A Primer For Conservatives: Health Insurance is not Really Insurance

Is health insurance a plan to help healthy people mitigate against an unexpected illness, or an income subsidy to help the sick pay for medical care?

Conservatives ought to have a clear answer to that question. Not long ago Congressman Morris Brooks from Alabama did not and found himself on the receiving end of liberal ridicule.

By suggesting that those who take better care of themselves should pay lower health insurance premiums, Brooks implied that health insurance is indeed a type of insurance arrangement. After all, the risk adjustment of premiums is a practice proper to all other kinds of insurance services. A prudent driver pays less for auto insurance than one with a negative driving record. A homeowner pays more for home insurance if the property is on muddy terrain rather than on sturdy ground. A smoker pays more for life insurance than a non-smoker, as does anyone whose risk of dying prematurely is high, even if that predisposition is inherited genetically.

Brooks’s conception of health insurance, however, intuitive as it may be, is wrong. Health insurance is not insurance even if, on the surface, health insurance policies meet the dictionary definition of insurance as contractual arrangements “in which one party agrees to indemnify or reimburse another for loss that occurs under the terms of the contract.”

Health insurance cannot really be insurance because human health is un-insurable: human beings are not machines or buildings whose function or condition can be ascertained objectively. Yet, an objective assessment of damages and costs is essential for any contractual arrangement to function in a sustainable manner.

Consider, for example, that medical care is based on the legal principle of “medical necessity.” Medical necessity is invoked when, presumably, there is an impairment in the patient’s health that could be remedied by a medical intervention. But medical necessity is a perniciously elastic concept that cannot possibly satisfy the precise contractual requirements of insurance.

Take Joe, an overweight truck driver, who suffers from back pain and whose MRI shows a slipped disk at the location corresponding to his symptoms. He and his doctor wish to proceed with surgery. Is surgery medically necessary?

To answer that question, the insurer would need to know several other things. To what degree is Joe incapacitated by his back pain? Did he give physical therapy a fair try? Could he improve his condition by losing weight? If so, how willing is he to try to lose weight? In other words, did he do his very best to avoid expensive medical care? And, similarly, for the doctor. Did he carefully advise Joe on all his options? Is his advice disinterested? How confident is he that the surgery will help?

These are all legitimate questions, the answers to which are completely inaccessible to the insurer, for they reside in Joe’s mind and his doctor’s—and possibly below their level of consciousness.

No amount of utilization review can overcome this insurmountable “information asymmetry,” yet medical care is replete with situations that are just like Joe’s: doctors and patients who wish to pursue a plan of care, without objective evidence to show—one way or another—that the care is necessary, let alone effective.

This consideration is not meant to cast doubt on the integrity of doctors and patients, but to point out that medicine is an occupation that frequently deals with intangibles. And even for conditions which, on the surface, seem objectively determinable, like heart attacks or cancer, the tentative way in which medical care necessarily proceeds is antagonistic to the aims of insurance.

Take Laura, who has sudden severe chest pain in the middle of the night. Concerned, she calls an ambulance and is taken to an emergency department staffed by competent and cost-conscious doctors. For a variety of reasons (the character of the pain, the fact that Laura has a family history of heart disease, the equivocal finding on the electrocardiogram, etc.), expensive tests and scans must be performed before the doctors can reassure themselves—and Laura—that she is fine, and that her chest pain was simply a bad case of acid reflux, or perhaps a panic attack.

Should the insurance cover the expensive work-up for this false alarm? A “no” answer seems absurd: people cannot be penalized for misjudging the severity of their condition. If the answer is “yes,” on the other hand, the program is no longer insuring against objective health impairments, but against any concern that can cross someone’s mind—be he a stoic or a hypochondriac.

In short, it’s in the uncertain nature of medical care to conspire against insurance plans that, by nature, must necessarily deal with objectively verifiable claims to remain viable.

So, health insurance is definitely not insurance in the proper sense of the term. Instead, health insurance is—and always was—an income subsidy, ostensibly designed to help the sick pay for medical care.

Such an understanding of the essence of health insurance should not be controversial if we consider government health insurance programs. After all, the first health insurance program was plainly designed by Bismarck as an income subsidy, if only to gain for the Prussian state the loyalty of the working class.

In the United States, the Medicare and Medicaid programs were also enacted as income subsidies to help the elderly and the poor pay for medical care. The subsidies seemed justified by the sharp increase in the cost of medical care that followed the widespread adoption of private health insurance after World War II.

