The question of universal health coverage is one well worth discussing at the national level; the goal of universal coverage is to make health care services ubiquitously available, for rich and poor alike.  It’s a laudable goal.  However, in order to have a coherent discussion, it’s necessary to review the terms of the subject.

Too often, though, the discussion assumes that health care and health insurance are so much a part of each other that they cannot be had separately.  This is wrong.  Health care is what you get from your doctor or hospital.  You’re getting treatment for a medical condition, advice about how to treat a medical condition, advice about how to avoid getting a medical condition.  In return for these health care services, someone pays the doctor or hospital money.

Many people pay for these services with cash out of their own pocket, and many more would prefer to do so, were they given the choice.

Others—the vast majority of Americans (I’m eliding the free riders in the market)—pay for these services by buying something we call insurance: they pay a periodic premium to a health insurance provider for a policy that obligates the insurance provider to pay (most of) the costs of a medical condition should that condition actually arise at some time in the future.  The insurance company makes its money by selling lots of such policies on the bet that few enough people actually will incur the covered condition within a given time frame that the aggregated premiums over that time frame will more than cover the actually required medical payouts.  That’s what insurance is, including health insurance: it’s one person transferring part, or all, of a risk of something untoward happening to him to another—an insurance company, for instance—in return for an agreed upon fee.  For that fee, the entity accepting the risk, or the agreed part of it, agrees to cover the cost of that untoward event should it actually occur, with the aggregated fees over lots of such agreements, being enough to cover the required cost payouts.

Health care and health insurance, thus, are entirely separate industries: one is the actual provision of services, and the other is simply a means of paying for those services.

But for the risk transfer, or insurance, industry to work, though, two things must occur: the first is that the fees charged for the risk assumptions must be voluntarily agreed to between the two parties to the risk transfer.  If the fees are dictated to one or the other side, without any market flexibility, they run a very strong risk of being too high for the one party to afford, or too low for the other party to be able to cover the agreed costs.

The other thing that must occur is that the fees must be consistent with the risk assumed.  To take an over-simplified example, if a man has a risk of a medical condition that costs $1,000 to treat, and the likelihood of his incurring that condition within the next year is very high, and he wishes to transfer 80% of that risk to an insurance company (i.e., get the company to pay $800 should the condition arise), then the insurance company must be able to charge a premium that, over the course of a year, sums to $800 in order to break even.  Of course, if the insurance company were to sell that same policy to lots of folks subject to that medical condition, actuarially it’s highly unlikely that all of them—even with the same risk—will incur that condition in the same year.  This would allow the insurer to sell the policy for a lower premium than it could if the customer population were limited to that original single person.

With lots of companies in the market selling policies for a given coverage, competition ensures that a single company does not abuse single-company monopoly power and overcharge.  Nation-wide marketability of that policy both enhances the competition and expands the customer base with the insured-against condition, thus increasing downward pressure on the policy’s premium—the risk transfer fee.  This downward pressure makes insurance more accessible to more people.

The actual situation facing us, though, is a market structure of government limits on the policies offered, government limits on the premiums allowed to be charged, and two critical government mandates: every individual must buy health insurance—must buy those government-limited policies—and every insurer must accept all customers.  There is little to no market flexibility—or pressure—to structure coverages to match the risks being transferred, nor is there much flexibility to match the fees charged to the risks being transferred.  This combination of government limits and mandates is a health welfare program of universal coverage.

My own view is that universal coverage is unnecessary, never minding its laudability, and that health welfare (or welfare generally) is actively suboptimal when it’s the first resort, rather than the last resort after market forces have taken their effect on prices and availability.

Because the welfare program’s risks and fees do not match, and because competition among health insurance purveyors is limited, inefficiencies will rapidly develop in the form of coverage payouts being too great for the premium income in some areas and too little for the premium income in others, with a strong bias toward too little premium income.  While companies’ desires to charge more, including “too much,” would be heavily constrained by competitive pressure, the government’s bias is to hold down costs to its voters, without regard in the short term to the market consequences, and the bias is unchecked.

This drives the welfare program to one or more of three outcomes: the insurance companies must prevail on the regulatory authorities to raise premiums, they must get tax dollar help from the government to make up the shortfall, or they must stop providing that insurance coverage.  All of these represent stark cost increases to the insurees: either they pay higher premiums today (even for conditions for which they do not want coverage or whose risks are very low, because those conditions are included in the required coverage allowed to be sold), their taxes go up tomorrow, or next week they lose their insurance coverage altogether until they move to another company—if one is left in business.  Indeed, this is the rationale for the Individual Mandate requiring everyone to buy insurance: all those extra premiums, hopefully from young, healthy Americans who aren’t likely to need a payout (and who also aren’t likely to want to buy the coverage) are intended to provide those extra monies and so avoid any of the three outcomes.