RALEIGH – John Cochrane, a University of Chicago finance professor and research associate at the National Bureau of Economic Research, has just written a paper for the Cato Institute on what he calls “health-status insurance.” The paper is concise, provocative, and well worth your reading time.

One of the reasons the political debate about health care is so frustrating and convoluted is that the term “insurance” is so poorly defined and sloppily applied. Advocates of government-run financing systems for medical care, for example, frequently equate the statement “she has no health insurance” with “she gets no health care,” though they are obviously not equivalent. What the uninsured actually don’t have is a financial instrument to manage the risk of a large, unforeseen medical bill wiping out their savings. Most still consume routine medical care, to varying degrees, and some end up in hospitals consuming care paid for by donors or taxpayers.

What is typically called health insurance includes both true insurance against financial risk from unforeseen major medical conditions – which is similar to insurance policies on life, cars, personal items, and commercial and residential property – as well as a prepayment system for routine medical expenses.

Cochrane calls the former health-status insurance and the latter medical insurance. I’d prefer that the latter not be called insurance at all. It’s more like a payment plan or even a membership fee. Once you start talking about how to pay for scheduled visits and routine services, you aren’t talking about insurance anymore. But that’s the term Cochrane sticks with, no doubt because of its familiarity.

The focus of his Cato paper is on the health-status insurance component. Cochrane properly argues that it really ought to consist of personally owned lifetime insurance coverage, not employer-based benefits renewed annually. The best way to get from here to there is to equalize the tax treatment of health benefits regardless of how they are acquired – through employers or through individual purchase. Policymakers could do this either by eliminating the tax deduction for employer-provided benefits or extending the full income and payroll tax exclusion to families. They also need to eliminate state regulations that keep insurers and customers from bargaining freely about coverage, policies, and premiums.

What would a true system of health-status insurance look like. Cochrane sketches it out:

The combination of health-status insurance and competitive, freely priced medical insurance solves the central problem of our current health insurance market: the lack of real, long-term, portable health security. With health-status insurance, you can always get medical insurance, no matter if you get sick, change or lose jobs, move, divorce, take some time out of the labor force, or even let your medical insurance lapse. The lump-sum payment from the health-status insurer means you can always pay your medical insurance premiums.

Health-status insurance would also give each of us much greater freedom and choice. No matter how sick you become, you would always be free to change medical insurers. You could always afford the higher premiums a new medical insurer will demand, just as you could afford the higher premiums your current insurer will require. You could not depend on the good treatment of one insurer, the vagaries of one group, the link to one employer, or the bureaucratic decisions of one government-provided plan.

As I said, the paper is a good read, even if I do have some quibbles with his terminology. I have vastly more quibbles with the current terminology in health care debates.

Hood is president of the John Locke Foundation