The Redistributions and Distortions of the Health Care Market

A while back I talked about the health care and health insurance market and how it is the result of tremendous government regulation.  There are portions that involve competition, but they are limited by a variety of matters, including large distortions from licensing, regulation, tax exclusions, and government provided health care.

The matters are so complicated, it is hard to get a handle on it.  The transfers and redistributions are significant and hard to follow.  But it is worthwhile just attempting to describe some basic aspects of this sector.

One take on what is happening is the following story.  It is my sense that this is accurate, but perhaps some people in the know will disagree with it.

We start with Medicare and Medicaid.  These are government operated programs of health services for the elderly and the poor respectively, but it is recognized that they pay low reimbursements, especially to hospitals, with some claiming that they reimburse less than their costs.  As a result of the low reimbursements, hospitals end up charging less to Medicare and Medicaid, but attempt to make up the difference by charging even higher rates from private employer provided health insurance.

This will increase the costs of employer provided health insurance, redistributing income from employers and workers to the government and those on Medicare/Medicaid.  Employer provided health insurance also redistributes in another way.  It charges young and old workers (and healthy and poor workers) the same amount, even though their expected costs are quite different.  The high costs paid by employers on behalf of their younger workers, however, are compensated by another redistribution – the fact that employer provided health insurance is excluded from income taxation.  The redistributions appear endless, going to taxpayers from employers and then back from taxpayers to employers.  What could possibly justify this craziness?

If hospitals and doctors charge employer provided health insurers higher rates to compensate for the low rates paid by Medicare/Medicaid, why do these insurers pay those rates?  Wouldn’t competition lead them to refuse to pay excessive rates?  This is a good question.  The answer appears to have its source in limits on competition and regulation.  Regulation has reduced the number of health insurers, so that they may be able to make excess profits.  Consequently, they can still make money even if they are overcharged by providers.  In addition, it may be that state regulators will be displeased if the insurers do not help out the hospitals and other providers, and the state regulators may reward these insurers in other ways for providing the assistance to providers.

These aspects of the health insurance sector all existed prior to Obamacare.  Obamacare may have changed some things, but it generally just increased the amounts of the redistributions.  For example, the health insurance exchanges have involved redistributions from taxpayers to people with lower incomes and from taxpayers to insurers (through payments that appear to have been made illegally to insurers).