Monday, September 14, 2009

What is Insurance for?

The health care debate has stirred up a lot of emotion and generated a lot of rhetoric, but the debate still doesn’t seem to be getting at the fundamental issue: what is insurance for? Insurance is to protect you against catastrophic circumstances. You don’t use your auto insurance to pay for routine auto maintenance do you? You don’t use your home owner’s insurance to pay for routine home maintenance do you? So why is it that we expect our health insurance to pay for our routine visits to the doctor?

I think that there are actually a few simple changes that could reap a large benefit to both individuals and society at large. First, you have to reform Tort law. This is necessary so that the malpractice insurance rates can be decreased, which will help bring down the cost of health care. Second, we should institute Health Savings Accounts for everyone who wants one. This would be pre-tax income. I’m not sure how the amount that could be contributed would be calculated (percentage of income, perhaps, or maybe no limit), but the money should not disappear at the end of the year if it hasn’t all been spent. Once the accounts are established, link a debit card to them and use them to pay the doctor directly at the time of service (no paperwork to file). Third, there needs to be transparency in health care cost. And last, but not least, health insurance should only be used for catastrophic illness or accident, not for routine visits to the doctor, and it should not be linked to your job.

If you do this, you will probably cover the majority of people, and then you just need to have a government program to catch the folks that fall between the cracks, because there will always be those people.

One thing that we should not do is require that everyone buy health insurance. This simply burdens the young and poor. We have the same problem with requiring everyone to have auto insurance. If we went to true no-fault auto-insurance we wouldn’t need to do this either and young people just trying to get started and poor people trying to improve their lot would not get hit by these unfunded government mandates.

We keep hammering at the existing mess and making things more complex (and increasing Government in the process), when we should be taking a step back and asking ourselves if our underlying assumptions are correct. That is the way to true reform.

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