Monday, November 29, 2010

What Health Insurance Isn't

Crap health coverage wins a regulatory victory. - By Timothy Noah - Slate Magazine
How's this for a deal: You pay me $13.09 a week. In exchange, I will pay your medical bills, but only up to $2,000 a year. Maybe that deal makes sense if you know with absolute certainty that your medical expenses in the coming year will fall between $680.68 ($13.09 each week for 52 weeks) and $2,000. It makes no sense at all if there's the slightest chance you might end up in the hospital. True, if your hospital expenses exceed $2,000 you'll have lowered the bill by about $1,300. But $1,300 won't likely cover even the cost of an ambulance, much less anything that happens after you arrive. You'd be better off using that $13.09 to buy yourself a weekly lottery ticket.
That's Slate's Timothy Noah describing a health insurance plan that McDonald's offers to its employees. A plan that Noah goes on to describe as "crap health insurance".  The proximate cause of this denunciation is the Obama administration's granting of a waiver to allow McDonald's to continue to offer this type of limited coverage, coverage that was supposed to be illegal by now under the recent health reform.  Noah speculates about why HHS Secretary Sebelius couldn't have at least denounced the McDonald's insurance as she issued the exemption.  He writes:
Why lie to protect McDonald's? Sebelius could have said, "Yes, McDonald's says it may not offer health insurance to its workers anymore. But what they call health insurance wouldn't meet the fiduciary standards of a second-rate Christmas club." Why didn't she say that?
Set aside for now how this episode is an example of why we will never have in practice the health reform system Obama and the Democrats designed, focus instead on Noah's choice of analogues, a Christmas Club, and you'll see why we can't even talk about health insurance in this country.

Insurance is not a Christmas Club where you put aside some amount of money for a particular expense and expect to get back at least that amount at some definite date in the future.  Insurance is about risk.  It's where the insured pays a premium on the chance that his medical expenses will exceed the amount he pays in premiums and the insurer takes the other side of that bet, trying to take in more in premiums, plus the investment income derived from the premiums, than they pay out in claims.

In this country, Noah's Christmas Club metaphor is the dominant way of thinking about insurance.  People believe that since they pay premiums they shouldn't have to pay for all sorts of care ranging from physicals to the utterly predictable trips to the doctor for minor ailments that all of us will take during our lives.  And under most insurance that is written in this country, they'd be right!  At some point our system stopped being about the possibility of catastrophic loss and went into effect at the first dollar. (Keep in mind that even if you pay the first dollar, but it goes toward your deductible, the terms of your insurance contract are kicking in even with that first dollar that you pay.)

In my estimation one consequence of first dollar coverage is that costs for routine care, including some less common things like stitches and simple broken bones, are driven up by the fact that they are covered by insurance.  I guess one could argue that the coverage provided for these items outpaces the cost distortions and that consumers come out ahead in this, but I'm skeptical that this is the case.

The conception of insurance as a health expenses savings account funded by one's premiums is unfortunately widely held.  I believe it remains one of the major stumbling blocks to enacting real reform in this country that accomplishes the twin goals of reducing cost for everyone while providing a social safety net befitting the richest country on earth.

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