What people need
is health care. Yet on both (or every) side of the current health care debate
the discussion centers on how people will obtain insurance, not how people
will obtain health care. Why is it assumed by everyone that a third-party
payer should be the primary way that people pay for health care? And that the
obligation of the third party to pay should be secured not by the consumer
but by a fourth
party (their employer or government)? Even Dr. Robert Murphy on Mises.org devotes most of his space
to analyzing the problems with insurance in his discussion of the current
system.
For almost every
other good or service in our lives, people pay cash out of current income,
obtain credit, or save up cash reserves. Insurance plays a role in only a
minority of our purchases. Off hand I can think of residential property
destruction, car theft, and accidental death or permanent disability as the
other common forms of insurance for consumers/property owners.
Even more
troubling to me is that the meaning of the word insurance has become
corrupted in public discourse. What most people mean when they talk about
obtaining health insurance is "How can I find a third party who will
provide me with unlimited consumption of health care at no or minimal cost to
me?" The current health care debate seems to be about the search for a
system where everyone can obtain unlimited care at no cost to anyone.
I believe that
employer-provided plans are responsible for the illusion of no cost to the
insured. Most employed workers do not understand that they pay for employer
costs incurred on their behalf through reduced wages. The tax system is
partially responsible for this -- by making the employer's but not the
employee's premium payment tax deductible -- but that is not the whole story.
The lack of economic reasoning by the general public is also partly to blame.
Few realize that the opportunity cost to the employer of providing the plan
is less money available to pay wages.
But even if
employers were not paying for insurance, why does everyone assume that a
third-party payer is the best model? Let's go back to the definition of insurance and then address
this question.
Insurance, in law
and economics, is a form of risk management primarily used to hedge against
the risk of a contingent loss. Insurance is defined as the equitable transfer
of the risk of a loss, from one entity to another, in exchange for a premium,
and can be thought of as a guaranteed and known small loss to prevent a
large, possibly devastating loss.
Insurable risks share
certain characteristics, among them, a small risk of loss, the magnitude of a
loss would be too great for the insured to afford, and when the risk is
spread over a large number of similar cases, the premium for each insured is
affordable. For market conditions to make insurance a sensible model, a risk
must meet all of these characteristics.
Let's segment
health care consumption into various categories:
- predictable
care: annual physicals, tests you get every year,
getting your teeth cleaned, care for a chronic but manageable condition,
e.g. a medication or regular chiropractor visits, or a planned event
such as giving birth
- unpredictable
non-serious care: minor injury, tooth cavity, a cut
- unpredictable
but serious health emergencies: getting
hit by a car, a life-threatening illness
The first two of
these categories are clearly not insurable because the risk of an event is
close to 100%. The third category is the best suited for the insurance model,
but even then, only if the cost of obtaining care for an accident or illness
is necessarily too great for an individual to afford and the likelihood
of such an occurrence is small enough that the risk can be spread over a
large population of insured.
I frequently hear
people ask, "how can someone with an illness obtain insurance?" If
you think about this for a moment, the question doesn't make any sense. It
would not make sense for an insurer to insure someone who already had
incurred the insured risk. What the sick person needs is care, not (necessarily)
insurance.
it is not clear a priori that the cost of care would be too great for the ill
person to afford. Current prices for care are quite high, but the prices of
health care as they are now have a lot to do with the four-party system. This
has resulted in a system where prices are high in part because we have
insurance, yet we must have insurance because prices are so high.
Prices would be a
lot different under a cash-paying system, for several reasons: people would
become price-sensitive in their consumption decisions; costs in the provision
of care would not be generated by monitoring costs created by a third party
payer; and providers would have to compete on the basis of price. See this
discussion of health care in India for a case study.
In making the
calculation of whether they could afford care without insurance, people
ignore how much purchasing power they are already giving up in terms of lower
wages due to employer-provided plans. If your employer is providing a family
plan that costs several hundred dollars per month, this is costing you
thousands of dollars annually in lower wages. Having your employer purchase a
policy on your behalf also creates the well-known inconvenience of lack of
portability of plans when you change jobs. I have not seen anyone address the
cost in lost wages of people not changing jobs due to health care
portability. I know that this is an issue because I have heard many people
talk about the insurance as a factor employment decisions. I wonder how many
people do not change to an (otherwise) better job due to the portability
issue.
I won't begin to
discuss the problems created by supply
restrictions.
We should not
limit the discussion to insurance reforms: we should be talking about what is
the best system for everyone to obtain care
at the lowest price. Insurance may be one means of securing
this, but the word "insurance" should not become synonymous with
care itself. Focusing all of the discussion on the best model for insurance
leaves out the more fruitful discussion that would result if we began to
compare alternative payment models, including a cash payment system.
It is my view
that the four
party system is an artifact of the regulatory regime, not a successful
market model for payment. In a deregulated market, most care would not be
paid for by insurance companies; it would provided in return for cash
payments directly from the consumer to the provider. Insurance, were it used,
would only make sense with very high deductibles and low premiums in order to
segregate routine care from infrequent but high cost risks.
Robert Blumen
Also
by Robert Blumen
Robert Blumen is
an independent software developer based in San Francisco, California
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