The basic premise of any insurance policy is the transfer of risk from one person to another (or to a group of people). If I am concerned about wrecking my car, I buy an insurance policy on the car and pay my insurance company to agree to pay the costs of repair in the event I get in an accident. Insurance companies make money by accumulating a large pool of clients, and essentially making the very good bet that the number of times they actually have to pay for repairs is very small in comparison to the total number of policies they have on their books. In other words, the risk of a single driver getting into an accident (or the cost to the individual driver) may be substantial, but the risk of more than, say, 1% of the drivers in a large group getting into an accident in any given year is actually small.
The key, of course, is that most forms of insurance "work" for society as a whole because the nature of these insurance policies is such that the frequency of claims for any individual policy holder is very low. Many property owners will insure their homes, for example, despite knowing that there is a 99% chance that they will live there for 40 or more years without filing a single claim.
Health insurance is the exact opposite, for it is the one type of insurance where everyone involved in the process (policy holders and insurance companies alike) know from Day 1 that claims are going to be filed with such boring regularity that it makes almost no sense to even call it "insurance" anymore. If you filed three or four claims every year on your auto insurance, then your insurance company would either dump you as a customer or decide that it's cheaper to buy you a car and hire a driver to get you around. But somehow we have such an entitlement-based mentality about medical insurance that we are appalled by the notion that an insurance company just might not want to do business with you.
Some other fatal flaws with medical insurance are as follows:
1. Insurance claims don't adhere to typical economic principles of supply and demand because there are three parties to every transaction, not two. This is not a serious problem with something like life insurance because there a finality about death that makes the claims process and the aftermath much more clear, but for health and property/casualty insurance it introduces a potential flaw that often rears its ugly head. If I crash my car and file a claim, we have three parties to the transaction who operate under conditions that do not apply to a "pure" economic transaction . . . 1) I have already paid for the insurance, so I really don't care how much it costs to fix the car -- I want the best parts, best service, etc.; 2) the insurance company doesn't have to drive the car around, so it doesn't really care about the quality of the repair and is perfectly willing to accept something that is sub-standard by my standards; and 3) the body shop is dealing with two "customers" who have two different goals in mind in the transaction. This three-way dilemma also applies to medical insurance, and is why the problems you perceive in medical insurance are almost identical to the problems many states have encountered in auto insurance (including Mitt Romney's state of Massachusetts).
2. Medical insurance is the only type of insurance that is pretty much an open-ended financial commitment on the part of the insurance company. In agreeing to pay your medical bills, an insurance company has no control over how complex medical procedures get over time, and how advanced technology becomes. So they always find themselves spending more and more money on what is "normal care" -- because the definition of "normal care" is always changing (upward, of course) and getting more expensive over time. Imagine how expensive your auto insurance would be if you drove a $10,000 sub-compact car, but had the ability to have it replaced by a $200,000 Rolls Royce. That's basically the way medical insurance works.
3. All insurance carries what is called a "moral hazard," which means that people with insurance policies will tend to behave in certain ways simply because they know that the insurance is there to protect them. A person with a brand-new car is likely to be a far more careful driver if he has no collision insurance, and a person with no medical insurance of any kind (even government-funded care) is more likely to keep himself in relatively good health (I'll leave hereditary/genetic conditions aside, since they aren't relevant to this point). It is no coincidence that the incidence of almost every physical and mental pathology has risen dramatically since people have been covered by medical insurance plans of one kind or another.
There have always been lepers. And vagabonds. And beggars at the temple gates. So your linkage makes no sense.
What you ignore about health insurance is that you use very little in the first 50 years of your life, much in the next 15, and a lot in the last 10. So a mandatory plan that included young people in the risk pool would avoid the problems of adverse selection. The only way the risk can be bearable for an insurer is to include lots of young people.
And don't ignore the fact that "reasonable and customary" involves a continual dialogue between insurers and health care providers. Insurers routinely game the system by saying to doctors, "If you settle for 70% of your fee you can have it right now but if you want the full amount the bill will have to go through a lengthy review process." Generally the doctor says, "fine". It's a game they play in billing. So don't assume insurers are in any way at the mercy of health care providers. The insurer, after all, controls when the health care provider sees his money and that is a lot of leverage.
Excellent analysis.