Econoclasm Chapter Two, continued: "Insurance"

 

Health insurance – again I’m using the term because everybody else does, not because I think it’s accurate – can work in many ways. One of the most important broad dimensions is how the benefit gets delivered.

 

· Indemnity plans are the most like fire insurance. They pay money when the beneficiary incurs medical expenses. (The money could be paid to the beneficiary, or directly to the provider. That doesn’t much matter.)

· Service benefit plans have negotiated arrangements with providers to pay them a certain amount for a given service, when it is provided.

· Service delivery plans actually provide the service, in other words a provider organization is given the premium and then must provide whatever services a beneficiary happens to need.

 

Health insurance, even in the indemnity form, is different from fire insurance. We can estimate in advance the cost to rebuild our houses and replace the contents, and buy insurance for that amount and no more. For obvious reasons, insurance companies won’t let us insure our houses for far more than they are worth. But there’s no meaningful limit to the medical costs someone might confront. Once you’ve rebuilt your house, you’re done. But medical expenses may be ongoing for the rest of your life.

Which creates another problem. You can’t hold off on buying fire insurance until your house catches fire; it will only pay for costs incurred after the policy is in effect. But in principle, you could wait until you were diagnosed with cancer to buy health insurance, since most of your costs will be in the future. Obviously, if people could do this, nobody would sell health insurance. The problem that people who are likely to need more medicine would be more likely to purchase insurance is called “adverse selection.”

 

Another difference is that it won’t do the contractor who rebuilds your house any good to make your new house twice as big, unless you ask for it and pay out of your own pocket, because that won’t increase the insurance settlement. But if doctors know they will be paid more to do more, guess what they’ll do? This is called “moral hazard.” It’s often blamed on patients, who are presumed to go out and get more health care than they really need if it doesn’t cost them the full price. This is quite dubious. Medical interventions are usually unpleasant and in fact dangerous. I’m not going to rush out and get brain surgery just because it’s paid for. The only reason I’ll get it is because a doctor tells me I need it. Either way, however, it is a legitimate problem for insurers, because the doctor has an incentive to tell me I need it since the doctor will get paid.