John C. Goodman

Two recent items in the news help illustrate why this approach is so wrong. In one, The New York Times reports:

The brothers, Philip and Joel [Levy], earned close to $1 million a year each as the two top executives running a Medicaid-financed nonprofit organization serving the developmentally disabled.

They each had luxury cars paid for with public money. And when their children went to college, they could pass on the tuition bills to their nonprofit group.

Philip H. Levy went as far as charging the organization $50,400 for his daughter’s living expenses one year when she attended graduate school at New York University.

That money paid not for a dorm room, but rather it helped her buy a co-op apartment in Greenwich Village.

In the other story, The New York Times reports that Blue Shield of California will voluntarily limit its profit to no more than 2% of revenues — no doubt anticipating that government regulators were going to force that result anyway.

Think about those two examples. Almost everybody in health care agrees that many of our biggest problems stem from the way we pay for care. And who is paying? Insurance companies.

The $800 billion is almost all funded by third-party payers. So another way of stating the social problem is: we need to find newer and better types of third-party payment.

Let’s suppose that an insurance company contracts with Bill Gates for the hypothetical software described above. By using it, the insurer will cut its spending by one-third and add that amount to the bottom line. This would be good for numerous reasons: the elimination of wasteful spending would improve the quality of care for patients, reduce the chance of medical errors, free up resources for use by other patients and encourage every other insurer to find ways of achieving the same outcome.

But under ObamaCare, the software will never be invented, never be purchased and never be used. Why? Because under the new health law it will be impossible for an insurer to cash in on that innovation.

Under the new law, large health insurance companies have to pay out as much as 85% of their premium income in the form of benefits. The remaining 15% has to cover all sales and administrative costs plus brokers fees and if anything is left that’s what the insurer gets to keep.

The insurer with Bill Gates’ hypothetical software would have to rebate its profit to enrollees in the form of lower premiums. Thus, no insurer will be able to profit from major cost-reducing discoveries. Nor will any insurer even try. Instead, insurance companies will function like utilities, taking no real risks and making no radical changes in their current business model.

ObamaCare has ensured that our health care problems will not be solved by stifling innovation in the one sector of the market that most needs vigorous entrepreneurial activity.


John C. Goodman

John C. Goodman is Senior Fellow at The Independent Institute and author of the widely acclaimed book, Priceless: Curing the Healthcare Crisis. The Wall Street Journal and National Journal, among other media, have called him the "Father of Health Savings Accounts."