The Insurance Model

Let me start here with this article by David Goldhill. If I was a good blogger, I would have made a big deal about this back in August when I first read it. The article is long but well worth it. His father went into a hospital with pneumonia and died from hospital related infections. The author then spent a year trying to figure out how to improve things.

I’m a Democrat, and have long been concerned about America’s lack of a health safety net. But based on my own work experience, I also believe that unless we fix the problems at the foundation of our health system—largely problems of incentives—our reforms won’t do much good, and may do harm. To achieve maximum coverage at acceptable cost with acceptable quality, health care will need to become subject to the same forces that have boosted efficiency and value throughout the economy. We will need to reduce, rather than expand, the role of insurance; focus the government’s role exclusively on things that only government can do (protect the poor, cover us against true catastrophe, enforce safety standards, and ensure provider competition); overcome our addiction to Ponzi-scheme financing, hidden subsidies, manipulated prices, and undisclosed results; and rely more on ourselves, the consumers, as the ultimate guarantors of good service, reasonable prices, and sensible trade-offs between health-care spending and spending on all the other good things money can buy.

He talks about the way our health care is currently set up. We've taken an insurance model and expanded it to nearly every related health event of our lives. That's not what insurance does well. Our rising costs (without any end in sight) is a result of that. In the article, Goldhill notes that even the other industrial countries with universal healthcare have seen comparable rise in costs over the last decade. Putting the whole shebang under one umbrella doesn't drop the cost.
Think of healthcare costs as being in two different categories. One of those is for catastrophic events and costs. These are things (car accidents, serious diseases, etc.) that happen out of the blue and can threaten your entire financial livelihood. Insurance is well developed for this type of event. You buy home insurance because you fear fire and flood, not because you'll need to repaint or replace the windows.
The other type of healthcare cost is more routine. Prescriptions drugs, check-ups and lesser illnesses, for instance. Even routine natal care gives most people time to shop for various services and locations. A growing field of medicine has to do with orthopedic surgery for sports injuries. Most of these could be shopped for as well. All of these could use the Lasik model. Thanks to Walmart and Walgreens, prescription drugs already do. There is no reason why prices for these shouldn't be going down to a point where most people could pay them out of pocket or (at worst) with short term loans.
The problem is that we've mixed the two. Everyone needs insurance to protect against the really bad stuff but we've made it very tough to buy for just the catastrophic. And once you've shelled out a bunch of money for the routine stuff, by God, you will use it. Throw in the fact that consumers don't make decisions based on cost and you have a recipe for ever increasing costs.
If we want to control prices (and hopefully make some of them drop) then we need to change the structure. To do this we need to allow people to shop for the insurance that suits them best, which means allowing interstate purchases. We also need to do away with onerous minimum coverage requirements. For instance, a post menopausal woman shouldn't be forced to buy natal coverage.
I've heard various pro-Obamacare folks make the case against insurance companies and especially their very evil execs. The ironic thing is that if they succeed they will put tons of new money in their pocket. Instead, they could stop forcing people into their arms and actually allow the markets to work.
They should.