Bermuda’s national health care issues are indeed numerous (eg, access, pricing, coverage, funding etc) and one of the Island’s biggest fiscal drains. Rapidly rising healthcare costs undermine the all-important confidence of small and medium-sized businesses, costing jobs and ultimately economic growth. The debate has recently focused on “who is without” and “who pays for what”, and not the more important aspect of actually lowering overall healthcare costs. The free market, however, could go a long way to solving some of the major flaws in the system.

Game Theory and Rent Seeking

Two of the major problems associated with most healthcare systems, not just Bermuda’s, involves non-cooperative game situations (“game theory”) and manipulation of economic activities to the detriment of the majority (“rent seeking”). A couple of simple examples should help clarify these concepts.

You and most consumers of healthcare are currently incented to consume and use as many services as possible regardless of the true economic merit. It is in your best economic interest to max out on more elective services to get the “full benefit” of the services you pay for in premiums. Unfortunately, if we all maximise utilisation levels, costs escalate.

It would be great for all of us to use as little as possible in the form of healthcare for the benefit of the whole but since we have no idea what everyone else is doing, you maximise your own usage. The socially optimal equilibrium is a system where we all know we all use only the health care services that we actually require. Unfortunately at the moment we feel someone else is milking the system and using more services than they require and we individually feel that we should too. This leads to a socially sub-optimal equilibrium where participants use as many services as they can to get the most benefit from their premium, and the total amount of health care services used is far greater than what is optimal. So in this case, in order to reduce the total amount spent on health care, the solution would be having a health care system that incentivises individuals to be conscious of consumption and use.

The other example is when a small group of service providers benefits from inclusion in insurance packages at the expense of the wider group of premium payers. So as to not discriminate on any particular service provider let’s use the example of a mythical “toe-tapping”. Let’s assume toe-tapping is great for fixing injuries caused by running. Ten treatments are provided in a standard health care package per year. Now this is great for competitive runners but for the 90 percent of the rest of healthcare premium payers this added service offers no incremental value.

In fact 90 percent of premium payers are now subsiding ten percent of the population’s competitive runners. Clearly this minor but additional cost is not efficient but the toe-tappers will lobby hard to ensure this service is a standard benefit even if it is not in the best interest of the majority. The solution, again, is tying the cost to the benefit.

Crank Up the Co-Pay and/or Deductibles

First we need to simply define what insurance actually should be. Generally, insurance in its various forms exists to protect against “catastrophic” events, life insurance for death, fire insurance for fires, etc. Unfortunately, Bermuda’s health insurance system has evolved from “insurance” into a “service” that both protects against catastrophic events AND includes additional maintenance benefits.

Imagine, for example, if Bermuda car insurance policies were similar to health care policies. In this case not only would car insurance insure against catastrophes such as auto-collisions but would also include maintenance features such as car washes and mechanical visits. What do you think would happen? Policy holders would be incented to get their car washed and engine serviced as often as was permitted. The size of the car wash and mechanic business would increase far beyond what it would be otherwise.

Because each policy holder paid a hefty premium for this extended coverage they would feel highly incented to use as much as they possibly could. In order to compensate for these escalating costs to the insurers (due to increased or over-usage) insurers would need to charge higher and higher premiums.

Unfortunately this is what is happening in Bermuda’s health care market. Policy holders who pay huge premiums feel that they better use as much as they can even if some of the maintenance claims aren’t necessary. If we want to “bend the curve” of escalating cost this incentive system needs to change.

We need to reform health insurance towards a true insurance programme (ie, mainly coverage for catastrophic health events). Free market costs accruing to patients, particularly on maintenance issues should be allowed to rise.

Insurance co-pays, and deductibles should increase significantly forcing each insured to discriminate between health issues which are actually maintenance (and less costly to address outside of insurance) and those which require official professional intervention (and insurance). This would lead to overall insurance premiums coming DOWN as health insurers will have reduced costs of paying for maintenance events.

The chart above shows health care prices relative to overall consumer prices. They have risen steadily for years. This is because the demand for health care services has been so strong (and supply has not come in with greater competitive pricing). As long as insurance covers “any and all” health issues, why not go to the doctor (or the emergency room where you pay nothing) for a scratch or a gash? Indeed, how much would window washing cost if it was fully covered under the homeowner’s policy? As more of the cost of “maintenance health care issues” gets passed to policy holders, the demand for overall health care services should slow overtime and diminish healthcare inflation.

If we let the “invisible hand” and free market pricing convert our health care insurance to a real insurance programme (one which really insures only against catastrophes), it will help to improve one of the biggest problems in Bermuda — rapidly rising health care prices.

Undoubtedly, many of the Island’s other health care issues still need to be addressed in future years. This is simply one aspect to consider. Our system still focuses on coverage and payment. It does not focus on the more important longer-term solutions to why Bermuda faces unaffordable costs or how to prevent health problems.

The ultimate solution will revolve around a push to promoting overall health and wellbeing, especially focusing on reducing chronic, and in most cases preventable, conditions such as diabetes, heart disease, and obesity.

Ultimately, individual responsibility for health, lifestyle and wellbeing needs to be encouraged. One of the best ways to do this, of course, is to have people incur a cost for non-compliance. If we can let free-market forces incent individuals to be more conscious of cost and use insurance mainly for catastrophic events we can slow the upward spiral in health care prices.