Health care vs. health insurance

by Russ Roberts on August 24, 2009

in Health

In this post, I asked you to respond to this question I received from a reader, Tom:

Imagine we had entirely private health insurance market – no Medicare or Medicaid.  If I live to be sixty-five, I will probably have a personal and/or family history that indicates a strong probability of developing an expensive chronic condition. I would wager that is true of almost all sixty-five year olds.

So here is my question: which insurer in their right mind would take on my risk?

I suspect none. Once philanthropy and savings were exhausted, I would surely risk a painful life and preventable death.

Do I want this? Does anyone? Isn’t “socialized” medicine for older people an unpleasant moral necessity for our wealthy society? Please note I am deeply suspicious of most arguments cast in moral terms in discussions of politics and economics. I ask these questions guardedly.

Your answers were wonderful. Thoughtful, interesting, and perceptive. But no one really got to what I think is the key to the matter.  (Though AdamGurri hinted at it at one point and I stopped reading after about 150 comments so I may have missed someone else’s insight.)

Tom’s question is interesting. But it’s the wrong question. And that Tom asks it and that everyone answered it is fascinating in and of itself.

It’s the wrong question because when you’re 65 the problem isn’t getting insurance. It’s paying for health care. But the public debate has become so obsessed with health care insurance we’ve forgotten what the real issues are.

When you turn 65, the high cost of insurance isn’t the problem. The problem is that you’re old. A lot more things are going to go wrong. Yes insurance is going to be costly. But that’s because so many things are more likely to break in your body. The high cost of insurance at that point is just a result of the problem. It’s not the problem itself.

It’s like saying that if you drive your car in a demolition derby, it’s hard to get coverage for collision damage. No kidding.

What’s funny (well not funny, really) is that we’ve totally forgotten the point of insurance and why it’s economically sensible. Insurance is designed for the unpredicatable. There’s nothing unpredictable about bad health when you get old.

By the way, most of you in the early comments did make this point clearly and talked wisely about why it’s important to save when you’re young. But most of those comments if I read them correctly, were trying to explain why you’d still be able to afford insurance rather than health care per se.

Our current world of health “insurance” is absurd. It should not cover pregnancy which is a largely predictable and planned event. It should not cover an annual checkup. This is not insurance. This is just a subsidy.

What we have come to mean by health insurance is “cheap medical care.” They are not the same thing.

This confusion is most obvious when people talk about the uninsured as if the uninsured don’t get health care. Of course they do. They just pay more for it (or they get it for free under certain circumstances.)

Most importantly, the cost of health care, whether you are uninsured or over 65 has been increased and distorted by the public subsidies to insurance that artificially lower the out of pocket costs for those who are insured either via employer-based coverage or Medicare and Medicaid. This is what makes being uninsured in modern America, no matter your age, so unpleasant. It’s that what you pay when you do need health care is artificially high.

Let me ask Tom’s question in a different context.

Once I get married and have kids, how am I going to be able to get insurance coverage that pays for my kids’ college tuition? Who’s going to insure me against that?

The answer is no one. But people still manage to send their kids to college even though it’s really expensive. Hard to believe, but it would be a lot more expensive if people had subsidized insurance to cover the cost of college. And it would be a lot less expensive if there the current subsidies to education were eliminated.

This is not to say there aren’t challenging issues about how to allocate your income when you’re 80 years old and trying to decide on medical treatment. But the health insurance issue is a red herring.

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Anonymous August 24, 2009 at 12:35 pm

Oh dear God… change the second “your” to “you’re” in the last paragraph, then delete this comment, before anyone else notices.

Anonymous August 24, 2009 at 1:10 pm

Thanks, evanm. Got it.

Anonymous August 24, 2009 at 11:16 pm

“What we have come to mean by health insurance is “cheap medical care.” They are not the same thing.”

Yesssssss! Hala-fu.king.looya! Thank you Russ!

Name August 24, 2009 at 12:51 pm

I’m curious about how you see life insurance – nothing, but nothing, is more predictable than death, after all. Of course, the exact time, place and manner is anyone’s guess but if I’m committed to pay up when you kick the bucket, I know I’m definitely coughing up sooner or later (unless some exclusion applies under the circumstances).

Anonymous August 24, 2009 at 1:36 pm

Big difference: life insurance is actually insurance. Life insurance also becomes unaffordable once death in the current time period becomes much more likely. It is only economically worthwhile while one is rather unlikely to die in the current year. As that likelihood increases, the premium per benefit dollar increases proportionately. For instance, if one is only 40, but has been diagnosed with pancreatic cancer, life insurance is for all intents and purposes unaffordable. On the other hand, the average healthy 40-year old can afford a substantial death benefit.

Life insurance provides an excellent example of what would be a healthy dynamic in health insurance, precisely because life insurance is not subsidized and is much less regulated with mandates of all kinds, and there are not “minor maintenance” issues covered by life insurance. Either you live, and it doesn’t pay, or you die, and it pays. (“Guaranteed issue” in health insurance is tantamount to requiring life insurers to cover people who are already dead — the catastrophic but unlikely event being insured against has already occurred.)

