the mess we are in proves that, in the case of health care, the free market system does not work. Facts prove the opposite. The government, both on federal and state levels, is so over-concerned with the quality of health care that Americans receive that it heavily regulates the whole industry.

Heavy-handed licensing restricts access to medical practice, limiting consumers’ choices. After all, in many urgent cases people go to the emergency room not because of the severity of their sickness, but because they cannot find a family physician who could see them. Mr. President, please help me understand how a government-run insurance plan would resolve this problem.

As you correctly pointed out in your speeches, in some states the costs of health care went up much more than in others. You indicated that, under your administration, the government would get busy finding the reasons for these differences and would create policies reflecting this. I have another suggestion. If I live in a state with high health care costs, and if insurance plans offered in another state are more suitable for me, I would like to be able to purchase my health insurance plan from this other state. Presently, state regulations do not allow me to do this. Mr. President, could you increase my freedoms by helping me in eliminating these restrictions? This would create competition between states, pressing down the price of health care, without any work from the federal government.

Excessive hospital care costs often make splashy points in debates on health care. However, if I could find a way of providing hospital care for the half the price that existing hospitals charge, I would not be allowed to do so. Before opening a new hospital, I need to obtain a “certificate of need” from my state. There, a few state bureaucrats, heavily lobbied by the owners of the existing hospitals, would deny my petition on the grounds that the beds in the existing hospitals are not fully utilized, hence no new hospital is needed. They would conveniently overlook the fact that the resources of existing hospitals are not fully used because many people who need their services cannot afford them. With the prices cut in half, my hospital would not only provide health care for some of those who cannot afford it now, but would also put out of business the expensive hospital, lowering health care costs for everybody. Mr. President, could you help me by getting rid of “certificate of need” regulations?

Critics of the current system often cite instances of hospitals charging hundreds of dollars for an item that one could buy for a few dollars at Walgreens. They forget that there are two parties in every transaction: a seller and a buyer. The seller might ask for the moon, but as long as the buyer does not accept the price, nothing happens. Instead of focusing on sellers asking excessive prices, I would shift attention to buyers accepting them. The U.S. government pays for 46% of all health care costs through its programs, and is the largest buyer of health care services. Therefore, it has the power to set prices. In plain language, greedy doctors, money-seeking hospitals, and profit-thirsty insurance companies do not set the prices of health care. The prices are set by what their largest customer, the U.S. government, agrees to pay. Mr. President, I have difficulties in comprehending how a public insurance plan run by the government can help us in resolving this problem.

In the previously mentioned interview with Dr. LaPook, you said that you want to create a public insurance plan in order to discredit the arguments of skeptics who claim that “government is widely inefficient and can never have anything done.” Let me suggest to you that you can prove these skeptics wrong in a much simpler way, without creating a new government entity. For all practical purposes, the government is already in the health care business. Within the last ten years, the costs of both Medicare and Medicaid have roughly doubled. If within the next year you can reverse this cost escalation, one year from now I will look favorably at your idea of creating a public insurance plan.

What is the purpose of business?
Most Americans who have health insurance have it selected and in large part paid for by their employers. This appears to be the American way of handling it. Although, if personal freedom and the right of each individual to pursue happiness are core American values, then health insurance chosen and paid for by corporations is downright un-American. It means undignified patronizing. It is limiting someone’s freedom of life through an essentially not business-related dependence attached to the employment contract.

This practice started during War World II when employers offered extra benefits to attract workers, circumventing government-imposed wage limitations. It is a relic of wartime government intervention into the economy. What is the rationale behind expecting an employer to select and pay for the health insurance of his or her workers, and their families? The purpose of business is making a profit by selling its product. The government takes its share of this profit, and in exchange provides the infrastructure for business to function. It pays for law enforcement, it monitors the education of youngsters, and guarantees technical infrastructure – water, sewers, roads, postal service, electricity, phone lines, etc. The government takes care of these essential services by administrating them itself or by regulating and closely monitoring businesses that provide these services.

Is it too much to ask that a business be able to select its workers from a pool of people healthy enough to do the job without having to take into account the cost of their insulin injections or the cost of healing the broken bones of their children? Should not the health of the public be a part of the infrastructure like water, sewer, education, and national security? And obtained in a similar manner?

Mr. President, please give me one good reason why my employer should buy me my health insurance. Should he select the plan suiting his personal preferences, or mine? Should he include abortion in the plan, and – indirectly – force me to pay for it, despite the fact that I consider it morally wrong?

Nevertheless, most small business owners work extended hours struggling to survive. You plan to drop one more administrative task on their shoulders. Forcing businesses to provide servitude in a kind of administrative work, which should be handled by the federal government, is an ungracious tax.

Lastly, forcing business to pay health insurance will affect their bottom line, especially in the current economic downturn; prices and unemployment will go up. With one hand you hand out money to stimulate economy, and with another you take it back.

Mr. President, I heard you say on several occasions that abandoning the routine of employers buying health insurance would create disruption that you are not ready to accept. Unfortunately, this is the essence of the current problem. If anything is worth changing, this is. Real change always causes disruption. If you cannot endure it, please call off your promise of change.

How urgent is it?
Americans are fed up with the current health care system and want speedy reform. On the other hand, the reform we need to make is at least a few decades past due. How much more damage will we suffer if the current system remains unchanged for another year? How much damage can we cause if we pass a reform that is not well thought out and contains provisions that many Americans disapprove of?

By creating obligations affecting every American, this reform touches the basic values of our political system. It is much more than who pays for health care and how. It is about what core American values, as defined by our Founding Fathers, mean to us today. I find it deeply disappointing that you put so much energy in pressing for a speedy legislation process, avoiding discussion on the concept behind your health care reform proposal.

This text can serve as an outline of an alternative concept of health care reform. Maybe it is worthless, as I do not have the wisdom and resources available to the federal government. However, before considering your proposal, I would like to see at least one, preferably two alternative proposals, equally detailed as yours is. Furthermore, I would like to have at least several weeks of public discussion of the pros and cons of the presented proposals. Out of this process, Americans will support one of them.

By following this regimen, you, as President, would be able to take credit for the best health care reform plan that American people were able to bring up. Unfortunately, as it is now, one can get the impression that it is less about fixing the health care system but more about implementing certain political concepts shared by some present leaders in Washington. This ideological leaning is prevalent in the report prepared by your Council of Economic Advisers. According to my unscientific observations, about 50% of Americans do not share ideological leanings of your advisers. In preparing your health care reform proposal, you dismissed their views and the American tradition behind them.

It is your call Mr. President; in selecting the health reform plan you have to choose between political beliefs on one side, and a cold analysis of facts on the opposite side. It may take a little longer than we all would desire. However, it is worth some extra time and effort, because, in its very essence, the current debate is not about health care. It is about America defining itself at the beginning of the 21st century. What does it mean to be an American here and now? What do the fundamental concepts of individuals’ freedom that led to the original rise of America mean to us today, and do we care?


Henryk A. Kowalczyk

A version of this text was published by Huffington Post

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