Health Care = $$$. No matter how you analyze health care reform, you end up with a discussion of who pays for health care. We can always pay for health care ourselves; but, that approach correlates to bankruptcy.

Alternatively, we can all contribute money to a fund that pays for the care of those who contributed. Theoretically, we have more contributors than users of the fund. Also, we hope that the amount we contribute (premium) is less than the actual cost of care; otherwise, we might as well just pay for the care ourselves rather than contribute to the fund. In keeping with the simple math, if you want lower insurance premiums, you need lower health care prices.

There are many different ways to figure out how much each person must contribute. At one end of the spectrum, we all contribute the same amount no matter what physical condition we find ourselves in. We contribute without regard to disability, lifestyle, genetics, etc. This is called “community rating” and there exist many variants. Washington uses a “modified community rating” for individual policies and traditional methods for large group markets (Here is an example.) Every method is a decision about how much the healthy subsidize the sick.

We could calculate premium with great precision and analyze what each person’s likelihood of needing care will be in the near future and charge the person accordingly. (We don’t like that or we would not have banned the use of genetic tests in setting insurance prices.) Either way works mathematically. But obviously, consequences change depending on the amount of risk you can weigh when setting prices.

Unfortunately, we continually dither and argue about the relative values of different methods of collecting and distributing money to pay for health care. We now have health care reform that relies upon the private health insurance system; yet, we write laws as if we don’t understand the common sense rules of insurance such as:

  • If people can buy insurance only when they need care, there is a good chance the fund will never get enough premiums to cover the care and everybody else’s premiums skyrocket. The point of longer preexisting condition waiting periods is to encourage people to buy and keep insurance before they need it.

We either all pay now or we screw up the financing system. That’s the whole point of an individual mandate that some state’s Attorneys General want to challenge. (Of course, the penalty for ignoring the mandate is laughable.) If you want to let people buy insurance without regard to health that’s fine, so long as you make sure that they have to contribute to the fund now. But even when you get everyone to contribute, you still have fights over how much each person should pay:

  • People who exercise and struggle to maintain a healthy lifestyle don’t want to subsidize the cost of care for couch potatoes. (My wife should probably pay less than me.)
  • If young people have to pay as much for care as old people, the “immortal” young will be a hard sell. (On the other hand, I don’t skateboard.)

What happens when one company creates a health care network that everyone loves, particularly the sick? More to the point, how do we adjust prices when one insurance company attracts a healthier population than another company? What kind of behavior do we want to encourage in our insurance companies – risk attraction or risk avoidance? What kind of behavior do we want to encourage in their customers?

Here is a thoughtful article on how hard pricing the system can be: “The Moral-Hazard Myth