The problem isn't government, or private industry, or any other entity involved in the process. The problem is that any business sector built entirely on a third-party payment system is doomed to fail simply because there is no longer any "free market" involved at all. I apologize for the lengthy post, but if you have the patience to read through it I would highly recommend it (it's taken from a post I made on another thread on this same subject some time ago) . . .
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The basic premise of any insurance policy is the transfer of risk from one person to another (or to a group of people). If I am concerned about wrecking my car, I buy an insurance policy on the car and pay my insurance company to agree to pay the costs of repair (or full replacement) in the event I get in an accident. Insurance companies make money by accumulating a large pool of clients, and essentially making the very good bet that the number of times they actually have to pay out on claims is very small in comparison to the total number of policies they have on their books. In other words, the risk of a single driver getting into an accident (or the cost to the individual driver) may be substantial, but the risk of more than, say, 1% of the drivers in a large group getting into an accident in any given year is actually small.
The key, of course, is that most forms of insurance "work" for society as a whole because the nature of these insurance policies is such that the frequency of claims for any individual policy holder is very low. Many property owners will insure their homes, for example, even if they know that there is a 99% chance that they will live there for 40 or more years without filing a single claim. They're paying for the peace of mind that comes with the knowledge that someone accepting the risk of a catastrophe.
Health insurance is the exact opposite, for it is the one type of insurance where everyone involved in the process (policy holders and insurance companies alike) know from Day 1 that claims are going to be filed with such boring regularity that it makes almost no sense to even call it "insurance" anymore. If you filed three or four claims every year on your auto insurance, then your insurance company would either dump you as a customer or decide that it's cheaper to buy you a car and hire a driver to get you around. But somehow we have such an entitlement-based mentality about medical insurance that we are appalled by the notion that an insurance company just might not want to do business with you, or might want to limit their financial exposure by refusing to pay the full price that doctors charge for their services. Government is no different than insurance companies in this regard. They both function the same way because they are third-party payers who are not directly involved in the delivery of the service in question.
Some other fatal flaws with medical insurance and government involvement are as follows:
1. Insurance claims don't adhere to typical economic principles of supply and demand because there are three parties to every transaction, not two. This is not a serious problem with something like life insurance because there a finality about death that makes the claims process and the aftermath much more clear, but for health and property/casualty insurance it introduces a potential flaw that often rears its ugly head. If I crash my car and file a claim, we have three parties to the transaction who operate under conditions that do not apply to a "pure" economic transaction . . . 1) I have already paid for the insurance, so I really don't care how much it costs to fix the car -- I want the best parts, best service, etc.; 2) the insurance company doesn't have to drive the car around, so it doesn't really care about the quality of the repair and is perfectly willing to accept something that is sub-standard by my standards; and 3) the body shop is dealing with two "customers" who have two different goals in mind in the transaction. This three-way dilemma also applies to medical insurance, and is why the problems in medical insurance are almost identical to the problems many states have encountered in auto insurance (including Mitt Romney's state of Massachusetts).
2. Medical insurance is the only type of insurance that is pretty much an open-ended financial commitment on the part of the insurance company or government agency. In agreeing to pay your medical bills, an insurance company or government agency has no control over how complex medical procedures will get over time, and how advanced technology will become in the future. So they always find themselves spending more and more money on what is "normal care" -- because the definition of "normal care" is always changing (upward, of course) and getting more expensive over time. Imagine how expensive your auto insurance would be if you drove a $10,000 sub-compact car, but had the ability to have it replaced by a $200,000 Rolls Royce. That's basically the way the medical industry works -- and why the whole system is falling apart.
3. All insurance carries what is called a "moral hazard," which means that people with some kind of coverage (government-paid or private insurance) will tend to behave in certain ways simply because they know that the insurance is there to protect them. A person with a brand-new car is likely to be a far more careful driver if he has no collision insurance, and a person with no medical insurance of any kind (even government-funded care) is more likely to keep himself in relatively good health (I'll leave hereditary/genetic conditions aside, since they aren't relevant to this point). It is no coincidence that the incidence of almost every physical and mental pathology has risen dramatically since people have been covered by medical insurance plans of one kind or another.
The problem is that any business sector built entirely on a third-party payment system is doomed to fail simply because there is no longer any "free market" involved at all.
This is very true. This genesis of the explosion of third party payments in health care started in WWII. It was for employers to get around wage controls. Again, because of government, a cancer was allowed to evolve -- the third party payment system.
In a truly free market system, the third party payment system would never have evolved.
Here is an 5 minute video from Milton Friedman Milton Friedman on Market-Based Health Care
I come from the school of thought of our Founders -- "hostility towards government" I would rather have the flaws of the market system rather than the corroding and destructive solutions of arrogant elites in government.
Again, thank you for your interesting post. I think we mostly agree.