The nature of insurance

This is really one of the best commentaries I've seen on the uproar about the possibility that insurance companies will no longer be forced to cover pre-existing conditions. From Michael Owen, who you can find on FaceBook:


Coming from the GOP, I'm sure whatever is in the bill the house passed today is awful. But I see a lot of emotional response, mainly around "pre-existing conditions." How awful it is to deny people insurance if they have a pre-existing condition.

I'm about to say something that is going to hurt your feels. You cannot buy insurance for a pre-existing condition, not as a matter of "market failure", but as a matter of the definition of insurance. You cannot buy homeowner's insurance after your house burns down. You cannot buy car insurance after you've wrecked the car. You cannot buy life insurance after your spouse dies. That's not what insurance is. Insurance is the pooling of risk BEFORE something bad happens. That's what keeps the price down when it is allowed to work properly. Something bad but unlikely is costly (rebuild a house, get cancer treatment), so people pool their risk and pay a small amount up front. The pool then has the funds to pay out to those few unlucky enough to get cancer, wreck their car, or have their house burn down.

I'm going to hit you in the feels even more: mandating that pre-existing conditions be covered by insurance completely breaks this. It is no longer insurance, and unsurprisingly, it makes costs shoot up. Imagine if the government mandated that insurance companies had to sell you a homeowner's policy, even after your house burned down. Who would buy a policy BEFORE their house burned down? You'd have to be a sucker to do so. The risk pool would collapse, with the only people buying policies being those that needed payouts. But of course there is no money in the pool. So of course to "fix" the market it just destroyed, the government then has to mandate that everyone buy into the system. Individual mandate; sound familiar?

The problem with that is that the government has been intervening in healthcare and insurance for so long and so pervasively that the levels of coverage it has mandated and the services themselves have become so expensive that people can't afford them. So premiums ratchet skyward, as they have for decades, well outpacing the general rate of inflation. Low income people would be priced out completely. This is politically unpopular, so the government externalizes those costs onto taxpayers and other people via taxes, inflation, and higher premiums. Unsurprisingly, this causes massive friction, as it pits demographics against each other.

The thing nobody want to hear is that the possibility of bad outcomes has a social utility. Because we might die, we buy life insurance to provide for our families. Because our house might burn down, we buy home owners insurance. Because we or our families might get catastrophically ill or injured, we buy health insurance. By doing this we set aside and do not consume now the resources that society needs later to deal with these crises. But because the government limits supply (licensure schemes, huge regulatory burdens that only a few large suppliers can navigate, intellectual property laws, coverage mandates, etc.; all of these supply limiting measures are in place to drive up profits for these industries) and subsidizes demand, prices skyrocket and fewer and fewer people can afford it. People of very modest means can afford technological marvels like smartphones and flatscreen TVs, but they can't afford healthcare and healthcare insurance.

The natural operation of markets is to reduce costs. The market is nothing if not a giant machine whose purpose is to grind away costs. Consumer electronics are cheap and amazing precisely because they are relatively unregulated and unsubsidized. Healthcare and insurance are the exact opposite. If you really want to make healthcare affordable for everyone, get the government out of it completely and let the market treat it like flat screens and smartphones. Let charity handle the truly needy. The system we have now is making everyone into the needy.