In an earlier editorial, I sought to point out that health care is directly related to personal health choices. Health care specialists agree that half of our personal and national health care costs could be eliminated if Americans made rational lifestyle choices. In a free society, people may to choose to smoke, drink, eat and exercise as they choose. My question was, who should pay the health care costs associated with the risks brought on by those choices? Now I want to turn our attention to the cost of health care insurance.
Companies who provide insurance do so as a business. Consider the most common types of insurance - auto, homeowners and life. The consumer is paying in advance for costs that may occur in the future. The price he pays varies with his risk profile. A 50-year old smoker does not expect to pay the same life insurance premium as a 25 year old non-smoker. A driver with speeding tickets, who texts while driving, drives intoxicated and has multiple accidents does not expect to pay the same auto insurance premium as a careful driver. People who choose to live in the path of hurricanes or in flood zones know that they will have to pay higher home owners insurance. There are no tax payer subsidies for people whose choices increase the probability that they will require a large payout.
Whether you think they should make a “profit” or not, to stay in business, insurance providers must cover their costs. Insurance, like any other product has well-defined cost components. Cost of goods sold (the actual payouts on behalf of policy holders) makes up about 70 percent of the total costs. These payouts have three components. First, the likelihood that the policy holder will need the service. Second, when the payout will be required. And third, how large the payout is likely to be. This is what high school math students know as “expected value.” Insurance mathematicians (actuaries) calculate statistical probabilities for hundreds of categories of policy holders and thus the COGS. Even without profit, total premium revenue must cover these costs plus 30 percent overhead. If the coverage expands to include people with higher risks, the premiums must go up to cover basic costs. Again, the question is who pays for the higher risk people? Some propose that those with healthy lifestyles should pay the costs of those with unhealthy lifestyles or that those with higher incomes should pay for those with lower incomes. Some propose that the additional cost is borne by the individual whose choices create the greater risk. There are also combinations of these.
It has been said by some that the new ($1 trillion) costs can be covered and actually decrease the costs of health care insurance, decrease the costs of health care delivery and increase the availability and quality of health care for every American family. The idea seems to be that this can be done if we just remove self-serving “profit” (often equated with avarice) from both health care delivery and health care insurance, by creating either a highly efficient, comprehensive national health care system (where insurance, doctors, nurses, hospitals are basically public), or some form of large taxpayer-subsidized nonprofit alternative that will provide “competition” to the free market providers.
I have genuine doubts about either of these options achieving the promised goals. While I have great appreciation for those who serve in the public sector, there are not many public agencies that operate more efficiently and effectively than their marketplace counterparts. NASA, Congress, the Post Office, Medicare, Social Security, the SEC, Amtrack, education, the military all come to mind. Private university education, for example, compares favorably with our best public institutions.Yet, the fundamental cost of a public education is the same as the cost of a private education. At a public school the taxpayer pays 70 percent of the cost, whereas at a private school, the customer pays 70 percent of the cost. In Oklahoma, a Ph.D. from Duke will be paid $90,000 at one of our quality state universities to teach history to classes of 130 students. A Duke Ph.D. teaching history to 30 students per class at a private school may be paid $55,000. I am sure I don’t need use the salaries of coaches to show that public options don’t necessarily reduce the costs of personnel.
Several research studies suggest that when organizations, private or public, do not derive operating revenues from operating services, but have a ready source of subsidy, they rarely achieve their budget goals and almost never move toward greater efficiency. It may be that some form of government health care system could be efficient, but to date the preponderance of the evidence does not support the idea.
Editor’s Note: This guest editorial is offered by John Cragin, a member of The News-Star Guest Editorial Advisory Board. He also is CEO of Vertical Learning Curve and adjunct professor at OBU. The views expressed by our guest editorialists and guest columnists are theirs, and do not necessarily reflect the views of the News-Star’s management.
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In an earlier editorial, I sought to point out that health care is directly related to personal health choices. Health care specialists agree that half of our personal and national health care costs could be eliminated if Americans made rational lifestyle choices. In a free society, people may to choose to smoke, drink, eat and exercise as they choose. My question was, who should pay the health care costs associated with the risks brought on by those choices? Now I want to turn our attention to the cost of health care insurance.
Companies who provide insurance do so as a business. Consider the most common types of insurance - auto, homeowners and life. The consumer is paying in advance for costs that may occur in the future. The price he pays varies with his risk profile. A 50-year old smoker does not expect to pay the same life insurance premium as a 25 year old non-smoker. A driver with speeding tickets, who texts while driving, drives intoxicated and has multiple accidents does not expect to pay the same auto insurance premium as a careful driver. People who choose to live in the path of hurricanes or in flood zones know that they will have to pay higher home owners insurance. There are no tax payer subsidies for people whose choices increase the probability that they will require a large payout.
Whether you think they should make a “profit” or not, to stay in business, insurance providers must cover their costs. Insurance, like any other product has well-defined cost components. Cost of goods sold (the actual payouts on behalf of policy holders) makes up about 70 percent of the total costs. These payouts have three components. First, the likelihood that the policy holder will need the service. Second, when the payout will be required. And third, how large the payout is likely to be. This is what high school math students know as “expected value.” Insurance mathematicians (actuaries) calculate statistical probabilities for hundreds of categories of policy holders and thus the COGS. Even without profit, total premium revenue must cover these costs plus 30 percent overhead. If the coverage expands to include people with higher risks, the premiums must go up to cover basic costs. Again, the question is who pays for the higher risk people? Some propose that those with healthy lifestyles should pay the costs of those with unhealthy lifestyles or that those with higher incomes should pay for those with lower incomes. Some propose that the additional cost is borne by the individual whose choices create the greater risk. There are also combinations of these.
It has been said by some that the new ($1 trillion) costs can be covered and actually decrease the costs of health care insurance, decrease the costs of health care delivery and increase the availability and quality of health care for every American family. The idea seems to be that this can be done if we just remove self-serving “profit” (often equated with avarice) from both health care delivery and health care insurance, by creating either a highly efficient, comprehensive national health care system (where insurance, doctors, nurses, hospitals are basically public), or some form of large taxpayer-subsidized nonprofit alternative that will provide “competition” to the free market providers.
I have genuine doubts about either of these options achieving the promised goals. While I have great appreciation for those who serve in the public sector, there are not many public agencies that operate more efficiently and effectively than their marketplace counterparts. NASA, Congress, the Post Office, Medicare, Social Security, the SEC, Amtrack, education, the military all come to mind. Private university education, for example, compares favorably with our best public institutions.Yet, the fundamental cost of a public education is the same as the cost of a private education. At a public school the taxpayer pays 70 percent of the cost, whereas at a private school, the customer pays 70 percent of the cost. In Oklahoma, a Ph.D. from Duke will be paid $90,000 at one of our quality state universities to teach history to classes of 130 students. A Duke Ph.D. teaching history to 30 students per class at a private school may be paid $55,000. I am sure I don’t need use the salaries of coaches to show that public options don’t necessarily reduce the costs of personnel.
Several research studies suggest that when organizations, private or public, do not derive operating revenues from operating services, but have a ready source of subsidy, they rarely achieve their budget goals and almost never move toward greater efficiency. It may be that some form of government health care system could be efficient, but to date the preponderance of the evidence does not support the idea.
Editor’s Note: This guest editorial is offered by John Cragin, a member of The News-Star Guest Editorial Advisory Board. He also is CEO of Vertical Learning Curve and adjunct professor at OBU. The views expressed by our guest editorialists and guest columnists are theirs, and do not necessarily reflect the views of the News-Star’s management.