If health insurance were similarly allowed to operate on the free market, a young, healthy person would pay much, much less than an older or sicker person. Policies would be available that did not cover benefits such as tests and treatments that most or all old people need (therefore making them not insurable risks); these policies would be much less expensive than current policies which are mandated to cover a great many such “risks”.

Even better, life insurance is permitted to calculate the additional risk of certain behavioral factors, such as smoking, so that higher-risk policyholders pay higher premiums. When this type of program is in place in a health care setting, it effectively modifies risky behaviors, reduces overall costs to the system as a whole, and reduces premiums. (e.g. Safeway Stores)

Dano August 24, 2009 at 3:46 pm

Big difference: life insurance is actually insurance.

True. Plus many financial planners (perhaps those who sell insurance products will be a major exception) will tell clients that one needs less insurance as one gets older. Look at Modigliani’s Life Cycle Hypothesis: as someone approaches their peak earning years, Income > Consumption and one creates net wealth, which can be used to cover the family’s living expenses and provide an inheritance. It is when one is young, with fewer resources that insurance is needed.

Anonymous August 24, 2009 at 8:07 pm

Exactly – thank you. This point to some extent unifies the issues of Medicare and Social Security: life insurance insures against the risk of a premature death while others depend on the insured’s income (HT foxmarks, below). A death benefit creates an instant estate. The establishment of an estate over one’s lifetime gradually displaces the need for life insurance. It ought to similarly be relied upon for one’s care in old age. Regrettably, most Americans die with almost no wealth. To some extent, this can be attributed to an expectation that the state will provide for us in retirement. A substantial reduction of that expectation, then, ought to contribute to changes in the balance between consumption and savings over a lifetime, and thereby obviate a great deal of the “need” for social insurance.

foxmarks August 24, 2009 at 6:00 pm

Life insurance contracts assume everyone dies at age 99. If you keep your policy in force and live to 100, you get a check.

The insured risk, as you observe, is not against death, but against death while people still depend on your income.

Anonymous August 25, 2009 at 2:37 pm

Life insurance (Term Life) is a poker game. You are betting that you’ll die before your policy is up and the insurance company is betting that you won’t. Most of the time, the insurance company is right, and you lose. On the occasions that they are NOT right, they pay up with the money they made on their other clients. What’s left over is their profit.
Whole Life is much more expensive, and it’s part poker game, mostly bank account. They determine how old you are and how much a year you should have to “bet” that you’ll die for a certain payout. Every year that you live, a certain amount of your premiums go into your bank. If you die before your account is paid up, they lose. If you live long enough, you get to draw out your “deposit”, just without interest (or at least without as much as you could have earned if you’d not been “playing poker” with it).

Anonymous August 24, 2009 at 1:04 pm

I get rather cranky on this point (must be my age or something).

“I’m curious about how you see life insurance…”

“Insurance” is, when putting the word “life” with it about something happening like death within a specific timescale. “Assurance” is about something that will happen. A funeral or burial plan, for example, is assurance, not insurance. Insurance is something like term life.

“Our current world of health “insurance” is absurd. It should not cover pregnancy which is a largely predictable and planned event. It should not cover an annual checkup. This is not insurance.”

Correct, this is assurance.

Insurance would be the catastrophic care insurance that Arnold Kling keeps proposing. Assurance is the covering of the once every 6 months trips to the doctors.

The difference is that insurance covers against things that are unlikely to happen but which are potentially catastrophically expensive. Thus we pool risks and insure. Fire insurance, not fire assurance.

Assurance is rather more a savings plan to aid us in dealing with a future cost that we are, while not absolutely certain, at least pretty sure, is going to happen.

When we get the wrods and their meanings right then we can start to think about what to do.

For example, I’m all in favour of national health insurance, even tax subsidised. Yup, some 3 year old gets leukaemia, sure, Uncle Sam can pony up. Horrendous car smash and three people quadriplegic for life? Sure, I’ll pay my tax dollars to care for them.

You want to have sex without having kids? No, that’s assurance, paying for your birth control, and you can pay for your own pleasures, thanks very much.

Cheers August 24, 2009 at 1:15 pm

I’ll get even a little more picky on that point. The original understanding of “Assurance” was not just an event that was guaranteed to happen, but an event that was guaranteed to happen with an unpredictable frequency and timeline. The idea of Assurance (like life) was that you WERE going to die, but had no idea when. Original life assurance policies had an absolute exclusion for suicide and murder. The idea being that they were no longer plans of assurance if the ending was determined by someone. Nowadays, we find controls for that (like 2 year suicide clauses, etc.)

Assurance itself requires both pooling and savings. You pool with a bunch of other people who are also assuring against the same event. The costs themselves should spread over the timeline in a predictable fashion. The point is that under a true insurance/assurance operator’s mindset, the notion of pooling for an event you can trigger yourself (pregnancy, doctor’s visits) totally breaks the system.

Anonymous August 24, 2009 at 1:05 pm

“words” of course….Muphry’s Law strikes again.

Anonymous August 24, 2009 at 1:28 pm

“This is not insurance. This is just a subsidy.”

