Monday, April 13, 2009

"Health Insurance" Is a Misnomer

Arnold Kling, author of the wondeful Crisis of Abundance, has an excellent post today briefly exploring the difference between what most Americans call "health insurance" and what health insurance would consist of if it really were "insurance." Some highlights:

Let me offer two choices:

(a) Health insurance is the collective provision of all health care.
(b) Health insurance is the sharing of extreme risk in health care spending.

In my view, (a) represents what most people think of as good health insurance. For example, I have a friend who says her health insurance is great because she can get new eyeglasses every year for everyone in her family for a co-payment of only $10.

We have never observed (b). (b) would mean something where you only make a claim when your expenses are going to run into the tens of thousands of dollars. Claims would be rare and large, as in fire insurance. Premiums would be low, as in fire insurance.

* * *

. . . if you believe that government can save significant money on health care, then by the same token you have to believe either:

(i) our current mix of medical services is optimal, and we could deliver it much more cheaply;
(ii) our current mix of medical services is far from optimal, with too many cost-ineffective services provided.

Most people who can do arithmetic realize that (i) is not the answer. The standard bogeymen of drug industry profits and insurance company overhead are not big enough to make a major difference. Moreover, the evidence for (ii) is broad and overwhelming.

The bottom line is that what we think of as health insurance is not going to survive if we are going to get control of health care costs. Either health insurance is going to become very intrusive about our choices of medical services (the top-down, government option, under the guise of "health care quality"), or we are going to see much higher deductibles and co-payments (the bottom-up option).

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