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The Trouble With Insurance


Brian D. Rude 1991


     Insurance is seen as a good thing in our society.  I would not want to argue with that premise in general.  I believe insurance is a good thing.  However it is not an unmixed blessing.  In fact I believe there are some very real problems with insurance that need to be addressed.  I am concerned primarily with health insurance.  My thesis is that the very existence of insurance has grossly inflated the cost of health care.  Consider the following points:


   - Insurance distorts incentive.  A patient, faced with a large medical bill thinks, “It’s ok! I’ve got insurance.”  The doctor, when he writes out the bill, thinks, “It’s ok!  He’s got insurance”.  The insurance company, when it gets the bill thinks,  “It’s ok.  We’re making a profit.”  So for at least a generation medical costs have been more and more insulated from normal market forces.  Hence costs have skyrocketed.


   -A vicious cycle has been set up.  Insurance causes costs to increase, which creates the need for more insurance.


   -As a nation we have developed an “insurance mentality.”  We think that uninsured bills are uncollectable.  We think uninsured people are not getting medical care.  We think insurance is the only way that medical care can be paid for.


   -  In the popular mind the idea of insurance has become, “You pay in a little, and when you get sick you get a lot back.”  This is just part of the insurance mentality.  By this perspective it is perfectly reasonable to go shopping for insurance when you suspect you have AIDS.


   -As a result of the insurance mentality we think every $30 office visit ought to be covered by insurance.  Therefore vast numbers of small claims go through a bureaucratic process that is wasteful and costly.  This violates the basic idea of insurance - that you insure against the unexpected, not against certainties.


      In other words insurance is more a part of the problem than a part of the solution, at least for health care.


      Yet the most promoted reform seems to be a federal law requiring all employers to provide health insurance for all employees and dependents.  Would this be a good solution, or even a step in the right direction?  I find some objections.


      First, mandatory employer-provided insurance would only increase the free ride for doctors.  Instead of thinking “It’s ok, he’s probably got insurance’, the doctor can now think, “It’s ok, of course he’s got insurance.  Everyone has insurance.”  Would not this force our medical costs ever higher?  Doctors now think they ought to make five times what teachers or accountants make.  When everyone has insurance would seven or eight times seem a reasonable ratio?


      Of course doctors fees are not the only thing in health care that seems very expensive.  However I think their high fees are the leading edge that draws hospital costs, drug costs, and other health costs along.  Putting downward pressure on the leading edge would put downward pressure on the whole system.


      One way to restore normal market forces would be high deductible insurance.  When a doctor thinks, “Of course he’s got insurance, but he still pays the first $3000”, then the doctor has some very real downward pressure on his fee.  I would favor such a system.  In fact I have always advocated high deductible health insurance.  (My health insurance is $2500 deductible.)  Indeed there are pressures felt today to increase deductibles.  But I don’t think there is nearly enough sentiment to get results.  I think if the normal deductible were even $1000 we would see great benefits.  But a great many people feel even a few hundred deductible is unsatisfactory, even exploitative.


      There are reasons why people want low deductibles.  One reason is that many people have a great deal of trouble handling their money.  They can hardly save for the rent, and have no reserve at all for emergencies.  But another reason, a more hidden reason, is the insurance mentality.  Instead of simply being a business transaction between a customer and a company, insurance is seen as something more.  It’s like being part of a family or commune.  The company is “good” or “bad” in accordance to what it gives us, not in accordance to how well it meets its express contractual obligations.  The insurance mentality includes some unrealistic expectations and attitudes, (very much promoted by insurance companies’ advertising, by the way) - we want to pay in a little and get a lot back; we want the company to take care of us; the more the company pays the better the company is; the only reason for a company not to pay is that it’s greedy.


      With universal employer-provided insurance mandated by law,  I would fully expect low deductibles to also be mandated  The public , especially organized groups such as labor, would demand it.  Costs would continue out of control.


      A second strong objection to mandatory employer-provided insurance is the problem of employment.  Unless we are very careful employability could become hostage to insurability.  If it is to be a true insurance system, then employees would sometimes be subject to insurance requirements as part of gaining employment.  These insurance requirements could make it very difficult for many people to change jobs.  I have high blood pressure.  What will happen when an employer wants to hire me but realizes that I will be twice as expensive to insure as another applicant half my age?  More importantly, how good will my health insurance be even if I am hired?  Will high blood pressure and anything secondary to it be covered?  Or will it be excluded as a pre-existing condition?  In a true insurance system of course any pre-existing condition would be excluded.  (A pre-existing condition is a certainty, not a risk.)  This would affect a great many older workers.  A middle aged person contemplating a career move to a different employer, and therefore a different insurer, would be foolish not to consider that medical conditions covered by the old insurer would be excluded as pre-existing by the new insurer.  Would not the economy in general suffer by such negative pressure on career mobility?  And perhaps more importantly, would not many individuals’ quality of life suffer tremendously by being forced to slog out a few remaining years before retirement in a soul-deadening work environment?


