A lot of ink has been spilled over the last several weeks over the pending health-care requirement that all employers cover contraception at no cost to their employees. I am not interested – as a professional, at any rate – in whether or not the mandate is, per se, good public policy; I am not interested in whether or not contraception is morally good or bad. I am interested in two key elements:
- What should and should not be covered by insurance?
- How do you defuse a situation that appears to be intractable?
What Should Be Covered by Insurance?
Insurance was originally conceived to cover low-risk low-tolerance events. For example, the overwhelming majority of people do not get into total-loss car accidents. Yet, with a car costing tens of thousands of dollars, most people cannot afford having their car totalled. If the probability of a total loss is 1% per year, and the cost of replacement is $20,000, then one of every 100 people, each year, will lose $20,000 on their car. If those 100 people each puts $200 into a pool, then the total amount in the pool is $20,000, exactly enough to cover the losses. For these people, paying $200 each year to make sure that a total loss will be covered in full makes sense.
In reality there is some administrative overhead, and we have to pay actuaries to figure out if the risk is 1% or 0.1% or 10%, and if it matters if you are a smoker or not, or if you live in Manhattan (lots of accidents) or rural Kansas (very few), so that your cost might be much lower. Let’s say the overhead is 25%, so, it is more than likely it will cost you $250, but still a really good deal.
On the other hand, if the cost of a tune-up is $100 each year, and you will get a tune-up every year, it doesn’t make much sense to insure it. Since everyone will have to file a $100 claim, everyone will also have to put in at least an extra $100. Using our previous example of a 25% overhead uplift, you will pay $125 in insurance premiums to cover $100 in costs. Most people would rather just pay $100 out of pocket than $125 in premiums. A tune-up is a high-risk high-tolerance event: it will happen to just about everyone, and just about everyone can handle the price out of pocket.
This is not some new analysis; this is the very basic structure and purpose of insurance. Insurance works extremely well for low-risk low-tolerance events, and extremely poorly for high-risk high-tolerance events.
Contraception is a high-risk high-tolerance event: the majority of people will purchase it, and nearly everyone who will use it can afford it. As the Georgetown Law student correctly pointed out, it may be expensive, but putting it in insurance does not make it less expensive; it actually makes it more expensive. On drugstore.com, a one-month supply of a name-brand pill cost $56; but getting it covered by insurance will likely cost $70-80 in premiums. Even if she convinces the school to cover it, she either will see an increase in her health-care premium, or in her tuition… and that increase will be more than the cost of the item itself, if only due to administrative overhead.
From the pure self interest of the individual, contraception is better off not being covered. Someone has to pay for it, and that someone, in the end, is always the individual – through lower salary, higher tuition, higher premium or higher taxes – and for a high-risk high-tolerance purchase such as contraceptives, the individual will pay more.
How to Defuse the Intractable Situation
Women’s issues focused organizations and individuals want contraception covered by the employer, and their desire to cover such items is understandable. Liberty focused organizations and individuals want contraception to be a matter of employer choice, and their desire and constitutional right to choose how to spend their funds also are understandable. How is it possible to square the circle, and have both parties walk away feeling their perceived rights are respected?
At heart, the friction point is created by having a third party, with its own desires and morals, in the middle: the employer. If the employer were not involved in the coverage and decisions of the individual, the issue would instantly defuse. No one objects if an individual, using his or her own funds, spends $56 at drugstore.com to buy a month of contraceptives. Even Georgetown does not care if the funds were earned by working for Georgetown, or, for that matter, by working as a direct aide to Edward Cardinal Egan. Conversely, no one cares much if someone chooses not to spend their funds on contraceptives, whether the funds were earned by working for the Cardinal, or by filling potholes for the District of Columbia.
The entire situation is created because the employer directly spends its own funds purchasing health coverage. If the employer were to pay the individual, and the individual were to purchase contraceptives, or pay for insurance, or pay for insurance that covered contraceptives, or pay for insurance that on principle did not cover contraceptives, it would be irrelevant to the employer, and hence to society at large.
The fundamental issue, then, is the injection of the employer between individual and health-care provider / insurer. The solution, then, which would satisfy both the individual and the employer, is to remove the employer from the picture.
As an aside, I suspect that most politicians would be disappointed with that outcome, but my interest is the good of the employers and individuals, and economy and society as a whole, not the politicians.