The Schrug

After watching countless TV ads for life insurance as a child, I finally went to my parents and asked “Do you have life insurance?” They assured me that they did. So I asked the natural follow-up: “Do I have life insurance?” They laughed. “Why would we need life insurance for you?” I was hurt. You see, I had misunderstood. The ads I was watching said “buy life insurance, because you might die.” So I reasoned that buying life insurance was a way to prevent death, and I was sad to find out that my life wasn’t worth the premiums.

I understand the concept of insurance better now than I did then, but the concept of health insurance is in some ways just as baffling to me today as life insurance was then. And I worry that what’s getting overlooked in the current debate about our health care system is just how peculiar the notion of health insurance is.

Think about all the things we normally insure and the hazards we normally insure them against. Usually we insure tangible items: houses, cars, boats, jewelry, etc. And we insure them against very unlikely events: fire, flood, theft, fraud, and so on. This kind of property insurance makes a lot of sense for everyone involved. The big winners, obviously, are people who make claims. They get back far more from the system than they put in. People who never make claims also win, though, because even though they are effectively throwing their money away, they are only out a fraction of what they might otherwise have lost, and they got to sleep better at night. Insurers win because they have very smart people calculating the odds of these unlikely events happening and how much each policy is worth. (For example, if a ring gets stolen, they have to pay whatever that ring was appraised for – not for “a new ring.”) So insurers have a pretty good idea of how much they are likely to pay out each year. Occasionally they encounter insurance fraud, but for the most part they can be assured that their policy holders will take reasonable precautions to prevent the losses from occurring in the first place.

Life and disability insurance are a little trickier because no one can objectively calculate the replacement value for a life or a career. To correct for this, life and disability insurance policies are written with defined benefits. For example, there might be a fixed amount awarded in case of accidental death, and someone who becomes disabled gets awarded a percentage of his or her previous salary. Again, there are instances of fraud (and murder), but generally speaking people would much prefer never to collect on these policies.

Now think about health insurance, and note how radically different “health” is from life, disability, and property:

• Everyone gets sick or injured eventually.
• Defined benefits are usually not part of the equation – certainly not as explicitly as they are with other types of insurance. Some health insurance policies have lifetime benefit limits, but no policies tell you in advance exactly how much will get paid out for every conceivable malady. The general proposition came to be “if you get sick or hurt, we’ll pay for you to get well.” (With the advent of managed care, that got amended: “And we’ll also pay to keep you from getting sick in the first place.”)
• Most people intentionally behave in ways that increase their need to “cash in” on their insurance policies. These behaviors range from things we generally frown upon, like smoking and overeating, to things that are commonly accepted in everyday life, like playing sports or driving a car, to things that are essential to society, like working in dangerous jobs or getting pregnant.

So the very building blocks of what makes the casualty insurance system work – unlikely hazards, defined benefits, and motivation by the insured to avoid claims – are all absent in the health insurance system.

Now add to that the fact that the health care services purchasing market is like no other and you have a real mess.

I was curious as to how this obviously silly idea of health insurance came about so I did a little poking around. There’s clearly enough here for a doctoral dissertation so I won’t attempt to provide “the answer” here. But if you’re interested in the history of health insurance, here are a few links to get you started.

• Timothy Noah, “A Short History of Health Care,” Slate.com, 2007 (this is a review of Sick by Jonathan Cohn)
• Melissa Thomasson, “Health Insurance in the United States,” Economic History Services
• Wisconsin Policy Research Institute, “The History of Health Care Costs and Health Insurance,” 2006

Any health care system that has “insurance” as its foundation is doomed to fail. The only solution as I see it is to define some package of health care services that every resident of this country is entitled to regardless of income, assets, age, medical condition, or any other factor. This package would include preventive measures like annual physicals and vaccinations but not gym memberships. It would include a reasonable standard of care for chronic conditions but not the latest, greatest, and most expensive treatments (even if those treatments were proven to prolong life). It would provide crutches but not million-dollar prosthetics. Most people, of course, would not want their care to limited to such a bare-bones package, and we could let the private sector figure out a way to provide supplemental benefits, like quicker access to a wider range of physicians, more expensive operations and drugs, private hospital rooms, and so on. Ideally the supplemental benefit system would expose the true costs of health care to the consumers and give them an incentive to spend conservatively.

In a system like this, rich people would live longer and more comfortably than poor people. Could we abide such a result? We do now.