Healthcare Installment #5. Please read posts starting from 08/25/09.

The Need for Health Insurance

Given the unpredictable nature of health and its associated costs, we protect our personal finances by buying health insurance. It is simply too risky to bear all the potential costs ourselves. As a result, discussions of healthcare include not only the cost of service, but also the cost of insurance to pay for that service.

Insurance spreads the risk over a pool of people. In exchange for paying a fixed premium amount, we get the assurance that we will not be forced to pay exceptionally high amounts – the amounts being set by the policy we purchase. The more risk we are willing to take on ourselves in the form of higher deductibles, the lower the premium. Private firms send us a bill. If we have employer-sponsored insurance, then our portion of the premium is paid through payroll deduction. The amount paid by the company is usually invisible to us. The government collects premiums for Medicare in the form of the Medicare payroll tax (1.65% on the employee and also the employer). Check your year end pay stub to see how much you contributed to Medicare last year.

When we participate in insurance, we are partners with all the other people in the plan. The insurance company brings us together and administers the provisions of the policy. As a result, we now have more parties with a stake in our health and healthcare expenses because they are helping pay for them. This creates one of the most intractable aspects of managing healthcare. How do we preserve decision making at the doctor-patient level when those decisions affect other insured parties and the shareholders who own the insurance company itself? The short answer is that we sacrifice some personal freedom in other to get the protection offered by the group. Unless we are willing to pay unlimited premiums to provide unlimited care, there is no other approach. Finding the proper way to balance decision making is one of the major issues to be resolved in the healthcare debate. It is the sensitive spot that flared into prominence with Sarah’s Palin’s remarks about "death panels." That ill-conceived and inaccurate comment did however, touch on this underlying issue. Unfortunately, it inflamed passions rather than led to useful discussion.

It is helpful to look briefly at other forms of insurance to see issues hidden in healthcare insurance. Homeowner’s insurance protects against many perils, but not against floods. If you live on a flood plain, you need special flood insurance because you are in a special risk group. This gives individuals some incentive not to live on flood plains. The higher the cost for flood insurance, the greater the incentive (the same could be true for hurricanes and wildfires). Persons wishing to live high-risk lives pay more for the privilege. In a similar fashion, people with higher risks for illness are charged higher premiums by health insurance firms. This is not meanness. It is practical economics. In the same way a bad driving record increases car insurance, a poor medical history can increase healthcare insurance premiums.

To expect private insurers to lower premiums to high risk persons is to fail to understand the nature of insurance. High risk people will always cost more to insure and when the cost of insurance is unaffordable to them, only charitable or government assistance can close the gap. When government closes the gap, it forces the taxpayer instead of the insurer to fund the coverage. Mandating that private insurers cover high risk people either raises the premiums for all the policyholders or bankrupts the insurer when claims exceed premiums. We cannot legislate away basic economics.

Why Do We Provide Healthcare?

Healthcare is required to maintain good health, restore poor health, and to treat chronic and end-of-life conditions. We seek healthcare as individuals because without it we either have a diminished quality of life, or no life at all. We provide healthcare as a nation so that we have a population capable of competing in the global marketplace. That’s the economic side. We also provide healthcare out of a concern for our fellow man. We are compassionate. The cost of healthcare, whether for competitive or compassionate reasons, must be balanced with the cost of other national activities: education, transportation, defense, sanitation, etc. Just as a family must prioritize spending for food, shelter, clothing, and healthcare, so must a nation prioritize its expenditures.

The difficulty with healthcare is the total cost to extend full coverage to every citizen for every treatment for every ailment. If that is not economically feasible, then "Where do we draw the line?" and "Who draws that line?" become major questions. These are behind some of the vitriolic attacks against government intervention in health care. People do not want a third party intervening in the health care decisions between a patient and a physician. However, when the patient is part of any insurance plan, government or private, the insurer and all other policy holders have an economic stake in that decision. Those who pay, decide. Therein lies the rub of money against morality.