Friday, February 26, 2010

The Health Insurance Iceberg

The world is not run by those who are right. It is run by those who can convince others that they are right p 37

When you're debating something as big as health care reform, it seems that there are two sides that have each decided on a solution, and they simple report the numbers to convince others that they have the "right" solution.

Government Provided Health Care
For example, one solution is for a complete takeover of health care by the government. This side reports the high costs of medical insurance, excessive executive compensation, etc. The logic for government provided health care goes something like this:

1. Because of high costs, too many American's don't have health care.
2. It's the moral responsibility for a rich nation to assure all citizens have access to health care.
3. Therefore, the government should provide health insurance for all American's.

I've tried hard to come up with a valid syllogism to fit this argument. The form of a syllogism is:

All X is Y
All Y is Z
Therefore, all X is Z.

"All" can be replaced with "Some" or "No".
"is" can be replaced by "is not".

In order to be a valid argument, the premises need to be valid and the syllogism needs to be valid.

Valid Premises, Invalid Syllogism = Invalid Argument
Some health care is provided by the government
Smart people have health care
Therefore, smart people get their health care from the government.

In order for this to work, any value of X,Y and Z should work:
Some X is Y
Z is X
Therefore, Z is Y

To show how this is flawed, try:
Some lawyers are crooks.
Pres. Obama is a lawyer.
Therefore, Pres. Obama is a crook.

Another example (if you see no fallacy in the last example)
Some whites are racists.
Nancy Pelosi is white.
Therefore, Nancy Pelosi is a racist.

Valid Argument, Invalid Premise = Invalid Argument
Everyone deserves affordable health care.
Only the government can provide affordable health care (Invalid).
Therefore the government should provide health care for everyone.

Valid Argument, Valid Premise = Valid Argument
All health care for American's is _________
All _______ is health care provided by the government
Therefore, all health care for American's is provided by the government.

For those pushing government provided health care, a middle term is needed to make both premises valid. Good luck!

The Free Market Solution

For full disclosure, I am a proponent of the Free Market, but some of the arguments on this side are weak. For example, in response to the attack on health insurance companies, the health care reform opponents say that the we spend about $2.5 trillion ($2,500 billion) on health care in the U.S. each year and that the executive compensation ($10 million and up) is pennies. Also, the average profits for health insurance companies is only about 5%, which ends up being less than $20 billion per year (not even 1% total health care cost). Very compelling numbers! The Free Market wins! Or does it? (I think this is a fallacy of invalid contrast or misuse of statistics).

A closer look at the numbers (see table below) shows that the top 10 health insurance providers have total annual revenues of $253 Billion or 10% of all of our health care costs.

Total Revenue
UnitedHealth GroupUNH38.1910.443.6687.144.2%
Health NetHNT2.450.4815.713.1%
Coventry Health CareCVH3.3814.10.2413.91.7%
Universal AmericanUAM1.18.340.134.852.7%


While these revenues represent exchanges for goods or services, none of these goods or services actually represent health care. For example, a policy that costs $8000 (rough estimate of annual cost of insurance), the amount breaks down as follows (If we assume that all U.S. health care is paid by claims against insurance - which it isn't).

$7200 Medical Claims paid out ($8000 minus 10% or $800 of insurance company revenues)
$760 Operating costs (buildings, utility bills, salaries, etc.)
$40 Profit of 5% on the $800

The opponents of government provided health care say that the $40 profit on a $8000 policy is nothing. The problem is that this is a flawed argument used to counter another flawed argument. Insurance profits are only the tip of the iceberg. The rest of the "insurance" iceberg is the $760 per person it costs to run the insurance company.

The flawed argument here is:
1. Insurance company profits and executive compensation are only 5% (True)
2. Insurance company profits are an even smaller percentage of total health care costs (True).
3. Therefore, insurance companies are not the problem with out of control health care costs.

This is either the fallacy of the excluded middle (total insurance costs) or of irrelevant contrast.

Why is Health Care so expensive?
My hypothesis is that government measures that attempt to improve health care has the unintended consequences of interfering with the free market feedback loop.

Here's where I expose my strong bias against publicly owned/traded companies.

Privately owned - focus on making customers happy by increasing quality of products and services while reducing prices/costs.

Publicly owned - focus is split between making customers happy and making stock holders happy. Increasing revenues is the only way to make stockholders happy.

Regulation on health care companies and another focus to both types of companies: how to satisfy government rules and regulations. For public companies, no amount of regulation is going to reduce the stockholders demand for growth. Limiting preexisting conditions, guarantees for uninsured, etc. all reduce revenue growth and therefore force premiums to go up.


Insurance companies are a larger contributor to rising health care costs than free market proponents will admit. The reason that insurance companies are a problem is due to government intervention and market growth demands that squeeze out the consumers needs.

The way to shrink the "iceberg" is to find ways to help private companies compete against the public companies. This will only work if many of the regulations that the government has imposed to "fix" health care are changed so that market forces can help melt the rest of the "iceberg".

Only the government thinks that cutting a foot of the bottom of a blanket and sewing to the top will make the blanket a foot longer.

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