Some Thoughts on Our Health Insurance Mess

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The news over
the past year has brought some rumblings to my ears. There have
been reports of panels and committees exploring mandatory health
insurance in my state. The proposals in my state fall along the
line of a state subsidized insurance plan. Employers not otherwise
having health coverage for their employees would be required to
join. There, of course, have the requisite newspaper editorials
crowing about the success in Massachusetts for implementing mandatory
health insurance.

In reflecting
on current health insurance I see a number of problems. Employer-provided
health insurance distorts the distinctions between customer and
consumer. And finally the tax-privileged status of employer-provided
health insurance distorts the decisions that are made regarding
savings, salary, and benefits. Health insurance has degenerated
at large corporations from protection against catastrophic losses
to what amounts to a prepaid purchase plan.

Health insurance
provided through the employer distorts the distinctions between
customers and consumers. Who is the customer of an employer-provided
health care plan? The employer or the employee? The health care
plan is purchased by the employer. You, the employee, are not the
customer. Therefore the health care plan is not crafted to meet
your individual requirements or desires. One consequence of this
is wretched “customer service.” It has not been uncommon in my dealings
with my employer's health plan to find that they have lost forms
and records that been sent to them.

Some basic
economic reasoning reveals why this is. I am not in fact the customer
who pays them. I have no ability to impose any economic sanctions
on the insurance company providing my health plan. In this context
“customer service” simply does not pay, it is simply an expense
to be minimized. The “customer service” needs to be just good enough
so the employees don't rise up and persuade their employer to change
plans.

The distinction
between customer and consumer are similarly muddied in the patient-doctor
relationship. Who is the customer? You, or the insurance company
that pays your doctor? I have heard from both friends and doctors
stories of requisite health care being held up while the insurance
company has to be persuaded of the necessity of the care. My wife's
OB has told her of any number calls to insurance companies to explain
and argue for extended hospital stays or observational stays that
have to be cleared with insurance companies. This, unfortunately,
is to be expected when the insurance company is the customer paying
the doctor as opposed to the patient being the customer paying the
doctor.

Employer-offered
health insurance originally started in World War II as means of
evading war-imposed wage and price controls. The offering of health
insurance as a benefit was entrenched because employers could deduct
the cost of insurance as a business expense, whereas, employees
could not deduct the cost of health insurance from their tax liability.
This makes employer-provided health insurance cheaper from the standpoint
of the employee than some other possible alternatives.

One alternative
is simply for the employee to purchase his own health insurance.
This is what is done for car insurance or homeowner's insurance
or for all other necessities of life like food, clothing, and housing.
It is simply a historical and legal artifact that maintains health
insurance as an employer-provided benefit.

A second alternative
is for the employee to take the money and save it against the day
it is needed for medical expenses. I work for a large employer who
provides a relatively plush healthcare plan. The annual cost for
a family to be enrolled is on the order of $15,000 a year. This
is actually very close to the cost of the actual healthcare received
by the employees at my employer. My employer is self-insuring and
pays the insurance company the actual cost of health care received
plus a management fee. $15,000 is not unusual for a family plan.
I talked to the owner of an auto body shop and he pays $18,000 a
year for family plans. I have talked to other small employers and
$4,000 a year is not unusual for a simple individual plan.

I have been
at my employer now for almost twenty years. Just imagine if that
money had gone to me: I would have almost $300,000, or $200,000
if we allow for taxes. After deducting for medical expenses, births
of children, assorted doctor visits, and emergency visits out of
pocket, I would still have a substantial amount of money left.

I can hear
the objection coming – what about people who have a catastrophic
expense. I can think of two families of employees where I work who
have had catastrophic expenses. The first had a child born with
a congenital heart defect. The second had a wife who required a
bone marrow transplant as a consequence of breast cancer. In both
cases the expenses approached a million dollars. Catastrophic coverage
insurance exists to cover such extreme costs that a self-insuring
individual could purchase.

The whole point
of insurance is to protect oneself from catastrophic loss or liability.
You buy car insurance to protect you against the expenses of totaling
your car. Car insurance does not pay for oil changes or new wiper
blades, the routine expenses of owning a car. Health insurance has
come to be seen as a prepaid purchase plan which is supposed to
pay for every health-related expense no matter how routine — vaccines,
child birth, the occasional stitches.

Another objection
I can hear coming is what about lower-income workers whose employers
do not purchase expensive health care plans. Even the cheapest health
care plans cost about $4,000 a year. Barring a serious incident
which would require exhausting the savings and using catastrophic
insurance, twenty years of working allows building up a savings
of $80,000.

A final complaint
I have against the current employer-based health insurance scheme
is that it restricts labor mobility. I have known several people
who have developed a medical condition and live in fear of losing
their jobs and refuse to look for another because they were afraid
that they would be deemed uninsurable by another employer's plan.
There is no reason that individuals should fear losing their medical
insurance when changing jobs anymore than they fear losing their
car or their house.

February
9, 2007

Joel
Chesser [send him mail]
is a mechanical engineer working for a large government contractor.
He blogs on engineering at jbchesser.blogspot.com.
More importantly he is married and the father of four boys.

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