Health Insurance Scam

It is fitting, on several levels, that the debate over de facto nationalization of “health care” may hinge on abortion. To get her bill through the House, Speaker Nancy Pelosi had to accept an amendment that would forbid the use of taxpayer money to buy insurance policies that pay for abortions (except for rape, incest, and danger to the mother). The prolife and prochoice sides are wrangling over whether people who get government insurance subsidies should nevertheless be allowed to spend their own money for abortion coverage.

For me that’s not the interesting issue. My first reaction was: How can you get insurance for a volitional act? Regardless of one’s position on abortion, there is no denying that it is something a woman chooses. It doesn’t happen without her initiative and consent. My objective here is not moral judgment but precision. For all kinds of reasons a pregnant woman might feel she needs an abortion, but that does not change the fact that it is an action not a happening (as Thomas Szasz would put it).

So how can it be insured against? Insurance emerged long ago to protect one’s assets against  the risk of rare but catastrophic events that one cannot prevent, such as a house fire or a serious automobile accident. You’re not likely to find an insurance policy that covers arson by the homeowner, an intentional crash, or elective cosmetic surgery. And for good reason. What would be in it for the insurer? He’s in business to make a profit. He doesn’t exist to pay other people’s bills. (That will be a surprise to some folks.) Traditional insurance is viable when the pool of policyholders is sufficiently large and so constituted that the expected payoff for the covered rare event is a small enough percentage of the premiums collected to make the profit greater than the opportunity cost. If the covered event were a volitional act, the business plan would be fatally flawed.

But “health insurance” isn’t traditional insurance. As Szasz puts it, “[W]hat we call ‘health insurance’ has little to do with health and nothing to do with insurance.” (By the way, when did medical care/insurance become health care/insurance? They aren’t the same thing. Health care is whatever you do care for your health: dieting, exercising, meditating, and so on. Medical care is what you buy from a doctor or a hospital to recover from or manage a disease or injury, or to ascertain if you have one of those. Conflating those terms has had huge adverse public-policy ramifications.)

The historical explanation for the corruption of insurance in the case of medical care has been rehearsed many times. When 1940s wartime economic controls prohibited pay increases for factory workers, the government allowed employers to provide medical coverage instead. Unlike wages, noncash benefits were not taxed and soon became part of labor negotiations. The tax advantage given to insurance versus cash  wages brought forth ever more elaborate  packages, which included coverage for uninsurable events, such as routine physical and dental exams. Employers had no problem with this because their employees actually paid the price in forgone cash wages. (Bosses might have liked that their workers were dependent on them this way; it was one more reason not to leave a job.) Employees were satisfied because they were fooled into thinking their bosses were paying for the benefits. But even if they had realized who was really paying, the tax advantage would have proved irresistible. The employer-based policy was paid for with pretax dollars; not so an individual policy.

Why were the insurance companies willing to cover noninsurable events? Because they were compensated through the oblique payment system. But the fact that an insurance company covers something doesn’t make it real insurance. Getting a physical exam each year is completely discretionary no matter how beneficial it may be. For an insurer to cover that predictable service he would have to be paid, for each covered person, the price of the exam plus administrative overhead. Why would the company do it for less? It’s not a charity. Many years ago an insurance CEO told me it costs $35 to $50 to process a $25 claim. No one paying for insurance out of pocket would think that’s a good deal. But if you hide the costs and throw in some tax benefits, such coverage will be bought and sold.

Nevertheless, it is not insurance but rather prepayment for future services, with administrative costs added to the tab.

Encouraging Waste

Much of what we call health insurance is of that nature. In a textbook example of rent-seeking, state governments aggravate the situation by mandating coverage for a variety of elective services — coverage that most people would not choose to buy. What we call health insurance is a lie perpetrated and sustained by the political system. But it’s not only dishonest; it’s also wasteful, because it perversely encourages people to buy medical and other services without regard for cost. As the economists say, demand curves slope downward: The lower the (visible) price the larger the quantity purchased.

If you want to know the fundamental reason for medical price inflation in the United States, there it is. Consumers are untethered from cost constraints. This is true for most people because most people get their coverage through their employers, Medicare, and Medicaid. It may seem humane to free consumers from cost constraints, but it is unsustainable as long as scarcity is a feature of our world. Costs can be hidden and shifted, but they cannot be eliminated. That is why rationing lies at the end of what is misleadingly called “health care reform.” Anyone who says otherwise is wrong. (For a response to the false claim that the market rations too, see my article “The Market Doesn’t Ration Health Care.”)

Thus the system that earlier generations of planners constructed creates artificially high prices for services and “insurance,” pricing younger and lower-income people out of that market. A new group of planners now comes along claiming to want to help those harmed by the previous groups. New burdens will be piled atop old. None of the offending interventions will be repealed. That’s how government works. (There is no time to describe how government also constrains supply through occupational licensing, the FDA, and other ways, increasing prices further.)

We need not question anyone’s motives. It should be enough to point out that the logic of government control of medical care and insurance must, sooner or later, entail interference in our most personal affairs. How can we be letting this happen?