Cliff Asness writes The Healthcare Myths We Must Confront in The American, 6/29/12.
Myth #2: The pre-ObamaCare system was ‘insurance’
It was not a system of insurance. Insurance, as practiced everywhere else but healthcare, is about catastrophes. What we had was a government-subsidized payment plan funneled through insurance companies.
OK, this part is going to sting a bit. I never promised you there would be no math. Let’s step back a bit and talk about how insurance works. Few of us buy insurance because we expect to make money on the deal. No, the insurance company expects to profit and we expect to lose a bit. Free marketers and socialists can both surely agree that the insurance companies expect to profit. Well, how do they profit? It’s statistics (I told you it would sting). If they sell 1,000 policies that pay out $100,000 but only 1 percent of the time, they on average pay out $1,000,000 (1,000 policies times a $100,000 payoff times 1 percent, as 99 percent of the time they don’t pay). If they sell them for $1,100 each they take in 1,000 x $1,100 or $1,100,000 and will make a profit of $100,000. But despite the insurance company profiting, insurance can often be a great deal for you. You take out insurance because there are events that would cause you severe financial hardship—for instance, the totaling of a car you can’t afford to replace, the death of your family’s bread winner, or the destruction of your house. It’s worth overpaying a bit to avoid catastrophic financial consequences. We often call insurance like this “catastrophic,” as you’re only paying a small amount to insure against improbable but devastating events. Actually, we usually don’t bother to even call it “catastrophic insurance.” We usually just call it “insurance,” as that’s how it almost always works… except in healthcare!
The insurance companies’ expected profits are not without risk. Companies compete on premiums to see who can sell the insurance for the lowest price while still being profitable, and, importantly, they compete on “underwriting.” Underwriting is attempting to assess risks and charge consumers most accurately, charging more for expensive, more probable risks, and less for the opposite (in my example above, I pretended we knew these risks; in reality, the insurance company has to guess at them). The insurance companies that predict more accurately are generally more profitable, and those that are woefully inaccurate go out of business.
Let’s get back to healthcare. Due primarily to the tax subsidy given to employer-provided healthcare (a bipartisan, so-far-untouchable disaster), catastrophic health insurance is not Americans’ norm. Rather, employers provide essentially all healthcare from basic health maintenance and symptom relief to the most expensive life-saving procedures, and they do it because the government massively subsidizes this approach.
This is odd. You don’t go to your car insurer to fill your car with gas or to your homeowner’s insurance company to change a light bulb. Why do you go to your health insurance company for everyday medical services? That is not insurance, it is tax-subsidized provision of all your healthcare needs, and it causes two of our system’s biggest problems. 1) Health coverage is not portable, as it’s employer-provided, and 2) consumers are insulated from the cost of basic healthcare because they don’t pay directly for services. Educated consumers spending their own money would be far better shoppers for healthcare. Also, I wish I wasn’t asked for a $5 co-pay after a doctor’s appointment. Ask me to pay at least $200 or nothing. Paying $5 for a prostate exam is demeaning to both parties.
Why does this matter? ObamaCare sets out to fix health insurance, and to provide it to more people. Laudable goals. But the system we had was not badly managed health insurance. It wasn’t insurance at all. ObamaCare does not throw out the crazy system we had in favor of real insurance, which would actually work, but rather enshrines and extends all the problems of an insane healthcare payment system masquerading as insurance and built as a tax dodge.
While many are without insurance the real problem is that many of us are over insured. It is the equivalent of buying an auto insurance policy that covers oil changes and flat tires. The government requires mandated coverage that drives costs up. Again this would be the same as ‘mandating’ that all wheel alignments have to be covered by your auto insurance.
Asness is correct that the root of this distortion was tax law, but the accumulation of federal mandates and intrusions over decades have added to the cost. Obamacare ruled that high deductable health plans now must cover physicals and preventive care. We used to save a considerable sum on health insurance because we chose to cover those items out of pocket. (again think what would happen if your auto insurance carrier was required to cover oil changes.) As a result the lowest cost insurance coverage, with the most amount of consumer input has been priced out of the market.