There are a lot of outright lies (at worst) / profound misunderstandings (at best) on all sides circulating around health insurance at the moment. Today’s post is about the most fundamental one: the relationship between health insurance and redistribution and what it means for social consensus.

Redistribution is a toxic word in US political discourse, but one I want to reclaim. So let’s be up front: Much of what we do as a society is about redistribution. For instance, public roads and public schools both involve a degree of redistribution (from those who don’t drive to those who do, from those without children to those with). We have public roads and public schools because we believe that society as a whole is better off with them.

Now redistribution is also at the heart of insurance. Start with the simplest of cases which doesn’t involve the government or even an insurance company at all. Consider just a bunch of farmers getting together to insure each other against crop failure. Everyone puts a little bit of money in. If everyone’s crops are fine you get the money back or roll it forward to the next season. If someone’s crops fail they get the money so they don’t starve. Ex post, every insurance scheme is redistribution from those who are fine to those who experienced a loss. The reason people have nonetheless participated voluntarily in various forms of local or communal insurance is that you don’t know in advance whose crops are going to fail.

Now here comes the rub. What if you are a farmer who is wealthy enough to survive a year or more of crop failure? You might be better off not participating in the insurance scheme, thus saving on your contribution potentially for many years in a row. But this act of an individual opting out tends to decrease the size and effectiveness of the insurance scheme for all. Historically, most societies had strong local pressures on participation mostly based on social norms (many of these schemes originally worked implicitly via a commons, as researched by Elinor Ostrom).

As societies have grown in scale and become more impersonal, governments increasingly had to step in with formal regulations to assure participation in insurance schemes to maintain their viability. For instance, here in the US car insurance is mandatory in most (but not all states).

So what should you take away from this? There always is some element of redistribution to insurance – at a minimum ex post and generally also ex ante. The “why should I (usually some healthy person) pay for x (usually some payment for someone from a different demographic)” objection to health insurance is about redistribution. We should acknowledge this openly and not pretend that it is otherwise, because then we can move forward and say “you should, because that is your contribution to how our society works.”

This also points to why at present health insurance at the federal level is such a battleground. The US is too heterogenous at the moment to have a consensus on how society works for many important issues affecting healthcare. There is, for instance, no broad consensus on reproductive rights including questions of access to contraception and abortion. Having government enforce some amount of redistribution via healthcare in the absence of a broad consensus is difficult at best and possibly even dangerous by turning federal government into a villain. 

See my related recent post about getting past the dominance of nation state. And if you want to geek out more about insurance, here are some more posts. 

There are a lot of outright lies (at worst) / profound misunderstandings (at best) on all sides circulating around health insurance at the moment. Today’s post is about the most fundamental one: the relationship between health insurance and redistribution and what it means for social consensus.

Redistribution is a toxic word in US political discourse, but one I want to reclaim. So let’s be up front: Much of what we do as a society is about redistribution. For instance, public roads and public schools both involve a degree of redistribution (from those who don’t drive to those who do, from those without children to those with). We have public roads and public schools because we believe that society as a whole is better off with them.

Now redistribution is also at the heart of insurance. Start with the simplest of cases which doesn’t involve the government or even an insurance company at all. Consider just a bunch of farmers getting together to insure each other against crop failure. Everyone puts a little bit of money in. If everyone’s crops are fine you get the money back or roll it forward to the next season. If someone’s crops fail they get the money so they don’t starve. Ex post, every insurance scheme is redistribution from those who are fine to those who experienced a loss. The reason people have nonetheless participated voluntarily in various forms of local or communal insurance is that you don’t know in advance whose crops are going to fail.

Now here comes the rub. What if you are a farmer who is wealthy enough to survive a year or more of crop failure? You might be better off not participating in the insurance scheme, thus saving on your contribution potentially for many years in a row. But this act of an individual opting out tends to decrease the size and effectiveness of the insurance scheme for all. Historically, most societies had strong local pressures on participation mostly based on social norms (many of these schemes originally worked implicitly via a commons, as researched by Elinor Ostrom).

As societies have grown in scale and become more impersonal, governments increasingly had to step in with formal regulations to assure participation in insurance schemes to maintain their viability. For instance, here in the US car insurance is mandatory in most (but not all states).

So what should you take away from this? There always is some element of redistribution to insurance – at a minimum ex post and generally also ex ante. The “why should I (usually some healthy person) pay for x (usually some payment for someone from a different demographic)” objection to health insurance is about redistribution. We should acknowledge this openly and not pretend that it is otherwise, because then we can move forward and say “you should, because that is your contribution to how our society works.”

This also points to why at present health insurance at the federal level is such a battleground. The US is too heterogenous at the moment to have a consensus on how society works for many important issues affecting healthcare. There is, for instance, no broad consensus on reproductive rights including questions of access to contraception and abortion. Having government enforce some amount of redistribution via healthcare in the absence of a broad consensus is difficult at best and possibly even dangerous by turning federal government into a villain. 

See my related recent post about getting past the dominance of nation state. And if you want to geek out more about insurance, here are some more posts.