Preexisiting Conditions and Free Market Healthcare

This post on no third solution had some interesting bits about the evil of State regulation of the healthcare industry. In particular, David Z was talking about the law forbidding healthcare sellers from excluding preexisting conditions.

I thought about this issue very carefully, and came to an interesting conclusion. In a true free market, health insurance would look very different than it does now.

Consider the current corrupt system.

Health insurance corporations are barred from charging customers extra if they have a "pre-existing condition". Sick people love this arrangement, because they will buy health insurance. Suppose you're a healthy person who doesn't get insurance from their wage slave employer. In that case, it's in your rational self-interest to forego health insurance. Otherwise, you're subsidizing the health care costs of sick people.

When healthy people choose to go uninsured, the net effect is that everyone who buys health insurance pays the rate charged a sick person.

Health insurance corporations are required by law to cover certain drugs and procedures. This drives up the cost of health insurance. The cost is merely passed onto customers as higher prices.

My last two jobs didn't offer any health insurance at all. COBRA coverage from my previous job expired. I paid an extortionate fee for an individual health insurance policy. Fortunately, my new wage slave job includes health insurance.

Can I afford to forego insurance? My parents would freakout if I said "I don't want to purchase health insurance!", so that option is eliminated. Further, if I am re-hospitalized, I'll pay a much lower fee if insured. If you're uninsured, the "full retail price" for a hospitalization is $5k-$10k+ per day, according to the statements when I was hospitalized! The health insurance corporation negotiates a discount where they pay 10%-50% of the "full retail price". Remember that all the doctors did was forcibly drug me, feed me lousy food, and give me a lousy bed. My health insurance corporation has negotiated a deal with the hospital. The insurance corporation only pays $1k per day, and the rest of the fees are waived/negotiated. Even for $1k/day, it still was very profitably for the hospital.

This arrangement makes it mandatory for me to purchase insurance. Unless I'm 5x less likely to be hospitalized than the average person, I have an expected net loss by foregoing insurance. Even if I don't get another panic attack, I could break an arm, get hit by a car, need my appendix removed, etc. I'd be forfeiting my savings if hospitalized.

Ironically, someone who's broke can afford to be uninsured. If hospitalized, they can always declare bankruptcy and default on their bill. The law requires emergency rooms to give (lousy) care to all patients, even if uninsured. Due to the risk of a deadbeat poor uninsured person, the price is raised for *ALL* uninsured people. Because uninsured people are more likely to default on their medical bills, *ALL* uninsured people are charged extra to compensate for this risk. If you have savings, then you're forced to buy health insurance.

Suppose that health insurance companies were allowed to charge sick people more. That would defeat the point of purchasing health insurance. You'd get sick, and then your premiums get jacked up next year.

A wage slave has the same problem. You get health insurance from your job. If you get sick, you lose your job *AND* you lose your health insurance.

Summarizing the flaws of the current corrupt system:

1. Insurance companies are barred from charging sick people more. This means that poor healthy people make the rational decision to be uninsured.
2. If insurance companies could charge sick people more, then they would jack up your premiums whenever you get sick. That defeats the purpose of purchasing health insurance.
3. If you're healthy but unemployed, and have savings, then you're forced to buy health insurance. You're forced to pay the same rate as sick people, even though you're healthy. If you do get hospitalized while uninsured, you'll pay through the nose. This forces you to buy health insurance.
4. Most wage slaves get health insurance through their job. If you have a job, you're almost definitely not severely ill. Employers get cheap group rates. Employer-paid health insurance is a loophole around the "sick people can't be charged more" rule. If you don't have a wage slave job, then you're going to pay a lot more. If you're unemployed and purchasing a health insurance policy, then you're probably sick.
5. This rule also hurts small business owners, who pay a lot more than a group policy at a large corporation.
6. Emergency rooms are required to treat everyone, even if uninsured and poor. The cost of this free care is paid by everyone else.
7. Uninsured people tend to be poor deadbeats. To compensate, the price for uninsured people is raised.
8. When you're sick, you don't get the opportunity to negotiate for price. You can't make arrangements ahead of time. When you call 911, they take you to the nearest hospital based on where you live. There's no competition among hospitals; it's more like a group of mafia gangs parceling out their turf.
9. Insurance is expected to cover everything, including routine doctor visits. This makes health insurance more expensive. The whole point of insurance is protection against disasters, not coverage of routine problems.
10. Due to State regulation, insurance corporations have very little discretion regarding what is covered and not covered.
11. The economic interest of the hospital bureaucrats are not aligned with those of the patient. The doctors get paid on work performed and procedures done, and not based on whether the patient actually recovers or not.
    
12. Restrictive State licensing requirements for doctors decrease the supply of doctors, driving up prices. That isn't the main point of this post. I've emphasized that enough elsewhere.
    

What would health insurance look like in a really free market?

Suppose a doctor or insurance association made an offer "We'll agree to offer health insurance for your entire life, even if you get sick. The initial premium is 0.5 ounces of gold per month." Call this "Insurance business A".

Suppose now that 10% of the customers get sick. Their expenses are 5 ounces of gold per month instead of 0.5 ounces. Now, the insurance business is forced to raise its premium to 1 ounce of gold per month.

Another competing doctor or insurance association says "We'll agree to offer health insurance for your entire life, even if you get sick. The initial premium is 0.5 ounces of gold per month." Call this "Insurance business B".

The 90% of healthy people will now switch from insurance business A to insurance business B. Insurance business A now has only sick customers who have expenses of 5 ounces of gold per month. Insurance business A is forced to charge 5 ounces of gold per month in premiums.

Insurance business A's customers say "WTF? We bought health insurance and now our premiums got jacked up. What was the point of buying health insurance?"

Insurance business B's customers say "WTF? If we get sick, our insurance provider will go bankrupt and healthy customers switch vendors. What was the point of buying health insurance?

This example illustrates "We promise to cover you for your entire life, even if you get sick!", is *NOT* a valid model for health insurance.

What is a valid model for health insurance?

Insurance business C says "If you develop diabetes in the next year, we will pay you 100 ounces of gold to offset future expenses. If you have a heart attack in the next year, we will pay you 200 ounces of gold to offset future expenses. If you need a kidney transplant, we will pay you 150 ounces of gold. (etc)" Insurance business C will then do an evaluation of its customers risk. To one customer, they might say "You're pretty healthy. Your premium is 2 ounces of gold for one year of coverage." To another customer, they might say "You're a bigger risk. We charge you 10 ounces of gold." If the customer doesn't like it, he can shop around for a better price.

The incentive is for the insurance business to evaluate risk correctly. If they're too cautious, they lose customers. If they're too generous, they will lose money.

Suppose that insurance business C has a bad year and loses money. Provided the owner is not bankrupt, he may try again next year. He doesn't have the burden of sick customers raising his expenses. There also could be partial payouts. If a customer's risk of diabetes increases during a year, then there might be a partial payout.

For routine medical expenses, the customer will pay out of pocket. You got the flu and need to see a doctor? You just pay the fee directly yourself. You broke an arm? You just pay the doctor directly. It doesn't pay to buy health insurance for routine small medical expenses. For those, it makes sense to pay the doctor directly yourself. You should only buy health insurance for expensive disasters.

That was an interesting conclusion. In a free market "We agree to cover you for your entire life, even if you get sick!" is an invalid business model. Instead, the insurance business agrees to pay its customers if there's a serious illness. Also notice that the interests of the insurance business are aligned with the interests of the customers. Both the insurance business and customer have a financial incentive to maximize their health.