In "Redefining Insurance... To Actually BE Insurance" I discussed how health insurance is not truly insurance, however I think I need to go into this a bit more. Especially as some suggestions offered by conservatives as an alternative to liberal health care reform are themselves violations of the basic principles of insurance.

First, let us look at one aspect oft he question that is not related to the current reform movement. That is the regulatory environment which creates insurance cartels. In every state, health insurance, like most or all insurance, is regulated by state agencies which both set rates and determine which companies can provide insurance. As a result, only a limited group of authorized companies can offer insurance, and it is very difficult for competitors to enter the market. As expected this raises prices and reduces the quality of service. In addition, it tends to distort market incentives, causing insurers to struggle to do things that please regulators more than customers, as continued favor of regulators insurers a place within the cartel, which means customer satisfaction is secondary at best.

Many conservatives have noticed this situation and proposed as a solution allowing the purchase of insurance across state lines, imagining that it is the restriction of insurance to single states that causes this situation. However that is, at best, a half step. It would widen the cartel, and would tend to favor those states whose regulators' wishes most closely matched the wishes of the consumers, but it would still leave us with a cartel where success was still tied to pleasing regulators. It may allow some small increase of competition, as states with more lax regulation could be used as entry points to all fifty states, but it would still leave barriers to entry which would stifle competition. In short, it would not be a true solution, only a way of reducing the harm done in some states.

In addition, it would do nothing to eliminate one of the worst problems of our regulatory environment, the one discussed most in "Redefining Insurance... To Actually BE Insurance" and "The Insurance Sham", mandated coverage. In all fifty states regulators insist that insurers provide payment for specific services, with the federal government adding their own requirements. As most mandated coverage is for events which would not be covered by traditional insurance, such as routine visits, preventative care or medical supplies, these mandates move us away from an insurance model to an inefficient welfare model which end sup causing us to pay more for medical services while destroying an pressures favoring price competition. Of course the costs are hidden by the way insurance is normally purchased, with a large part subsidized by employers and paid in pre-tax money which hides the true cost. but that does nothing to ameliorate the harm done. As I mentioned in " High Cost of Medical Care", by providing no incentives to economize, this insurance model is responsible for a considerable part of the rise in medical costs.

Yet this principle is one often overlooked by nominal conservatives in crafting their "alternatives", as I described in "Preexisting Conditions", and elsewhere, many conservative plans include their own species of mandates. In addition to allowing interstate purchase of insurance, most alternative plans also include something along the lines of "prevent denial of preexisting conditions". While I understand the reasoning, as the people writing this assume that the current use of insurance as a form of payment is the normal situation, in relity this is just another mandate, which, as I explained elsewhere, will only force insurance prices for everyone to rise to a level comparable to the expected payment for people suffering form the worst diseases.

Then again, that is the necessary outcome of all mandates, as well as of our current model, using nominal insurance to pay for routine costs.

Looking at the second part first, using insurance to pay for routine costs, the reason should be obvious. If it can be assumed the average individual sees three doctors a year, each visit costing $100, then the insurer must charge at least $300, plus some overhead, in order to break even. Which means for the average individual it would be cheaper to pay doctors out of pocket rather than through insurance. Yes, for a few individuals on the high end of the range the insurance is cheaper, but that ignores a second fact. Without insurance paying, with people paying out of pocket, there would be more price competition and prices would drop, so even for those seeing more doctors than average, if there were price competition, even their higher number of visits might  cost them less than the insurance does now.

The second form of mandate, requiring insurers to ignore relevant data, be it allowing coverage for preexisting conditions, or ignoring relevant demographic data, even to the point of charging everyone the same, should have equally obvious results. Just think of auto insurance. Imagine auto insurers could only charge one rate. To break even they would obviously need to charge the average of what they charge everyone, but not just that. With prices being lowered for high cost coverage, more people at the high risk end would be induced to get insurance, so risk would be greater. Thus insurers would be encouraged to raise rates higher, charging something close to the teenage boy rate for all drivers, lest they suffer bankruptcy. And, in the same way health insurance would have to cost close to the rate for the most sickly individuals in order to make it cost effective.

Nor is that the only harm. As insurance comes to cover more and more of the medical field, the insurers, especially the government, come to have more influence over precisely HOW care is provided as well. Rather than simply providing payment for services, insurers begin to have a say in what care will be provided. For example, if a given treatment, while effective, is not covered by any insurer, many doctors will not bother to perform that procedure, as few people will be willing to pay out of pocket. And as procedures fall out of favor, research in that area declines, the equipment or medicines needed are not manufactured, and otherwise fruitful lines of research are abandoned all because of insurance. Of course this could also happen in a fully free market with insurance paying only for catastrophic conditions, but it seems much less likely. (Especially with price competition driving down medical costs, it seems with lower prices and individuals used to paying some costs out of pocket, lack of insurance coverage would not be the deal breaker it often is today.)

Of course this list could be continued. But I have written on many of those topics elsewhere. I think what I have written above presents the main points we need to bear in mind, especially when considering presenting an "alternative" plan. While it is tempting to say "tort reform and interstate competition", and think you have enunciated a conservative position, it ignores the fact that that sort of plan leaves in place both insurance cartels and regulators, as well as state and federal mandates, all of which could effectively nationalize coverage as much as any "public option" could.

The answer is not to spread the regulation around, but to cut through it. The first step of which is to eliminate our current insurance model, including the tax laws which favor employer insurance, and the regulatory framework which creates the insurance cartels. Next, we need to get the government out of medical regulation, allowing competition between hospitals, the free purchase of equipments and all the rest of the elements of the free market that are so sorely lacking in medicine. Ideally we would also eliminate government medical insurance, as the scope of medicare and medicaid give the government a lot of influence over the way medicine works, but even if we did not, those first few steps would do more good than all the tort reform in the world.

POSTSCRIPT

I know I close with a comment which sounds like I am opposed to tort reform, but that is a bit misleading. I do favor tort reform, and not just for medicine. But I also think it is a very difficult and time consuming undertaking, and in medicine may not produce as dramatic a result as many think. Yes, it will reduce costs, but less than some think. There are many other pressures on medical costs, and many that can be remedied much more quickly than malpractice costs and defensive medicine. For a bit more discussion on this topic read " High Cost of Medical Care","Medical Reform, An Overview", "Red Herring" and "The Problem With Tort Reform". As should be clear from those posts, I favor tort reform, I just don't think it will be a panacea, or will be a fast and easy process.

POSTSCRIPT II

For a list of all my writing on this subject, see the links in the postscript to "Bad Economics Part 2".