Perverse Incentives

Col#214-9/6/24

PERVERSE INCENTIVES
By
Richard Davis

In a recent article in vtdigger it was noted that Vermont health insurance rates are among the highest in the nation. Just another painful fact for people to digest who live in a state that is also among the highest for property taxes.

Subsidies do lower the cost of insurance for many Vermonters who pay, on average, $243 a month for an individual marketplace plan. The article describes many of the details about the costs of health care but the only important information comes at the end of the piece when Mike Fisher, Vermont’s health care advocate, states, “Many of us have been looking at this health care financing ‘not-system’ – the way we finance care- have been saying for a number of years that it’s unsustainable and that it can’t possibly continue. But it feels like we’re in a much more acute stage of that.”

So why are things so expensive when it comes to health care? It’s a complex situation but there are a few issues that can be teased out. If you look at how we use health care in this country and who pays for it many of the answers become clear.

It doesn’t matter whether a hospital or a provider is for-profit or non-profit. They all have to guard the bottom line and they have to try to remain solvent. In order for any provider, whether an institution or an individual, to remain solvent they need volume. That means that a hospital needs to have a lot of customers, meaning they make more money when people are sicker and when people have more surgery and when people have more diagnostic tests.

All of those providers want to make people healthy, yet they can only thrive in a climate where people are sick and seek out medical care as much as possible. That is perverse incentive #1. One of the solutions to this problem is for an entity such as state or federal government to provide a hospital with a global budget. They receive a negotiated amount of money every year to operate. If they spend too much they take a loss and if they spend less than allotted they keep the difference. But this is only a very partial solution.

Then there is perverse incentive #2. Very few people can afford a product known as health care. The only way that the majority of Americans can afford health care is to buy health insurance. The insurers are in the business of balancing risk against loss. The more people use their insurance the more money the insurance company loses.

It is in the best interest of insurers to incentivize their customers not to use their product. Insurers can only remain solvent if they have a balance of customers between young and healthy people who rarely use insurance and those who have many chronic diseases and use insurance frequently.

In a small state like Vermont it is difficult to have enough people who buy insurance or utilize health care in order to have the economy of scale that big cities and larger states have. We will always struggle to remain solvent. That does not imply that larger entities do not struggle to remain solvent, but they generally have larger profit margins, although most are still slim.

In order to have a health care system that makes sense financially and that does not have to fight perverse incentives, states and/or the federal government have to become the only insurers, as is done with Medicaid and the VA system. Sadly, Medicare is being taken over by private insurers and that program may end up in the vicious cycle of perverse incentives.

Until health care is no longer a commodity to be operated within a free market system we will continue to be able to have our pockets emptied by health care providers and insurers. Nothing new, but we need to be reminded of this from time to time.