– Or, in the case of private insurance, to some extent just prepaid health care, no?

Anonymous August 25, 2009 at 3:12 am

You’re right. No doubt the subsidy portion has a significant effect, but it is probably smaller than the prepay portion–especially as baby boomers go on Medicare.

Methinks August 24, 2009 at 1:40 pm

Actually, Russ, college is made more expensive by government subsidy.

I’ve said this before – nobody is going to escape paying for their own medical care. Either you have to save in youth to pay for yourself in a competitive market, or you have to save in youth to pay to get health care when the socialized system won’t provide it. Or you suffer and die – that’s also a cost.

The only difference is that in the absence of socialized medicine, taxes and more jobs will be available to allow people to save more money for health care in old age and medical decisions will remain in the hands of the individual.

This doesn’t just apply to old age. The young won’t receive medical care beyond a certain point either once someone else is forced to pay for it.

Anonymous August 24, 2009 at 2:05 pm

“Actually, Russ, college is made more expensive by government subsidy.”

Overall cost, yes. Cost to the individual consumer, no.

Anonymous August 24, 2009 at 2:21 pm


Absolutely right about the educational subsidy. That’s what I meant to write. I’ve corrected it. Thanks!

Methinks August 24, 2009 at 2:23 pm

lower taxes is what I meant to say.

Anonymous August 24, 2009 at 1:57 pm

As one astute commenter wrote in that long post (and I tend to agree):

“You need to stop and think about what insurance really is–a product, a hedge–and what it is not–charity, financing.”

JohnK August 24, 2009 at 2:02 pm

Insurance providers are only allowed to sell products that conform to government regulations.
These products are unaffordable to many people.
The blame is then placed squarely on the providers, and the call is for more regulation.

Where’s the logic?

Anonymous August 24, 2009 at 2:10 pm

Excellent point, but the real issue is that the logic is not at issue. The propagandists who harangue the insurance companies have an agenda — which is to eliminate the insurance companies so that the government controls the whole kit and kaboodle. Given that, the logic of their propaganda is unassailable.

Consequently, we have an immense educational and marketing mission if we are to have any hope of the free market prevailing. The good news is that people in America apparently are still predisposed to grasping and accepting the truth of the matter.

On the other hand, liberals are in a position where to accept the market argument, or to have it accepted over their objections and thus be proved wrong in history, is to essentially accept the error of their entire basic argument. Their entire program would be seen to be the mirage that it is. Consequently, as in a war, this is an all-or-nothing battle, and liberals will fight to the death (figuratively, of course). Free enterprise can admit of no compromise — the war must be won. As von Mises wrote, there is no third way. In the long run, a stalemate is a total loss.

Anonymous August 24, 2009 at 2:20 pm

I’m not one to defend regulation, but I think it’s a mistake to look at “regulation” as some abstract monotonic variable that you can increase or decrease.

A little bit of really bad regulation can do a lot of damage and a moderate amount of good regulation could theoretically do quite a bit of good. You frame the debate as “lots of regulation or a little regulation”. That’s not what the debate actually is – it’s “good regulation or bad regulation”… or I suppose “a lot of good regulation or a little good regulation or a lot of bad regulation or a little bad regulation or a little good and bad regulation”.

Either way, there isn’t some regulation dial that policymakers turn up or turn down.

Anonymous August 24, 2009 at 2:35 pm

You are falling for the liberal thesis that regulation works. Check out some of Russ Roberts’ and his fellow economists’ writing on regulation. The conclusion that an objective analysis leads to is that the intended consequence of regulation is generally poorly served by the actual enacted regulation, and the unintended negative consequences generally far outweigh whatever intended good was done. In other words, “good regulation” is an oxymoron. The regulators have no idea whether or not their program is “good regulation” or “bad regulation.” What they do know is that their legislation serves the interest of the special interests that have lobbied for the various components of it. Thus, their own reelection prospects are strengthened. We forget the motivation of the legislature at our own peril.

The concept of regulation necessarily requires the acceptance of the thesis that central planning is feasible. Economic history confounds that argument at every turn.

Anonymous August 24, 2009 at 2:59 pm

See my response to JohnK below – the research on regulation isn’t lost on me, and I’m not particularly a fan.

What does regulation have to do with central planning, though? They seem to be entirely different things, with different expectations, motivations, methods, and delusions of grandeur associated with them.

Methinks August 24, 2009 at 3:17 pm

You are a fan. You’ve stated before that you’re a fan of “good regulation”. You wrote countless posts a few months ago blaming deregulation for bringing on the “financial crisis” – after admitting that you know nothing of financial regulation.

We have laws in this country to protect people from fraud. Beyond that, we don’t need regulation. The whole point of regulation is to control outcomes. Just because it’s not called “central planning” doesn’t mean it isn’t.

JohnK August 24, 2009 at 2:42 pm

You seem to confuse intentions with results.
Regulations rarely result in what they were intended to do, and the reaction is always to strengthen the regulations. Give them more teeth and they’ll get the job done. But it never happens.
Intentions do not guarantee results.

