Health Insurance Innovation? By Arnold Kling

Tyler Cowen waxes romantic.

Let me also tell you my ideal world. Insurance companies are judged by honest third party intermediaries. Insurance companies compete like heck to make customers satisfied. Insurance companies monitor doctors, read Robin Hanson, and require evidence-based medicine. Insurance companies which fail at these pursuits either go bankrupt or they must abide by an ex ante contract to permit the exile of their CEOs to Greenland. Every year prices would fall in real terms, quality would improve, and coverage would be expanded.

I doubt it.

The insurance industry may be the only private-sector institution that I trust less than government. In auto insurance, I find that unless I change providers every few years, my premiums just get ratcheted up for no reason. I think that life insurance is a huge rip-off, particularly considering that it starts out with a tremendous tax advantage.

I do not trust my fellow consumers to understand the concept of insurance well enough to make insurance companies offer products that make sense. Too many consumers think that good insurance is something that provides payouts for small problems rather than protection against rare catastrophes.

In fact, as I have pointed out before, most people do not want insurance of any sort. They get homeowners’ insurance to satisfy the mortgage lender. They get car insurance to satisfy the state. They get health insurance only when they think their employers are “giving” it to them.

The insurance industry is heavily regulated, and it has gotten quite cozy with that arrangement. My guess is that something like the Massachusetts health care mandate, which completely eliminates any meaningful form of competition but which leaves the private insurance companies still standing, appeals to the typical insurance company.

My wife recently sought information on long-term care insurance. What I concluded is that we would be trading one risk for another. Now, we face the risk that long-term care would eat up our savings. If we had insurance, we would face the risk that the insurance company would not pay a claim, because of how it reads the fine print in the contract. I’d rather take the risk I understand–having my savings not accumulate–than the risk I do not understand–getting into a dispute with the insurance company over a large claim.

I think that meaningful innovation in health care is more likely to come from Wal-Mart than from Aetna. But Wal-Mart is likely to be thwarted by the credentials lobbies. If practice regulations and licensing were not a factor, Wal-Mart could rely less on formal schooling and more on internal training for its medical workers. Then you would see real improvements in quality and reductions in cost.