Health Care

What is the purpose of health insurance (or insurance in general)? I answer the question this way: It can serve three roles of smoothing costs---smoothing over time; smoothing over probability; and smoothing over society. The first two, time and probability, are very similar. They are also individual, and therefore in a free country no one would ever (we can only hope) step in and stop you from taking advantage of the "technology" of insurance if you want it for the stability it brings. Smoothing over society happens to some degree inadvertently and is open to debate whether that should be a mandatory objective or not. This is where a lot of the political debate happens. The stories of people going bankrupt because they have health problems that are expensive.

If smoothing over society were not an objective, then the job of insurance providers is to figure out just how risky each person is for health care expenses. They need to set the price high enough to make up for costs and risk but low enough that you'll buy it. We may complain that insurance companies do a terrible job of correctly assessing health, but in fact this is there job. (With more competition in the industry this would really be a sink-or-swim aspect of the business.) If they lump healthy and unhealthy people together at the same price, then savvy healthy people will eventually catch on and stop purchasing. Then they're stuck insuring only the unhealthy people and average expenses go up. You know where this is going...

In the situation outlined above, I don't see why a natural monopoly exists. The insurance companies compete at their ability to differentiate health. Perhaps if they got really good at this then a monopoly would emerge (like Google).

So the real concern seems to be whether the focus on health care (or insurance) should be to smooth expenses over society, from the less healthy or less fortunate, to the healthy. In fact, most of the current turmoil about health care seems to be silently hinged on this question.