Anonymous August 24, 2009 at 2:58 pm

I think you’re confusing what I’m saying. I’m not a particularly big fan of regulation. I just think looking at them in an undifferentiated way is wrong-headed.

Anonymous August 24, 2009 at 2:15 pm

But is a health problem (and the amount that it will cost) really anywhere near as predictable as whether your kid will go to college? It is a good point – too many people conflate health care and health insurance in this debate. But the other confusion is that health insurance is really as much of a consumption smoothing arrangement as it is “insurance”. So maybe it’s not entirely appropriate to call that “insurance” – but it is reasonable to focus on the problem as a consumption smoothing problem. True, we could save and go into debt to smooth health care consumption over time (like we do to smooth consumption of education, housing, etc.), but I don’t think it’s inherently problematic that we’ve developed a financial instrument to do that smoothing. It’s the same approach.

But I think one thing that was problematic for a lot of us was that in Tom’s scenario he just magically appeared at age 65. Since this is fundamentally a consumption smoothing problem (whether or not it’s right to label such a problem “insurance”), starting at a random age doesn’t make sense.

Anonymous August 24, 2009 at 2:28 pm

We have the financial instrument to perform the smoothing function in health care: HSAs. But it is important to keep in mind that HSAs accomplish more than smoothing — they also change the dynamic of who pays. With HSAs, consumers pay out of pocket for those health care expenses that are not truly insurable risks. In doing so, they have a tremendous incentive to economize, an incentive fundamentally lacking with the current arrangements. Thus, competition among providers would have to take price into account, consumers would demand, and get, quality and price information that is all but unavailable now, and costs would be held down the way they always are–competition, innovation, improvements in productivity.

The insane notion that price controls via ObamaCare will now work for the first time in recorded history must be dispelled.

What is an insurable risk and what is not will be sorted out by insurance carriers, once they are free to do so. If it is not an insurable risk, it will have to be paid for out of income or savings. With over 1300 health insurance carriers, someone will offer products to address virtually every market. Elimination of artificial separation of markets will facilitate real competition, which again is the only mechanism that will rein in premiums. Those catastrophic risks that are uninsurable (among groups already at high risk) are a relatively small piece of the problem, contrary to what the statists claim, and could be subsidized by taxation without monumental government expenditure.

Seth August 24, 2009 at 6:55 pm

Thanks. I enjoyed the discussion.

Strange. I thought I had posted something about how a freer market in medical care might do revolutionary things for the costs of care, not insurance, and then ended by asking whether Tom considers himself an ant or grasshopper. But, when I look back I can’t find that post. I either had a vivid dream or a computer malfunction.

I agree with the idea that insurance has become a subscription and may soon morph one notch further to a right.

Anonymous August 24, 2009 at 7:00 pm

The point is an important one, but I don’t reckon it answers Tom’s underlying concern, which is this:

Once Tom is old, his health care expenses will become greater. They may exceed his means — no matter how carefully he might have saved in his youth, assuming he was a model of responsibility (though I can’t help but suspect we are requiring him to have been more responsible than the human race has ever known how to raise youths to be).

The point is, when his costs surpass his means, whether it be savings or insurance, he is now exposed to the likelihood of death due to preventable causes.

It’s callous to say to Tom, “You’ve had a good run, but now you can’t pay your own way, why don’t you quietly excuse your costly self from the mortal coil.” Callous, and it seems to me probably deeply hypocritical. (Would you want to be treated this way by the next generation? Can you posit it as a universal moral law? I can’t.)

Tom’s underlying question seems to me to be, what does Austrian economic theory (not libertarian moral theory!) have to say about state vs. non-state solutions that would result in universal coverage for all preventable medical threats to life? Is there any set of policies that would give that end or something reasonably approximating it? And at what cost would those policies come? What is the lowest cost at which the high standard can be satisfied by this or that choice of policies?

Anonymous August 25, 2009 at 2:18 am

livingjp: you have correctly identified Tom’s question. It seems you agree with the underlying implications of his question (society owes Tom the health care he requires because he requires it). He wants an Austrian economic theoretical answer, not one based on libertarian moral theory.

I would argue that libertarian theory is political theory, not moral theory. The difference is this: I personally feel morally obligated to give a helping hand to one in need. That would be moral theory. But when I assert that the police power of the state should be used to force everyone to practice this moral theory I am deviating from moral theory and wandering into the political realm.

Does Austrian economic theory advocate such a political assertion? Or does it begin with the libertarian moral theory designed for the individual and advance from there? Tom was unfair to expect us to refrain from moral theory simply because he fears growing old.

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Anonymous August 24, 2009 at 9:27 pm

For those who think your healthcare is GREAT and single payer is evil, I wonder how many actually lived & experienced “socialized” single payer system. In Korea, visit to pediatrician without healthcare insurance cost $15 and with insurance it’s more like $2~3! Doctors over there don’t make 10% of the salary of the pediatricians in the US. Also, doctor’s in the US are not 10x better or healthcare quality is 10x better here.

It all comes down to price control through single payer system, high efficiency (electronic medical record system), best practice sharing. Each country has it’s own problems but the US’s healthcare / health insurance problems are not sustainable financially and morally.

