What is health insurance, really?

In our previous episodes, we discussed actual insurance, such as fire insurance and life insurance. Purveyors of these products must confront the problems of adverse selection and moral hazard, and the quandary that the better they do at reducing these problems, the less desirable their product becomes. If they could perfectly match the price of a policy to the individual buyer's risk, their product would be worthless, and nobody would buy it. They survive because the world is still fairly unpredictable, and they are helped by regulation which stops them from competing themselves out of existence in a process called the death spiral.

Is health insurance like casualty insurance? Partly, sorta kinda. It is true that part of the value of health insurance is that it pays for extraordinary expenses associated with catastrophic events, such as severe injuries from a car crash or a fire, or diagnosis with a serious disease, expenses that the policyholder probably could not afford to pay out of pocket. In that respect it is like casualty insurance.

We'll discuss what I'll call the non-casualty dimensions of health insurance in a later post. So keeping in mind for now that health insurance includes very important components that are nothing like casualty insurance, let's just consider the casualty part. Even that part of it is very different from other kinds of casualty insurance from the societal point of view. There are at least three very important differences.

The first is that when people experience severe suffering, or their lives are threatened by illness or injury, the ethical principle called the Rule of Rescue creates a social imperative to save them if possible. We do not feel compelled, as a society, to rebuild the home or business of someone who doesn't have fire insurance, or to restore the income of a widow who loses her business executive husband. (We do provide modest social security survivor benefits, and homeless families may get emergency shelter, but the value of these social insurance benefits is far less than the loss, and they are available only to the destitute.) However, we do not tolerate having people expire on the sidewalk outside of the hospital for lack of financial resources, even if their treatment would cost tens of thousands of dollars. We end up paying for it somehow.

Here's an excerpt from an e-mail I received yesterday:

Hi Joaquin,

I'm in desperate need of help. I am working at the University Hospital in Cincinnati, and I have this 25 year old patient who is an undocumented worker. On Sunday, he was involved in a motor vehicle accident that left him a quadraplegic with very minimal movement of both his arms. Because he is undocumented, has no family here that can take care of him full-time, and no health insurance, one can see the imminent danger once he leaves this hospital in a week. Hamilton county cannot provide him full services as an uninsured patient because he does not have documentation that he has been living in Hamilton County for longer than a month before the accident. He has an aunt and uncle that live close, but both have to work full-time and cannot take care of him. His only family is his mom living near Cancun who may not be able to take care of him, either. What we're trying to come up with is a solution to provide him with the equipment, rehab, nursing care, and prescriptions needed once he leaves this hospital.

Whatever may happen to this young man in the future, the hospital has already spent tens of thousands of dollars on his care. Furthermore, they cannot simply push him out the door and let him die. In this particular case, he may be deported to Mexico, but if he were a U.S. citizen, Medicaid would pay for his care, for life.

So the Rule of Rescue creates a kind of ethical externality -- both related and unrelated people would suffer from torments of conscience if we did not provide catastrophic medical care. But there are additional positive externalities. For example, people who are of working age who suffer curable or controllable conditions -- be it life threatening trauma or chronic disease -- can be returned to or maintained in the labor force, contributing to the support of their families and the common wealth; or providing care to their children, keeping a home, etc. Retired people may have important social roles as grandparents, repositories of wisdom, etc. That is a second difference from other kinds of casualty insurance.

Third, there is very little moral hazard involved in catastrophic medical insurance. While it is conceivable that having such insurance might make some people less diligent about practicing good health habits, there is no evidence for it. Getting lung cancer is sufficiently unpleasant, even if you have insurance, that it is unlikely that health insurance makes people decide not to quit smoking after all. There are much more powerful explanations for our bad habits. And nobody is going to check into the hospital for a heart transplant who doesn't actually need one, just because they have insurance to pay for it.

And that brings us to a final, essential point. The catastrophic part of health insurance is ultimately about social justice. The misfortunes that befall people, which can be ameliorated by medical care, are for the most part a random harvest. To the extent they are not random, they are in fact more likely to befall the poorest and most vulnerable among us. We don't feel compelled to do very much about their poverty and vulnerability, but we are compelled to do something about their imminent death or disability. It's just the right thing to do.

Next time: The rest of what health insurance is.