Thursday, January 10, 2019

What IS health insurance anyway?

As we get caught up in the debates about “Obamacare,” Medicare for all, single-payer and other fighting words, it would do us well to step back and ponder the fundamental question of what health care insurance should do. The basic idea behind any form of insurance is that some us will suffer a calamity: our home will burn to the ground, we will drop dead at 32 leaving a spouse and two young children, we will be hit by a distracted driver or we will develop cancer. Actuaries can predict how many of us will suffer these events but neither they nor we can say exactly to whom it will happen. By pooling our resources, we can each contribute towards the expenses of those who do suffer the calamity.
Through most of human history, medical care was neither terribly effective nor expensive. Doctors comforted and advised, but their fees could be paid by most, and if not, a chicken would do. As we moved into the 20th century, medical care became much more life-saving for serious conditions and dramatically more expensive. The original Blue Cross plans sprang up to cover the cost of going into the hospital for operations. Over time, this idea of having insurance to cover large unexpected bills has morphed into health insurance paying for checkups, routine consultations, all prescription drugs and every test. If you want an analogy, think of auto insurance as covering new tires, oil changes and all your routine maintenance. Imagine what that would do to your premiums! Using health insurance to cover every small-ticket item as well as the big ones adds enormously to the overhead cost that now consumes 25% of our health care dollars.
Premiums for most forms of insurance are set to cover the expected costs that will be paid out in claims plus the insurance companies’ operating costs and a profit. Hence the physical you get before buying life insurance and thus the “safe driver discounts” and surcharges for at-fault accidents on your auto insurance. Hence also the health insurers’ traditional refusal to cover pre-existing conditions and their attempts to “cherry-pick” healthier enrollees that I discuss in Prescription for Bankruptcy. While many have used this to paint the insurers as “the bad guys,” the insurers were simply behaving the way they should in a capitalist economy. They prefer to insure cheap healthy customers to sick expensive ones. Doing otherwise would fail their fiduciary duty to their shareholders.
The only way around this conundrum is to have the entire country in one big “risk pool.” The young and healthy would not get good value for their premiums or tax dollars, but that is no different than the fact that I paid my life insurance premiums year after year and hoped I was wasting my money! I am not a Supreme Court Justice (nor even a lawyer), so I will not comment on the constitutionality of requiring all of us to have health insurance. I will point out, however, that at least 48 of the 50 states require drivers to have liability insurance as a condition of having a car (and the two that do not require a cash bond if drivers do not have insurance). I will also note that a study just published in Health Affairs found that 19% of Californians would not have purchased health insurance without the mandate, most of whom were young and healthy, and that this would have increased premiums for those who did.
As we hopefully move toward universal health insurance, eliminating the fear of bankruptcy from illness, it would also be wise to consider NOT making this a no-deductible, 100% coverage plan. Covering every American against burdensome costs of medical care does not have to mean “no expenses.” This would be a more generous plan than any in the comparable western countries to which we are unfavorably compared and would escalate costs. Since a $50 co-pay looks very different to a business executive than it does to a clerk at Walmart, out-of-pocket expenses can and should be income-adjusted, but having some skin in the game would help all of us realize that medical care is not “free.”

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  1. I agree 100% Edward and have ordered your book to see the full argument. In the 1970s the naval hospital in SD gave out free tylenol and ASA. Every PM they were overwhelmed by the demand until they instituted a one dollar copay. This supports your argument above for a copay requirement. Joseph Alpert

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