[laurav]

Do you think tort reform would make premiums lower?

[Alberta's Child]

Tort reform will certainly reduce malpractice insurance premiums, which will likely result in lower health care insurence premiums. That, however, does not address the primary cause of skyrocketing health care costs.

The real problem here is that any product or service that is paid for through an insurance claim is what I call an "impure" economic transaction. The fundamental laws of economics don't apply because there are too many players in the mix. Most transactions have a "buyer" and a "seller," and normal market forces will lead to natural fluctuations in price depending on supply and demand. If something costs too much, the potential buyer won't buy; and if something doesn't cost enough, many sellers will leave the market.

The problem with a health care procedure is that there is one "seller" (the doctor, for example) but two "buyers" with distinct objectives. The patient is the one who is the recipient of the service, but the insurance company is the one who pays the cost. The end result is that the patient isn't going to care about the cost because he isn't paying it, and the insurance company isn't going to care about the quality of the service because it doesn't have to live with the results. And this doesn't even factor in the expected increase in costs due to the inherent "moral hazard" of insurance in general (that is, the fact that a person is insured may cause him to do things that he would not do if he were uninsured -- the saga of George Bailey in "It's a Wonderful Life" is a perfect example).

Now you might say that health care is different than any other economic transaction because people will "pay any price" to live a longer, healthier life. There may be some truth to that, but you'll find that there are striking similarities between the underlying causes of increasing health care costs and of increasing auto insurance costs. If I am involved in a car accident and I file an insurance claim, I want the body shop to use all the best parts and make my car look like brand spanking new. Who cares if it costs the insurance company $2,500 for the repairs? If, on the other hand, I was paying for the repairs myself, I would certainly consider accepting 90% of the "best" result at 75% of the "full" price. In other words, I would consider the various cost and benefit combinations like I would with any other purchase I might make.