At the Heart of Health Insurance

In my health policy class at Duke, I teach students two "laws" that govern all health systems: (1) Everyone dies; the only questions are when and from what? and (2) before that, the healthy subsidize the sick.

The first law is inescapable. Making the second function is the essence of health policy. These two laws hold true in Canada. The U.K. Germany. Japan. The U.S. Medicare program. Duke University's private employee plans, and every Blue Cross and Blue Shield group plan sold in North Carolina. In fact, the reason you have heard discussion of the State Employees Health Plan this spring is because Law 2 above was no longer functioning because there were too few healthy state employees and dependents subsidizing the sick ones.

These two laws are not new. If we lived in a hunter/gatherer society many years ago and couldn't hunt or gather, we would survive only if someone brought us food. Of course, health care is more expensive than sharing a meal, which is why we long ago gave up individual charity as the way to finance health care. Insurance is just a practical way to enact the same principle as sharing food, but for something that is too expensive for most people to afford or for us to provide to our neighbor in need. The healthy subsidize the sick. Eventually, almost all of us will be sick.

There will be lots of choices framed in the coming health reform debate. Virtually every choice will relate to how the healthy will subsidize the sick. For example, do you prefer a tax-financed, government-run insurance scheme a la Canada or employment-based private coverage? You will have to decide, but in doing so, remember that the point of both types of insurance -- public and private -- is to collect enough money to pay for the health care costs of all persons insured in a given risk pool.

Persons who are sick receive more care than do those who are well. And if there are not enough ins (whether called premiums or taxes) to cover the outs (amount paid for care) then there is a problem that must be fixed. And don't forget that the largest tax-financed, single-payer insurance plan in North America is Medicare; there are more Medicare beneficiaries than Canadians.

A personal example: Five people are covered by Duke University's health insurance as a benefit of my job (me, my wife, three kids). Last year my family was thankfully healthy and used little care. I paid about $335 per month in premiums, and Duke paid around twice that on behalf of my family. So we subsidized another Duke employee last year.

However, several years ago one of my children had an operation paid for by Duke's health insurance, so in that year we were subsidized by someone else. I am not sure what next year will hold; that is why I need insurance. Health insurance is no different from car insurance or homeowners insurance in this most basic respect.

One of my children has a chronic condition that has been judged by his doctor to be worthy of more investigation. There is a very low probability that it is serious, but it likely is not. He received an appointment to see a specialist -- four months later. The fact that he couldn't get an appointment for four months simply means that the demand for this type of specialist care exceeds supply. A waiting list is simply one way to make the ins match the outs.

When you hear discussion of waiting lists in other nations (which exist and are often longer because they spend less on health care than we do), remember that there are only two choices when the ins and outs don't match: increase the ins or decrease the outs.

The details of reform plans are important because they describe how the plan in question will get the healthy to subsidize the sick. Any insurance scheme, private or public, that doesn't do this well will eventually collapse. Anyone denying this doesn't understand how insurance -- government or private -- works. Even a plan that doesn't cover all persons but that incentivizes the healthy to purchase less care, say through a health savings account, will still be subject to the cross subsidy inherent when the uninsured get care. We are already all paying for the care of the uninsured, just not in the most efficient manner.

There is a third thing I teach my students. There is no perfect system, no panacea. All systems make difficult choices trying to make the ins match the outs. And they share in common a fundamental problem: It is expensive to care for sick people. We will all die, and most of us will be sick first, for varying lengths of time. The essence of health reform is deciding how the healthy will subsidize the sick.

Donald H. Taylor Jr. is an assistant professor of public policy. His blog is available for discussion of this article and health care reform in general. This article was first published in The (Raleigh) News & Observer on June 7, 2009.