Monday, July 13, 2009

Social Insurance

It has often occurred to me that the combination of social insurance and business is fundamentally distasteful. The purpose of buying a social insurance policy, especially in the form of health insurance, is to protect oneself from risk: risk of natural disasters, risk of theft, risk of early death, or risk of catastrophic health problems. A business, on the other hand, is largely concerned with extracting the largest amount of profit from its customers as possible, because its fiduciary duty is to increase the value of the company for its shareholders (or just regular owners, depending on what the structure of the business is). An insurance company takes advantage of the uncertainty inherent in our lives in order to make money. Now, this is not necessarily a bad thing. You could argue that non-lethal self-defense weapon makers do the same thing. Where they differ is that the business model of a successful insurer consists in doing everything they can to deny your insurance claims. In order to extract as much profit as possible, they must limit their outlays, and the best way to do that is through careful pre-screening, or denial of insurance claims. Insurances companies make money by denying you the peace of mind you thought you'd purchased.

I think it is this fact that explains why people hate their insurance companies. They know the insurance companies answer to two different masters. On the one hand, they are there to protect you. On the other hand, they exist to make their shareholders money, which they can only do by denying high risk persons insurance. The profit motive harmfully interferes with the insurance company doing its best by the customer. It would be one thing if the interests of the two sides were equally balanced, but there's no reason to think that they are. The people who run insurance companies, their CEOs, get their jobs because they are good at making money, not because they are good at offering great coverage for customers. They have to do that, in so far as they don't want to go out of business, but with the monopolistic stranglehold that most companies have in various regions, they can afford to pay more attention to their bottom lines. That's why the insurance companies are so terrified of a public option for health care. I won't pretend to know the numbers on comparative performance between government administered and private health insure, but the public option has at least two enormous conceptual benefits: no profit motive, and increased competition. The government is not trying to make money from providing health insurance. The government does not serve two masters, the insured, and their shareholders. While a public plan must make sure it stays solvent, it isn't concerned with making money for its shareholders. Its sole mission is to provide health insurance to those it insures.

I said that increased competition is a "conceptual" benefit, but really, it might as well be empirically confirmed. Vast swathes of the country are covered by one or two insurers, leading to a typically monopolistic situation. Providing a public plan, which can compete on cost because it isn't trying to make money, will force insurance companies to amend their practices. This will lead to more of the money paid into the companies being disbursed to those it insures.

One can see why the insurance companies are terrified. Their long reign of extracting profit due to their insecurities of their customers would be directly challenged. The moral of the story is that the government is the correct vehicle for social insurance. We can talk about what kinds of things people absolutely need to be protected from, but it seems prima facie clear to me that the ravages of disease is one of those things.

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