What is Health Insurance?
One of the leading causes of confusion when it comes to health care reform is the misuse and conflation of the terms "health insurance" and "health care." This sort of confusion manifests itself throughout the debate.
Insurance is the pooling of risk. The members of an insurance plan pay a premium that is used to help those members who face an adverse event. In the case of auto insurance this could the cost to repair a rear-end collision, in the case of health insurance this might be the cost to repair broken bone. Insurance as it exists is marked by two pillars:
- Not everyone is going to be affected by bad events that drain the insurance pool all at once. This is the assumption behind insurance that can turn it into a profit-making enterprise. At any given moment, group X that is running insurance pool Y is collecting more in the form of premiums than it is expending to pay for the health costs of members.
- Insurance is driven by the need to protect from the uncertain. If I pay a premium to insure a car, I am paying a premium to protect that car for unexpected events; the car is side-swiped, broken into, flooded, etc. That way, when my car does go missing one night and is discovered the next morning pulled over on the highway with no hubcaps and a missing passenger-side door, I will not have to pay out of pocket. It is this desire to protect ourselves from the cost of uncertainty that drives us to pay for insurance.
These two pillars, the profit pillar and the uncertainty pillar, are the basis for the private health insurance market. Agencies that want to make money collect premiums from people who want to protect against risk, and periodically are called upon to spend some of this money to help one of the premium-payers who needs coverage for some unexpected disease or accident.
The premium a member has to pay is based on the expected cost of care for this individual. This system leads to certain problems, among them the inability of low-income people with pre-existing conditions to afford insurance. This is because an insurance company is never going to charge someone with an pre-existing condition a premium that is lower than the expected cost to cover that person. As Katherine Baicker and Amitabh Chandra put it in their highly informative "Myths and Misconceptions in U.S. Health Insurance":
"Try purchasing insurance to cover your recent destruction of your neighbor's Porsche: the premium would be the cost of a new Porsche. You wouldn't need car insurance--you'd need a car. Similarly, uninsured people with known high health costs do not need health insurance--they need health care."
Because insurance providers are motivated by profits, they are never going to offer a premium that is less than the expected cost of care, as this will lose them money. However, low-income Americans without health insurance are not going to be interested in buying health care that is too expensive for their means. This constitutes a market failure.
This market failure is a huge barrier to providing accessible health care to all Americans. But alongside that is the difficulty of using the health insurance market to provide health care. Insurance is the business of uncertainty, not care. And this is a core problem: when Americans are buying health insurance, they are buying affordable coverage for uncertainty, not affordable coverage for health. But those who cannot afford to buy coverage from uncertainty still need coverage from health-adverse events. Thus, they do not buy health insurance and in addition to living with uncertainty, are burdened with exorbitant costs when they need health care.
A market failure in the private health insurance market points to the need for some sort of public actor in the healthcare sector if we want to take steps forward in providing care for all Americans. Along those lines is Barack Obama's plan to create a public pool for health "insurance". This proposal is an effort to create healthcare options for people who wouldn't otherwise be able to afford it. However, mindful of the private market, Obama's plan also has provisions to keep this plan price-competitive enough with the private market to drive people into the public pool.
The nature of insurance and the private market are unavoidable features of America's health care landscape. Attempts to understand and respond to these factors with clarity, such as the Obama plan, are a good start to tackling health care reform in America.