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Tuesday, November 20, 2007

The Psychology of Insurance

In 1929 Justin Ford Kimball founded health insurance by guaranteeing Dallas school teachers 21 days of hospital care at Baylor University Hospital for $6 a year. At the time, he probably had in mind nothing very much more complicated than the realization that it was easier to get small amounts of money from large numbers of well people than large amounts from small numbers of the sick.

But his scheme also had the consequence of subjecting health care to the psychology of insurance.

There is something in human psychology that mentally disconnects the cost of insurance from the cost of what the insurance covers. If I have a car accident or storm damage to my house, I look upon the insurance settlement process as a sort of game in which I should try to get as much money as I can from the insurance company. If I am admitted to the hospital and my insurance covers the whole thing, it gives me an internal glow like winning the lottery. In neither case does it concern me that the more generous the settlement, the higher the insurance premiums.

During most of the 20th century, there was no thought that too much money might be spent on health care. Any measure that caused more to be spent was seen as progressive. So the psychological implications of health insurance were irrelevant.

But now that the level of expenditures has become too high, that psychology is a serious barrier to doing something about it. When people complain about the high cost of health care, they are in most cases really complaining about the cost of health insurance, which they are inclined to attribute to the insurance companies. No doubt there are health insurance companies that charge more than they ought to, but the main factor determining their rates is the amount they pay to hospitals, doctors, and other health care providers. The psychology of insurance obscures that and thereby shields providers from the social and economic forces that might otherwise cause them to lower their costs.

It is not obvious what can be done about it. There is talk about making patients more cost-conscious by giving them a larger economic role through Health Savings Accounts, higher co-pays and deductibles and the like, but we are not about to abandon the use of insurance to protect people against being financially harmed (or even pinched) by injury or illness.

It is another example of the central role that public attitudes play in the health care issue and the magnitude of the change required to achieve real health care reform.

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