Sunday, December 27, 2009

Those who take medical risks get Congress' help

Published in The Tennessean, December 27, 2009

Those who take medical risks get Congress' help

By RICHARD J. GRANT

"When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean — neither more nor less."

"The question is," said Alice, "whether you can make words mean so many different things."

"The question is," said Humpty Dumpty, "which is to be master — that's all."

We can only wonder what Humpty Dumpty would have said about health insurance. The word "insurance" used to have a clear meaning. But as insurance has come increasingly under the control of our masters in the various levels and branches of government, the thing itself bears less and less correspondence to the word we use to describe it.

Life comes with a natural uncertainty, and each of us must find a way to handle this fact. We can identify and, in many cases, measure the various risks that we face. This helps us see the connection between what we do and the likelihood of various consequences. Not all smokers will get lung cancer, and we don't know which smoker will. But we do know that smokers are more likely to get it than are non-smokers.

This kind of knowledge enables individuals to make voluntary agreements with each other to share or trade risks. A corn farmer might fear that the price of corn will be lower at harvest time; the company that makes corn flakes might fear that the price of corn will go higher. Each can reduce their risk by agreeing now on the future price.

From this we see the natural emergence of a market for futures and other "derivatives." There is no need for government involvement beyond its basic role in the enforcement of contracts and of laws against theft and fraud.

Similarly, people can agree on methods of sharing and reducing health risks. What we call "health insurance" is an agreement between individuals to contribute to a fund that is used to pay some of the expenses of those who are unlucky enough to require medical treatment. Those individuals who engage in behavior, such as smoking, that is more risky to their health would be required to pay more into the fund.

Faced with this higher premium, each risk-taking individual must decide whether or not the enjoyment he gets from the risky behavior is worth the greater insurance expense. If not, then he is likely to reduce his risky behavior.

Suppose the government forbids "discrimination" between smokers and non-smokers. Smokers would not have to pay the full cost of the higher risk they bring to the insurance fund. Smokers and non-smokers together would pay equal, but higher, average premiums. This would attract more smokers to buy insurance, but many non-smokers would feel ripped off and drop their coverage. The result of "well intended" government intervention is higher average premiums and fewer people with health insurance.

If the government now forbids "discrimination" against people with "pre-existing conditions," then someone who already has lung cancer could purchase a policy from an insurance company to have the medical expenses paid by all the other policyholders. Such a rule would require an increase in everyone's premium to a level that would cover all potential costs. Otherwise, the insurance company would be certain to fail.

Pre-existing conditions by their very nature are uninsurable. We apply the word "insurance" to situations that entail risk, not certainty. The treatment of pre-existing conditions requires existing resources that must come from the patient or from someone else. If they come from someone else, we call it "charity" or "welfare." Congressmen can call it whatever they want but cannot change the underlying reality.

What Congress is now attempting to do will shift the cost of medical risks onto taxpayers. But with an unlimited supply of possible medical conditions, there is potentially no limit to the liability that taxpayers will soon bear.

The result will be the destruction of both insurance and charity.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2009, 2010