As it turns out, however, even American private health insurance plans were conceived as income subsidy programs. In the 1930s, the early Blue Cross and Blue Shield experiments were carried out not to actually provide insurance against illness, but to alleviate the surge in hospital bed vacancies that occurred when the Great Depression corrected the hospital construction boom of the 1920s.

A decade or two later, employer-based private health insurance emerged as a means for businesses to circumvent wartime wage controls and recruit employees whose salaries could not be raised. After the war ended, the government made that form of income subsidy permanent by specifically exempting health insurance from payroll and income taxes.

In short, be it a public initiative or privately provided service, health insurance is an income subsidy program and can only be considered as such.

As far as income subsidy programs go, however, health insurance has its own peculiarities.

First, health insurance essentially operates as an unlimited voucher program for medical care, since neither the government nor private insurers can set limits to the amount of allowable coverage. As such, then, health insurance is one of the most generous income subsidy programs conceivable. It is no wonder, then, that the healthcare industry has grown to command nearly one fifth of the gross domestic product.

Second, the income subsidy conveyed by health insurance is not allocated based on a person’s income or wealth. After all, it is the wealthy and securely employed who have historically benefited from “Cadillac plans,” while those uninsured tend to come primarily from the lower middle class.

By forcing health insurance on everyone, the Affordable Care Act is admittedly trying to close the gap separating those who do from those who do not currently benefit from health insurance. The plain result of that policy is to ensure that, in principle, no one is left un-subsidized.

Are income subsidy programs that make unlimited amounts of health care funds available to anyone and everyone sustainable? Conservatives had better answer that question correctly.

Michel Accad, MD, practices cardiology and internal medicine in San Francisco, offering individualized care in a free-market setting. He is the author of Moving Mountains: A Socratic Challenge to the Theory and Practice of Population Medicine. His blog about health-care and medicine is AlertandOriented.com.

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8 replies »

  1. Who cares? Is the army an income subsidy? I mean, we could each show up to battle with our own equipment when the enemy gets to our gates, right? It wouldn’t be very smart, but no dumber than being your own doctor. So we get together and subsidize each other’s defense risk by raising an army. What does the army do? It INSURES US against the risk of foreign attack. We pool our risk and our assets to control a risk we each face. (It’s NOT a common risk. NYC is a more attractive target than Peoria, yet people in each place pay the same “premium” to support the national defense.)

    We call some of these risk poolings “insurance,” and we call others something else. But they are what they are, and trying to put them in some sort of ideologically charged category in order to decide whether we like them or hate them does not alter their nature or their wisdom. Health insurance assists in recruiting a virtual army of healthcare professionals to protect/treat all of us. We DO know closely enough what it will cost to make health insurance a profitable business if left to its own devices.

    Adding portability without creating an “occurrence” type policy makes it unprofitable, which is why private insurers are dropping out of the individual market. So, instead of asking what pigeon-hole we can assign health insurance to, how about we think about ways to make it work?

  2. Market oriented systems tend to be more expensive. Regardless, cost should not be our only concern. Quality and access are important also. Maybe someone knows how to make markets achieve all three of these effectively, but no one has demonstrated it yet. None of the states are even willing to try it.

  3. Then why not call health insurance a kind of insurance? It clearly meets the definition. Risks are not manageable mostly because people can’t afford to buy the insurance to manage the risk.

  4. We do have zero idea of how much we “need” to spend, and I suspect we will hover around zero in that department for quite sometime (I have no idea what need means and I am suspicious of those who claim they know what it is). But, we do know exactly what we spent, waste and famine and all, and we know exactly how many percentage points it will grow by, all things being equal next year (no plagues or Armageddon and such). The Medicare budget is perfectly predictable and not capped. Medicare for all budget will be the same. The point here is that it is not “infinite” and it does not trend to infinity under any circumstance, in which case it can be budgeted for.
    I have no love for the Swedish system. The German or the Swiss are my cup of tea because patients can freely pick their doctors and hospitals, doctors are at liberty to treat without interference, and insurers are just lowly third party administrators with no ability to steal everybody’s lunch.

  5. Steve,

    I thought I was safe quoting a standard dictionary definition of insurance! For some reason, the hyperlinks are not in place in this THCB version, but the definition is not far from the one you offer, and “risk management” is certainly implied.

