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Old October 27th, 2009 #96
Alex Linder
Join Date: Nov 2003
Posts: 45,375
Blog Entries: 34
Alex Linder

[Good article, explains insurance. The government and its schools and handmaiden media have lied for so long that very few understand what's actually going on with health care and insurance and wages and employers. In a democracy, everything is reduced to the lowest level, that the stupidest among us might misunderstand and grow inflamed, hence clamarous to be led to the land of Free Good Things for Everybody.]

One of the many bad side effects of the current system is that the meaning of the word insurance has become corrupted in public discourse. The way that the word is used in the current debate means, approximately, "a third-party payer who will provide unlimited health care at minimal or no cost to the patient." I frequently hear people ask, "how can someone with an illness obtain insurance?" What the sick person needs is care, not (necessarily) insurance. In any case it would not make sense for an insurer to provide a policy to someone who is already sick.

When I blogged about this recently, I received several emails with questions along the lines of, "I have medical expenses that I cannot afford, therefore I need insurance." But insurance as such can only replace large unpredictable risks with small but known payments by distributing the small risk over a large pool of insured. Insurance cannot solve the problem of funding all routine or regular care because distributing a fixed and even expense does not reduce the cost – it probably increases the cost. A policy that covered predictable and recurring care would have to charge at least as much as the care itself, and then some to account for the overhead of claims processing. The insurance company must prevent fraud and ensure that the care they are paying for is necessary. This imposes additional monitoring costs. For the people who emailed me, a policy would only reduce costs if someone else paid the premium.

It is not necessarily the case that costs of care under a cash payment system would be the same as they are now. Under a cash payment system prices would have to be lower, for several reasons: people would become price-sensitive in their consumption decisions; third party monitoring costs would be eliminated in most cases; and providers would have to compete on the basis of price. See this discussion of health care in India for some insight into how a cash paying system might function.

While the current four-party system is not the only reason that costs are as high as they are, it is one reason. So we are stuck in a loop where costs are high because we have insurance but we must have insurance because costs are high. For more information about the history of the four-party system, I recommend the excellent paper The Modern Health Care Maze: Development and Effects of the Four-Party System by Kroncke and White.

Also, most people do not perceive the costs of the current system accurately. I believe that employer-provided plans are partly at fault for this. Because the plans are nominally paid for by the employer, they create an illusion that care is provided at no cost to the insured. Most employed workers do not understand that they pay for their health plan through reduced wages. The tax system is also partially responsible for this system because the employer's expense is tax deductible, but the employee’s purchase of a similar plan out of their after-tax income is not.

People are for the most part unaware how much lower their wages are due to employer-provided plans. If your employer is providing a family plan that costs several hundred dollars per month, this is costing you thousands of dollars annually in lower wages. Having your employer purchase a policy on your behalf also creates the well-known issue of lack of portability when you change jobs. I wonder how many people do not change to a better-paying or otherwise more attractive job due to the portability issue.

Without benefits, the present employer costs would have to go back into wages. In my experience trying to explain this point, it is an unfamiliar concept and many people are skeptical. The most common response I get is that employers have the ability to simply lower wages by cutting benefits without increasing the cash component of wages, as if the level of wages is totally discretionary on the part of the employer. Economic reasoning is required to understand that the total wage consists of cash payments paid directly to the worker plus expenses incurred on the worker’s behalf by the employer. The opportunity cost of providing employee benefits is less money available for the payment of wages. (If you are not familiar with this idea, see a text on the marginal product theory of wages, for example, Man Economy and State, Chapter 7).