Universal Health Care P3 (health insurance)

In the last post we looked at how life insurance helps us mitigate risk.  Let's take a look at health insurance.

Health insurance works in a similar way.  We have premiums that we pay the insurance company to get the insurance and then depending on the terms of the insurance we either split the bill with the insurance company (coinsurance) up to a certain amount (out-of-pocket maximum), make a fixed payment per visit/service (co-pay), or pay the whole bill till we've payed a certain amount (deductible).  Your co-pay may also go toward the deductible.

Here's an example.  Bob goes to the doctor.  The doctor charges $200 dollars for the visit.  Bob's co-pay for doctor visits is $20, so he pays $20 and the insurance company picks up the rest.  The doctor tells Bob that he needs surgery, so they schedule it.  The surgeon charges $4000 for the surgery and the hospital charges $2000 for his recovery, a real bargain (I'm simply making these numbers up for illustration sake).  Bob's deductible is $500 and after that he pays 20% up to $2000 for a given year. So breaking out the calculator, the entire bill from the surgery was $7000, Bob pays the first $500, then he pays 20% of what's left ($6500) which is $1300.  So with this doctor appointment and surgery, Bob has payed a total of $1820, bringing him $180 shy of his maximum out-of-pocket.  So he only needs to spend $180 dollars more until everything will be covered by the insurance company.

If you were Bob what would you do?  If you had any medical expenses already planned, of course you'd proceed with them.  If there was anything you were on the fence about, you'd probably go ahead with those too.  After you'd reached the limit, might you be less price sensitive?  It would be completely logical if you were.  This essentially distorts the price signal.  This is the problem with using insurance to pay for things that should be handled as regular transactions.  Even with paying 20% there's a price distortion. 

Remember, insurance is a tool to help us manage risk.  What if we purchased all our groceries with insurance?  You had some deductible and then some maximum out-of-pocket.  When you reached your maximum out-of-pocket, what would you do?  Oh yeah, it would be steak and lobster every night!  Your price sensitivity would be greatly reduced and it would affect your choices in food.  Suppose a bunch of people reached the max out-of-pocket and were buying up the steak and lobster.  What do you think would happen to the price of steak and lobster?  Those people buying steak and lobster aren't directly paying for it, but someone is.  What does the insurance company do to cover the increased cost?  The money doesn't come from the Tooth Fairy or Santa Claus (thanks Dr. Williams), they have to adjust the different costs of the insurance.  What's the up shot of all of this?  When insurance isn't used to manage risk but part of regular transactions, things don't "work right" in the market.  Would you be surprised if food and food insurance cost a lot more or if you couldn't even purchase some things at the store because demand completely outpaces the supply?

This is part of the problem with our health care system.  Health insurance definitely has a place in our system because of the catastrophic things that can happen to us, but I think eliminating it from the day to day medical interactions would help a lot.  We definitely DON'T need MORE insurance in the form of government insurance where everything is covered.  Worse would be "free" health care for everyone because it isn't really free.  The money has to come from somewhere and you'll have the problems outlined above.