Wednesday, February 24, 2010

Put Insurance Back Into Health Insurance

A good common sense piece on healthcare:

Having businesses offer full health coverage almost from the first dollar spent is phenomenally inefficient. Health care is over-consumed because it is essentially, at the margin, free to employees and too cheap -- fully deductible -- to the company. All incentive for the consumer to control costs is abandoned. Furthermore, the system is nonportable and famously bureaucratic, with the associated costs in time, money and frustration.

To put the “insurance” back in health insurance, we need to remove the tax deduction for routine health-care expenses, whether the coverage is purchased by employers or individuals. If we choose to retain a deduction for insurance against large losses, it should apply equally to plans bought by individuals directly and those provided by employers.

Among other benefits, this would remove a large tax deduction and the savings could be used to reduce other tax burdens. It would also solve the portability problem because without a tax advantage at work most individuals would purchase their own insurance. Most importantly, by buying their own insurance, designed to protect against only relatively large losses, individuals would become conscious of medical costs.

Assessment of Risk

Now let’s discuss risk assessment. Ignoring pre-existing conditions might sound compassionate, but it is equivalent to declaring that a fire-insurance company must charge the same amount for a modern house with smoke detectors and interior fireproofing as for a century-old, wooden-frame former stable, complete with some hay left over, and a basement full of painting supplies. Taking the analogy further, the same premium must be charged for a well-protected, unscathed house as for one that is already on fire.

The business of insurance is about determining risk and charging accordingly. It’s why insurance companies exist. If we eliminate that, medical insurers are just form-processing companies for the government. Worse, we lose a valuable economic input: that of accurate risk assessment and pricing, without which sensible management of medical expenses is impossible.

‘Don’t Ask’

The desire to help those with pre-existing conditions is laudable. The way to do this is to help. If someone needs more medical care than he or she can pay for, direct state subsidy is far more efficient than making insurance companies pretend that the patient isn’t ill or at high risk of becoming ill. We can separately debate the degree of generosity of this subsidy, but it is efficient and honest. Making insurance companies play “don’t ask, don’t tell” with health status is neither.

Though you wouldn’t know it from the headlines, our system today, and our discussion of reform, isn’t about insurance. It’s about the total provision of health care, largely by employers, with costs hidden from individuals. Furthermore, much of the proposed reform is about eliminating the main function of an insurance company: the assessment and pricing of risk.

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