Monday, February 22, 2010

Incentives, Incentives, Incentives

Our loyal readers may have noticed a recent increase in the amount of posting to the blog. The reason is simple; our wise conservative leadership has put an incentive program in place for posting. Nothing big, but now I have a real reason to post.

The heathcare industry suffers from the same ailment as the lackluster blog of last semester – no incentives to do good. In fact, the system incentivizes bad behavior. If you insurance covers something that isn’t worth the cost but may benefit you, it is in your interest to go for the extra test (or whatever) because you don’t pay the cost. To be fair, this is a problem with the mechanisms of insurance.

The troubling part is how few politicians grasp this idea of incentivizing good behavior.

Health savings accounts are tremendous cost savers. They combine catastrophic insurance with a savings account which is funded by pre-tax earnings and can only be used to healthcare. Users of these accounts suddenly care whether or not they receive the generic or expensive drug. People care about keeping their costs low. There is an incentive to not spend more money than one needs to on health (namely, you can put less money in your account next year).

Any government plan is the worst form of incentivizing possible. Say you ask for a $300,000 procedure on a government plan. With ~300 million people, that would only cost you one tenth of one cent because your cost is distributed across all taxpayers. Thankfully the public option seems to be off the table.

Private industries have a great incentive to run things efficiently (more earnings). Every person or corporation is just going to try to maximize their gain in the current system. Our high costs of healthcare, then, are not a problem with the insurers but a problem with the system they operate under.

The current system incentivizes employer based healthcare by allowing it to be purchases with pre-tax earnings. (Thankfully health savings accounts are a step in addressing this problem) This is an awful incentive because it means the unemployed become uninsured; it removes purchasing power from individuals; it removes choice of insurance from individuals, and lessens competition among plans.

There are further examples of bad incentives which need to be addressed (e.g. since hospitals can charge each insurer different prices for the same procedure, large providers have a monopoly on the industry because of the leverage they have negotiating with hospitals) but the moral of the story is we need to change the current incentives we have in place. And for a stunner of a conclusion, I have some hope that the current plans will do that (mostly because they will set up insurance exchanges and will not use a public option).

Let’s hope the republicans don’t forget about the good things in healthcare reform.

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