The Justification for Health Insurance, Part 1

By | July 13, 2011

The wholesale purchase and redistribution of healthcare isn't all that different than potatoes.

If there are so many problems with health insurance, why does it still exist? The laws of economics and social Darwinism tell us that useless or inefficient things tend to disappear over time, yet the role of health insurance has become more and more prominent.

One reason for this is that insurance is only one of the services that insurance companies provide. I would suggest that the primary service provided by most health insurance companies is the wholesale purchase and redistribution of healthcare. By contracting with doctors and hospitals at discounted rates and then reselling theses services to the public along with a catastrophic insurance component, the insurance companies not only mitigate risk but allow groups and individuals to purchase healthcare at costs lower than they would be able to obtain on their own, even with the huge profits that the insurance companies make.

But at least theoretically it should be possible to separate these two components of the standard heath insurance product. The risk management part is basically a commodity product, which could be supplied by any insurer in the world and should be subject to strong competitive pricing pressure. The wholesale purchasing and healthcare delivery service is much more involved and would need to be handled by a local firm with strong knowledge of the market. Nevertheless, in major urban centers, given a sufficient number of competing groups strong pressure to maintain quality and control costs should be allow for a better overall market environment than currently exists.

In the upcoming blogs we will look at some of the different segments of the healthcare market and see how they behave differently. We will also look at some of the ways that the ways that the government and oligopoly practices on the part of insurers and provider groups pervert the market.

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