Health Insurance: Part of the Problem or Part of the Solution?

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Watching
the so-called health care debate in this country, the health insurance
industry obviously has come under fire.  Why is this? 
In part, it is due to being in the position of being the bearer
of bad news.  The insurance company informs us that our premiums
are rising yet again, that we are not covered for something that
we thought we were, or that we will no longer be offered coverage. 
Even if our expenses are covered, we may find it frustrating and
confusing to go through all of the paperwork required, especially
when we are confronted with a major health problem.

From
a political standpoint, there is another reason for this. 
Politicians find that they can gain support for their schemes when
they can frame the problems that they are trying to address as the
result of the behavior of a bad actor (i.e. a scapegoat) that may
or may not have very much to do with the problem at hand. 
Demagoguery will elicit support for their scheme to punish the bad
guys and drive attention away from an objective assessment of whether
or not their scheme is likely to improve conditions or make things
worse.  Bad guys are chosen, like so much in politics, based
on the path of least resistance.  Of course, the politicians
are not likely to highlight their own role in creating the problem. 
And while they may know that past actions taken by the AMA have
contributed significantly to the health care crisis, they also know
full well that many people like their own doctor and regularly watch
handsome and compassionate MD’s on TV who perform heroic acts for
suffering humanity.  On the other hand, people rarely, if ever,
see handsome and compassionate health insurance executives on TV
going to bat for patients in need.  For this reason and the
ones mentioned earlier, health insurers make an inviting target.

Note
that my intent here is not to rationalize the role that health insurance
plays in the current environment.  First, I will briefly discuss
how some of the problems that people associate with today’s health
insurance companies are not inherent. Then I will discuss how
health insurance companies operating in a free market actually could
play a critical role in solving the problems of cost containment
and access to services that seem so intractable in the current environment.

The first thing
to note in analyzing “health insurance” offered in the United States
today is that most of it is not really insurance at all.  I
am referring to the benefits offered through employers.  Insurance,
for one thing, refers to the spreading of the expected costs of
coverage proportionately amongst people who pose similar levels
of risk.  Thus, for example for life insurance, there are different
rates for males and females, people of different ages, smokers and
non-smokers, and so forth.  For employer-based health insurance,
employers pay most of the cost and the employees each typically
pay the same cost (except if they are insuring other family members). 
In such a context, there is little financial incentive for an employee
to minimize his risk or to economize in his usage of health care. 
What is more, due to mandates, insurance must cover a great many
benefits that companies and individuals would not pay for, if they
were allowed to choose.  In effect, part of the premium represents
insurance and part of the premium is a tax which redistributes wealth
to providers with political clout.

One might wonder
how it became the norm for health insurance to be offered through
one’s employer, when the need for health care is independent of
one’s working status.  It turns out that this arrangement had
a lot to do with government intervention.  During WW2, when
resources were scarce and wage increases were limited by law, as
a workaround companies offered fringe benefits such as health insurance
and pension plans as incentives in order to attract sufficient workers. 
The costs for such coverage were tax deductible to employers (though
not for individuals buying their own insurance) and this also encouraged
our current system to evolve as it did.  In light of all this,
one can see that many of the problems that people today associate
with health insurance are not inherent, but are the result of perverse
incentives which have shaped the current environment. We might reasonably
ask how things might be different if free market conditions prevailed.

We know that,
in a free market, over time goods and services tend to improve in
quality and become less expensive.  Since that has not been
the case, for the most part, in health care, we must consider the
possibility that government interventions have interfered with that
process.  While medical licensing, patents, and FDA regulations
have undoubtedly played a major role in the costliness of today’s
health care, interference in the free market for health insurance
may be the straw that is breaking the economy’s back.  To see
why this is the case, consider the role that health insurance in
a free market could play in driving costs down and quality up. 
There have always been medical entrepreneurs who have found more
cost-effective approaches, but health insurance companies have never
been free to pay for only the most cost-effective treatments. 
The “approved treatments” are subject to the determination of medical
boards which, not surprisingly, favor established treatments and
look askance at innovations which have not yet been widely accepted
in professional circles, regardless of the promise that they hold
or the appeal they may have to patients.

Suppose, however,
that I were free to start an insurance company that only offered
the most cost-effective treatments available for particular problems. 
For cancer, for instance, we might feature the Hoxsey
treatment
.  For heart disease, we may generally favor a
nutritional approach
. For emergency services, our plan
might offer what is today standard medical care.  The specific
offerings presented here are only illustrative, though, and the
market might favor a company which offers a handful of successful
cost-effective treatments for each disorder.  Now if the reader
of this article does not put stock in alternative treatments, he
might object and say, “I want no part of that.  I want the
treatments that my trusted doctor recommends."  To which,
I would say, “Fine, this is a free market and you are under no obligation
to buy insurance from me or undertake the treatments that I subscribe
to."  In fact, we might find that only a relatively small
portion of the population will be attracted to my plan.  So
what good will this do for the health care market as a whole? 
Well, suppose that my company offered such a plan, that it was far
less expensive than comparable conventional plans, and that our
insureds were highly satisfied with our combination of price and
care.  They of course would tell their friends and family members
about their good experiences.  Some of those who were originally
skeptical would reconsider, in light of the high expense of their
plan and perhaps their less than total satisfaction with the care
that they have received.  More people would come over to my
plan.  As my market share grew, existing insurers would also
take note and modify their coverage so that they too could offer
more cost-effective treatments and be more competitive with my company. 
As more of the types of treatments our plan favors were paid for,
more practitioners would learn and offer them.

As one can
see, a truly free market in health insurance could rapidly lead
to a marked reduction in costs and improvement in quality of health
care, as health insurers took the lead in identifying and promoting
the most promising treatments.  And, of course, once these
changes came about, a great many of the now uninsured population
would then be able to afford coverage, or lacking that, be provided
for from the resulting savings of the currently insured population.

The
next time someone complains about how the health insurance companies
are to blame for the problems of our health care system, take the
time to show them the difference between what Bastiat referred to
as “what is seen and what is unseen."  Show them how the
problems in health care that they are seeing today are to a great
extent a result of the government interventions in the market and
tax system.  And then go on to share with them the unseen,
the glorious role that health insurers could provide in the free
market, if only they were allowed to.

    November
    12, 2009

    D.
    Saul Weiner [send him mail]
    is always on the lookout for how the State uses crises to vilify
    and persecute scapegoats.

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