Free Exchange Should Set Insurance Premiums

Should health insurance companies charge people with pre-existing conditions or known health risks more?

Lawrence Jones of Conifer wrote a thoughtful letter for the August 25 Denver Post arguing that higher rates are unfair for conditions beyond one’s control. I thought Jones’s letter deserved a full reply.

Jones writes:

Letter-writer William Hinckley [see the August 20 letter] thinks that charging higher insurance premiums to people with pre-existing medical conditions is akin to charging higher house insurance rates to dimwitted folks who knowingly choose to live in fire traps. People don’t choose to get diabetes. People don’t choose to have genetic predispositions to cancer.

Those who knowingly make risky life choices, whether to live in fire-prone shacks or to smoke tobacco, should certainly pay higher premiums as a result of their choices. But why should the boy with leukemia, the woman with breast cancer, the young athlete with diabetes? Why should the innocent be punished for wanting access to health care just because they actually need it?

Jones’s fundamental mistake is to ignore the rights of insurers and treat insurance as a collectively owned good. Insurance is a product sold on the market that properly belongs to its producers. Insurers have every right to set the terms of insurance policies, including rates. And consumers are free to buy an insurer’s product or not. The government’s only proper role is to enforce insurance contracts and prevent fraud, whether by the insurer or the consumer.

Politically controlled insurance rates violate the rights of both insurers and their customers. The key characteristic of free markets is voluntary exchange. A producer cannot sell a product without a willing customer, and a customer cannot buy something that no producer wishes to sell. Producers and customers have the right to reach mutually agreeable terms, free from force.

What Jones ignores is that forcing insurers to charge unhealthy people lower rates means that insurers must charge healthier people higher rates, or risk bankruptcy. The typical result of Jones’s policy is that young, healthier, less-wealthy workers trying to get ahead in life must subsidize everyone else.

Jones, then, implicitly means that he wants politicians to force insurers to charge healthy people more. Such political controls are a big reason why insurance premiums cost so much today, and why both Democrats such as Barack Obama and Republicans such as Mitt Romney call for mandated insurance. Some young healthy people decline to subsidize other people’s health through politically-manipulated insurance premiums, so they must be forced to do it, the reasoning goes.

Jones misses a number of other points as well. For example, he ignores the fact that politicians have effectively outlawed long-term insurance contracts, as I point out in a recent article on pre-existing conditions.

Of course insurers should NOT charge people with health conditions higher premiums — IF those people bought long-term insurance before they developed the conditions. But long-term insurance contracts, on the whole, simply are not possible in today’s political climate. Real health reform entails restoring a free market in health insurance, so that insurers are more competitive, more responsive to customers, and more free to offer useful products.

The entire purpose of health insurance, as I’ve argued, is to allow people to voluntarily pool their resources to protect against unexpected risks. If a risk is expected, such as if somebody knows prior to getting insurance that they have cancer, then the risk is simply not properly insurable.

Jones suggests that the “innocent” are “punished” when politicians do not force others to subsidize their care through higher insurance premiums. But this presumes that healthier people are somehow guilty. They are not. A free exchange between an insurer and a customer does not somehow “punish” a party outside that exchange.

Does this mean that people with pre-existing conditions and no health insurance cannot get health care? Obviously not. The idea that all health care must be funded through health insurance is ludicrous. The wealthy may fund their own health care out of pocket. The poor may look for voluntary charity, whether provided directly by hospitals or indirectly through charity groups. (Obviously today people have access to a wide array of health welfare programs. I favor gradually replacing welfare with strictly voluntary charity.)

Jones is also partly wrong about which diseases are impacted by personal behaviors. He mentions cancer and diabetes as examples. Yet both cancer and diabetes are often largely caused by one’s choices.

The American Diabetes Association states, “Type 1 and type 2 diabetes have different causes. Yet two factors are important in both. First, you must inherit a predisposition to the disease. Second, something in your environment must trigger diabetes.” What you eat can dramatically impact your likelihood of developing diabetes, as it can dramatically impact your ability to deal with the disease.

Likewise, cancer is partly genetically determined. For example, some women have genes that make breast cancer more likely. Nevertheless, our foods, activities, and chemical exposures can dramatically impact our risks of cancer.

I have two general points to make about this. To the extent that disease is impacted by personal behaviors, it is a very bad idea for political policies to encourage damaging behaviors. Laws forcing insurers to fund pre-existing conditions reduce the incentive of people take care of themselves. The inevitable result is more disease.

The second major point is that one person’s unluckiness does not impose some sort of duty on a more-lucky person. The person without a genetic predisposition to get cancer is free to donate funds to treat cancer patients but should not be forced, under threat of imprisonment, to do so. The proper purpose of insurance is to protect ourselves against unexpected risks, not to equalize luck after the fact.

Health care is not a right. It is not some collectively owned good to be distributed by political whim. Health providers and health consumers have a right to negotiate mutually beneficial trades and to donate whatever they wish to charity. It is that right which government must consistently protect, if we value or lives, our liberties, and our health.