The Evolutionary Health Insurance System We Need In America Today

by FRANK HILL June 7, 2012

This is a direct lift from a very good book you should consider reading very soon, 'The Righteous Mind: Why Good People Are Divided by Religion and Politics' by UVA professor of social psychology specializing in evolutionary psychology, Jonathan Haidt.

Maybe we do have a chance of 'evolving' out of this current ideological impasse that has frozen our national politics into doing nothing of any consequence over our debt situation for these past 12 years now and counting.

We have written about this issue before (see 'Gutter Insurance') and it has to do with the complete absurdity of our current health 'insurance' system, either current or post-Obama health care legislation.

We don't have a 'health insurance' system in America today.  We have a pre-paid 'health payment' system in America.  The massive federal expansion to take full root in 2014 as passed by then-Speaker Nancy Pelosi and Senate Majority Leader Harry Reid and signed into law by President Obama in 2010 only exacerbates the current problematic system.

What we all 'want' and really and truly 'need' in America for the 21st century is a national plan administered by the states that will cover the 'catastrophic' costs of every citizen. 

We don't buy car insurance (mandated by each and every state if you want to drive a car legally) to cover the cost of every oil change and lube job. We buy car insurance to cover the costs of the damages to the car when damaged in an accident and to cover the liability in the case of it being your fault.


Not the same with the current health insurance market in America or Medicare and Medicaid for that matter.  Virtually every health 'payment fee for service' plan in America covers everything from the smallest hangnail removal to the catastrophic costs of a head injury or illness due to diabetes, heat attack, cancer and stroke.  That is exactly like buying car insurance to pay for every oil change, lube job and touch-up paint to the exterior.

Imagine just how expensive car insurance would be with such add-on features.  It would be ridiculous.

Same with health insurance.  Covering everyone in the nation purely for catastrophic cases would cost on average $350/month per person from age 18 to 90 according to some actuaries with whom we correspond. The chances of an 18-year old having catastrophic costs are infinitesimal to the chances of an 80-year old entering the hospital for a long-term illness.  But any insurance plan would plan on having the younger cohorts in effect 'subsidize' the older cohorts and setting up such a national plan administered by the states would do just that.

See what Professor Haidt has to say about this situation on pages 303-304 when he references a fine article by David Goldhill, a Democrat businessman, published in The Atlantic in 2009 titled: 'How American Health Care Killed My Father':

'One of his main points was the absurdity of using insurance to pay for routine purchases.  

Normally we buy insurance to cover the risk of a catastrophic loss.  We enter an insurance pool with other people to spread the risk around, and we hope to never collect a penny.  We handle routine expenses ourselves, seeking the highest quality for the lowest price.  We would never file a claim on our car insurance for an oil change.

The next time you go to the supermarket, look closely at a can of peas.  Think about all the work that went into it--the farmers, truckers, and supermarket employees, the miners and metal-workers who made the can, -- and think how miraculous it is that you can buy this can for under a dollar.

At every step of the way, competition among suppliers rewarded those whose innovations shaved a penny off the cost of getting that can to you.  If God is commonly thought to have created the world and then arranged it for our benefit, then the free market (and its invisible hand) is a pretty good candidate for being a god.  You can begin to understand why Libertarians sometimes have a quasi-religious faith in free markets.

Now let's do the devil's work and spread chaos throughout the marketplace.  Suppose that one day all prices were removed from all products in the supermarket.  All labels too, beyond a simple description of the contents, so you can't compare products from different companies.

You just take whatever you want, as much as you want, and you bring it up to the cash register.  The checkout clerk scans in your food insurance card and helps you fill out your itemized claim.  You pay a flat fee of $10 and go home with your groceries.

A month later, you get a bill informing you that your food insurance company will pay the supermarket for most of the remaining cost, but you'll have to send in a check for an additional $15.  It might sound like a bargain to get a cartload of food for $25, but you are really paying your grocery bill every month when you (or your company) fork over $2000 for your food insurance premium.

Under such a system, there is little incentive for anyone to find innovative ways to reduce the cost of food or increase its quality.  The supermarkets get paid by the insurers, and the insurers get their premiums from you.  The cost of food insurance begins to rise as supermarkets stock only foods that net them the highest insurance payments, not the foods that deliver value to you.

As the cost of food rises, many people can no longer afford it.  Liberals push for a new government program to buy food insurance for the poor and elderly.  But once the government becomes the major purchaser of food, then success in the supermarket and food insurance industries depends primarily on maximizing yield from government payouts.

Before you know it, that can of peas costs the government $30, and all of us are paying 25 percent of our paychecks in taxes just to cover the cost of buying groceries for each other at hugely inflated costs.

That, says Goldhill, is what we've done to ourselves.  As long as consumers are spared from taking price into account---that is, as long as someone else is always paying for your choices--things will get worse.'  And so on.  Haidt goes on to explain how the market supply and demand forces have conspired to drive DOWN the cost of LASIK eye surgery by close to 80% since it was first introduced.  The procedure is rarely covered by insurance and services are delivered on a cash basis.

As we continue to sort through this desultory economy (made only worse by last week's desultory jobs report coupled with gloomy economic forecasts in the EU, China and Japan), maybe now is the time not only to be thinking about who our next President to lead us out of this crisis should be but what sort of economy and society we want to live in going forward.

Is it one directed from the top-down in Washington and the state capitals? Or one where every individual gets to makes their own economic decisions and the providers of such services even in health care have to compete with one another to see who can deliver the best service at the lowest possible cost?

Which is the America in which you want to live out the rest of your life and in which you want your children to grow up and live long and prosper (with apologies to Mr. Spock and the Vulcans)?

Contributing Editor Frank Hill ran for Congress at the age of 28 and served as chief of staff for former Congressman Alex McMillan (NC-9) and Senator Elizabeth Dole (NC). He was a budget associate on the House Budget Committee for 4 years and worked on the 1994 Commission on Entitlement and Tax Reform. He now lives in Charlotte, North Carolina where he does some consulting and lots of worrying about federal spending issues.


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