NCPA - National Center for Policy Analysis


May 7, 2009

In a very real sense, health insurance isn't insurance at all.  It's the artificial product of unwise tax and regulatory policies.  But there is an ingenious solution to all this, says John C. Goodman, President, CEO and Kellye Wright Fellow of the National Center for Policy Analysis.

Here is how real health insurance would work.  Instead of paying the premium for all-purpose insurance, University of Chicago Professor John Cochrane proposes two premiums for two different kinds of insurance:

  • The first premium is for, say, a year's worth of health insurance for a healthy person.
  • The second premium covers the risk of changes in health status that potentially increase premiums in future years.

Suppose that during year one you are diagnosed with a costly-to-treat medical condition.  If you shop for a new health plan in year two, your premium will be higher than the rate healthy people pay, as a result.  But your health status insurance (which you purchased in year one) will pay the extra premium cost.  In one simple step, we have converted a completely dysfunctional market into a real market that solves real problems -- for everyone, says Goodman.

Insurance for pre-existing conditions:

  • Instead of trying to force insurers to ignore them, the Cochrane approach allows everyone to insure against them.
  • In the Cochrane world, you don't have to worry about financial consequences of developing a pre-existing condition; your health status insurance will pay those costs.

Premiums for pre-existing conditions:

  • In Cochrane's world, premiums for pre-existing conditions would be determined in the marketplace.
  • This means that the cost of a year's worth of insurance for diabetics, asthmatics, cancer patients, heart patients, etc., would be transparent and competitively priced.
  • By contrast, regulation in many insurance markets today tries to force insurers to ignore both the conditions and the cost of insuring them.

A market for the care of pre-existing conditions:

  • Once there is transparency and competition in the market for insuring for pre-existing conditions, a natural extension is a competitive market for efficient, high-quality care for those conditions.
  • Providers who find ways to lower the cost of care will allow insurers to be able to lower the cost of insuring that care.

Source: John C. Goodman, "Real Health Insurance" American Conservative Union Foundation, Issue 131, May 5, 2009.


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