Health Insurance Isn’t Insurance

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Steve Olsen started a discussion about healthcare at THE UTAH AMICUS (I’m looking forward to part II) by asking: Is “free market health insurance” a nonsense phrase? He then identifies two issues that we must face head-on if we are to have any hope of actually pursuing a solution to this problem.

We hear a little about “this is how I’m going to pay for it” in these proposals, but very little of “this is how I’m going to eliminate waste, fraud and excessive profits”. Most independent studies have estimated between 25 and 40 percent of America’s health care dollar is spent on things other than actually providing care. . .

Not only that, improving the cost efficiency of health care has become an economic necessity. Consider Chrysler Corporation. In 1998, Daimler Benz paid $38 billion to purchase Chrysler, and earlier this year, essentially paid Cerberus to take it off their hands. Why? To escape the billions of dollars in unfunded health care obligations to employees and retirees. Basically, a major American manufacturing company was driven to insolvency because America expects employers to foot the bill for health care, something no other major industrial country does.

It is interesting that everyone seems to know that inefficiency in the system needs to be removed and yet there are no concrete ideas being presented on how to do that by any of the candidates spouting their proposals. The last time I wrote about health care I said that we need consumers to become sensitive to the costs of health care services rather than being sensitive to the costs of insurance premiums. Steve’s post reminds me that most Americans has even been insulated from the costs of insurance premiums until the last decade or so. Free markets promote efficiency but we are not going to have a free market for health care until we address the second issue that Steve discusses. (This is true no matter what Health Insurance Connector Authority we may decided to create.)

I believe one thing that hamstrings our efforts to improve health care is our insistence on using the word “insurance”. Let’s look at the dictionary definition of insurance: “A means of indemnity (transferring the responsibility for loss) against occurrence of an uncertain event.” Using the conservative definition of socialism, insurance is essentially socialistic, since it transfers personal responsibility to a larger group in society. The characteristic that allows insurance (in the traditional sense) to work in a free market system, despite being socialistic, is the fact that the event insured against is both uncertain and undesirable. . . Except for isolated cases of fraud, the undesirability of the event being insured against means collection of the benefit will not be abused.

Is health care a proper fit for the insurance paradigm? There are instances of catastrophic illness or accidents that meet the definition. But, in general, most consumption of health care services is neither uncertain nor undesired. We want that daily dose of Lipitor to keep our cholesterol down. We purposely conceive children and consume the health care services necessary to bring a new baby into the world – and we also consume birth control medicine to avoid pregnancy. Whether the illness is diabetes or bi-polar disorder, health care is often a matter of planned consumption where strong and significant consumer demand exists for the product.

People should be allowed to choose the kinds of plans that currently pass as health “insurance” but we need to wake up to the rigged system that we are working with. Insurance companies make it more expensive for doctors to operate and consumers pay that price. Worse yet, patients who don’t have insurance are charged higher prices to compensate for those extra costs because the insurance companies set their own prices on what they will pay for various treatments and office visits. This may be financially beneficial in the short run, but the result is that patients want to get their money’s worth so they expect more services. More demand means higher prices. If consumers were sensitive to the prices of individual procedures the demand would level off as the procedures got too pricey. On the other hand, more demand can lead to efficiency, but the insurance companies keep paying the same price for a procedure (and never lower their premiums) whether the system is efficient or not so the costs remain high even when doctors find ways to improve the system.

One comment from Scott Thompson asks Steve to run for Congress against Rob Bishop again. I don’t know enough about Scott to vote for him (not that it matters since that’s not my district) but I am impressed that he would come out and directly identify the central fallacy that keeps us from actually fixing our health care system.