Why does Colorado Democratic Chair Pat Waak want to outlaw my health insurance?
With Barack Obama demonizing health insurance companies and various politicians (both Democrats and Republicans) calling for more insurance controls, now is a good time to review what insurance is.
Insurance (on a free market) is simply a voluntary agreement to pool resources to pay for high-cost risks.
Let us take a simplified example. Let’s say we live in a community with 50 people total, and we figure that, within the next few decades, one of our houses will probably burn down. We don’t know whose house it will be, but we’re all at risk. None of us wants to bear the full costs of replacing a house. Therefore, we decide to share equally the cost of paying to replace the house that burns down. We might agree to split the costs of a new house once one is destroyed, or we might agree to contribute monthly to a fund. That’s insurance.
In the same community, we might agree to insure against the risks of premature death, unexpected car crashes, and unexpected health costs.
In real life, most people purchase insurance to cover their lives, homes, cars, and health. There are two main differences between real-life insurance and the insurance of our simplified example. First, insurance companies pool many more people, making it easier to calculate and manage risks. Second, insurance companies are managed by professionals who do the work in order to earn a living, just as you earn a living in your specialty.
For whatever reason, today some people demonize “profits” — earning a living — in the insurance industry. This is strange, for, as my friend Justin Longo has pointed out, few think it’s evil to “profit” by selling food. Do those who decry insurance profits also demand an end to for-profit grocery stores? In a free market, profits drive a company to offer better products and service at lower cost. Profits are good. A company that does not profit goes bankrupt.
Unfortunately, there is no free market in health insurance. (Indeed, as Tim Carney points out, insurance companies have been a major player in destroying the free market in insurance.)
Have you ever wondered why you purchase life insurance, home insurance, and car insurance on your own, but you buy health insurance through your employer? The reason is that tax policy has driven non-portable, expensive, employer-paid insurance. One consequence is that people do not buy long-term health insurance policies, as they do with life insurance. Lose your job, lose your insurance. This is the major reason why pre-existing conditions, which so upset Obama and other politicians, have become such a serious problem. Politicians have almost completely destroyed the market for long-term health insurance.
Another consequence of tax policy is that health insurance has evolved into pre-paid medical care. People have no problem dropping $30,000 on a new vehicle, but if they’re asked to cough up a $15 co-pay for health care, they think the sky is falling. This has largely undermined the very purpose of insurance, which is to protect against unexpected risks.
Imagine you purchased car insurance through your employer, and this insurance covered new auto purchases, oil changes, tire rotations, and everything else related to your car. What would be the result? People would be a lot less careful with their cars, and they would use a lot more car services. That’s basically what has happened in health care, thanks to federal tax policies.
In the tiny non-employer-paid insurance market, politicians have placed so many controls on policies that they are dramatically more expensive than they would be on a free market. Moreover, because insurers are subject to ever-changing political controls, they can neither calculate long-term costs nor (for the most part) offer long-term insurance policies.
The purpose of insurance is to cover long-term, unexpected risks. Because of political interference, health insurance no longer meets either goal. Because insurance is tied to one’s job and insurers generally cannot offer long-term policies, we get the problem of people developing medical conditions and then losing their insurance. Because politicians encourage pre-paid health care, “insurance” premiums are dramatically more expensive.
And yet, in the name of “reforming” insurance, various politicians want to continue to undermine the very purpose of insurance. For example, Pat Waak, chair of the Colorado Democratic Party, wrote for the Denver Daily News, “Insurance companies should cover annual exams and tests that prevent illness. How about mammograms, pap smears, eye exams and other tests that will promote wellness?”
Why doesn’t she demand that auto insurance cover tire rotations and oil changes?
Waak misses two obvious points. First, if you force insurers to cover routine, expected costs, the premiums will grow much more expensive. Because holders of this alleged “insurance” bear no direct costs for their health decisions, they are less thoughtful about how they use medical services.
The second point that Waak misses is that people can pay for preventative medicine without using insurance. This is what my wife and I do. Just this week my wife went to her physical and paid for it out of our Health Savings Account. Just a couple weeks ago I got blood work done at the local King Soopers pharmacy. (This blood work was free of charge, but I’ve spent our own money on other sorts of health care.)
Do people get oil changes or tire rotations even though those things aren’t covered by insurance? Sure they do. Why? Because routine maintenance reduces long-term costs. The same holds true with health, if only politicians would leave people free to act on their own judgment.
Right now my wife and I pay $148 per month for high-deductible health insurance. This covers both of us. (Our insurance would cost less and cover us for much longer if there were a free market in health insurance.) We save money in a Health Savings Account, which we use to pay for routine expenses.
What Pat Waak wants to do is outlaw our health insurance. A likely consequence of Waak’s policy is that my wife and I would no longer be able to afford insurance at all.
That is my biggest fear right now: if Barack Obama and Pat Waak get their way, the likely result is that my wife and I will go from having insurance we like reasonably well to not being able to afford insurance at all. That’s not “reform.” That’s outright thuggery.