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

by D. Saul Weiner

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.

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