Why is the cost of
Health Insurance so High?
Many ideas have been presented as answers to this question,
some with merit and some with no merit
at all. Some answers are based on the political position a
so called expert wants to exploit; However,
there are a significant number of studies and research that
give us the major reasons for the huge
annual increases.
The reasons fall into six areas.
- First , out of control lawsuits are crippling not only the
health care industry but many other
industries as well. In an unrelated area you might ask; “Why
does an $18.00 step ladder cost
$75.00?” Look at the number of stickers on the ladder. Most
of them are warnings on how to use
the ladder and how not to use it. The stickers are intended
to limit lawsuits that either have been
brought against the manufacturer or to limit future
lawsuits. They only reduce the cost of the
potential damage. The cost of the ladder must have the
litigation costs built in so the company
can stay in business. Only in the U.S. are lawsuits so out
of control.
But how does it affect Health Insurance costs?
Only 2.5% of lawsuits go to a jury or court verdict. The
rest are settled out of court. The trial
lawyers know this and know how to work the system.
An example;
Assume a person believes they have a reason for a lawsuit
because of some medical problem.
They contact an attorney to determine if a lawsuit can be
brought against the doctor, hospital or
nurse. (Many times it is the attorneys contacting them,
especially when they see the dollar
amount potential for a class action lawsuit) The attorney
may see some merit but often knows it is
a questionable case that will probably be lost. This however
is not a deterrent in the U.S. The
attorney files a lawsuit against the doctor / hospital,
knowing they (the attorney) has absolutely no
liability. The attorney sues for $ 10 million. The insurance
company representing the doctor or
hospital believes the lawsuit is frivolous, but they also
know they will spend $ 1 million in court
costs. The Insurance Company offers a settlement of
$600,000, not because the doctor or
hospital is guilty, but because even if they win the cost of
defense is greater than the cost of
the settlement. Insurance companies are “For Profit” and
like any profitable business, they want
to cut their losses.
Attorney’s who bring these lawsuits know this, and many of
the 97.5% of lawsuits settled out of
court are easy paydays for the attorney. A recent VP
candidate, John Edwards made millions with
these types of lawsuits. The claim by these attorneys that
they are helping the poor who cannot
afford good representation is bogus. The increased cost of
insurance to settle the lawsuits pushes
more low income families out of health insurance then the
lawsuits serve. More importantly, if
the intent was to help low income families why are'nt the
attorneys putting their millions in a
fund to help low income families buy health insurance?
Now a note of caution; there are many legitimate medical
lawsuits that are settled out of court
and have sound merit; however, the vast majority of medical
lawsuits do not.
The trial lawyers and their political supporters like to say
that lawsuits account for only 1% of the
costs of Health Care and Health Insurance. The fallacy is
that they are only counting the lawsuits
that have a verdict reached by a judge or jury.
The real direct cost of lawsuits, both those reaching a
verdict and those settled out of court
is 9% of the total health care costs. Consequently the cost
of malpractice insurance continues
to go up for doctors and hospitals.
- Second , the cost of malpractice insurance must also be
considered as part of the health care
costs. The cost of insurance varies by state depending on
the laws of the state. In some states the
cost of malpractice insurance can account for as much as 50%
of the cost of doing business as a
doctor or hospital. It has become so expensive that many
states are in a crisis situation where the
doctors are refusing some services and hospitals are closing
emergency rooms. Some doctors
simply close up and move to states with more favorable
rates. This is the direct result of poor
legislation by the state elected officials who do not want
to upset the lawsuit applecart.
The 1% pointed to by the trial attorneys can now grow to 59%
in some states.
- Third ; On average Obgyn doctors are sued three (3) times
a year. What is the cost to the
doctors who must spend their time at trial, doing
depositions, interrogatories and such?
Doctors want to spend their time with patients and now they
are being prevented from doing so.
Because they spend so much time in litigation, they have
less time to practice their profession,
making less money and consequently being forced to raise
their prices to pay for their services.
In more and more cases doctors must choose to raise their
costs, choose another specialty or stop
practicing medicine. Some studies estimate the increase in
costs due to less time in front of
patients adds as much as 25% to the fees that would be
charged if the doctors were able to spend
more time with patients.
Now, how much have the lawsuits added to health care costs?
Again, it does not stop here.
- Fourth , Doctors and hospitals in an effort to limit
lawsuits have started practicing “Defensive
Medicine”. Doctors are being forced to order un-necessary
tests simply to protect themselves.
Tests cost more money, and again the cost of health care and
insurance goes up. Some estimates
are as high as 10% in additional health care costs for
additional tests.
As we can see the cost of lawsuits reaches far beyond those
that reach a verdict.
What is the solution?
One law could significantly reduce the costs. Create a law
that simply states, “If you sue and
lose, you pay the costs for both sides.” Frivolous lawsuits
would stop and the legitimate ones
would go forward.
- Fifth, the cost of prescription medication is out of
control in the U.S. Prescription drugs now
account for as much as 50% of the annual increase in Health
Care costs in the U.S. This is
because U.S. citizens pay the majority of the cost for
research in the prices they pay for their
drugs. But, this is not the only reason. The drug companies
in the U.S. spend 14% of their costs
on research and 31% on marketing.
