“HEALTHCARE INSURANCE” IS NOT INSURANCE

Do you remember what “insurance” really means?  John Cochrane does – see “What to Do When ObamaCare Unravels” (WSJ 12/25/13).  Auto insurance and life insurance are insurance; “healthcare insurance,” as presently provided in the US through private insurance or Medicare or Medicaid, is not insurance, it is merely a “wildly inefficient payment plan for routine expenses” (in Cochrane’s words).   The purpose of insurance is to hedge against risk and to spread costs evenly over time.  (As Cochrane puts it, the purpose is “to protect against large, unforeseen, necessary expenses.”)  With insurance, you might end up having paid more than the benefits you or your family received, or you might have paid less, but if your life unfolds in accordance with the law of averages, your net lifetime cost for the insurance is only the carrier’s markup.

Here is why US healthcare insurance, with or without ObamaCare, is not insurance.  First of all, the premiums are out-of-whack with actuarial risk:  they may include direct subsidies to address financial need, cross-subsidies from younger or healthier members of the insured group to older or less-healthy people, and other distortions of premiums intended to reflect social agendas (e.g., certain racial or ethnic groups paying no more than other groups, despite having worse risk-profiles).  It is impossible to identify the percentage of total premiums expended on the subsidies, as distinct from the insurance component, which complicates the task of trying to reform the system.  Secondly, the insurance-provider (government or a carrier) limits the choice of doctors and hospitals, limits the choice of treatments, and controls the prices charged by the providers for their services.  According to CMS (the federal agency that administers Medicare), 88% of all healthcare expenditures in the US are paid by either the government or the insurance carriers rather than being paid out-of-pocket by patients, which means that over $2.3 trillion has been expended in 2013 in a non-competitive market by institutions that have no incentive to spend that money carefully and wisely; just the opposite, in fact.   Unfortunately, ObamaCare does not alter that system, it merely adds more layers of governmental micromanagement – and more subsidies.

Cochrane says we need to blow up the system – not because he objects to providing more care to more people and using taxpayer dollars to help the financially needy, but because there is a much cheaper and more-efficient way of achieving those goals.  Modest reforms to OBC, while retaining its basic structure and certain popular features (e.g., the directive to ignore pre-existing conditions), would not solve the problem.  No, both OBC and the pre-Obama system must go down – especially group policies, which are just tax-favored aggregations of cross-subsidies.

The Cochrane agenda is lean and elegant:  no more group policies – indeed, no more any kind of policies other than individual policies that are retained even if you change jobs or lose your job, are issued by private-sector insurance carriers, are priced solely on the basis of actuarially-calculated risk, and are offered to individual customers who can choose among alternative plans and alternative carriers in a mostly de-regulated national market.  While carriers could offer short-term policies, they also would be required to offer a policy that is guarantied renewable for life. (One should add, individual policies should be eligible for treatment as High Deductible Health Plans (HDHPs), so that premiums could be paid out of HSAs (Health Savings Accounts) and the insured could achieve the federal tax benefits that go with HSAs.)  No citizen could be turned down for coverage – and while premiums could be high for people with pre-existing conditions or other flaws in their risk profile, those people would receive ample financial help from the government.  The object is not to cut off assistance to the less-fortunate, it is to segregate that assistance from the market mechanisms for competitively establishing the pricing of the insurance product itself.

In a Cochrane-ized system, there would be nothing left for Medicare and Medicaid to do, except to determine eligibility for premium support and other financial assistance and administer their distribution; government would no longer control prices or approve or reject providers or treatments. People could purchase as much – or as little – healthcare insurance as they wanted, they could shop in a competitive interstate market to pick their carrier and their coverage, and they could negotiate price with doctors, hospitals, and insurance companies.  The aggregate cost of US healthcare would drop like a rock.

There would be no need for an individual mandate, because there would be a strong incentive for every individual to lock in a lifetime-renewable policy at as young an age as possible: wait too long, and you might have to exhaust your accumulated savings and wealth on treatment for a single catastrophic injury or disease before becoming eligible for federal assistance.  Dealing with people before they reach the “insure-or-else” age (minors) would require special consideration and expenditures, as would dealing with people who already have a pre-existing condition, but together such people represent just a small minority of the population, and the cost of an appropriate solution for those people would be much lower than the cost of turning our whole economy upside down with OBC.

The desire to help people who are financially needy or have pre-existing conditions, is the ideological foundation of OBC.  Deal directly and reasonably with those people, and you neutralize a lot of the opposition to the repeal of OBC and its replacement by a markets-based system.  Nationalizing our entire healthcare system, rather than merely providing financial subsidies for such people, is unnecessary and inappropriate.

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