Health Care Financing: Risk Management & Entitlement

This is just going to be a drive-by post, since I haven’t thought it through and probably don’t have the expertise to think it through if I tried. But, it seems to me that health care financing has both a risk management component and an entitlement component. Maybe we need to break those things apart to have a rational method of financing health care.

The idea of insurance is to manage risk. You know that, in a given population, Bad Thing X will happen a given number of times and you know that the total cost to the given population of Bad Thing X will be $Y. You just don’t know which individuals will suffer from Bad Thing X. So, for that population, it makes sense for everybody to pay into a pool of money that will be used to pay the $Y in costs when Bad Thing X inevitably happens to someone. Where everyone’s risk is more or less equal, it makes sense to buy into the pool. (Interestingly, Congress has passed the Genetic Information Nondiscrimination Act which, as I understand it, prohibits decision making about risk management based on genetic information. In a sense, this requires the risk manager to maintain a fictitious level of uncertainty. I’m not saying it’s wrong, but as a policy choice, it’s very interesting.)

However, where it’s certain that Bad Thing X will happen to a particular individual, it does not make sense for other people to buy into a pool with that person. At this point, you’re not managing risk, you’re just subsidizing that person’s costs. However, as a society, we have made policy choices that we won’t allow unmitigated suffering from certain Bad Things even if a person doesn’t have the funds to pay for treatment of the Bad Thing. If someone hits a certain poverty level, we pay for certain things. If someone is having a heart attack at the emergency room, we require treatment. There are humanitarian concerns here as well as some direct benefits. (For example, if you subsidize proper medical delivery, that might reduce the number and long-term societal costs of birth defects. Or, if you subsidize vaccination, that might reduce the overall costs of disease.)

I wonder if it would be possible to bifurcate the risk management aspects of health care financing from the entitlement aspects. Pay for the former through typical principles of insurance and pay for the latter through a general system of taxation.