The drug companies want you and everyone else to run into
their doctors office and demand a
drug they saw advertised on TV. There may be less expensive
alternatives or you may not need it
at all, but you are convinced because you saw it on TV. In
Canada the marketing of drugs is
limited which is one of the reasons prescription drugs are
less expensive.
In addition, drug companies spend large sums convincing
doctors to prescribe their drugs using
bonuses, offering free trips and putting some doctors on
their payroll so they will prescribe the
drugs in their practice and convince other doctors to do the
same.
Are new drugs important? Absolutely! The question is, why is
the U.S. paying the majority of
the costs?
Another note of caution. The drug companies employ many
people in the U.S. If we limit the
price of drugs, thousands of jobs may move to other
countries where the cost of research will be
much less. U.S. drug companies need to compete with
companies in other countries just like any
other business. Some countries offer no protection to
patents developed in the U.S. such as
China. Companies in non-protective countries can easily copy
the drugs and offer them at a much
lower price than the cost of developing the drug itself.
What are our legislators doing to change
this situation? It depends on how much the drug lobby is
contributing to their campaign.
The shortage of vaccine is a direct result of our litigious
society. The profit on making
vaccines is extremely low and companies are simply not
willing to make a low profit vaccine and
then be faced with multi-million dollar lawsuits that will
cost millions to defend.
Is there an easy solution? Probably not.
One solution may be to limit the price of drugs in the U.S.
to no more than 25% higher than
the average price for the rest of the world. This coupled
with a guarantee of jobs not moving
out of the U.S. or some similar law may help stem the costs.
- Six , each state passes laws regarding health insurance.
This results in a confusing myriad of
state laws that are more and more difficult to follow. The
state laws dictate what a health
insurance carrier can and can not do in offering health
insurance programs. Some states have
become so restrictive that fewer and fewer companies are
willing to compete for business in the
restrictive state. In many cases the legislators thought
they were helping their citizens but instead
they created an environment that drives out the insurance
carriers. The legislators in effect create
more of a crisis because the costs go up and fewer
individuals and employers can afford the cost
of those carriers willing to stay in the state. The governor
of Michigan, Jennifer Granholm, in an
effort to continue the big budgets of the past (when the
automotive industry was in its heyday) is
now proposing additional taxes on the insurance industry
which will further increase the cost of
insurance in an already depressed state economy. State
legislators continue to pass law after law
based on a few facts instead of attacking the root of the
problem.
In summary,
The first and most critical need in lowering health care
costs in the U.S. is lawsuit reform.
This is by far the biggest reason for the increase in Health
Care costs in the U.S.
A recent proposal by one of the major political parties to
create a board of trial lawyers to oversee
the lawsuit dilemma is like asking the fox to watch the
chickens. As previously stated, a simple
law that states, “If you sue and lose you pay the court
costs for both sides”, will greatly reduce
the frivolous lawsuits.
Secondly, we must get the cost of Prescription Drugs under
control. Limit the marketing that
drug companies can do (whose costs are passed on to the
consumer) and establish a formula that
sets prices at a percentage of the prices charged by the
drug companies in other countries.
Third, the country does not need national health care; it
needs a set of laws that allow
companies to compete for the consumer dollars and protects
the consumer from fraudulent
health insurance scams. Even now there are many fraudulent
schemes that are never prosecuted
because the state and national legislators are more intent
on passing laws that limit
legitimate companies than punishing fraudulent companies.
Where is the political glory when a
politician cannot get on stage and claim they are doing
something for the little guy? There isn't
any, consequently they push through laws and ideas that do
more harm than good.
The governor of California is now proposing universal health
care for everyone in California.
Who will manage the system? (Another bureaucracy ripe for
misuse and corruption?) Who will
pay the costs? (Responsible wage earners and profit
producing small businesses?)
In Michigan, Blue
Cross Blue Shield wrote legislation and duped four
legislators into introducing the legislation in the State
House. The Legislation in effect eliminates all competition
for BCBSM. The goal of BCBSM is to force a form of national
health care on Michigan with them as the administrator and
only provider. This will only drive taxes up and push more
business out of the state.
Jobs moving overseas.
Why are so many jobs moving overseas? Not only are the costs
of Health Care going up, but also
the cost of doing business in general due to litigation.
Most Companies who call the U.S. their
home are faced with moving jobs out of the country to remain
cost competitive or simply closing
up. The World economy and competitors from other countries
force them into these decisions.
Lawsuit reform in general along with lower health care costs
would significantly reduce the
cost of doing business in the U.S.
And lastly, tell legislators to stop making laws that only
add to the confusion and cost of
healthcare.
If you would like to comment, please send us an e-mail. We
will post all responses at the end of
this document as they come in. You must include your full
name and not use profanity or
personal dispersions.
Revised 12/20/2006
YOUR COMMENTS
10/05/06
Dear Sir,
I am in complete agreement with your thoughts on high
insurance costs.
A significant % of the costs are associated with law suits,
which is
wasteful for the US economy and very troublesome for the
healthcare industry.
It is unfortunate that the US legislators will be swamped
with special interest
lawyer groups opposing real reforms.
There is so much money at stake, for the lawyer lobby, that
I doubt they couldn't buy their
position and keep our current wasteful laws intact.
Thanks for sharing your thoughts.
Vic
Northville, MI
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