Mon, 07 Apr 2003

Medical Insurance

Do you have health insurance?

We have an institution in the USA that we call "medical insurance." It is nothing like insurance, but instead more like socialized medicine for employees. If you have a full-time job working for someone, you very likely have medical insurance. There's a small deductible, and beyond that most costs are covered by the insurance.

Insurance is subject to a problem called the "moral hazard". Very simply it is that the person being insured knows more about their need for insurance than the insurer. For example, if you smoke, or if your ancestors died at an early age due to a genetically-associated disease, you need insurance more than the next guy. Paradoxically, insurers want to sell to people who never need it, and yet the people who want to buy it are the people who are confident that they'll need it.

This conflict is resolved by selling insurance to a large category of people at the same time, for example everyone who works at the college, or is a member of the union, or who attends the same church. Membership in those groups is only weakly predicated upon one's need for insurance. That's good, and it's fine as far as it goes.

It doesn't go far enough. At some point in time; I haven't done the research to find out exactly when it was, the tax code was modified so that individuals and corporations paying for medical insurance were treatedly differently. Corporations paying for medical insurance found their payments to be an expense of the business. Individual's medical insurance payments were like any other expense -- non-deductible.

Corporate deductibility of medical insurance payments has had a perverse effect on medicine. With the system was arranged such that pre-tax dollars paid for medical insurance, a corporation is able to purchase more insurance than the employee. To make this work, though, insurance has to pay for ordinary expenses. That's not how insurance is supposed to work. Insurance is for uncommon expenses.

In a well-designed system, individuals would choose a doctor and pay for most health care out of their pocket. This would have the pleasant effect of causing bad and expensive doctors to go out of business. It would also encourage a thrifty health care system. Even so, there would be medical expenses beyond the ability of most people to pay in a reasonable amount of time. That is what medical insurance is for -- to cover unforseen expenses. Such insurance has a high deductible, in the realm of thousands of dollars.

The current system of health care is broken. Because most medical expenses are paid through insurance companies, the purported beneficiary, the patient, has no say in the treatment. Patients are told which doctors they can visit. Doctors are told which treatments they can prescribe. Hospitals are told how much a treatment will cost.

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