    That’s the point. Some risks are manageable, others aren’t. Making them so by decree can appear to work for a while, but reality has a way of re-asserting itself in the end.


  6. Margalit,

    “But it’s not ‘an income subsidy, ostensibly designed to help the sick pay for medical care’ either. If it was, each person would get X number of dollars to directly pay for care. ”

    It may not be a direct subsidy, and it is most certainly a disingenuous one, but it is nevertheless a subsidy.

    “We know exactly how much we will need to spend every year on health care for 320,000,000 Americans.”

    We have zero idea how much we need to spend. What we know is how much we spent last year. What we know is that we have overdiagnosis galore, overtreatment galore, overhype galore, and, at the same time, many people go undiagnosed and untreated. We have a boondoggle and a complete misallocation of resources, and the more centralized the system, the more misallocation and diversion of resources there will be. And no, the Swedish don’t allocate them any better…https://mises.org/library/truth-about-swedencare


  7. I 100% agree that health insurance is not insurance in the car/house sense. But it’s not “an income subsidy, ostensibly designed to help the sick pay for medical care” either. If it was, each person would get X number of dollars to directly pay for care. Instead, they get X number of dollars to put in a big pot where risk is shared. It is this notion of shared risk that makes people call it insurance. And it is the size and nature of the pot that makes it fail every single time.

    Why? Because no matter who (conservatives, liberals and everything in between) discusses health insurance, we always run into the “unlimited amounts of health care funds” statement. This is a red herring used by conservatives to argue that poor people shouldn’t expect equal care to richer people, and by liberals to assert their God given right to use their superior intellect to ration care for the poor they love so much that they can’t stop making more of them every single day.

    The plain fact is that we do not need unlimited resources. We know exactly how much we will need to spend every year on health care for 320,000,000 Americans. People will not go out and get multiple cancers just to get more health care money spent on themselves and their families. Unlike free ice-cream, health care is one of those services (like incarceration and execution) that people would very much rather not have to use.

    What we don’t know is how that very finite amount of health care money will be spread across each insurance pot.The more pots, the larger the uncertainty. That’s why we have a crisis of sorts. That’s why we never seem to have enough money for everybody. Uncertainty is indeed expensive. This is the third administration in my lifetime that will rise and fall because we’re too blinded by ideologies to realize that medical care is neither a market good nor a human right. It is an obligation of a state to its citizens. Just like security.

  8. You have made up your own definition of insurance. If you read through the many definitions of insurance, they mostly come down to the following which comes from Wikipedia and does a decent job of summing up other definitions.

    “Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.”

    If you buy individual insurance, you are buying protection against a large loss. If you are in a group plan, whoever is paying for that insurance, usually the company and the insured, are buying protection against a large loss. Medicare easily fits the common definition, even if people underpaid. Medicaid is a bit different, though IIRC, most people on Medicaid have worked and paid taxes at some point, so you can make a case there also. (For groups like the severely disabled who have never been able to work, it may provide protection for families, but sometimes it is just the state paying for health care so I would agree that it is a reach to call that insurance.)

    So if you have health insurance, if you are hit by a car tomorrow, have a massive MI or get diagnosed with some awful cancer, you have hedged against the massive loss that could come from paying those medical bills out of pocket.

    So subsidies are just subsidies. We have had those in health care insurance in some form for quite a while. Prior to Obamacare we had underwriting for small group plans. The premium for the group would go up or down based upon the overall health of the group. Get unlucky and have two sets of premie twins and two cancer patients (like we did) and your premiums went up 30%. However, we, like everyone else I know, charged the same employee contribution for each employee, i.e. the healthy subsidized the sick.

    So subsidizing the sick is not new with health care insurance, and it is insurance. If you want to make a new definition and say it is only insurance if what you pay is in direct proportion to risk, have at it. Anyway, I think the real question conservatives need to answer is whether or not you think people should lose the ability to “hedge against the risk of a contingent, uncertain loss” because they got sick at some time in their lives. Prior to the ACA if you had a major illness it became essentially impossible to obtain insurance in the individual market. Should we subsidize those people or not? When people got older, but not old enough for Medicare, their actuarial risk pushed up prices high enough that they could not afford to hedge their risk. Should we subsidize them or not? When you just don’t earn enough to buy insurance to hedge your risk, should you be subsidized? These are the questions conservatives should answer.