Legal Commentary

Defining Health Insurance

By Tom Kirkendall

All sorts of interesting debates regarding reform of the American health care finance are breaking out across the blogosphere, which is a good thing.

Those discussions prompted one of the best thinkers on health care finance reform -- Clear Thinkers favorite Arnold Kling -- to provide a particularly lucid explanation of the illusory nature of American health insurance and, in so doing, highlight one of the key issues to implementing reform of the current system:

Let me offer two choices:

(a) Health insurance is the collective provision of all health care.

(b) Health insurance is the sharing of extreme risk in health care spending.

In my view, (a) represents what most people think of as good health insurance. For example, I have a friend who says her health insurance is great because she can get new eyeglasses every year for everyone in her family for a co-payment of only $10.

We have never observed (b). (b) would mean something where you only make a claim when your expenses are going to run into the tens of thousands of dollars. Claims would be rare and large, as in fire insurance. Premiums would be low, as in fire insurance.

Since we never have observed (b), we do not know whether it is something that could be provided by the market or would have to be provided by government. I am willing to concede that it may be the latter. However, what most people mean by universal health coverage is (a), which has some pretty obvious incentive problems. [.  .  .]

The bottom line is that what we think of as health insurance is not going to survive if we are going to get control of health care costs. Either health insurance is going to become very intrusive about our choices of medical services (the top-down, government option, under the guise of "health care quality"), or we are going to see much higher deductibles and co-payments (the bottom-up option).

Full post as published by Houston's Clear Thinkers on April 15, 2009 (boomark / email).