Sunday, July 12, 2009

Why is health care insurance different?

As pointed out in my previous posting on the subject of health care insurance, pooling of funds is necessary in order to pay for expensive treatments such as leukemia treatment that otherwise would not be available (because leukemia treatment costs, on average, $1M, and very few people have $1M). This means the pool pays rather than the individual, which causes a decoupling of payment from cost, which causes an infinite upward spiral since providers now no longer have a free market check upon what they can charge for their services. At this point the free market advocate says, "it can't be! Why don't we see this kind of spiral in auto or home owner's insurance if this is correct?!"

In fact, you do see an upward spiral caused by this decoupling, but the upward spiral is limited because the items are replaceable for a fixed sum of money. For example, because insurers, not individuals, pay for most collision damage, auto makers charge far more for body repair parts than they would if it were an entirely free market, and auto body shops that cater to insured customers charge far more than if they had to compete for business based on cost. However, there is a natural limit: the spiral stops once repair costs become greater than the cost of the item. If the repair costs quoted are too much, the insurer will simply give you the money to buy a new one, rather than pay outrageous repair costs. Similarly, if repairing fire damage to your house costs too much, the insurance company can say, "Well, so much for that. Here's the payoff for the value of your house, pay off your mortgage and go buy another one." In short, if home or auto repair people try to charge too much, the insurance company simply buys you another one of what got destroyed, and the repair providers make $0 rather than making a profit.

But if you get sick with leukemia, the insurance company can't turn to you and say, "$1M for leukemia treatment is too much, here's $100,000, go buy another life." You only get one life. You can buy another car or another house if the repairer charges so much that it's cheaper to buy another one, but your one life is it. So with health insurance there's no upper bounds on repair costs imposed by the inherent value of the product, unlike with cars or houses, because the product being fixed is, literally, your life when you're talking about health insurance. So there's no natural upward boundary imposed by the replacement cost of the thing being fixed, because you can't replace your life. Once it's gone, that's it.

So that's the bottom line on why free market insurance works for home owner's and autos, but not for health insurance. Autos and homes can be replaced. Your life can't. That's the fundamental difference, and is why every attempt at "free market" health insurance has run into spiralling out-of-control costs and eventually required significant and extreme state intervention in order to keep costs at a reasonable level. The OECD numbers don't lie: the more government involvement in health care, the cheaper it becomes. Given that currently the median family income of the USA is around $50K, and the average yearly cost of a family health care policy is 25% of that, we need to do something about health care costs or we end up like the USSR, which collapsed when its military-industrial complex sucked up 40% of GDP. Except for us, it's going to be our health-industrial complex that collapses us if we don't do something -- and, like, soon (since those OECD numbers were published only three years ago, US health care spending has risen from 15.5% to 17% of GDP!).

-- Badtux the Numbers Penguin


  1. Wow. I never thought of comparing health insurance payouts to other types of payouts.

    Cool-headed penguin, you :)

    One small detail that is probably irrelevent to your point, but at least (in my mind) worth pointing out, is that we are already past USSR's collapse point on military spending.

  2. We're currently spending under 10% of US GDP on past and present military spending, Nunya. We've spent more of our in the past (e.g. during the Vietnam War) without a problem. But we're currently spending *17%* of our GDP on healthcare -- and that's up from "only" 15.5% three years ago! That has to be reined in, or we'll be in USSR collapse land -- 40% of GDP -- sooner than you think. And the facts show the only way to do that is serious government intervention in the health care system where provider costs are strictly monitored and reported to payers who can then take any profit away from over-prescribing, i.e., remove any overprescribing for profit. Providers will scream. Drug companies will scream. Diagnostic instruments makers will scream. But we can't go on this way -- it's bankrupting America even more so than the costs of our overseas wars.

    - Badtux the Numbers Penguin


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