Anonymous August 25, 2009 at 3:40 am

I can’t speak to SKorea, but Europe’s systems are no more sustainable than the US’s–arguable less so when you account for the rapid decline in quality of health care services in those countries.

It is an interesting time we are in that self-proclaimed “progressives” extol the efficiencies of monopoly. Of course, when insulated from competition, monopolies are, in practice, highly inefficient. But you are not alone in your profound economic ignorance, or economic denial, whichever it is that leads you to utter such nonsense.

Anonymous August 25, 2009 at 3:03 pm

The oft-stated claim that the US health care “system” is unsustainable calls for a defense. How is it unsustainable? If we spend too much, who is in charge of determining how much is too much?

John Dewey August 24, 2009 at 9:58 pm

Russ Roberts: “It should not cover pregnancy which is a largely predictable and planned event. It should not cover an annual checkup. This is not insurance. “

I do not understand this argument. We may wish to argue semantics, and say that prepaid health care is not insurance. But why do you argue that what we refer to as health insurance “should not cover” these events? If the buyer and seller of health insurance (prepaid health care) wish to enter into a contract which includes prepayment for those events, what is wrong with that?

Russ Roberts: “Insurance is designed for the unpredicatable. There’s nothing unpredictable about bad health when you get old.”

I’m fairly certain that the timing and severity of bad health are unpredictable for old people. Health insurance transforms the unpredictable timing and unpredictable cost of bad health into a predictable premium. To me, that seems the true economic value of health insurance.

Anonymous August 24, 2009 at 10:52 pm

Except that buyer and seller do not, necessarily, wish into a contract which includes prepayment for those events. They are mandated. This is, if I am reading this correctly, Dr. Roberts’ point. We should not refer to coverage for predictable and planned events as insurance, we should treat it like insurance, and we should not group it together with insurance. Your concluding sentiment is correct: why should government regulate what is or isn’t included in a mutually consensual agreement?

John Dewey August 24, 2009 at 11:10 pm

If you are claiming that insurance is too regulated, then I agree. But I do not believe that was the point Professor Roberts was making.

My point is this: health insurors transform the uncertain timing and uncertain severity of health events into a predictible insurance premium.

A young woman may wish to become pregnant. But she cannot know when childbirth will occur and how expensive it will be. A proper role for health insurance is to transform that uncertainty into a certain insurance premium.

A 65-year-old man can be fairly confident his medical costs will be higher than when he was 35. But he does not know whether his medical costs until death will be $20,000 or $5 million. He does not know whether that expenditure will occur in one year or in thirty years. A proper role for health insurance is to transform that uncertainty into a certain insurance premium.

Methinks August 24, 2009 at 11:54 pm

John Dewey,

I agree, the purpose of any hedge (insurance) is to reduce volatility. Anything can be insured, including pregnancy. It’s just a question of price.

I think that’s Russ’ strongest point. People don’t want to pay the price of the insurance for the comprehensive care they desire. Note the simultaneous demand for the latest treatments and complaints about rising premiums as if the two are unrelated.

Not Fooled August 25, 2009 at 1:37 am

No, what he’s saying is that the government *requires* coverage of conditions, such as pregnancy. I shouldn’t be forced to make a choice between no health insurance and insanely expensive health insurance that covers a condition that won’t impact me. The government should allow health insurance companies to sell policies that don’t cover certain conditions so that people like me can obtain affordable insurance on a level that matches MY risks. Then, people could purchase plans that cover conditions for which they know there actually *is* risk. If I know that I am sterile, then it makes no sense for me to be forced to purchase an insurance plan that covers my so-called “risk” of pregnancy just so that I can get coverage for real risks relevant to my life, such as heart attack or stroke, which runs in my family. There are many more options to solving this health care cost problem than just creating a government health insurance.

Anonymous August 25, 2009 at 3:12 pm

I’m not sure I agree with your description of the role of insurance. This is the point, I believe, of Roberts’ comment: we purchase insurance to spread risk. This is not the same as smoothing spending. We ought to allow the insurer and the insured to agree on a contract that is limited to spreading risk. By limiting the function of health insurance to the spreading of risk, we could reduce the cost significantly compared to the current regulatory regime which mandates so much coverage for buyer-controlled events like childbirth. It stands to reason that catastrophic coverage could include complications of childbirth.

John Dewey August 25, 2009 at 4:10 pm

I disagree with your limited definition of insurance. But it really doesn’t matter whether you call it insurance or prepaid health care or whatever. Insurors do transform the uncertain timing and uncertain cost of health expenditures into a certain, regular payment. We know there is an economic value in doing that, because health insurance was growing even before Congress granted tax exempt status to this benefit.

I agree that government mandates and restrictions on interstate purchase have made health insurance much more costly than it should be. Favorable government tax treatment of employer provided insurance has increased demand for health expenditure insurance. But the solution is not to eliminate health insurance. The solution is to eliminate government interference. The free market will then determine what features health insurance should have. IMO, employer-based health insurance would remain the norm. but who can know?

Methinks August 25, 2009 at 6:14 pm

Jim, risk and spending are the same thing.