      One solution to this would be to mandate (while we're mandating everything else) that employers can not consider insurability in their hiring practices.  The only way this could really be done would be to charge a flat rate, or a flat percentage rate, per employee in premiums.  Then who would pay?


     Let us assume that the government acts as insurer.  Government collects a percentage of each person's wages and pays the medical bills.  Insurability does not affect employability because insurance costs are fixed.  Do we then have socialized medicine?  Should we have socialized medicine?


      No, this situation would not be socialized medicine because doctors would still charge all they choose to.  Costs would continue out of control.  It seems to me to be about the worst of all possibilities.  Costs would skyrocket, but the costs would be diffuse, shared by the general public.  How would we rein in doctors?  By price controls - yet another layer of mandates?


      If we are going to be so close to socialized medicine, why not have socialized medicine?  I would not have said this ten years ago.  I think we could have had a tremendously better system had insurance never gotten out of control.  But that is irrelevant now. 


      We have socialized police protection.  If my car is stolen I call the police.  They respond.  They don't ask to see my "police protection insurance card".  They don't send me a bill.  Of course it's not a perfect system.  If I call about a stolen car when someone else calls about a murder I will be put off.  Police protection is rationed.  That's a trade-off we make.  But it is a workable system.  We do not have a "police cost crisis" pressing on us.  Similarly we have socialized education.  If you have children you send them to school.  You don't buy "school insurance".  The school doesn't send you a bill.  And, of course, schooling is rationed.  And maybe it's mediocre.  But it's a workable system.


     One reason I now favor socialized health care is that I think that is what people really want.  We do not really condemn the person who looks for health insurance only after he suspects he might have AIDS.  It is not business sentiment, but community sentiment, that motivates us in this situation.  From an insurance perspective, which is a business perspective, such a person is plainly perpetrating fraud.  But from a socialist perspective, which is a community perspective, such a person is simply looking to his community for help, and we don't blame him.


      Another reason I favor socialized health care is the simple belief that the American public is not quite capable of making the insurance perspective work.  We are weak.  We are small.  We are dumb.  For an insurance system to work people have to understand it.  But they don't.  The depressing prevalence of the insurance mentality attests to that.  For insurance to work we have to insure ahead of time - far ahead of time.  We have to pay for nursing home insurance from our twenties, not from our fifties.  We have to pay for pregnancy insurance from childhood, not six months before we plan to start a family.  We have to pay for orthodontic insurance from birth, not when we look with dismay at our kid's teeth.  I don't think enough of us can do all this to make insurance work.


      So I favor socialized health care.  That means doctors will be employees of the government.  That means they won't make so much money.  Yes, doctors will whine.  Yes, there will be ugly disputes.  Yes, there will be doctor strikes.  And yes, health care will be rationed, and yes, people will due.  But the same can be said of socialized police protection.


      Under fully socialized medicine I suppose costs will continue to rise, but I think much more reasonably.  Costs will be contained because the government has concentration of bargaining power.  Doctors will have to lobby just as hard as everyone else wanting a slice of the pie.  The free ride will be over.  That will put downward pressure on health costs in all areas.  Society will benefit. 





Update, October, 2002


     Apparently I had not heard the term "job lock" when I first wrote this.


      I circulated this among a few friends in 1991.  I'm not sure anyone cared.  I also had a reprint of a column by Kevin Holland in the Baltimore Sun.  I got it from the Rapid City Journal editorial page of 7/14/91.  In this editorial the author related a personal incident that he thought was very relevant, and I agree.  He and his father both had an identical set of symptoms one weekend, and when they wouldn't go away they both went to the same emergency room the next morning.  The author saw a doctor, and after five minutes emerged with a prescription and a bill.  Two hours later he found his father still waiting for lab tests to come in, " . . . .a urine test, a throat culture, a blood sample."  Both the author and his father eventually got the same diagnosis and treatment.  "He prescribed amoxycillin, and suggested Tylenol, a few days of rest and lots of fluids."   The difference, of course, is insurance.  The author was just out of college and uninsured.  The father was well insured.  "The form that will be mailed to my father's insurance company will include a much higher doctor's fee and a series of lab fees.  All to tell him something that a five-minute check, with no lab, told me."