Early in my career as a lawyer, I did a lot of work for insurance companies. I once had a case that provoked considerable laughter: a man was building an addition to his motel. He talked with his insurance agent about builders risk insurance, which would cover the structure while it was under construction, but decided not to buy it. One night, the structure caught fire and burned to the ground. The next morning at eight o’clock, the man was at his insurance agent’s office, saying that he wanted to buy that builders risk coverage after all.
Once the facts became clear, of course, we won the case. You can’t buy insurance against something that has already happened. You can try to make someone else pay your bills, maybe, but you can’t buy insurance. The fact that that plaintiff’s building had burned down was a preexisting condition.
It’s no wonder that health insurance policies have historically excluded coverage for preexisting conditions. You can insure against the risk that you might get cancer, but if you already have cancer, it’s not a risk, it’s a certainty. Yet there are several reasons why the analogy to my plaintiff who changed his mind about insuring his building isn’t fairly applicable to the current health care debate.
For one thing, the fact that health insurance is conventionally linked to employment–the curse of our present system–creates huge distortions. If an employee changes jobs, the consequence may be a change in insurance companies. A condition that was covered under the old plan is preexisting from the standpoint of his new carrier. Unlike my plaintiff who regretted his decision not to buy insurance on his building, the employee who changes jobs is entirely blameless and didn’t set out to assume a risk.
This is just one of the ways in which the link between employment and health insurance distorts our health care system. Some have proposed, over the years, that the simplest thing the government could do to reform health care would be to enact a law making it illegal for any employer to offer health insurance as a benefit of employment. I think that might be a good idea, but it isn’t feasible politically.
Health insurance, as we know it, is really a hybrid product. To some extent it really is insurance, protecting the policyholder against unlikely but potentially catastrophic costs. But in large part, it isn’t insurance at all, but rather a credit and cost control mechanism. We know we’re going to the doctor for checkups; we know it will cost money to have babies; we know that other routine medical expenses will be incurred. Paying these bills is not insurance. The credit and cost control functions can easily be fulfilled when a person switches from one health insurance carrier to another, but what about preexisting conditions–risks that have already materialized?
In yesterday’s Wall Street Journal, John Cochrane of the University of Chicago proposed a solution, based on a longer paper he has written on the subject. In essence, his solution is insurance against uninsurability, combined with less regulation:
[W]hat about pre-existing conditions?
A truly effective insurance policy would combine coverage for this year’s expenses with the right to buy insurance in the future at a set price. Today, employer-based group coverage provides the former but, crucially, not the latter. A “guaranteed renewable” individual insurance contract is the simplest way to deliver both. Once you sign up, you can keep insurance for life, and your premiums do not rise if you get sicker. Term life insurance, for example, is fully guaranteed renewable. Individual health insurance is mostly so. And insurers are getting more creative. UnitedHealth now lets you buy the right to future insurance–insurance against developing a pre-existing condition.
These market solutions can be refined. Insurance policies could separate current insurance and the right to buy future insurance. Then, if you are temporarily covered by an employer, you could keep the pre-existing-condition protection. …
The right to future insurance could be transferrable to another company, for example, if you move. You could have the right that your company will pay a lump sum, so that a new insurer will take you, with no change in your premiums. Better, this sum could be occasionally placed in a custodial account. If you got sick but had something like a health-savings account to pay high premiums, you could always get new insurance. Insurers would then compete for sick people too.
Innovations like these would catch on quickly in a vibrant, deregulated individual insurance market.
What Cochrane is proposing is a relatively simple risk management system with analogies in the world of finance. The key to implementing such a system (rather, allowing insurance companies to implement it) is lessening the stifling web of regulation that now drives up insurance costs:
How do we get to a competitive market? The tax deduction for employer-provided group insurance, which has nearly destroyed the individual insurance market, is a central culprit. If we don’t have the will to remove it, the deduction could be structured to enhance competition and the right to future insurance. We could restrict the tax deduction to individual, portable, long-term insurance and to the high-deductible plans that people choose with their own money.
More importantly, health care and insurance are overly protected and regulated businesses. We need to allow the same innovation, entry, and competition that has slashed costs elsewhere in our economy. For example, we need to remove regulations such as the ban on cross-state insurance. Think about it. What else aren’t we allowed to purchase in another state?
It is tempting to think that Obamacare is dead, but most likely the Democrats will pass something–anything!–before the end of the year to save face. We’ve learned over the last month that most Americans don’t want government medicine. Now we conservatives need to go on the attack, offering market-based solutions that solve the real problems of our current system (as opposed to the fictitious problem of “evil” insurance companies and doctors) with competition-based approaches.