Health Insurance: What Went So Wrong? | Opinion – By World

The big lie of the modern American health care industry is that what we call health insurance is actually insurance. That’s wrong. Insurance should be an instrument for risk aggregation and diversification. Rather than each incurring potentially catastrophic financial risk, consumers mutually agree to pay a fixed price proportional to their risk and replace a variable but potentially devastating expense with a fixed, known expense. Insurance companies add value by assessing individual risk and distributing money to those who incur costs.

You may find that under this definition of insurance, it is absurd for an insurance company to pay for costs that consumers know they will incur. If car insurance were reimagined like health insurance, it would also cover gas. Everyone who drives a car has to pay for gas, so at best this system just adds your gas costs to your insurance bill, which is silly, but again not what would actually happen. Now the insurance company has to hire people to manage gas payouts, so you have to pay the insurance company to pay for your gas and pay people to write checks to the gas station.

The next problem is that not everyone uses the same amount of gas, so the insurance company either needs to hire more people to track gas usage and adjust premiums accordingly, or they need to split the entire gas bill evenly among all customers regardless of usage. (If this were like health insurance, it would be the latter because it wouldn’t be fair for people to have to pay more for insurance because of pre-existing conditions that cause them to use more gas. Not everyone can afford an electric car, or live close to their place of work, etc.)

In addition, there would no longer be any incentive for petrol stations to lower prices. The customers who buy the gas don’t pay the bill, so they don’t care if the gas is $10 a gallon. That’s the problem with insurance. Likewise, there is no incentive for drivers to drive less or save fuel because once they have paid their premium, gas is free. Even if there were a deductible, the decoupling of consumers and prices would become clear once again when the deductible was reached.

It should be obvious that this system of car insurance is not only absurd, but would lead to skyrocketing gas prices and potential shortages. If we included other well-known, fixed or small expenses, such as new headlights, oil changes, and car washes, we would have an exact replica of the current American healthcare system. How did we come to this absurd system? It didn’t happen through a free market, but through a set of laws that required insurers to do things like cover various costs and set constant rates for people with vastly different known health conditions. The most important examples of these rules are the Affordable Care Act’s requirements for insurers to provide “guarantee service” and always cover “essential health services” regardless of medical condition.

The only way to fix such a system is through drastic free market reforms in health insurance and the healthcare industry as a whole. Stronger government “solutions” than those currently in place would only exacerbate healthcare price inflation and supply shortages. If insurers were allowed to offer a greater variety of plans based on individual risk, and individuals assumed predictable expenses, we would see improved competition in healthcare and reduced costs. Whether this could really solve bottlenecks would depend on the further elimination of absurd licensing laws maintained by the American Medical Association, but I digress. The fact remains that the only way to fix America’s healthcare system is to have a free and open market where insurance companies, doctors and hospitals compete to provide the best care at the lowest prices.

The views expressed are those of the author and do not necessarily reflect those of The Torch.

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