Health Insurance Isn’t Insurance

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 ar 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.

About David

David is the father of 8 extremely organized children (4 girls / 4 boys) who is constantly seeking answers to tough questions related to parenting, education and politics while moonlighting for 40 hours each week as a technology professional. He also enjoys cooking, gardening, and sports.

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Comments

3 Responses to Health Insurance Isn’t Insurance

  1. Reach Upward says:

    A few years ago my wife’s doctor came into the examination room obviously upset from a phone conversation with an insurance company flunky. Apparently the flunky was arguing that a procedure the good doctor wanted to perform on a patient was unnecessary, so the insurance company would not pay for it.

    The doctor said that he had ended up getting one of the company executives on the phone because he refused to be told by some guy a thousand miles away that had never seen the patient and that had lost his MD license due to alcoholism that a procedure was unnecessary.

    Seemingly lost in all of the bickering between the doctor and the insurance company was what the patient thought of the necessity of the procedure. I didn’t hear anything about the patient or the procedure, but it seems that the patient would have been unwilling or unable to bear the cost if the insurance company didn’t pay for it.

    When you say that uninsured people are forced to pay higher prices for medical services than insured people, this is not strictly true. Some uninsured people never pay, which raises the cost for everyone that does pay. And those that self insure often actually end up paying less than the insurance-charged rate.

    Many medical service providers offer discounts if they don’t have to deal with insurance bureaucracies. Even self insured people that incur catastrophic medical expenses often negotiate down to more acceptable rates. The Reader’s Digest had an article about this a few months back. That’s the free market at work.

    Olsen does a very good job of noting the main problems with our current system. I do not believe any of the programs being pushed by first-tier presidential candidates would satisfactorily address these issues. It will be interesting to see what Olsen says is the cure.

  2. David says:

    Thanks for the link. And yes, I know that some uninsured people never pay but the fact that the initial charge is higher than the insurance company charge is a red flag whether they end up paying or not.

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