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

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

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