Healthcare: “Insurance” Now Just Means Redistribution

Authored by Gary Galles via The Mises Institute,

Americans have been fighting over health insurance reform for ages. For example, 25 years ago, in 1992, over 200 congressional health care bills were introduced.

Unfortunately, while the rhetoric has focused on insurance, such as how many would supposedly gain or lose insurance if some change was implemented, that has not been the real issue. Income redistribution has. As Henry Aaron estimated that year, implementing a comprehensive national health insurance system would redistribute more income than any single national policy then in existence.

What Is Insurance? 

How do we know insurance is not the real issue? Because claimed “reforms” violate so many principles of insurance.

Insurance is about reducing risk in the face of uncertain events. But insuring things that would happen for certain, say annual checkups, offers no risk reduction — it offers no benefits to weigh against the added costs of insurance administration that must be borne — yet such coverage is frequently mandated.

Similarly, small health care risks are cheaper to provide for from modest levels of savings, rather than bearing insurance administration costs. If one’s own resources were involved, absent government interventions, they would not be insured at all. Only when others are forced to bear much of the cost would people want insurance to cover such things.

Administrative costs are not the only issue, either. The benefits from risk-reduction through insurance would also have to outweigh the cost of the health care. This is made especially difficult by the fact that the insurance itself induces over-consumption of health care services.

However, when most health care costs are borne by third parties rather than individuals themselves, there are many margins at which those individuals will want better care (e.g., better and more specialized doctors and hospitals, more costly newer drugs, tests and treatment utilizing the latest technology, etc.), as well as more care. Since that added care need only be worth what an individual pays, net of insurance coverage, much of it is worth far less than its cost to society, further limiting what people would voluntarily cover based on the principles of insurance.

Those considerations explain why lunch insurance does not exist. You will almost certainly eat lunch, which also involves relatively small expenses, so there would be little risk reduction. And if someone else would pay most of your bill, you would order far more expensive lunches than otherwise, raising the premiums that you must be charged to pay for it. The benefits don’t justify the costs, again unless others are forced to pick up a substantial part of the tab.

Also, insurance is about risk reduction that people value more than the premium they must pay for it. Thus, voluntary market insurance would not mandate coverage of things people had virtually no risk of experiencing. Teetotalers would not willingly insure for alcoholism treatment. Those sure they would never use drugs would not insist on addiction treatment. Yet government “reforms” are full of such mandates. And a quarter-century ago, before many current mandates were in place, it was already estimated that up to one-quarter of the uninsured population traced back to such cost-increasing government-imposed coverage regulations.

The price controls reform proposals incorporate are also about income redistribution, rather than health insurance. Say that my age makes my actuarial risk six times that of my students. If, as Obamacare required, I could not be charged more than three times what they were, that does not reflect actual risks. Obamacare regulations simply force the young to subsidize the old. That rip-off of the young also explains why Obamacare threatened them with a penalty to force them to accept that bad “insurance” deal.

The mandate that insurance cover pre-existing conditions shows even more clearly that “reforms” were not really about insurance. Rather than pooling those with similar circumstances and risks, allowing the law of large numbers to reduce people’s exposure, it forces others to subsidize those who are already sick, while misdirecting their blame from government requirements to insurance companies who must charge others more to pay for them. Those sorts of after-the-fact possibilities are not offered in fire, automobile or life insurance. Similarly, casinos don’t let you bet once the roulette ball has stopped or the dice are still. Only government mandates can create such windfalls through health insurance. 

In addition, if health insurance reform truly aimed to benefit all Americans — rather than benefiting some by the intentional pick-pocketing of others — it would not have been “marketed” with so many lies, damned lies and statistics (See my article “Comparing Obamacare scams.”). Honesty would have sufficed if reform did what was being promised.

The health insurance debate has been so contentious in part because it has allowed massive income redistribution to be misrepresented as about overcoming market failures in health insurance. It helped sell Obamacare dishonestly and now portrays reducing massive theft from government targets as imposing heartless harm on others. Such misrepresentation may be able to produce misinformed political support, but it cannot generate policies that advance Americans’ general welfare.