Thursday, June 07, 2007

Giuliani's Health Proposal

The Wall Street Journal discusses Rudy Giuliani's health care proposal:
Mr. Giuliani, currently leading opinion polls for the 2008 Republican nomination, wants to move tens of millions of people from employer-based health insurance to the individual market as a way of giving people more coverage choices. It is an idea he alluded to in Tuesday's Republican debate in Manchester, N.H., and later expanded on in an interview.

The principles Mr. Giuliani identified for health care mirror President Bush's call for an "ownership society" in which the power of the free market could eventually shore up health and retirement security programs alike. That concept proved a political failure when Mr. Bush used it in 2005 to argue for partial privatization of Social Security. But in the campaign to woo Republican primary voters, it could provide Mr. Giuliani with an issue to appeal to economic conservatives at a time when some social conservatives have misgivings about his support for abortion rights and gun control.

In Mr. Giuliani's view, the U.S. health-care system's major problem is a lack of consumer choice. "It's your health; you should own your own insurance," he said in Tuesday's debate. "The reality is that we need a free market."

He envisions a system where neither state regulations nor federal tax law push people into expensive plans rich in benefits. Rather, health insurance should be more like car insurance, he said, where people pay out of pocket for minor repairs and maintenance.
Giuliani's ideas are very similar to President Bush's and to mine, in which I noted that:
The problem with all three plans and indeed any plan designed to increase coverage or reducing costs is that the American health "insurance" industry is not really insurance, but a third party payor system. The only difference is that the payer is a private insurance company and not the government.

Insurance is protection against catastrophic costs or costs beyond the means of most people to pay. A good example of true (or at least truer insurance) is homeowner's insurance. Homeowner's insurance covers damage caused by fire, storms, burglary, faulty construction or just household accidents, like pipes bursting or (as in my case) the wash machine springing a rather nasty leak. What homeowneer's insurance doesn't cover is maintenance, like lawn care, or everyday maintenance items.

But American health insurance pays for the everyday maintenance items like going to the doctor for a visit because you have the sniffles. The fact that most Americans only pay between $5 and $20 for a visit to the doctor's office (which the doctor charges between $50 and $80 on average) means that most of a doctor's bill is covered by insurance. Because the actual out of pocket cost is hidden for maintenance items, people consume more healthcare. The more healthcare they consume, the more the "insurance" company pays out and the more it must take in to cover the added payouts.

The never-ending spiral leads to higher healthcare spending, and higher premiums, pushing more and more people out of the insuranble realm.

The only way to cut healthcare costs over the long term is to change the way in which health insurance really works and go back to a true insurance system. Under a true insurance system, individuals have to pay out of pocket for maintenance visits. They can claim insurance coverage only after a certain deductible is reached, say $250 or $500 or whatever that individual is comfortable with.
If Giuliani's plan is to push for a real market where individuals are paying for insurance they want, rather than the choices offered to them by their employer, then you will get a far different system.

When most of America is covered by the employer through an accident of history (look up the history of employer provided health insurance), what you get is not very many choices. My employer offers three plans and no more. You can't get the coverage options each individual of family determines best for itself, you get a compromise plan that tries to provide coverage for most of the workers (but not all their wants) at a cost the employer is willing to bear. Thus, you get limited choices and you pay what you must pay or you get no coverage at all.

The reason why the individual market is so expensive is that the pool of insured is so small. The reason why car insurance is so much cheaper (relative to health insurance) is that the insurance pool is much larger. If Giuliani is successful, you can see the size of the insurance pool of individual policy holders (as opposed to group policies like employer plans) grow and the cost of insurance come down. Oh, and Giuliani would give the individual the tax credit for the premium, not the employer.

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