Health insurance: what went so wrong? | Opinion | valpotorch.com – The Torch

The big lie of the modern American healthcare industry is that what we call health insurance is actually insurance. This is false. Insurance is supposed to be a risk aggregation and dispersion tool. Rather than each assume a potentially catastrophic financial risk, consumers form a mutual agreement to pay a fixed price proportional to their risk, substituting a variable but potentially devastating expense with a fixed, known expense. Insurance companies add value by assessing individual risk and distributing money to those who do incur costs.

You may notice that under this definition of insurance, it is absurd for an insurance company to pay for costs consumers know they are going to incur. If auto insurance were reimagined to be like health insurance, it would also cover gas. Everyone who drives a car is going to have to pay for gas, so at best this system simply adds your gas expenses to your insurance bill, which is silly, but also not what would actually happen. Now the insurance company needs to hire people to manage gas payouts, so you have to pay the insurance company to pay for your gas and to pay people to write checks to the gas station.

The next issue is that not everyone uses the same amount of gas, so either the insurance company has to hire more people to track gas usage and change premiums accordingly, or they have to evenly distribute the total gas bill among all customers regardless of usage. (If this were like health insurance, it would be the latter, because it would not be considered fair for people to have to pay more for insurance due to preexisting circumstances causing them to use more gas. Not everyone can afford an electric car, or to live close to their job, etc.)

Further, there would no longer be any incentive for gas stations to lower prices. The customers who are buying the gas aren’t paying the bill, so they don’t care whether gas is $10 a gallon. That’s the insurance company’s problem. Likewise, there’s no incentive for drivers to drive less or conserve fuel, because once they’ve paid their premium, the gas is free. Even if there were a deductible, the disconnect between consumers and prices would once again become apparent when the deductible was reached.

It should be obvious that this system of auto insurance is not only absurd but would also lead to skyrocketing gas prices and potential shortages. If we further incorporated other known, fixed, or small expenses like new headlights, oil changes, and car washes, we would have an exact replica of the current American healthcare system. How did we arrive at this absurd system? It was not through a free market, but rather a series of laws requiring insurers to do things like provide coverage for various expenses and offer constant rates to people with vastly different known health conditions. The primary examples of these rules are the requirements in the Affordable Care Act for insurers to “guarantee issue” regardless of health conditions and always cover “essential health benefits”. 

The only way to fix such a system is drastic free market reforms in health insurance and the healthcare industry at large. Stronger government “solutions” than the ones currently in place would only worsen healthcare price inflation and supply shortages. If insurers were allowed to offer a greater diversity of plans based on individual risk, and individuals covered predictable expenses, we would see improved competition in healthcare, driving down costs. Whether this could truly address shortages would depend on further removal of absurd licensing laws perpetuated by the American Medical Association, but I digress. The fact remains that the only way to fix the American healthcare system is a free and open market where insurance companies, doctors, and hospitals compete to offer the best care for the most affordable prices.

The views expressed are those of the writer and do not necessarily reflect those of The Torch.