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Health Insurance Conundrum

Health care reform debates dazzled us with extremes like single-payer, total government takeover, and death panels. It ended up somewhere rather less unspectacular: regulating the health insurance industry. What this 2,309 page bill lacks in sizzle, though, it makes up for in noteworthiness. The President preached competition, choice, and bringing tens of millions of unisured into the health insurance system. This, he says, will lower health care expenditures. (1)

Health insurance, as I’ve noted before, isn’t really an insurance scheme. It’s a pay-for-everything-no-matter-how-rare-the-event-is model. Insurance schemes, by definition, can only apply to a rare event. If everyone took out claims on the same, or multiple, high probability events, premiums would skyrocket. Look at it this way: I’ve heard a lot of analogies made to car insurance in this debate. The administration says that we’re all required by law to obtain car insurance. Most do not have the savings to cover potential auto repair and medical costs in the event of a car accident. Having car insurance is the responsible, thoughtful thing to do. Wouldn’t you agree? Similarly, by not having health insurance, the burden of your medical costs are transferred to a family member, friend, the hospital, and/or the taxpayer through Medicare and Medicaid. Many have tried to obtain individual health insurance, and been denied due to a pre-existing condition. The health care reform bill will prevent this from happening beginning in 2014. The problem with “health insurance” as we know it is that nobody gives a rip how much their medical bills cost. We hand over a $20 co-pay and our insurance takes care of the rest. In what other marketplace does having no price sensitivity, or elasticity, reduce prices? It would be like having car insurance plans that also bought the policy holder quarterly maintenance checkups, “spinners” for their wheels, XM radio service, iPod hookups, and car washes every week. I doubt consumers would leave these perks on the table, and I doubt it would decrease the cost of insurance pool premiums.

What if we had gasoline insurance? Well, there’d be quite a few weekend road trips happening. Overall mileage would increase dramatically and the price of gas would increase along with that demand. That is, assuming the oil cartel OPEC didn’t minimize their profits, do us all a favor, and increase the oil supply on the market.

I’ve had some ask me what we should do with health insurance. We don’t know when we’re going to get sick, they say. We don’t know how serious or expensive it will be. We need health insurance.

We need to price shop in health care, too

I agree. We do need it. However, to get serious about lowering aggregate health expenditures, we need high deductible, catastrophe plans for everyone. This is a real insurance scheme: rare event, low claims, and the policy holder takes on a greater amount of their own health costs. People would pay for their, say, $3,000 deductible, through a combination of health savings accounts, personal credit, and government subsidies. $3,000 won’t propel most people into bankruptcy. And, remember, this is for a catastrophic event like cancer. For more routine checkups and small issues, a health savings account empowers people to be aware of the cost of their treatment. It forces people to be responsible and price sensitive. It would make us shop around. Health savings accounts, either personal or set up by an employer, would roll over each year. This plan works especially well for those that are relatively younger, and have time to build up substantial funds in an account before they will likely experience high medical costs later in life.

It’s not popular to tell people to pay for more of their health care. But without this dynamic, how can we really expect national health care expenditures to decrease? Frankly, until regulations are lifted to freely allow consumers to go out-of-state for health insurance plans, ending state oligopolies, I doubt we’ll see substantial improvements in premium costs. This would be a meaningful answer to increasing competition and choice.

People need to be incentivized to reduce their own health costs before we can bank on an aggregate decrease. “Health insurance” as we know it does the opposite. If people were incentivized to lower their own health care expenditures, there’s a good chance they’d live a healthier lifestyle. Spending a 15-minute work break out in the back alley smoking may start to seem too costly. Eating unhealthy food, and overeating, might begin hitting the tipping point in personal cost-benefit analyses. Who knows, regular exercise might even start paying off in typical American utility functions.

There’s also the chance that expanding health insurance markets to those with pre-existing conditions could have a disastrous effect. If the incoming distribution of people entering an insurance pool is skewed to the high risk/unhealthy/pre-existing condition crowd, health expenditures will increase disproportionately with additional premium income; meaning the cost of insuring high risk, unhealthy people would exceed the benefit of insuring the new, relatively healthy bunch. Then, premiums for everybody go up, and the healthy people in the pool get fed up and drop out. This would cause the premiums to go up even more, causing even more of the healthy individuals to drop. Say hello to the death spiral. Insurance company lobbyists fought hard to prevent this. From those efforts, tax penalties were added in the health care reform bill for those that remain uninsured by 2014. The hope is that the tax penalty will steer the healthy, low risk uninsured individuals to obtain health insurance.

In review, “health insurance” will probably not lower premiums. I have serious doubts that it will lower national health care expenditures. Actual health insurance would, though. I’d rather see the money spent on Medicare and Medicaid allocated to providing as many Americans as possible with low risk, catastrophe health insurance plans. Money could even be allocated to start health savings accounts for the poor, disenfranchised, unemployed, etc. One positive thing about requiring health insurance companies to insure individuals will be that more people will have a portable plan they can own i.e. they’ll be able to take it from employer to employer and inbetween. This will assist in prying away the vice grip of employer-sponsored health insurace that currently rules the day. Under the current system, when employment ends, so does your health coverage. Temporary COBRA benefits are extended to those that leave their job due to a “qualifying event” such as a termination not due to an employee’s “gross misconduct”. Events like death or divorce of a covered employee would extend coverage to beneficiaries like family and the former spouse, respecitively. COBRA benefits are not offered to small businesses employing fewer than 20 people, or some church group health plans. COBRA benefits are also more costly than individual health plans. However, as we know, people with pre-existing conditions often cannot obtain one of those.

The more other people pay, the less people care about prices. This principle does not go away just because health care is the service at hand.




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