NCPA - National Center for Policy Analysis

Health Insurance Must Change: Here's How to Do It

July 2, 2012

One of the biggest problems plaguing the U.S. health care system is that "insurers" have gotten into the business of managing our medical care, rather than insuring us against risk. That this is a problem can be seen in a comparison between home and auto insurance (under the umbrella of "casualty insurance") and the current system of health insurance, says John C. Goodman, president and CEO of the National Center for Policy Analysis.

  • In the casualty insurance market the product being bought and sold is real insurance, providing protection against unanticipated catastrophic loss.
  • Homeowners insurance, for example, typically pays for losses from theft, hail, fire and so on, but it doesn't pay for the normal wear and tear of daily living, such as replacing worn-out carpet or repairing a leaky faucet.
  • Similarly, automobile insurance pays for collision damages, but it doesn't pay for oil changes, new tires, tune ups or normal maintenance.
  • Further, casualty insurance typically has a deductible, which makes the policy holder responsible for paying a set amount before the insurance coverage kicks in.
  • These provisions make home and car owners more responsible for their valuable possessions, knowing that it is their own money that is on the line if they fail to do so.
  • In health insurance, on the other hand, many employer plans provide first-dollar coverage for routine care that enrollees could realistically pay for (thereby encouraging greater use of these services) while leaving them largely exposed to catastrophic incidents.

The perverse nature of health insurers also extends to their control over care. Because administrators of employer-provided plans are agents of the employer and not the employee, they are encouraged to cut costs and forsake health outcomes. This agency problem results in suboptimal treatment policies.

The way to fix the health care problem is not with more regulation or tighter controls, but with a new two-tiered insurance system.

  • This system would include casualty insurance -- consisting of a high-deductible catastrophic insurance policy to protect against the cost of a major accident or illness.
  • It would supplement this coverage with a Health Savings Account, which could be used to pay for many, if not all, routine medical expenses.
  • Such a system would allow health insurance to function much like its market-abiding counterparts.

Source: John C. Goodman, "Health Insurance Must Change: Here's How to Change It," Forbes, June 26, 2012.

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