Streetwise Professor

The celebrations in some quarters over the cold blooded murder of health insurance company CEO Brian Thompson are beyond sick. Thompson has become dehumanized, and transformed into nothing more than the face of an industry that many despise. The man accused of his murder, Luigi Mangione, a Ted Kaczynski (Unabomber) admirer and radical anti-capitalist evidently believed that his supposedly humanist ideology justifies taking a human life.

That’s wrong regardless of the particulars of the supposed systemic sin he really wants to destroy. It therefore seems somewhat invidious to examine the merits of his motivation. But given that he has received such widespread accolades it is unfortunately necessary.

Take it as given that there are massively dysfunctional elements and intense conflicts in the US healthcare system. But what is the source of those dysfunctions and the resulting dissatisfactions, with respect to insurance in particular?

The fundamental problem inheres in the nature of insurance, and third-party payment for healthcare generally (whether via private insurance or government provision).

Insurance incentivizes moral hazard. In healthcare, part of that moral hazard in due to the insured: they have insufficient incentive to take actions to reduce bad health outcomes. This leads to greater demand for healthcare services. But a big part of the moral hazard problem relates to providers: they have an incentive to overtreat. And facing low marginal cost for additional treatments, the insured have an incentive to overconsume.

Due to moral hazard, risks are not insured completely. One way of limiting insurance coverage is through deductibles–a major source of complaints in our current system. In healthcare particularly, another especially despised way of limiting coverage is to deny some claims–another source of great discontent, and supposedly one of Mangione’s specific grievances (as indicated by his writing “Deny” on at least one of his casings). Especially given the severe information asymmetries between the insurer, the insured, and the provider, in many cases these denials are arbitrary, and would not occur in a Nirvana where information is complete and free. But we don’t live in Nirvana. (And note that denials, and anger about them, are a feature of every type of insurance, be it auto or home or what have you).

That is, there is inherently an adversarial relationship between the insurer and the insured. When the stakes are high–as they are with health–this adversarial relationship is inevitably extremely fraught.

Don’t like denials? Well, if you outlaw them, or even substantially restrict them, you definitely won’t like what insurance costs.

This is not something that moving to a government-run system changes. Medicare and Medicaid also limit coverage and deny coverage for treatments. And look at systems like the UK or Canada where treatments are rationed in large part by waiting, or not getting treated at all.

It is no coincidence, comrades, that Canada and now the UK have implemented “right to die” legislation, which in reality is “right to kill”: offing granny is a very efficacious–and cost effective!–way of denying treatment. Both countries’ systems have proved incapable of providing care at cost that taxpayers can afford, so they are reducing demand through such Orwellian measures, as much as they try to deny that.

So it is not an issue of insurer “greed” or the evils of capitalism. It’s baked into the cake, regardless of the baker.

In countries with socialized medicine, years of government propaganda have helped to diffuse anger at the inadequacies of the health system. In the United States, insurers have been the targets (quite literally in the case of Mr. Thompson), and this has only increased since Obamacare was adopted.

This was effectively a devil’s bargain for the industry. Forcing people to obtain insurance increased the demand for the insurers’ products, but effectively shielded the government from hostility. Given that the insurance industry was a major booster (and in fact author) of Obamacare, it is clear that this was a trade-off that they were quite happy to accept. Although Brian Thompson might beg to differ. If he was alive.

The conflict in healthcare is inherent in the nature of the product, but the conflict has been exacerbated by, and the system hugely distorted by, government policies adopted over the decades.

The original sin is the tying of health insurance to employment, an artifact of labor union lobbying and taxes. The tax-favored nature of paying compensation in the form of benefits rather than wages/salary incentivized employer-provided insurance. This had several malign effects, notably the linkage of insurance with employment, and also the encouragement of excessive coverage (and hence excessive demand for healthcare services) by distorting relative prices.

Other distortions include restricting choice by mandating that insurers provide coverage that individuals don’t want or need. This inflates cost by yet again distorting relative prices. Broader coverage also inevitably leads to more denials, increasing resentment among the insured.

Healthcare insurance is hard. Insurance is hard generally due to information asymmetries, but those generic difficulties are exacerbated by the emotional salience of sickness and health. As a result, insurers will never be loved, and indeed, will almost always be reviled.

Meaning that those whose sickness is a moral rather than physical one who celebrate the death of Brian Thompson are not just moral defectives but mental ones. They attribute the defects of the healthcare and healthcare payment systems to the greed of private enterprises, or the supposed systemic evils of capitalism. The seen vs. the unseen. The things that they hate are inherent in the nature of the service, and can be worse when private enterprise and capitalism don’t deliver it. Don’t believe me? Move to Canada and find out the hard way.