by Gary M. Galles
For at least half a century (Medicare turned 50 last year), health insurance policies have been hotly debated. The most recent skirmish is over the Trump administration’s final rule expanding the availability of short-term, limited-coverage insurance. Single-payer and Obamacare stalwarts have attacked it tooth and nail. For instance, Los Angeles Times columnist David Lazarus asserted backers “have no clue how insurance works” because they “decided to skip class when the topic of insurance came up in Econ 101.”
Unfortunately, if accurately applying principles of insurance is the standard, both single-payer and Obamacare fans compare poorly to pots calling kettles black. Their preferred policies sharply conflict with insurance principles on multiple fronts.
Insurance is about reducing risk from uncertain events. It makes outcomes for a group with similar risks more predictable. But that must be weighed against the additional administrative and other costs of insurance. That would mean that people would not insure against what would happen for certain nor where there is only a small amount of risk reduction provided if they were spending their own money.
Insuring things which would occur with certainty, say certain inoculations and annual checkups, offers no risk reduction. It provides no added benefits to weigh against the added costs of insurance administration, yet government plans mandate such coverage. Similarly, small health care risks are cheaper to cover directly out of modest savings than incurring the added costs of insurance administration, but government plans also mandate such coverage. Few would want such coverage unless much of the cost was forced onto others (which is how Obamacare subsidies muted criticism of such inefficiencies).
Further, any benefits from reducing risk would also have to exceed added costs induced by insurance coverage. When insurance covers most of the costs, it makes care artificially cheap to recipients, just like a subsidy (e.g., if a medical treatment cost $1,000, someone who had 80 percent coverage would face a cost of only $200). Those artificially low costs to recipients increase the quantity and quality of care they desire. That will increase medical utilization and costs (called moral hazard in the insurance literature), much of which would not be worth the real cost (e.g., above, someone who valued a $1,000 service at $250, but had 80 percent coverage, would still want it, even though it wastes $750 in value). And the ensuring waste can be very large because there are many margins at which those insured will want better care (e.g., better and more specialized doctors and hospitals, more costly newer drugs, tests, and treatment, etc.) as well as more care, raising costs (or requiring care to be rationed, making treatment unavailable, even with insurance, to those on the losing end of such allocation).
Further, differences in circumstances and preferences mean that not everyone would want the same coverage. Teetotalers confident of remaining so would not willingly insure for alcoholism treatment. Those sure they would never use drugs would not want to bear the cost of providing addiction treatment. Yet government mandates that many such medical services be covered, reflecting the political power of provider lobbying far more than the values recipients place on them.
The price controls government health care proposals incorporate also violate insurance principles. For instance, my age makes my actuarial risk roughly six times