Thursday, September 24, 2009

Self Insurance

I've blogged about how private health insurance is dead. Many on the libertarian side say that private saving is the answer. The economist in me knows this is not the case. In China, most health care is privately purchased. There is neither a social safety net nor a private insurance system. So people self insure.

What does self insurance look like? People saving 30-50% of their incomes. It's what you have to do if you might have a medical condition that could easily consume 400% of your income.

This is not optimal. Protecting yourself against the possibility of catastrophic loss soaks up income which would be better used on current consumption, or investment in other areas. Instead, it is saved, and saved, and saved. I would even argue that the lack of insurance in China is why their attempts to trigger domestic consumption fail.

It's like the guy who was so concerned about home security, that the only possession he had that was worth stealing was his guns. In fully privatized health care, or self insurance, so much money is spent protecting your health, that there's nothing left for any other laudable uses--would you send a kid to college when the whole family might be on the street tomorrow because you didn't have that money? Would you invest in your business knowing that a cash flow problem could ruin you? Self insurance is for people who don't have to worry about money.

A purely private system won't work, and a mixed system is unstable, tending towards the extremes. It's all or nothing.


On the other hand, I expect that what we cobble together will put the "dis" in "functional".

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