Decentralizing Tragic Choices: Pooling Health Risks with Health Unions

I Centralized Versus Decentralized Tragic Choices in Health Care Life-and-death decisions arouse a sense of tragedy because there are conflicts in ethical principles. Specifically, compassion requires us to regard all human lives as priceless and to preserve them at all cost. But utilitarianism dictates that scarce resources be allocated to achieve the greatest good. Hence, life-and-death human needs must be prioritized. When some lives must be given up in favor of others, such choices are regarded as tragic. This sense of tragedy, however, can vary depending on how tragic choices are made. For example, most people would be resigned to an aggregate tragic outcome if it were a result of impersonal interactions of individual decisions. But if the same outcome were a result of a centralized decision, most people would be repelled by it (Calabresi and Bobbitt, 1978). This is so because in centralized decision making, the conflicts between ethical principles are highly visible and often explicit. In impersonal interactions of independent decisions, these conflicts are hidden and anonymous. As a result, people are resigned to seemingly random results of uncoordinated innocent choices. In health financing, however, this insight for avoiding a sense of tragedy is ignored. Health insurers deal with tragic life-and-death health choices by pooling premiums into their centralized coffers. This centralized mode of decision making has engendered a profound sense of tragedy when funding for life-and-death treatments is denied. Although treatment decisions are recommended by individual physicians and desired by individual patients, health insurers ultimately approve or disapprove these recommendations or desires. Paradoxically, this concentration of power in the hands of insurers weakens their power for rational but unpopular funding decisions. Because resources are pooled into the hands of insurers, their deep pockets invite political, moral, and legal challenges. If health dollars were decentralized to the hands of health consumers who must independently decide on whether to fund specific life-and-death cases, their decisions wouldn't be easily subject to political and legal challenges. But can decentralized health-financing work? This paper analyzes the unique moral hazards of health insurance and suggests an alternative institution to pool health risks by separating the fund pooling function from the fund allocation function. For ease of exposition, this paper defines health insurance as any health plan that pools resources up front and centralizes funding decisions on health needs. Thus, health insurance encompasses private health plans as well as Medicare and Medicaid. II Unique Moral Hazards in Health Insurance Health insurance pools health risks by converting unpredictable medical expenses into a fixed health insurance premium. In spite of its prevalence, health insurance is fraught with unique moral hazards not found in other kinds of insurance. In most insurance, the covered loss is determined when the covered event occurs. For example, if an auto collision occurs, the damage to the car is determined at the same time and cannot be altered easily by the wishes of the insured. The covered loss will be either the repair cost or the replacement value of the car, whichever is less. So most of the risk that can be affected by the behavior of the insured is before the fact. In health insurance, the insured can also affect the risk of loss after the fact. For example, if the insured develops a bad liver, the loss is determined largely by the wishes of the insured. The loss will vary considerably depending on what expensive treatments are available and which of these treatments the insured wishes for, subject to the lifetime coverage cap. Furthermore, the insurer is no longer free to offer a replacement value to the insured instead of the more expensive treatment. …