The risk you’re hedging against is a large expenditure to treat a health outcome.

As John Dewey pointed out, a woman may know that she wants to become pregnant, but she cannot know when that will happen, if that will happen and how much it will cost if it should happen. She can smooth the cost of a potential pregnancy by either saving a lot of money before she becomes pregnant to prepare for a potentially large expense (self insuring) or an insurance company can translate that risk and the likely cost associated with it into series of premiums.

Nobody should be mandated to pay for pregnancy insurance if they don’t want it. I’m just saying that it’s perfectly reasonable for an insurance company to price and offer such insurance to those who wish to buy it.

Anonymous August 25, 2009 at 3:47 am

“If the buyer and seller of health insurance (prepaid health care) wish to enter into a contract which includes prepayment for those events, what is wrong with that?”

Nobody is arguing that any voluntary agreement is wrong:

For your pre-retirement health care consumption, the Federal government encourages it through large tax breaks.

For your post-retirement health care consumption, the Federal government simply mandates it.

Without those interventions, it is unlikely third-party financing would be the most cost-effective arrangement for consumers.

John Dewey August 25, 2009 at 9:35 am

My question is not about the part of Professor Roberts post that addresses health insurance subsidies. I am referring to the part where Professor Roberts argues against insuring against costs of pregnancy:

Professor Roberts: “Our current world of health “insurance” is absurd. It should not cover pregnancy which is a largely predictable and planned event.”

I do not understand what is absurd about insuring against the uncertain timing and cost of childbirth and neonatal care.

If Professor Roberts had said:

“Our current world of health “insurance” is absurd. Government should not mandate that pregnancy costs be insured”


“Our current world of health “insurance” is absurd. Government should not subsidize insurance of pregnancy costs.

then I could understand his argument. But that’s not what Professor Roberts argued in that paragraph, and so that’s why I’m asking the question.

I agree with the portion of Professor Roberts’ post about public subsidies distorting the cost of health care.

John Dewey August 25, 2009 at 9:41 am

vikingvista: “Without those interventions, it is unlikely third-party financing would be the most cost-effective arrangement for consumers.”

Perhaps third-party financing would not be the most cost-effective for the total population of consumers. But group buying power would still enable employers to negotiate a better deal for their employees than most of those employees could obtain on their own, IMO.

Anonymous August 25, 2009 at 2:41 pm

Every ask yourself, if that is true, why group buying power isn’t the norm for most purchases that consumers make?

John Dewey August 25, 2009 at 4:02 pm

Few items we buy are costly enough that group discounts would overcome the overhead group buying entails. But we do take advantage of group buying power for some products. Credit unions negotiate deals with auto dealers on behalf of their members. Employers, professional groups, and social groups negotiate deals with hotels and restaurants. AARP negotiates deals for its members.

Anonymous August 24, 2009 at 10:36 pm

OK, let me get this straight. Obama’s health care plan will be written by a committee whose head says he doesn’t understand it, passed by a Congress that hasn’t read it, signed by a president who smokes, funded by a treasury chief who did not pay his taxes, overseen by a surgeon general who is obese, and financed by a country that is nearly broke.

What could possibly go wrong?

interesting thing about it …not one of the people above will be covered by it…They will has have a “Golden Fleece… the voters” health pkg.

Anonymous August 25, 2009 at 11:57 am

There’s nothing unpredictable about bad health when you get old.

That’s not true. Death is predictable, but poor health — particularly poor health that requires expensive care — is not (after all, a substantial number of people drop dead from heart attacks and stroke or don’t have terminal cancers diagnosed until there’s nothing to do for them but hospice). I would imagine that the variation in lifetime medical costs for 65-year-olds is quite large and that the costs in any given year are unpredictable, making insurance appropriate for the situation.

Anonymous August 25, 2009 at 5:27 pm

At some stage the actuaries would price the coverage such that it would no longer be economical for the consumer. The market would sort out what age that might be, but I consider it unlikely it would be much older than 65.

John Dewey August 25, 2009 at 7:51 pm

How can you know this? We’ve had medicare for senior citizens for 40 years. What is the basis for your claim that those over 65 would be priced out of health insurance? Freed from government interference, it’s possible that markets would offer affordable insurance products which older consumers would desire.

Anonymous August 27, 2009 at 3:32 pm

Did I say ‘know’?

I think that after age 65 the likelihood of being diagnosed with cancer in your remaining lifetime is close to 50% Obviously other issues are much more likely. Maybe insurance would be worthwhile until someone is 85 – I don’t know. And I know the US government doesn’t know either. So the market should sort it out.

Joe Cushing August 26, 2009 at 12:38 am

Medicare and social security are almost the same thing. I once calculated that if an average person saved instead of payed into medicare they would would accumulate an amount in the mid six figures by the time they are 65. What they could do at this point it take out a health insurance plan that covers say $2,000,000 worth of care and has a $500,000 lifetime deductible. Most people would not use the insurance and therefore it would BE insurance. We need health care IRAs. We can do this using the same techniques Chile used to privatize social security.

