The Problem of Being Overinsured

One of the arguments for health care reform is that millions of Americans with employer provided health care are underinsured. Proponents of this view are saying that people are underinsured if they are paying too many of their health care costs out-of-pocket. A little reflection on what insurance is and is supposed to do suggests that the problem is really the opposite- many, if not most Americans are overinsured- they have too much health insurance coverage.

On what basis can I claim that Americans have too much health insurance? The purpose of insurance is to protect people from risk. Private companies offer affordable insurance against losses from automobile accidents, accidental death, fires, storms, and floods, among other things. These kinds of insurance arose in response people’s willingness to pay for a contract that will compensate them for losses due to a relatively low probability event over which the insured party has little or no control. Yet, unlike other kinds of insurance, most of what is covered by many health insurance plans does not fit this description. This is why so many people who do not have employer provided health insurance are either uninsured or purchase only catastrophic coverage.

The problem with many existing health insurance plans is that they cover the cost of routine treatment for illnesses, such as colds and flu that occur frequently or the cost of care for conditions, such as pregnancy, that are heavily dependent upon the choices of the person who is insured. Basic economics teaches that paying for routine treatment via a third party insurance company will raise the total cost of that treatment. This happens for two reasons. First the insurance company, as middleman between the consumer and the health care provider, has costs that must come out of what the consumer pays. Second, insurance that pays for routine care lowers the cost of each doctor visit to the consumer, thus increasing demand. Higher demand with a given supply means higher prices.

It does not matter whether consumers or employers pay health insurance premiums. The premiums are part of the cost of health care. Eliminating routine care from being covered by health insurance would mean premiums would decrease and employers could pass the savings along to their employees as higher wages. The average consumer would be better off as a result. If it were not for the tax deductibility of health insurance premiums, employers would not cover routine care and avoidable conditions as much as they do.

This is not to deny that many Americans do not have sufficient access to affordable health care nor that the inability of some to afford health insurance is something we should be concerned about. Although it does not make sense for insurance to cover the ordinary medical costs of child birth, treating chronic asthma, or flu symptoms, it may be a good idea to have insurance in case of complications resulting from childbirth or to cover hospitalization for pneumonia and other serious illnesses.

The best way to help those who cannot afford basic health insurance is not to require or subsidize the kind of comprehensive health insurance plans that most employers now offer. On the contrary, health care costs and the cost of health insurance that would cover life threatening illnesses and serious accidents would be considerably lower if the existing system of taxes, subsidies, and government regulations did not result in so many people being overinsured.

There ain’t no such thing as a free lunch (or free healthcare)!

A few days ago, I received an email from the daughter of our Congresswoman. In the email she explained that because of Health Care Reform, which her mother supported, she no longer had to pay a $25 co pay for each prenatal appointment. This will save a family “that lives paycheck to paycheck” over $500 per year. Such savings makes healthcare reform sound like a wonderful gift until you stop to reflect- who pays the $25 that the consumer no longer has to pay each time she visits the doctor? The answer: for those who have health insurance, the elimination of copayments will mean higher premiums. In other words, paychecks will become smaller as insurance rates rise to cover this new government mandate.

Proponents of this new rule emphasize that if people do not have to pay for preventative care, they are less likely to require more expensive hospitalization or treatment in the future. Thus, mandating no copayments on preventative care may reduce health care expenditures in the long run. This line of argument is fundamentally flawed. It assumes that the government knows or can find out how much preventative health care each person needs and mandate insurance companies to pay for the required number of visits. How many doctor visits are covered as preventative will be a political decision, and self-interested medical professionals will undoubtedly play an important role in that decision. Thus we should not be surprised if the government mandates more free preventative care than would be cost effective for most patients.

We live in a world of scarcity. Money spent on health care cannot be spent on something else. If the insurance company provides a certain number of free doctor visits, each person covered by insurance will pay for the number of times the average person visits the doctor, regardless of how often he visits the doctor. One person’s visit to the doctor has an imperceptible impact on the per capita cost of health care borne by a large insurance company. Thus the monetary cost to each patient of a visit to the doctor for “preventative care” is effectively zero. The quantity of health care demanded will be greater at a zero price than at a $25 price. Since almost everyone will demand more health care at the zero price, insurance premiums will rise for everyone, and because more health care is being consumed, the total cost of health care will be greater than if everyone had to pay a $25 (or higher) copayment.

If you are covered by a typical health insurance plan which requires you to pay part of the cost of each doctor visit, Congress has not saved you money by passing health care reform. Instead they have mandated that you spend more than you might choose to spend on so-called preventative health care. If you don’t pay for it up front with a copayment, you will pay for it through higher premiums. The only way to keep people’s premiums from rising is if the “free” care is taxpayer funded, and then someone still pays for it.

Instead of Obama Care, which takes away our freedom, what we need is health care reform that gives the consumer more freedom to decide how much health care to purchase with his own money.