I recall a few months ago sitting in my apartment up at college, and I was discussing the wonders of Reddit with someone who was just beginning to use the site. He found Ask Social Science and saw its top post at the time.

“Hey. There’s a question here entitled ‘What would happen if insurance were banned or made illegal?’ I’ve considered the idea of banning insurance!”

My previous post might indicate what feelings went through me at that point in time, but I made an honest effort to explain why insurance was a good idea. I don’t feel like I did a very good job at the time, so if he’s out reading this now, I’d like to make a second stab at the defense of insurance companies.

My best guess would be that people believe insurance drives the cost of things up. After all, you get insurance to help you pay for very expensive things if they happen. While it’s true that insurance helps pay for expensive events, getting rid of insurance won’t make said events any cheaper.

“But providers are out to make money! They’d want to sell health services at the price level people could pay at!”

Well, yes and no. A brain surgery is expensive because it is difficult and risks injuring you permanently. The cost of an item is two factors: What can an item or service be sold for and still make money on each sale, and how much demand is there for this? Most things insurance covers are expensive not because insurances pay large amounts out. Not even close. Every insurance company I know of lists a discount on their payouts saying “you charged us X, but we won’t even consider more than Y.” Price comes from demand and the overhead costs of providing said item or service. Plus, the cost of an item is a signal to the market, and keeps a item or service from being consumed by someone who may need it less than someone else.

“But not everybody needs a brain surgery. I have to spend $90 to see a doctor about an ear infection! That’s a walk in, look at my ear, write a note, and leave.”

Yeah, well, that’s not a problem with insurance either. That’s a problem with too few doctors and other providers. Currently, 10 minutes of a doctor’s time may very well be worth $90 because of the opportunity cost. They might be able to spend that and other chunks of time tending to a really important problem someone else is having. This would be fixed by having more doctors so that we could have lots of ear doctors, while a few specialized in really big ear problems.

“So why don’t we have more doctors then? Seems like there’s one of those market demands you’re always on about.”

I’d like to introduce you to the American Medical Association. Sure they set some good standards and all, but they’ve lobbied everywhere for laws saying you have to go to medical school to legally diagnose ear infections. Try getting into medical school without a 4.0 GPA. Not only that, the AMA is the sole provider of medical school. I’m not out to say they’re being evil in their arbitrary “we’ll give you the schooling you need to be a doctor, but it’ll be 15 years and hundreds of thousands of dollars.” It’s the laws of supply that are doing that. There’s no competition as they are the sole provider so prices can be enormous both from lack of competition and demand to be a doctor, and they are out to train everyone to be the best doctors a doctor can be. In doing so we have the greatest doctors in the world, and at the same time very few doctors per person. That and we have some other interesting government intervention.

“But we need good doctors! If we abolished the AMA then we’d have quacks running around with buzzsaws!”

Those sorts of characters wouldn’t stay in business very long. One, those doctors would scare away their potential clients to the competition, and two, most people don’t want to be under the knife of someone who isn’t very good at what he does. Were there no AMA, a team of reputable doctors in every field would start their own association that had training and handed out certifications to those wanting to work in those fields. People would be looking for the relevant certifications in the doctors they are soliciting before actually going through any service.

“What if an association is just handing out certificates without really meaning anything by them? For money perhaps?”

Somebody will find out, and like Wikileaks the bad news will spread like agent orange. Nobody would want to go to any doctor that displayed those certificates, whether they got them legitimately or by bribe.

“So if all this happened and prices came down, would we still need insurance?”

Maybe. Maybe not. $90 for an ear infection isn’t a whole lot for me, but it might be a lot for someone else. Some people might still choose to have it to help cover some things or the catastrophic events. Some people just pay the entire bills themselves. Lots of places give discounts for paying in full right after a service simply because collecting from insurance can be difficult and because they would get more from you after your discount than from the insurance after their discount.

But there’s no reason to ban something you can voluntarily have or not have. Let demand drive that.

“But what about people who have it and never need it? It seems like a bad deal.”

You get insurance as a safety measure against the unknowable. That’s a risk you take in either having it or not. If you don’t feel like you need it or are not getting a good deal out of it, then terminate your contract and not get it from elsewhere. Again, it’s up to you to decide if you want it.

“Didn’t you say previously that health insurance isn’t a free market?”

Currently and by federal law, you can’t start a health insurance company and compete in other states, unless you make a compact with the state you are moving into because states can regulate insurance companies however they please. I would wager that part of that compact is “charge at least X” because that’s the going rate, so you really aren’t competing. No competition = high prices. There’s not really a reason to bar an insurance company from freely competing around the nation or world. It would grow large enough by selling to so many people that it could drop its prices because it’s risky people to not so risky people ratio would be minimal.

“A giant insurance company would just push out other insurance companies! We’d have a monopoly!”

Other insurance companies would be pushed out by inability to compete at the level of this big one. This would only happen if the big insurance company were charging rates that were so low that nobody else could stay in business and make a profit on that level of rate.

Am I as a consumer supposed to hate a giant insurance company that charges the lowest rate ever? I’d love to pay $5 a month for health insurance.

But you’re probably worried about them boosting the rates back up. Other companies would start up and undercut these new raised prices or market themselves as those who won’t ever just pull the rug out from under you.

That, and you still don’t have to buy insurance or buy from specific companies in a free market.

“So the individual mandate in the Affordable Care Act is sort of good then. Everyone will have to buy it and the risk will be spread out.”

There exist people who insurance companies would rather not cover. The way insurance works is that you pay in and both you and your insurance company hope and pray that nothing happens to you. This is why some people don’t get intensive plans in favor of catastrophic coverage plans (plans with high deductibles). If you want insurance, you should want it at a time when you’re not already sick. No company wants to trade $100 a month in income for $3000 a year payouts. Your deductible and rate would be enormous if you got insurance because you were starting to get cancer or something.

I’ve heard there’s a bit about insurers being required to charge a flat rate. That’s horrible for me. They’ll have an enormous rate to cover those people I just got done talking about, and I’ll have to pay it too even though I really only use my health insurance to help pay for my prescriptions (another problem with healthcare, but for a different discussion).

And that’s not to mention that we’re still butting up against current law stating you can’t legitimately compete outside of your state. This arbitrary rule dictating everyone buy insurance will just mean more money for insurance companies, with no incentive to lower their rates. In fact, with all that money floating in, they might not even do those discounts I discussed either. “Yeah! We’ll pay all of X because we have that much money!” Then providers would be raising their prices to see just how far up they could go before they run into the discount rate they had before.

All of that and you are fined with a tax if you think you don’t need insurance and therefore don’t buy it.

“I am afraid.” :(

Me too.