What Health Insurance Should Be, But Isn’t

Now that a Health Insurance guy has been whacked, it’s time to review. Here is an expanded version of a thread I did on Twitter—which is all a repeat of (ignored) arguments made back when Obamacare was being discussed.

Health Insurance should be, but isn’t, a bet you make that you hope you lose.

It has become instead an inefficient form of socialized medicine, increasing costs. Here’s how.

Here’s what insurance should be. You bet with an Insurer that you get cancer, say. If you get it, the Insurer pays costs of care X. If you lose and remain cancer free, you pay Y. You re-bet every month (or whatever). You pay Y every time you lose. The X and Y are negotiated between you and the Insurer, and the risk of cancer is decided by you and separately by the Insurer. That is the bare bones of true Insurance. Or, indeed, of any bet.

You can also group diseases, say cancer and CHF. Then you pay Y_1 + Y_2 (say) and the costs are X_1 + X_2. The result is a contract bet just the same. But with higher stakes for both.

Suppose you already have cancer and bet the Insurer you won’t get it. You immediately win the bet! The Insurer must pay X.

How much should the Insurer charge you for this sure-thing bet? X. After all, your “pre-existing condition” is a sure-thing bet the Insurer is bound to lose. There is no sense in you making the bet.

Unless a Ruler steps in and says “Insurer, you must take this bet!” Which, of course, happens. Then the Insurer must spread the costs of X to others.

If the Insurer doesn’t spread the costs, he has sure loss (assuming calibrate bets, about which more later). Which means if you bet you have cancer when you do, when your neighbor makes a bet for cancer when he doesn’t have it, he must pay Y+S, where S represents the spread. The more people in the system, the smaller S is.

Voilà! With coverage mandates Insurance automatically becomes socialized medicine. Very inefficient, too, because not only are we paying a private entity to manage this, and take his profits, we pay bureaucrats to monitor it all. Costs must increase. Health care won’t get better, but costs must rise.

It’s worse than all this, too!

It’s worse because people insist on having general coverage for an entire range of diseases without regard to whether they will get any of these diseases. To most, any risk is too large. Safety First! Which means that however the Insurer is reckoning probability for each disease, the more diseases you add to the bet, the greater the probability you “win” at least one.

Which means the greater the Y you must bet. Because, of course, the greater the X the Insurer might have to pay, which is now cumulative. And, of course, general coverage encourages people to “win” and claim their X, by going to the doctor for sniffles, etc.

Add to that employer mandates, which require employers because they are employers must pay the Y for their employees because they are employees—thus creating a serile, slave-like cast. This point cannot be over-emphasized. This creates oligarchy.

These large additional costs must be spread by the Insurer. Again, costs rise, medicine is socialized, and health care at least does not improve. Or gets worse because too many patients choke the system.

This is all before Insurer greed comes into the picture, which has the obvious effect of increasing Y for all. Again health costs rise, but health does not. In fact, mandates encourage Insurers to deny claims because there is only so much spreading that can be done.

What needs to happen, but won’t, is the elimination of this form of bastardized insurance. If it were made a true bet again, and all had to pay for losing this bet (monthly, or whatever), and for only a limited range of diseases (different per person). Costs would decrease on average.

It is an entirely separate question whether it is more or less moral for medical care, and to what extent, to be socialized.

Somebody reacted to the original thread saying how would you “feel” if it was your relative was denied “coverage” for some pre-existing condition. The kind of unthinking reply is common. But it’s wrong. The correct way to put this is that your relative has been denied having his medical care paid for by others.

Oh, calibrated bets. Roughly, for every probability of an outcome, you want to realize that proportion of outcomes. So if you say it’s 10% chance, then 10% of the time the event happens, you’re calibrated (at that level). Which is good. We’ll cover this in the Class.

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