Is “free market health insurance” a nonsense phrase? - Part 1

Most of the Democratic and Republican presidential candidates have proposed programs to deal with the health care mess in this country. The most recent was John McCain last week. I’ve looked at McCain’s proposal, and although I don’t agree with everything, McCain appears to be more thoughtful on the subject than Mitt Romney, whose only contribution to the health care discussion is to bash “Hillarycare” (although Senator Clinton’s proposal is basically the same thing he did in Massachusetts).

One thing bothers me, however. None of the health care proposals out there take a serious crack at improving the efficiency and cost effectiveness of our health care system. We hear a little about “this is how I’m going to pay for it” in these proposals, but very little of “this is how I’m going to eliminate waste, fraud and excessive profits”. Most independent studies have estimated between 25 and 40 percent of America’s health care dollar is spent on things other than actually providing care. There is plenty of money in the system to pay for universal health care if we were to spend it more wisely. We don’t need to raise taxes.

Not only that, improving the cost efficiency of health care has become an economic necessity. Consider Chrysler Corporation. In 1998, Daimler Benz paid $38 billion to purchase Chrysler, and earlier this year, essentially paid Cerberus to take it off their hands. Why? To escape the billions of dollars in unfunded health care obligations to employees and retirees. Basically, a major American manufacturing company was driven to insolvency because America expects employers to foot the bill for health care, something no other major industrial country does. It’s been known for years the most expensive raw material in a new car is not steel or electronics, but Blue Cross/Blue Shield. Is it any wonder our manufacturing base has imploded the last twenty years?

A phrase that is overused in business these days is “thinking outside of the box”, but in this case, it applies. We need to re-examine our assumptions about providing health care, and have the intelligence and courage to abandon those assumptions if they don’t make sense.

I believe one thing that hamstrings our efforts to improve health care is our insistence on using the word “insurance”. Let’s look at the dictionary definition of insurance: “A means of indemnity (transferring the responsibility for loss) against occurrence of an uncertain event.” Using the conservative definition of socialism, insurance is essentially socialistic, since it transfers personal responsibility to a larger group in society. The characteristic that allows insurance (in the traditional sense) to work in a free market system, despite being socialistic, is the fact that the event insured against is both uncertain and undesirable. No one is going to will their own death to collect life insurance. The prospect of successfully filing a claim is little incentive to torch your home and a lifetime of priceless personal possessions. Except for isolated cases of fraud, the undesirability of the event being insured against means collection of the benefit will not be abused.

Is health care a proper fit for the insurance paradigm? There are instances of catastrophic illness or accidents that meet the definition. But, in general, most consumption of health care services is neither uncertain nor undesired. We want that daily dose of Lipitor to keep our cholesterol down. We purposely conceive children and consume the health care services necessary to bring a new baby into the world – and we also consume birth control medicine to avoid pregnancy. Whether the illness is diabetes or bi-polar disorder, health care is often a matter of planned consumption where strong and significant consumer demand exists for the product.

Why is this distinction important? Understanding of this concept makes clear why health insurance in America, from an economic standpoint, is socialism at its worst. Not only does it transfer responsibility for health care from the individual to society, it does it in a way that has few mechanisms for restraining demand. As important as health care is to the well being of society, the spiraling costs of America’s crazy system of socialized medicine will doom America economically if we do not deal with it.

So, if the insurance paradigm is incorrect for delivery of health care, what is the correct paradigm? Stay tuned for Part II.