Posted by on November 7, 2012

The title of this post comes to you from President Obama, who used this phrase in the second presidential debate in response to a question from an earnest young woman.  Specifically, he said with pride that Obamacare required insurance companies to provide contraceptive “coverage”, by which I think that we can reasonably assume he meant insurance coverage.

(As an aside, it was clear from the response that President Obama considers contraception to be a “woman’s issue”.  Interesting.  In the responsible segments of society, I think that the provision of contraception is generally considered to be an issue for both parties.   But perhaps this wasn’t his target audience.)

Now, the terminology of insurance has been mightily abused, and this for a long time, in the field of medicine.  But this time Obama has taken the perversion a step forward.

What is “insurance”?  Insurance is financial protection against random undesirable events, usually of significant consequence (since we don’t typically bother to insure ourselves against trivial events).  The combination of “random undesirable” is important because if the events were non-random and desirable, like having sex, then no one would insure you against them.  Insuring you against these events would create too much “moral hazard”, which is the term in economics used to describe this situation, even outside of a sexual context.

Now, it is pretty clear that the purchase of contraception fails this definition of insurance on nearly all counts.  It is not random nor is it undesirable (or at least the activity it facilitates is not).  Moreover, in the absence of exceptionally low incomes or exceptionally high “activity”, it is not typically significant.  So why does President Obama call it “coverage” and why does he expect insurance companies to provide it?  Could it be that if he calls it what it truly is (a subsidy) and has it paid for directly by the Federal Government (instead of mandated to be paid by the private sector) that voters might feel that this oversteps the line of social engineering?  Would he ever be that intellectually dishonest?

Before we are too harsh, we should acknowledge that President Obama is really just continuing along a well-trodden path of shoddy thinking on this subject, as the following example illustrates.

You are offered you the following proposition:  You pay someone each month for automobile maintenance “insurance”.  In return, every time you change a tire or get a scratch fixed, you would have the right to fill out a form claiming 80% of the cost, with you retaining a 20% “co-pay”.  The insurance company would review the form and reimburse you, maybe after reviewing further information from Midas, incurring substantial administrative costs in the process.  For this service, the insurer would charge you the expected cost of your car maintenance plus their cost of administering this program plus something for the “moral hazard” that you would be changing your tires like a Formula One driver or having it repainted by Michelangelo.  And Midas would, of course, build the cost of the paperwork into its service charges.

This proposition is plainly ridiculous, yet this is closely analogous to what most people think of as medical “insurance” in America.   Like Obama’s contraception “coverage”, it too fails the definition of insurance.  Routine medical care is a cost of living, just like routine maintenance is a cost of driving a car.  It should also be obvious that this type of medical insurance promotes the frivolous use of medical care, just like the maintenance insurance promotes the frivolous changing of tires.  For those who don’t believe this, who think that all medical care is non-discretionary and can never be frivolous, I suggest they ask a doctor about how much time he or she wastes “treating” common colds or flus.

How did we find ourselves in such an absurd position?   Here is an important lesson: when you observe something that makes absolutely no sense, you are virtually guaranteed to find the government at the bottom of it.  This case is no different.  For years the tax code allowed companies to fully deduct the cost of medical insurance, while the employees did not have to recognize the benefit of the insurance as income; it was a tax-efficient way to compensate your employees by creating an “insurance” product that offset a routine expense.  This fact, combined with the “template” for insurance established by government programs such as Medicare, produced the misnomer that we have now and that has become embedded in the minds of most people.

Now, the issue of healthcare in America is a huge subject and one where my thoughts are far from complete.   However, going back to the general theme of this blog, this is an area where incentives are probably more distorted than in any other part of the US economy.  As usual, when incentives are fundamentally distorted, the government has attempted to correct the resulting problems by applying regulatory “bandaids”.  Through an application of the laws of “unintended consequences” and “regulatory capture”, and the “theory of the second best”, these usually just create more problems than they solve.  And the cycle continues.  With the possible exception of financial services, health care is the most heavily regulated and the most dysfunctional part of the US economy.  This is not a coincidence.

This is not the place fully to discuss the health care crisis in America and, as I said above, I don’t claim that I am competent to do so.  Suffice to say that the fundamental problem is price.  Here in Switzerland, which is not exactly known for the poor quality of its health care, I recently had large-scale shoulder surgery that, according to a US doctor friend of mine, would have cost 3 to 4 times as much in the US.  To get a cup of coffee at my local Starbucks costs about $7, so I know that Switzerland is not a low cost producer of anything.  Yet, in the field of healthcare, America produces an inferior product for multiples of the price.   All of our efforts to reform American health care should be directed at understanding and correcting this anomaly.

Going back to my Economics 101 textbook, I see that price is the intersection of the supply and demand curves for a product.  So, if we are trying to find the answer to why health care is so expensive in America, we need to consider both of these factors.  The major factor on the demand side is the appallingly unhealthy lifestyle led by most Americans.  This has produced a health crisis which has in turn caused a health care crisis.  Until we correct the US lifestyle, the chronic health problems that it creates will continue to put such demand pressure on health care services that it will be very difficult, or impossible, to correct the price issue.  This is something that the politicians will never tell you.

Medical insurance in America is another contributor to this excess demand, both directly (since it causes the frivolous consumption of healthcare) and indirectly (since it subsidizes unhealthy lifestyles).  One element in the solution to the health care crisis in American involves a complete re-design of our medical insurance.  At a minimum, this would involve the following elements:

  •  incorporating meaningful deductibles, probably as a function of the insured’s income, to avoid the absurdity illustrated in the  example above and to eliminate the frivolous demand for health care services that this creates;
  • allowing insurance companies to price discriminate heavily for life-style choices, such as smoking, drinking, obesity, drugs and other high-risk behaviors, so that individuals are forced to pay for — or modify — these choices;
  • addressing the enormously expensive “end of life” problem by allowing individuals to choose the level of intervention and to pay insurance premia that reflect these choices;
  • dealing with “pre-existing conditions” the way that all “long-tailed” insurance exposures are handled, namely by making them the life-long responsibility of the insurance company at the time of the incident; and
  • breaking the link between employment and health care, which is a relic of the perverse tax incentives described above and which impairs the efficiency of the labor market and breaks the link between the direct consumer and the direct supplier of health insurance.

As I said above, this is not an attempt to offer a complete solution to America’s biggest – 17% of GDP! – and most complicated problem.  I would simply note that, for all of the required changes listed above, Obamacare either doesn’t address the issue or, in many cases, it marches resolutely in the wrong direction.  What a surprise.

Roger Barris, Switzerland

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