Which Insurance is Better? — 10 July 2012

Having dinner with an old friend this week, the subject of health care came up – my friend being self-employed, and very sensitive to the issue – and eventually the discussion boiled down to a fundamental question: Should health insurance be profit-driven?

After all, my friend suggested, real people’s health and even their lives are at stake; is it right that that should be balanced against profit and loss accounts?

As a blunt proposition, that seems pretty straightforward – I think most would agree that it is morally problematic to weigh people’s lives against a bank account.  It is the sort of straight-line thinking that animates many liberal positions on current issues: posit A, ergo B.  How could any self-respecting person believe otherwise?  And that is why conservatives, who tend not to agree, are often portrayed as cold-hearted, morally obtuse, or worse.

But the problem is that this premise and conclusion is not the whole story.  The question really hinges on a comparison of alternatives.  Privately-provided health insurance has to be weighed against the government-provided alternative.  There are pluses and minuses to each choice, and I would argue that the government-provided version is worse.

Health care is not an inexhaustible good.  At the same time, there is potentially an inexhaustible demand for it.  Who, after all, would turn down a free test or treatment if it was remotely useful?  Unlimited demand for a limited good results in a market that is in disequilibrium.

How then to put limits on demand?  There are essentially two ways: use the price mechanism, or limit access to care and artificially bring supply and demand into balance.  Briefly, that is the difference between private and public insurance.

Now, let me pause here and stipulate that our current system for provision of health care is a mess, that it unfairly treats millions – often when they most need care.  Those who argue against Obamacare are not advocating for a return to the status quo ante, regardless of what Democrats say.  In this, I think that President Obama has done the country a service despite pursuing a disastrous policy: he has forced the issue of health care reform onto the agenda.  If (as I fervently hope) the Affordable Care Act is overturned, it has to be replaced with something else.  The public will not be satisfied with the previous state of affairs.

There is no reason, except what was expedient historically, that individuals must be forced to enter our current unfriendly market for health insurance while those lucky enough to have employer-provided insurance have not only reliable insurance (my family has a “previous condition” but I have no fear of being denied as long as I have my company policy), but have it at tax-subsidized rates.

But this is not a necessary consequence of privately-provided health insurance.  It is instead a consequence of wage controls instituted in the years after World War II, forcing companies to provide health care as a benefit to attract workers, an arrangement that benefited workers but not the self-employed or unemployed.  If, instead, all were put on a tax-equalized basis, and individuals were able to join any large group to apply for insurance – church members, or Costco customers, for instance – that would go a long way to equalize the current market’s unfairness.

Similarly, the current opacity of prices for health care services is not a necessary consequence of private insurance.  Sixteen percent of the economy is operating with a dysfunctional price mechanism, which inevitably results in misuse of the money devoted to it.  That can and should be reformed, so that consumers of health care have more information with which to make their decisions – but that is separate from the provision of insurance.

At its core, insurance is the funneling of the money between the payers of the premiums and the doctors, diagnosticians, and other providers of health care.  That in turn means deciding what to pay for, how much to pay for it, and, crucially, how much to charge the premium payers to cover the anticipated costs.  The question is whether that function is better provided by private insurers or the government.

Private insurers have an exquisite series of cost-benefit analyses to do: they deploy their capital to best effect if they provide good benefits to their customers, spread the net as widely as possible to ensure that enough healthy people are paying in to offset the cost of the very sickly, and keep premiums low enough that competitors don’t steal their customers.

If state regulators allowed it, they would also offer a variety of possible plans.  A truly free market in health care would have different layers of possible coverage, ranging from the minimal to the all-encompassing, varying by premium.  The very well-off, of course, would be able to afford the best health care.

It would be anathema to someone like President Obama, who intensely dislikes the privilege that wealthy people can obtain unto themselves, but in fact different levels of insurance coverage would result in a flowering of different delivery systems of health care – again, if regulators would permit it.

If your insurance pays relatively little, for example, you would be a perfect patient for local health clinics staffed by nurse practitioners rather than large, hospital-linked physicians’ practices.  Such clinics are starting to form in Walmarts and the like, and chances are good that the ultimate health outcome would not be greatly different – any more than a Ritz-Carlton provides a better night’s sleep than a Comfort Inn.  Certainly the society-wide results would improve if more people had access to care providers at different price points.

The foregoing, of course, does not suggest that policies should not cover major illnesses; but a free market in health insurance (which, to emphasize again, we do not enjoy now) would enable a wide variety of possible coverage levels to match “every pocketbook” as the saying goes.

Government providers, on the other hand, are impervious to the pricing mechanism.  That doesn’t, however, make health care universally available.  It is still a limited commodity.  The only way government health plans make ends meet is by limiting access.

In Britain and in Canada, which have national health plans, people with non-threatening conditions often wait for months just to have an appointment to see the appropriate practitioner.  Indeed, it is typical for every incoming government in the UK to have as one of its principal policy objectives to shorten hospital waiting lists.

Obamacare has another method of “controlling costs” of health care: they simply refuse to pay what the market demands for certain medical services.  Reimbursement rates for Medicare and Medicaid are notoriously low, to the point of failing to cover the cost of the treatment.  The consequence is that fewer and fewer doctors will agree to accept patients in those programs, and patients therefore go without treatment.

The alternative is, then, a system in which insurers vie for customers’ business, by trying to design plans that offer value for money, versus a bureaucratic system that limits access to care by a set of arbitrary rules.  As in almost any contest between the private and the public, the free market better resolves the conflicts between supply and demand.

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