One of the biggest problems in this whole debate over health insurance is that "insurance" in terms of health care no longer means what it does in every other area of human endeavor. And thanks to the new definition, we have come to think of insurance as a privately funded quasi-welfare system rather than as insurance. And this strange meaning we have given to the term "insurance" has led to all manner of foolish claims, from the insistence on covering pre-existing conditions ("Preexisting Conditions") to the idea of "universal coverage" ("The Absurdity of Mandatory Insurance"), and, worst of all, int he process we have driven prices sky high (" High Cost of Medical Care","Medical Reform, An Overview"). Worst of all, the combination of government interference and the idiosyncratic redefintion of "insurance" having created the distorted market for medical car, we are now being told the solution is more of the same.

Let us look at insurance. Not government "insurance", such as social security , which is not insurance but rather income based welfare("Social Security is Not Insurance"), nor governmental subsidies, such as flood insurance ("Welfare for Malibu Residents"), which charge so little in comparison to risk that it cannot be called insurance, but real insurance.

Insurance is a very simple product, at its heart. Individuals fear an event may come to pass which will cost them a certain sum of money, in order to protect against that eventuality, they pay an insurer a set fee. The insurer takes that fee and invests it, hoping the return will more than compensate for the payouts he will make, while the insured knows that either he will avoid the unwanted event, and thus lose his premium, or will suffer the event, and hopefully receive more benefit than he paid in premiums. The entire process is based on several simple principles. First, uncertainty, the event in question cannot be certain to happen, or at least when it will happen cannot be known, or insurance will not work, there must be risk, not certainty. Second, the event must be undesirable, or else the insured may cause the event to happen in order to receive a payout. To be insurable, there must be little likelihood the insured will intentionally bring about the triggering event. Finally, a large pool of risk, allowing insurers to play the averages and offset their wins against losses.

Traditional health insurance was all these things. It only covered illness, hospitalization, doctor's visits for treatment of diseases and so on. These events were not predictable, they were not desirable on the part of the insured, and the pool of insured individuals allowed the risk to be pooled, making it possible for insurers to rely on averages.

But then the state got involved, and started asking insurers to "cover" other costs, such as routine doctor's visits. And that is when insurance stopped being insurance. You see, doctor visits for well care are not unpredictable, and are not undesired. In fact, they are to be desired. So, they are not unforeseen events. In fact, they have a probability of almost 100%, meaning insurers know they will pay out, which doe snot allow for risk pooling. Instead, they must charge what they will pay for the visit, plus a small premium, in order to make a profit.

Which would be bad business, and sure to drive insurers out of business. After all, who wants to pay $110 to get $100 a year in doctor visits? Except that insurance is usually subsidized by employers, and deducted pre-tax, meaning that the insured does not realize he is paying more in insurance than it would cost him to pay out of pocket. But for that deceptive situation, this form of pseudo-insurance would not be marketable.

Nor are routine check ups the only expense of this nature. Many, many government mandated services fall into the same category, and the government, both state and federal, continues to pile on more. Even the president is talking of "mandating preventative care", which will do nothing but raise costs while providing less return than it costs. And, worse still, by taking payment out of the hands of the individual, it eliminates any pressure to reduce costs. If individuals paid out of pocket, there would price competition, as well as individual economization if prices rose. As it is, individuals have no incentive, as they pay the same co-pay regardless of cost, and so have no drive to shop around.

Which brings me to my proposal. While ideally I would want government to get out of the insurance business entirely, and stop regulating medicine, I think a good interim step may be simply to restore the true purpose of insurance. Rather than requiring insurance to cover anticipated and regular costs for "well care", we would do much better to modify insurance to cover only illnesses, while establishing something like health savings accounts to allow individuals to use pre-tax dollars for routine checkups, prescriptions and the like. This would allow price competition to enter the bulk of medical transactions, while still providing individuals with coverage should an unforeseen medical crisis strike. In fact, were the government out of the medical business, I imagine many private plans would resemble that scheme, as it mirrors how insurance works in areas without significant government involvement.

Whatever we do, creating a broader pseudo-insurance, using "insurance" to pay for routine predictable costs, will do nothing but waste more money while driving prices higher. In fact, if everyone is covered there will be absolutely no price competition left at all, meaning low cost "minute clinics" and the like will disappear, as the uninsured, whose patronage tends to keep such cost-conscious clinics afloat, will have no incentive to economize either, and prices will just rise more quickly.

If nothing else, universal insurance will do nothing to stem the rising costs of medical care, despite the claims tot he contrary.

POSTSCRIPT

My writings on health costs and universal health insurance can be found in the following posts:

Lifespan
A Most Dishonest Commercial
Medical Regulations
There ARE NOT 46 Million Uninsured!
Envy Kills
Medical Regulation II
Envy And Analogy
A Thought on Healthcare
Misunderstanding Profits
A Passing Thought on ObamaCare
Government Efficiency
A Useless Measure
High Cost of Medical Care
A Potential Problem With Universal Insurance
Negative and Positive Rights
Private Charity
The Devil is in the Definitions (And Assumptions)
Two Examples of "Inefficiency" in Capitalism
Private Charity Take Two
Cutting "Costs"
Clarification of My Argument for a Free Market in Medicine
Big Government Creates New Problems
ObamaCare on the Ropes?
AARP Proves They Are Partisan Hacks and other Thoughts on Health Care Reform
Red Herring
The Problem With Tort Reform
Shameless Self-Promotion
Who Will Decide
Confirmation, Yet Again
My Health Care Plan
First Kill All the Lawyers, Looking Back at Katrina
The Insurance Sham
One Real Life Example
Public Insurance
Again?
Medical Reform, An Overview
The Absurdity of Mandatory Insurance
Medical Reform, An Overview
The Absurdity of Mandatory Insurance
"Compassion"? Well, For Some
ObamaCare's Achilles Heel
Private and Public Coexisting
Preexisting Conditions
Interetsing Cuts in Budget
Symmetry and Greed
Disgruntled Workers
So, Why No New Medical Posts?
Desperate Media

As usual, I may have missed some, but doubtless the links in these posts will reveal any significant omissions.