Car insurance in the United States is a system that more or less works well. You call up insurance agents representing different insurance companies with similar policies but varying quality of service. Then you buy it based on how much insurance premium they charge and how good/bad quality of service you are willing to accept. If you have an expensive car or you are a reckless driver, you end up paying more. The less you use your insurance, the lower your premium becomes over time.

Car insurance insures you against significant unexpected losses like accidents and trees falling on the car. It does not cover regular oil changes and other wear and tear of your vehicle. In other words, by buying car insurance, you put a cap on your potential losses. But regular maintenance is your responsibility.

Lastly, in case of car damage, due to vandalism or an accident, you can go to a repair shop which is required by law to provide you an estimate in advance. And they cannot deviate too much from before taking your explicit permission.

The car insurance works because the incentives are aligned. Some people pay more for higher quality/coverage insurance. Some people pay less for cheaper insurance. The repair shops cannot charge arbitrary prices since the customer does not want their insurance companies to overpay, or else the customer’s premium will go up next year. The insurance companies cannot charge premiums way higher than the market or else; the customers will leave. If they charge too low, they go out of business.

Now, look at the health insurance system. Most people get free or subsidized healthcare from their employers. Anything your employer spends on you has to come from somewhere, it’s a cost to the company, be it a “free” parking spot, “free” food, or “free” health insurance. The employer buys one-size-fits-all insurance with no say from the insured person on the pricing. Many employers self-insure thinking that they won’t have too many major incidents, but sometimes they do end up paying. And hospitals try to bill the insurance company for as many tests as possible, even committing fraud.

Coming to the policy itself, the employee has a few choices, usually three or so. Young employees not only indirectly subsidize health care for the old, but this system also discourages companies from hiring older employees who can adversely increase the health insurance premium for the company. There are two significant problems here - opaque pricing models and insurance for regular checkups. Unlike car repair shops, American hospitals won’t give you an estimate when you show up. They don’t want to. What they would prefer to do is to bill your insurance company as much as they legally can, the insurance company will push back and somewhere the tug-of-war on pricing will be decided. Different insurance companies will have different prices. So, the billing reflects more on salesmanship and negotiation power than the actual quality of service. The other major problem it leads to is that even the regular checkups go through the insurance company, which not only adds administrative costs but discourages the person from choosing the right service. A person going for an oil change might decide to optimize on price or will go by the best Yelp reviews or a friend’s referral. In this case, the person has to find a hospital that is in-network with the insurance provider. Out-of-network has higher costs. The last part of the disincentive comes from the care provider, the doctor/clinic/hospital itself. First, there is no incentive for the doctor to reduce the costs since efficiency gains won’t attract more customers. So, they prescribe expensive tests and drugs. Second, the complicated insurance contracts discourage doctors from setting up their clinics as only big hospitals have the negotiating power. The system fails badly because of the broken incentive structure.

Now, consider this scenario. Rather than allowing employers to deduct insurance premiums as expenses, what if the government made employer-provided insurance illegal? Further, the government brings in a law to force all health-care providers to publish rates like this surgery center in Oklahoma. People will check prices and decide where they want to go, and the system will incentivize participants to be efficient. Of course, now, one can bring health insurance into the system, which has to be purchased in the free market and will only cover major unexpected issues like heart surgeries. Would older people pay more in such a system? Probably yes, but the government can come in and subsidize that at a much lower cost than the current Medicare. Would women pay more in such a system? Probably yes, but again, the government can step and pay a fixed percentage of the premiums. Since the overall incentives are aligned, the system would move towards efficiency instead of hiring bill adjusters everywhere.

If you aren’t convinced, wonder if your employer provided you with “free” car insurance. Then something as simple as an oil change would require an appointment a month in advance. Opaque prices and mysterious bills showing up a few months later with undecipherable medical car diagnostic codes stating that the mechanic used an “uncovered” engine oil brand in your car? Affording health care isn’t hard in the US; it’s the broken healthcare system that keeps becoming more and more unaffordable.