Thursday, September 17, 2009

Health Insurance (as opposed to Health Care) Reform

Alot of the venom regarding health care in the US has been directed at the insurance industry. Nancy Pelosi singled them out as the top villain, town-hall protestors are labeled as industry shills, and the primary evidence of the failure of the current system is the number of uninsured people in the US. In fact, the overall health care reform drive is largely a matter of health insurance reform. But health insurance is not health care and was never meant to be. The purpose of insurance is to spread risk among a large number of people. Unfortunately, the insurance industry seems to have moved away from that goal and I want to institute policies that direct the industry back towards their original purpose. Reformers, however, want to turn the insurance industry into something it was never meant to be.
The principle idea behind insurance is that bad things will happen to some people, but not to everyone. If there are ten people and each one of them has a 10% chance of having an accident that will cost $100,000, then each person has an expected cost of $10,000 and the insurance company will charge each person $10,000 (plus some profit) for coverage. If some people choose not to buy insurance, then that won't affect the expected cost of the remaining individuals. The main point is that insurance should charge each person their expected cost plus profit and each person has the right to either buy insurance or not to buy insurance.
Reformers want to turn insurance from risk-sharing to cost-sharing. Under cost sharing, people are no longer charged an amount based on their own level of risk, they are charged an amount based on the collective level of risk. Suppose you had ten people again and one person had a 91% chance of having an accident while the other nine had a 1% chance. Risk-sharing Insurance would charge the nine people $1,000 (plus profit) each and the other person $91,000 (plus profit). Cost-sharing Insurance would still charge each person $10,000. If one of the nine refuses to buy insurance, insurance would have to charge the remaining nine $11,000 each (expected costs are now $99,000 divided by nine people). If another person drops out, the premium would by $12,250 (98,000 divided by 8). The expected costs would be divided among fewer and fewer people until the one person has a premium of $91,000 that he can't afford and the other nine have no insurace.
In order for cost-sharing to work, everyone must be required to buy insurance with the low-risk people effectively subsidizing the costs of the high-risk people. That is why the reformers push three primary reforms: mandates that force everyone to buy insurance (or pay a fine), guaranteed issue which says that insurance companies can't refuse high-risk individuals, and community rating which means that everyone is charged the same regardless of their level of risk. These changes would be accompanied by subsidies that help poor people pay for insurance and taxes that force wealthy people to pay for those subsidies.
The primary healthcare reform proposals being debated result in redistributions from the wealthy to the poor through taxes and subsidies and from low-risk individuals to high-risk individuals (from the healthy to the sick) in the form of individual mandates, community ratings, and guaranteed issue. As far as I'm concerned, there isn't a lick of difference if this is done through a single-payer system, a public option, co-ops, exchanges, or reform of private insurance. I can understand some people supporting this type of reform. It might even be better than what we currently have. But it still isn't the best system and I don't support it.
The fundamental characteristic that a health care policy has to have in order for me to support it is the existence of different levels of quality of care with the customer paying more for higher levels of quality.

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