Anonymous August 27, 2009 at 5:17 pm

That’s great! Have you by any chance calculated the same thing for Soc Sec? I think if people knew how much wealth they could accumulate by saving instead of paying in to Soc Sec, they would be much more willing to hear about reform ideas.

Anonymous August 27, 2009 at 2:45 am

Some states do have a sort of insurance for college tuition, Michigan has a program where you can pay your children tuition at the the current rate regardless of their age. So you can pay your newborn tuition today at today rate.

Anonymous August 27, 2009 at 4:29 am

Why would you think pregnancy shouldn’t be covered? What is more important than the beginning of a life? Do you think that any doctor would suggest costly tests for development and disease if it wasn’t going to be covered?

Anonymous August 27, 2009 at 5:22 pm

I think it is a quite valid argument that coverage for the routine elements of childbirth is not actually insurance but savings. (Complications, neonatal intensive care, etc, are in fact insurable risks.) In almost all cases, having a third party do one’s savings (whole life ins, etc) is more expensive than doing it yourself. Also, if a couple is paying childbirth expenses out of pocket (they have planned for close to 9 months, or more, so they will have saved), they will find out what the charges are and economize as they see fit, or not.

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Anton September 9, 2009 at 2:31 pm

change “your” to “you’re”

Anonymous August 24, 2009 at 3:23 pm

Wow – went right over your head, huh? Yes – I am a fan of good regulation. But as I stated here, I’m not really a fan of “regulation” because “good regulation” is so hard to come by.

RE: “You wrote countless posts a few months ago blaming deregulation for bringing on the “financial crisis” ”

You may be confusing me with muirgeo. I’ve said I wouldn’t be surprised if the elmination of some regulations contributed but I think I’ve always emphasized Greenspan’s expansionary policy and Asian savings. I mean – I haven’t said “elmininating regulations did absolutely nothing”… so if that’s your standard, maybe.

RE: “The whole point of regulation is to control outcomes. Just because it’s not called “central planning” doesn’t mean it isn’t.”

OK – I just think of central planning as setting production levels and coordinating production, which isn’t really regulation at all. It seems to me you can be a regulator and not a central planner, or a planner and not a regulator.

Anonymous August 24, 2009 at 11:23 pm

Yes, Methinks,

Good job.

Disingenuous Kuhen, do you suppose the term “good regulation” is highly, intensely, thoroughly subjective?

Naw, lefties can’t understand why conservatives don’t buy their cheese.

“good regulation” is subjective to vidyohs, but it is middle of the road, mainstream to a lefty. How could vidyohs question “good regulation”, well sheeet it only tells him to cough up 55% of his fruits of labor to ideas that DK deems worthwhile.

Methinks August 24, 2009 at 3:32 pm

But as I stated here, I’m not really a fan of “regulation” because “good regulation” is so hard to come by.

No, your constant straddling the fence so that you can never be pinned down for any of your opinions is not going over my head – or anyone else’s. Don’t mistake your cleverness and youthful arrogance for intelligence. You fly over no-one’s head here.

You are a fan of “good regulation” and you don’t assume that all regulation is bad regulation just because all regulation seeks to control industry.

I just think of central planning as setting production levels and coordinating production, which isn’t really regulation at all

You can choose to think of central planning as narrowly as you like. The fact is, that is exactly what regulation does. In the insurance industry it controls who can buy what and at what price. Price is indirectly controlled as a function of mandates and barriers to competition. In the financial industry regulation controls who can transact, at what price and when. By any other name, that’s central planning.

Anonymous August 24, 2009 at 3:34 pm

Regulation by definition is one central authority directing economic activity in some form and to some degree. It is in that sense that I label it ‘planning,’ and I stand by that label. As such, it requires the operation of Hayek’s fatal conceit: a handful of individuals presuming the requisite knowledge, and arrogating to themselves the authority, to direct the decisions and actions of millions of individuals, because the regulators “know better.” One need not centrally plan every transaction to have planning going on. Further, as noted by another poster above, and with authority by Mises, one regulation tends to lead to another and another, until the economy is no longer recognizable as free. As is the case today.

And again, regarding your affinity for “good regulation”– with all due respect, you have no idea what good regulation looks like. You may decide for yourself that some regulation is “good,” but that does not make it good for the economy as a whole, nor does it mitigate the negative effects of the regulation on certain out of favor parties, such as greedy insurance companies, over-charging doctors, or the no-longer-useful elderly.

Anonymous August 24, 2009 at 3:38 pm

That’s fine – that’s why I asked why you identified the two. It seems a little broad as a definition, but obviously there are some common strains in the sense that it’s an intervention of sorts. I guess to find common ground I’d just say that planning is a very specific subset of regulation, so I wouldn’t compare all regulation to it.

Anonymous August 24, 2009 at 3:41 pm

You have the cart before the horse: regulation is a subset of planning.

Anonymous August 24, 2009 at 3:44 pm

Well… most people think of “regulation” as broader than “planning”.

You can define it either way. I’m just relying on what we’ve historically called “central planning”, so it seemed less confusing to just run with that. I’m not sure this is really worth arguing over.

