mgroves.com

Insurance or insulation?

• politics
• economics

By: mgroves 14 May 2008

Do you have health insurance, or do you have health insulation?

What's the difference?

Insurance protects against risk, it isn't meant to insulate against costs. Kling (above link), advocates that instead of the current health "insurance" that most people have, Americans should use tax exempt HSAs in combination with cheap, high deductible insurance for catastrophic/unforseen health issues.

In this way, you would pay (entirely) for your own routine/chronic health expenses (flu, cough, cold, checkups, etc). If you get cancer, or lose a limb, or even get pregnant (anything uncommon), you pay a high deductible to cover it with insurance.

Compare that to the current system, which is "insurance" for everything. What ends up happening is a version of the agency problem with misaligned incentives. If a patient has insurance, the doctor could recommend whatever they want, since they know it will be paid for largely by the insurance company. The patient has no incentive not to do what the doctor recommends, since they are far insulated from the real cost.

The end result is stifling of efficiency, waste of resources and perhaps even worse.

"For health care providers, insulation is a bonanza. Because consumers are not spending their own money, they accept doctors' recommendations for services without questioning them and without concern for cost."

From an anecdotal perspective, I can see this happening to me everytime I go to the doctor. Hundreds and thousands are being spent on services, but I only care about the $20 deductible. You might ask, why wouldn't you do what a doctor recommends? This isn't an economic problem, but an educational one. Consumers need better information and more openness from health care providers to make better decisions about what is necessary and what isn't.