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Is It Time For Mega-Cap Tech To Enter The Healthcare Insurance Business?

The US healthcare system doesn’t work very well. While the American system arguably has the best talent and best care all-around, reining in costs has been a major and ongoing problem.

For one, Americans as a whole don’t have the healthiest habits with a significant portion of the population deemed overweight or obese, far in excess of other developed countries.

Second, the mandates, regulations, and taxes subject to US businesses are the highest in the developed world. Malpractice insurance is through the roof for US physicians due to the lack of adequate tort reform.

Since the Affordable Care Act (ACA) was enacted in 2010, a more government-controlled system has placed mandates on insurance companies that have forced them to price policies increasingly higher in order to render them profitable. If they can’t feasibly do this, then they have no choice but to pull themselves from the exchanges, limiting competition, choice, and only exacerbating the conundrum.

Senator Ted Cruz (R-TX) introduced an amendment to the Senate healthcare plan that would better enable the free market to dictate how health insurance plans provide coverage options. Democrats and centrist Republicans may fear that pre-existing conditions won’t be adequately covered. Moreover, insurers, working with less subsidized markets, may be forced to increase costs on riskier customers, which may result in public relations issues.

In general, there is no reason a free market solution can’t be reached with respect to health insurance in the same fashion as the concept works in auto insurance or any other product or service market in and outside of insurance. But given the idea that health insurance has such gravity attached to it for obvious reasons and the notion that it should act as an entitlement such that nobody is financially ruined due to an illness of any form, it’s become a heavily bureaucratic and partisan issue.

For those who want a centrally planned healthcare plan, one issue is the cost. Once a good becomes “free,” there is more demand for it, effectively driving up the true cost even more, progressively burdening public funding. Entitlements already constitute nearly 60% of the federal budget, and the US has accumulated $20 trillion in debt, which leads to lower financial flexibility, higher taxes or spending cuts in the future, and lower expected peaks and troughs in the business cycle.

The next issue is the inefficiency (and perhaps constitutionality) in forcing individuals to buy a product/service that they don’t necessarily want or need. I disagree with the notion that everybody needs insurance. It’s helpful for the sake of mitigating tail-risk, but for those who are otherwise healthy, paying out of pocket is probably okay.

Moreover, costs necessarily need to remain below the amount paid for insurance in the first place, otherwise the entire solvency of the program doesn’t work. This is true whether it’s orchestrated via taxpayer funds or the private market, as the laws of economics don’t apply differently in either case.

Does the healthcare insurance market need disruption?

The US healthcare insurance market is highly political and bureaucratic and is probably a good target for disruption due to the various inefficiencies inherent in it. The barriers to entry in the health insurance market aren’t so high that large-/mega-cap tech players can’t penetrate. Both Amazon (AMZN) and Google (GOOG)(GOOGL) have the technology, influence, and retail capability to move health insurance into more of an actual marketplace driven by supply and demand forces.

Both of these companies also have the potential to provide decision support tools and offer individually customized plans that render them attractive both on the side of coverage and overall expense. This would be similar in concept to Netflix uprooting the traditional cable industry by selling customized content over a plan where most of what’s provided is unneeded, disregarded, and overly expensive.

The concept of a free market in health insurance may never transpire to the same extent as in other insurance markets (auto, home, natural disaster, renter’s, etc.) – it depends on who’s in charge politically – but Silicon Valley ingenuity can push the vast majority of the market in that direction.

With the cost of entitlements gradually squeezing the budget and progressively growing the debt and secularly strangulating the economy, eventually some of this expense will need to be off-loaded into the private sector to avoid a Japan-like scenario down the road.

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