Though I have been decrying the current method paying for health care for some time, I often get the impression that people still don't quite grasp why our current model of "insurance" is such a bad idea. I have explained it several times ("The Insurance Sham", "Redefining Insurance... To Actually BE Insurance", "High Cost of Medical Care", "Medical Reform, An Overview", "My Health Care Plan"), but I don't think it is clear yet. So, to help make this more clear, I think it may help to create an analogy, to point out precisely why our present model makes no sense.

Let us look at food. We all buy it, it is essential to life, it makes up a huge part of our national economy, so, in short, it is a relatively good model for at least part of our insurance debate. Granted, you would not likely have a "catastrophic" food need, or an unexpectedly huge food bill, but those aren't the parts of insurance that concern me. As I am more concerned with using insurance for everyday, expected medical costs, such as checkups and everyday pharmaceuticals, food is a very good analogy. The costs are regular and can be anticipated, just like the cost of routine preventative care.


So, let us suppose there was a firm offering "food security". Basically, they would promise to pay for all of your food purchases. All you would need to do would be pay a monthly premium and a minimal co-pay every time you bought groceries. At first it may sound like a good idea to you, but then you think about it a bit.

First, this is a business, a profit-making enterprise. So, if they pay the same price for food that you do, how exactly do they make a profit? Easy! By charging you more than they pay out. For example, for every $1 of food you buy, the premium must be $1.10 or $1.50 to cover overhead, admin costs and their profits. In short, what you pay in premiums and co-pays will be more than you would pay out of pocket.

Of course the insurer will claim that he negotiates a better price, having bargaining power, but is that true? Or is it not more likely the providers jack up their prices, and then the "lower" price the insurer pays is just what would be the market price without insurance? In fact, as insurance tends to discourage any price competition, is it not likely even the "lower" price paid by the insurer is not still higher than the price would be in a competitive market?

So, if it would be such a bad idea to have food security insurance, how could such a plan come into existence?

Only if the "insurer" could find a way to make the cost seem cheaper than paying for yourself. For instance, ahd your employer pay for part of it, or maybe have it paid in pre-tax dollars. At that point, from your perspective, it would be cheaper than buying your own food, as it would look like you are paying less than you get. Of course, in reality, your employer is considering the cost part of your salary, though it doesn't show on your pay check that way, so if he didn't pay for food "insurance" he would pay you that cash and you would be able to buy more, but because of the way you see your salary, you don't realize that.

Only the pre-tax payment actually makes it slightly cheaper. But, then again, even if taxes are pretty high, given the admin costs, you still probably end up paying more than you would out of pocket, but if you combine it with employer contributions, it is clear you might be eld to think otherwise.

One final point to make, or two.

First, if we were to somehow adopt such a system, there is one outcome that is not immediately obvious, but will have horrible repercussions for those who do not buy such food insurance. That is the lack of price competition. With most paying for food with insurance, there is no real need for producers to compete as to prices. If bread is always paid for with insurance for a $0.05 co-pay, then is there any reason not to charge $10 a loaf? As long as the insurer will pay, the price will not come down, so prices will rise to the maximum insurers are willing to cover. And that means those who pay out of pocket will find they pay very high rates. In addition, as there is no push to economize, there is little pressure to adopt any cost saving methodologies, as there is no competitive advantage to bringing goods to market cheaper, and so the efficiencies which appear in other competitive markets will vanish. There will simply be no pressure to adopt savings, so the market will remain high priced and inefficient.

Second, and even more significantly, once people are used to paying for food with insurance, they will be reluctant to pay any other way. With prices kept artificially high, they will imagine paying out of pocket would bankrupt them. So, if anyone suggests paying out fo pocket for food they will argue that to do so would result in everyone but the rich starving. They will imagine a post-unsurance world would sitll retain the same inefficiencies and high prices, and would believe they somehow pay less for insurance than they get in services. In other words, they will be tricked into thinking insurance is some sort of free lunch, where they get more than they pay, and so doing away with it will leave them worse off, when in reality they are now paying more than they get, and in the deal are creating an inefficient system where prices are artificially high, and so they would be better off with a system paying out of pocket. But it will be almost impossible to convince them of that.

And that, in a nutshell, is the problem with our present "insurance" system. We end up paying more than we get out of the system, and drive prices higher in the bargain, and yet thanks to many accounting tricks, think we are getting some sort of free lunch. It is absurd, but we still believe it. And so, those of us who oppose this socialized system need to begin pointing out, whenever we can, that not only is nationalized health care a bad idea, but we need to do away with tax preferences for health insurance. The sooner we return to paying out of pocket, maybe with coverage for catastrophic illness, the more quickly prices in health care will begin to decline.