The second, third, fourth and fifth most important reasons why private
health insurance costs so much are:
2. Improvements in medicine and medical technology. We've gotten
spoiled by computers and cell phones, which have gotten cheaper as
they've gotten better. This isn't true with most things, and it
certainly isn't true with drugs or with new diagnostic equipment. And
because they work so well, people who otherwise would have died live
longer, and consume more health care.
A Kaiser Family Foundation paper
in 2007 estimated about half the increase in health care costs since
1970 is due to improvements in medical technology.
3. Frivolous lawsuits. Under our current system, plaintiffs can win
enormous judgments against doctors and hospitals on the basis of
According to the consulting firm Towers Perrin, the
tort system imposed $252 billion in costs on the U.S. economy in 2007.
These costs are imposed in three ways.
The first is the cost doctors
must pay for malpractice insurance, which is passed on to you whenever
you visit the doctor. Obstetrician-gynecologists in New York pay about
$200,000 a year in malpractice insurance premiums. For neurosurgeons,
it's about $300,000.
The second is the cost of litigating medical tort claims, which in 2007
was $30.4 billion, a 100 percent increase from a decade before.
The third and most expensive is defensive medicine, ordering tests
and procedures that aren't really needed to guard against a lawsuit. In
a 2005 survey by the Journal of the American Medical Association, 93
percent of high risk specialists in Pennsylvania admitted to the
These costs would decline sharply if plaintiffs who file frivolous
lawsuits were required to pay the legal costs of the innocent
defendants, as is the practice in most of Europe. But though Democrats
are eager to impose limits on how much doctors may earn, they are
unwilling to impose limits on how much ambulance-chasing lawyers may
earn, since trial lawyers are major contributors to Democratic
4. Health insurance mandates. State governments require insurers to
provide certain benefits, and to include some high risk patient
These mandates increase the cost of basic health insurance
coverage from about 20 percent to nearly 50 percent, depending on the
state, according to 2005 estimate by the Council for Affordable Health
5. Cost switching. Medicare and Medicaid don't reimburse doctors and
hospitals for the actual cost of providing health care services to these
patients. This causes doctors and hospitals to charge patients with
private insurance more to make up the difference. Milliman, a
consulting firm, estimated consumers paid an additional $89 billion a
year in private health insurance premiums in 2006 and 2007 to compensate
for federal underpayments.
But the most important reason why private health insurance costs so much
is because it really isn't insurance at all. It's a baroque form of
third party prepayment.
I have insurance on my car, not because I expect to get in an accident
every week, but so I won't be wiped out financially if I do.
My auto policy doesn't cover oil changes, tune ups, tire rotation and
other aspects of routine maintenance that I'm expected to take care of
myself. If health insurance were more like that, it would be a lot
I cheerfully pay the costs of routine maintenance on my car because I
know it saves me money in the long run. I don't have the same attitude
about health insurance, because it's my company, and not me, that gets
most of the bill.
Our reliance on employers to provide health insurance is a product of
World War II. Because of wage controls, companies couldn't offer higher
pay to attract workers. So they offered health care instead.
This has been bad for two reasons. Losing a job becomes a real calamity,
because you lose your health insurance, too. But the bigger reason is
because we've lost the incentive to be smart shoppers when it comes to
Tort reform, a relaxation of health insurance mandates, and fair
reimbursement for Medicare and Medicaid would lower dramatically the
cost of private health insurance. But the most important reform would
be to transfer from our employers to us the tax deduction for health
insurance, and the responsibility for obtaining it.