Tag Archives: principal-agent problem

Understanding the Health Care System

One of the worst parts of the current health care system is its sheer complexity. Because most of the payments are made by third parties, the paperwork burden is enormous. Co-pays, deductibles, ever-shifting networks, and so on. Unfortunately, that complexity is about to get a lot worse because of this year’s health care bill. Check out this flow chart of what the health care system will look like once Obamacare is implemented:

You can also download a PDF version of the chart that allows you to zoom in more closely. It’s worth taking a few minutes to look at all the agencies and bureaucracies in greater detail.

This chart was released by Rep. Kevin Brady, a partisan Republican. But whatever your politics, you should be wary of any scheme as grandiose as Obamacare. This represents a re-ordering of one sixth of the American economy.And not only is the government tasked with making this flow chart flow smoothly. It is also tasked with fighting two land wars in Asia. With delivering the mail. With developing new energy technologies. With overhauling the nation’s entire financial system. No organization can do all those things and do them well. Doesn’t matter how talented and well-meaning the people behind it are. It is beyond the limits of anyone’s ability to plan.

As Dan Mitchell points out, real health care reform would have just two parties to most transactions: buyer and seller.

There are two other things I’d like to see. One is that health insurance should not be linked to your job. Under both the current system and Obamacare, if you lose your job, you lose your insurance at exactly the time you need it most. This can be done by treating employer-provided insurance exactly the same as individual insurance in the tax code. Employer-provided insurance is currently given special treatment.

Real reform would also fundamentally change the way we use health insurance. The purpose of insurance is to insure against unexpected risks. Your annual physical does not fit that description. Having insurers pay for routine, expected expenses is like using your auto insurance to pay for a tank of gas and a car wash. No wonder premiums are so high. Health insurance isn’t really insurance. It’s pre-paying for your health care. And it also has one whopper of a principal-agent problem that explains a large portion of why health costs are so shockingly high.