Anonymous August 24, 2009 at 3:46 pm

Who are the “we” who define “central planning” so as to exclude regulation? Words matter. Precision is the friend of understanding. Because “planning” has a bad name, the advocates of planning prefer to call it something else, such as liberalism or progressivism. The title does not change its fundamental character. However, labeling does influence the public debate, and therefore it is important. I call it planning because that is an accurate term for it.

Anonymous August 24, 2009 at 3:52 pm

Like I said – you can define it either way. But using a definition that most people don’t use defeats the whole purpose of language. Planning does have a bad name, rightfully so. But it also has a very specific concept associated with it – and that concept is very, very different from capital requirements, ingredients disclosure, and professional licensing. I’m just warning you that if you don’t use it how most people understand it dialogue will get confusing.

Anonymous August 24, 2009 at 6:44 pm

Hayek allows for a category of regulation governing standards and procedures, but not for outcomes. These don’t count as “planning” in his critique of planning. Examples he gives in Constitution of Liberty involve the sale and packaging of poisonous goods, and building safety ordinances. Nothing he says there or, as far as I know, elsewhere, confines his main points in that connection to matters of bodily safety.

Anonymous August 24, 2009 at 3:55 pm

So warned.

sandre August 24, 2009 at 5:18 pm

well said

Anonymous August 24, 2009 at 8:28 pm

Point well taken. Thank you. Yes, Hayek was in favor of rules and laws that 1. applied equally to everyone; 2. were easily understandable and easily known, so that they could be used in an individual’s decision-making.

The vast majority of regulations are in fact designed to protect the interests of one special interest or another, or to direct individual or corporate behavior in a fashion deemed desirable by politicians, generally for scurrilous political reasons. This is a de facto theft of a portion of the right to the use of private property. I would cite McCain-Feingold, aptly dubbed the “Incumbent Protection Act” by George Will, or of course Waxman-Markey. It is these regulations that I would include under the umbrella of planning. As far as regulations that truly do create desirable and cost-effective safeguards or protections, I believe the tort system is quite capable of serving that purpose.

Methinks August 25, 2009 at 3:34 am

I don’t disagree with you. We should all be able to buy the plan we want rather than the plan that’s mandated. Not only do I agree with you about government health insurance, but I think it will actually make things worse.

However, I think neither Russ nor John Dewey mentioned mandates.

Anonymous August 25, 2009 at 5:19 pm

I don’t believe I suggested any such thing.

I agree 100% I think employer-provided insurance would gradually go the way of the dinosaur, because of the issue of consumers’ preferences and needs varying considerably, and because of the need for portability.

Anonymous August 25, 2009 at 5:22 pm

Housing is a major expense. We could get together on that too.

Here’s the thing: it is highly unlikely that all, say, 500 employees at some firm would agree to coverage provided by the same insurer and with essentially the same coverage, and that they could not maintain if they left the company, were it not for some outside enticement, such as a near-50% government subsidy. There is absolutely no way the price (because of the group purchase) is better for close to half of those employees if the subsidy is not calculated in.

Anonymous August 26, 2009 at 7:00 am

Interesting you say that. I belong to a very large and well-funded professional organization. They are constantly sending me adds for great insurance products only available to members. In each case, for each type of insurance, the rates I found for myself were MUCH lower.

And why would you think otherwise? Most economic mistakes come from not accounting for all of the costs. In this case, you are not counting the cost of a one-size fits all program. My driving history, health history, life style–the things I’m willing to do without, the things I really want covered–make me UNIQUE. By entering a marketplace full of a wide variety of options, it is not unexpected that I would find something better, even cheaper, than what a group can offer. The group, after all, is not finding the best available option specifically for me.

John Dewey August 25, 2009 at 7:47 pm

jimpierq: “There is absolutely no way the price (because of the group purchase) is better for close to half of those employees if the subsidy is not calculated in.”

How do you figure? According to McKinsey and Co survey, the average cost for group health insurance for a family of four is about $13,000 annually. The majority of households have a marginal tax rate of 15%. So the tax subsidy for employer-based health insurance is less than $2,000 for a majority of families.

If state insurance mandates were removed, group health insurance would be much lower than $13,000. The tax subsidy would be much less than $2,000 annually.

Anonymous August 26, 2009 at 7:20 am

First, $2000 is a lot of money, particularly for someone in a 15% bracket. It is enough money to affect behavior even for people in much higher brackets.

Second, a lot of people are in higher brackets.

Third, your rebuttal doesn’t even make sense. What you should be comparing is the cost of group insurance + tax break, to the cost of individual insurance. And even then, you have to be aware of the downward pressure in everyone’s prices as more people choose the latter.

Anonymous August 27, 2009 at 3:28 pm

“risk and spending are the same thing” ???

I need some clarification on that.

As I define it, risk involves uncertainty: the event may occur in the future, it may not. I could go my whole life and never get cancer, but the entire time insure myself against the risk that it does happen. The routine expenses of pregnancy, I suppose, can be considered risk to the extend the woman doesn’t know for sure she will get pregnant, or when it will happen. But it is a reach to put that in the same category as illnesses that the insured is unlikely to contract over their lifetime.

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