Marc Coleman, Economics Editor, unravels the risk equalisation issue and concludes the fairest system of all would be one which made health insurance mandatory for everyone
In one of his crueler remarks, Otto Von Bismarck had this comment on the Irish question: Put all the Dutch people in Ireland, he said, and Ireland would be the garden of Europe. Put all the Irish people in the Netherlands, he continued, and it would sink.
Obviously a bit prejudiced; were Bismarck alive today our economic success might make him eat his words.
Then again, the state of our health system might do the opposite. But that quote isn't the main reason why I refer to Bismarck. Apart from the re-unification of Germany and the world's first proper social welfare system, the iron chancellor was also responsible for solving the problem of health insurance.
Over a hundred years later, we still haven't got it right in Ireland. Instead of developing a cohesive and systematic approach from first principles, we are polishing rotten wood.
To briefly recap: When health Minister Mary Harney ordered British health insurance provider Bupa to "compensate" the VHI for having older, costlier customers, all hell broke loose.
The policy aimed to achieve "community rating", namely the principle that everyone pays the same regardless of age. We'll come to that issue in a moment. Bupa then threw a hissy fit, announcing just before Christmas that it would leave the market.
With more than 400,000 subscribers, the Government faced the anger of a huge constituency of younger voters. Now international insurance company Axa appears to be coming to the rescue, promising to take up where Bupa says it will leave off. Since Axa's emergence a further three groups, including the Mount Carmel Group, are said to be interested in taking over Bupa's business.
For any government dealing with health insurance, this problem - which economists refer to as adverse selection - is a big one. The healthier you are, the less likely you are to take up health insurance and vice versa. The result is that health insurers draw from clients who are more likely to claim, health insurance premiums are higher than necessary and the differential between premia charged to healthier and younger subscribers is greater.
Another problem is a combination of what economists refer to as imperfect information and moral hazard. Imperfect information describes the fact that healthcare, being a less standardised and comparable product than, say, a haircut, means your healthcare provider usually has far more information than you about the quality of its product. Moral hazard - the awesome temptation to talk up a service or a drug beyond its true value - is the result.
In his excellent book, Public sector economics, leading world economist Joe Stiglitz describes how this can work: "A very expensive drug may represent a very, very slight improvement over a very, very cheap drug," he says.
Pay for a drug yourself and you're less likely to pay an extra 100 per cent of the price for just a 5 per cent improvement. But if the provider convinces you that the margin of performance is 50 per cent, you just might. And if you're insured, who cares? You've paid your premium anyway and have the luxury of not paying extra.
The principle applies not only to drugs, but to expensive equipment in hospitals - places not famous for their approach to cost management. No right-wing ideologue, Stiglitz is a former World Bank chief economist and strident critic of the IMF, his identification of this critical problem facing the healthcare sector is beyond reproach.
So, any insurance system starts off with a bias towards unnecessary expense.
While it may level the field between the young and old, our own Government's particular approach has an nasty effect. Higher profits might reflect younger clients, it's true. But they may also reflect internal operations, types of care and drugs that are simply more cost effective.
In its present form, risk equalisation risks punishing competence and efficiency. And it has a further, whopping inequity. On top of the taxes they pay for healthcare, those who take out insurance pay higher premiums because of those who don't. In this debate, rather than their interests being in conflict, old and young alike who take out health insurance are the common victims of those who don't.
Which brings us back to Bismarck's solution: mandatory universal health insurance. Car insurance was made mandatory because the implication on society of a person not being insured - innocent road victims with huge medical bills - was too directly observable to be politically bearable. But even if not directly observable, the costs to society of some not being insured are, at least in financial terms, huge. By enlarging the revenue base that insurers have to fund the care for those in need, this policy would lower average premiums. Some modest differentials between younger and older clients might still persist, but is this entirely wrong?
Each phase of the cycle of life brings its own different cost pressures. As a share of their incomes, younger people spend far, far more servicing their mortgage and paying for child care than the elderly. What the elderly lose on the swings of health insurance, they gain on the roundabout in the form of much lower accommodation costs and, usually, zero childcare costs.
The swings and roundabouts principle also applies to insurance premiums. If insured from the start of their career, higher premiums paid when older are offset by lower premiums when younger.
And unlike the present approach to health insurance, universal coverage is fully consistent with competition between insurance companies, both for the efficiency of their administration and for the services and drugs they provide.
As UCD professor and leading healthcare expert Ray Kinsella puts it: "A mandatory universal health insurance scheme could deliver both market stability, as well as competition, and a much fairer system." Kinsella also points to strong evidence of public support for such a system - in a 2001 survey conducted by the ESRI, some 60 per cent of those asked favoured the introduction of universal coverage.
Enterprising and innovative political parties might note that this percentage could rise even further if mandatory coverage was appropriately lubricated by the tax system.
Invented by an iron chancellor, mandatory health insurance could be the iron rod we need to straighten the back of our health system.