How government ruined the US healthcare market. Part 3: the 80/20 rule

"Everything government touches turns to shit." – Ancient proverb

First, let’s remember that the primary problem with the U.S. healthcare system is the outrageous prices charged by healthcare providers. The U.S. healthcare industry operates under the "regulated capitalism" model, which means it is riddled with monopolies, oligopolies, and labor cartels - all of which are enforced by the filthy government. Thanks to these restrictions on competition and supply, healthcare in the U.S. is absurdly expensive.

In this post, I want to address a particularly stupid piece of government regulation: the 80/20 rule, a gift from Obamacare. This is from the video linked at the bottom of this post:

"The data revealed so far are shocking: Not only do prices for the same test or procedure sometimes vary between hospitals in the same city by 1,000 percent or more, but some health plans are charged four, five, or six times more for the same procedure at the same hospital. That’s right: Not only can an MRI at one hospital in Boston cost a quarter of what it costs at a hospital down the street, but a person getting that MRI at the same hospital might pay 75 percent less than someone else—depending on which health insurance plan they have. Two people, at the same hospital in New York City, getting the same surgery from the same surgeon, can be charged $3,000 in one case and $15,000 in another.
How can that be? Why would health insurers paying the higher prices (sometimes ten times higher) tolerate such a thing? Aren’t they supposed to negotiate the best rates to keep their costs low and our premiums under control?

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The answer is the 80/20 rule, courtesy of Obamacare. Here's how the government describes it:

A basic financial measurement used in the Affordable Care Act to encourage health plans to provide value to enrollees. If an insurer uses 80 cents out of every premium dollar to pay its customers' medical claims and activities that improve the quality of care, the company has a medical loss ratio of 80%. A medical loss ratio of 80% indicates that the insurer is using the remaining 20 cents of each premium dollar to pay overhead expenses, such as marketing, profits, salaries, administrative costs, and agent commissions. The Affordable Care Act sets minimum medical loss ratios for different markets, as do some state laws.

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Sounds good, but it's actually very bad.

In every other insurance market, paying out more in claims is bad for the insurance company. Auto and property insurance companies do everything possible to reduce claims. For example, auto insurers lobbied for seat belt laws and drunk driving laws because both reduce accidents, which lowers payouts. But the idiotic 80/20 rule of Obamacare flips this logic on its head. To see why, consider the following two scenarios:

Example 1:

A health insurance company receives $40 million in claims.
Since claims must make up 80% of total revenue, next year, the company may charge $50 million in premiums.
The remaining $10 million (20%) is for overhead, profit, executive salaries, and bonuses.

Example 2 (Healthcare Costs Double):
Suppose the cost of healthcare doubles, and the company receives $80 million in claims.
Since claims must make up 80% of total revenue, next year, the company may charge $100 million in premiums.
The remaining $20 million (20%) goes to overhead, profit, and executive salaries.

See the problem? Under this government-mandated scam, the higher the claims, the more money the insurance company makes. Obamacare turned health insurance into a cost-plus business, where insurers are financially incentivized to let healthcare costs skyrocket. Insurers don’t care about medical costs because higher costs means bigger profits in the long run. Hospitals and doctors are happy as they can just keep raising prices because insurers don’t push back.

This is a natural result of regulated capitalism: insurance companies and healthcare providers win, while the sick and dying patients lose.

Edit: one objection might be that employers and individuals still shop for lower premiums, which provides some downward pressure on costs. However health insurance is regulated at the state level, which drastically limits competition to a few big players.

The only thing that will stop the advance of healthcare costs is to stop all further advances in biomedical science and technology. Fortunately, President Trump is on top of that.

Maybe we can go back to doing it the way we did it when American government was small: blood leading. It was cheap and kept costs down.

You can really see where implementing MLR minimums in 2011 ruined health care.


Average Annual Growth

Holy Mother of God