Jeffrey Singer: Health insurance an endangered species


Health insurance will soon be extinct. Unlike other members of the species – property and casualty insurance, life insurance, liability insurance, auto insurance – political predators have been steadily killing off health insurance over the years. Soon it will cease to exist, allowing for more intrusive regulation of behavior.

Insurance is designed to protect against unforeseen costly events. The primary role of insurance companies in the economic ecosystem is risk assessment. In a way, insurance companies get paid to discriminate. Say you want to build a house in an area known for landslides, and you want to buy insurance for that house. If the insurance company assesses a very high likelihood of your house sliding down the hill, it will charge a very high premium for the insurance, or it might refuse to insure your house. Similarly, a malpractice insurance company would be expected to charge very high premiums to such a doctor who has had an extraordinary amount of lawsuits for malpractice and bad outcomes. It may even deny coverage.

Insurers create "risk pools" by gathering the money of various participants in a way that puts enough money in the pool for the insurance company to pay claims made by any of the risk pool members, while still leaving enough to pay to make it worthwhile to manage the system. The insurance company determines how much each risk pool participant needs to kick in based upon the likelihood of that participant making a claim on the pool. The greater the likelihood, the greater the contribution to the pool.

Insurance companies provide society a service by assessing the risks of society's choices, and creating options to mitigate those risks. As a byproduct, they steer people away from risky choices.

Beginning in 2014, under the Affordable Care Act, health insurance companies will no longer be able to deny coverage to applicants who are extremely likely to take money out of the risk pool – those with pre-existing conditions. What's more, health insurance companies will not be allowed to charge those riskier applicants any more than applicants who have little or no likelihood of taking money from the pool.

In other words, health insurance companies will no longer assess and insure against risk. They will just gather the money of plan participants and then pay all of their health care bills. Because they can no longer discriminate by risk, low-risk participants will pay much more, while high-risk participants will pay much less. Everyone pays the same ballooned premiums.

Health insurance companies that cannot discriminate based upon risk will no longer be selling health insurance. They will function more like escrow agents than health insurance companies, gathering money from plan participants and disbursing it to health care providers.

With no disincentives to risky choices by health plan participants, the door opens to more and more laws regulating personal behavior in the interest of fighting rising health care costs.

Furthermore when there is no discrimination against high-risk applicants, and such applicants cannot be denied coverage, then why pay those higher premiums for health insurance? Why not wait to get a serious and costly health problem before buying the insurance? If auto insurance functioned under the same rules, any rational person would hold off buying auto insurance until an accident occurs – and then pick up the cellphone while still at the scene and buy the insurance.

Obamacare seeks to remedy this problem by charging a penalty tax to those who choose not to purchase this so-called health insurance. The problem is that, when fully implemented, the penalty is minimal – in many cases little more than one month's bloated premium.

The upshot of all this is that the only people who will willingly pay into the health plan will be those who need to take out from the health plan. As those taking out of the pool become an ever-increasing share of those paying into the pool, the premiums will necessarily spiral upward. The public outcry over rising premiums will lead to further regulations over the "health insurance" companies' administration and profits. Many will leave the market.

Finally, the politicians will proclaim a "market failure" in the provision of private health insurance. They will see no alternative but for the government to move in and place everyone on a taxpayer-funded, government-run health plan. And with that will come all of the inefficiencies, depersonalization, and rationing seen in similar systems around the world.

Health insurance should be placed at the top of the endangered species list.

Dr. Singer practices general surgery in metropolitan Phoenix and is an adjunct scholar at the Cato Institute.


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