The Myth of Health “Insurance”

There is no health insurance in the United States today; at least not any that maintains any real connection to what is meant by ‘insurance’.  As Obama’s healthcare overhaul begins to be implemented, there continues to be praise for its extension of health insurance to everyone.  Setting aside the dubious constitutionality of the law itself, there remains little evidence that access to health insurance has any meaningful correlation to positive health results.  Hospitals and emergency rooms treat people with life threatening diseases or injuries regardless of health insurance.  In fact, many emergencies and hospitals actually find it more cost effective to treat patients without insurance rather than deal with all of the regulatory hassles and bureaucratic red tape of Medicaid enrollment and reimbursement procedures.

Aside from this however, the idea that we have ‘insurance’ in the healthcare market is false.    What we have is simply pre-paid medical care.

The difference is not negligible and is important in understanding why the Affordable Care Act is going to anything but make healthcare more affordable.  Insurance deals with protecting against a possible costly, yet unlikely, life-altering event.  Insurance protects against the risk of an unpredictable outcome, not something that you know you will experience in the near future.  Think of auto insurance or home owners insurance.  You buy these types of insurance to protect yourself against the rare, yet costly, likelihood that you wreck your car or your house burns down.  You don’t, however, purchase them to cover the cost of an oil change or a heavy dusting of the family room.  It is obvious that these are not insurable events because they are predictable and/or planned.  If those events were to be included in our auto or home owner insurance we would most certainly expect the premiums we pay to be significantly higher to cover the expenses of these near-certain events.

Unfortunately, such common sense does not exist when it comes to the market for healthcare.  When we speak of health insurance almost all plans cover predictable or preventative medical care.  Insurance that covers things like preventative screenings or annual checkups destroys the very nature of what insurance is meant to do.  Compounding the problem, when these services are offered with no out of pocket fees, people are incentivized to take advantage of them.  When it is known for sure that patients will undergo various screenings or checkups, insurance companies will increase the premiums paid to cover these costs.    

These increased premiums, besides costing consumers more money out of their paycheck, also have adverse effects within the healthcare market.  Because patients know that the the money they paid for their ‘insurance’ entitles them to various services, people are much more likely to utilize them.  This increase in demand will consequently lead to rising costs, leading to a vicious cycle of perpetually increasing demand and prices.

Understanding that there is no such thing as genuine health insurance in the United States is an important first step to curbing costs.  Pre-paid medical care is not the same thing as insurance, and its adverse effects have filtrated throughout the entire system.  Just like in any market, a legitimate price system is essential for allocating goods and services to their most highly valued ends.  Just like any subsidy, the current pre-paid system of health ‘insurance’ severely damages the ability for this system to function, resulting in higher prices and a misallocation of resources.  Freeing the market from the decades of price and product intervention is not a one-step solution, but if we ever wish to address the problems of rising healthcare costs understanding how insurance functions and realizing the importance of a free price system are essential first steps.

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