Friday, August 14, 2009

An Interesting Solution to the Insurance Problem

John Cochrane from the Wall Street Journal has his say:

There is only one way to reduce costs in such a business: intense competition for every customer. The idea that the federal government can reduce costs by negotiating harder or telling businesses what to do is a triumph of hope over centuries of experience.


A truly effective insurance policy would combine coverage for this year's expenses with the right to buy insurance in the future at a set price.


A "guaranteed renewable" individual insurance contract is the simplest way to deliver both. Once you sign up, you can keep insurance for life, and your premiums do not rise if you get sicker.

Cochran is talking about covering pre-existing conditions. Certainly, the goal of the federal government is universal coverage, but there are many economic problems that are involved which need to be addressed. Certainly access to health care is one problem, and renewable life contracts would help bring people in at a younger age while securing them from being dropped in the future.

The right to future insurance could be transferrable to another company, for example, if you move. You could have the right that your company will pay a lump sum, so that a new insurer will take you, with no change in your premiums.

The mobility of coverage is also a problem. This includes things such as changing working conditions, interstate transferability, and mobility between different hospitals and the providers they will accept.

How do we get to a competitive market? The tax deduction for employer-provided group insurance, which has nearly destroyed the individual insurance market, is a central culprit. If we don't have the will to remove it, the deduction could be structured to enhance competition and the right to future insurance. We could restrict the tax deduction to individual, portable, long-term insurance and to the high-deductible plans that people choose with their own money.

He's right. Coverage tied to employment is one of the biggest issues in the arena. It has removed the individual freedom to purchase one's own healthcare in favor of tying people to a particular job which, as experience tells us, is not tenable. Americans change jobs at least a handful of times in their lives, and god forbid downsizing or a recession hit. Leave it in our hands, and give the deductions to us, possibly on a progressive scale tied to income.

More importantly, health care and insurance are overly protected and regulated businesses. We need to allow the same innovation, entry, and competition that has slashed costs elsewhere in our economy. For example, we need to remove regulations such as the ban on cross-state insurance. Think about it. What else aren't we allowed to purchase in another state?

Regulation certainly is a problem:

A far more accurate “bottom-up” approach suggests that the total cost of health services regulation exceeds $339.2 billion.


Moreover, this approach allows for a calculation of some important tangible benefits of regulation. Yet even after subtracting $170.1 billion in benefits, the net burden of health services regulation is considerable, amounting to $169.1 billion annually.

In other words, the costs of health services regulation outweigh benefits by two-to-one and cost the average household over $1,500 per year.


Moreover, 4,000 more Americans die every year from costs associated with health services regulation (22,000) than from lack of health insurance (18,000).

Possibly more to come on the specifics of health care regulation and other issues. You can download a PDF of the Cato report at the hyperlink provided above.

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