Health Insurance Isn’t Really Insurance At All

The health insurance system in the United States is broken. But you already know that. What you may not realize is why it is not only broken, but in many ways is not fixable. At least not without changing some of our fundamental beliefs about how health insurance and our health care system should work.

To fully grasp this, let’s start by looking at insurance itself. Insurance exists because there are rare but ruinously expensive events that happen to people at unpredictable times. The purpose of insurance is to spread the risk of those rare but ruinously expensive events across a large enough group of people and a long enough time that the cost per person per unit of time becomes bearable. For most of the insured, this is a losing proposition. That is, even excluding administrative and profit costs, you are likely to spend more on insurance than you will receive in claims. The more catastrophic and rarer the insured event, the more likely this is true.

And yet we buy insurance anyway, mostly because the cost to us of the rare event is so great that we are unwilling to accept the consequences. This is completely rational and expected behavior. There’s an entire article that can be devoted to a discussion of how insurance relates to the spectrum of people from risk-averse to risk-seeking, but that’s far more involved than necessary for this article. The Wikipedia article on risk aversion is quite good, though.

Now let’s look at health care. We treat it as if it were this monolithic beast, when in fact it consists of several loosely related separate parts. I’ll describe them here, and you’ll see what I mean.

Catastrophic external events: These are things like car crashes or earthquakes causing bookcases to fall on you. They’re essentially unpredictable, and the cases that matter most require expensive medical attention.

Catastrophic internal events: These are things like aggressive cancer or degenerative diseases. These are, to varying degrees, more predictable than the catastrophic external events, and many of these benefit from early diagnosis and treatment.

Chronic conditions: Asthma and some types of diabetes go here. Treatment of these is focused on the symptoms, as the underlying disease is not curable.

Communicable disease: I’m not counting things like the common cold. This is more about diseases for which treatment addresses the underlying disease and/or prevention of acquiring the disease in the first place.

General maintenance: This includes both asymptomatic and symptomatic checkups, where there is not a clear indication of a particular disease. Non-communicable infections and minor communicable diseases like the common cold also apply here. Basically, this is the stuff for which you go to a General Practitioner.

Elective services: Most cosmetic surgery falls under this category, but so do a few other things. There’s room for differences of opinion on many of these, such as gastric bypass.

One problem with insuring healthcare is the notion of a total loss. In traditional insurance, there is a known maximum value for an event. In the case of automobile insurance, there is a maximum liability in the policy, and collision will cover a maximum of the current value of the vehicle, at which point it is considered a “total loss.” Health insurance has attempted to accomplish a similar result with lifetime caps (which are no longer legal). But people are understandably squeamish about assigning a dollar value to their lives. Nobody wants to be told that they or their loved ones are going to die due to a lack of money. This immediately changes the insurance equation, because premiums need to be significantly higher if the policies have no caps on claims.

Another problem with insuring health care is most of the above categories don’t all fit well with the traditional notions of insurance. Catastrophic external events are the only sort of situations for which classic insurance is a perfect match. General maintenance would be silly to cover in the case of automobile insurance (imagine insurance covering oil changes), but for catastrophic internal events, the cost to the insurer is often significantly lower if discovered early, which means that it’s less expensive to cover general maintenance if it results in early discovery of catastrophic internal events. But general maintenance will rarely uncover these catastrophic internal events, so most of the money spent on general maintenance goes to areas not typically associated with insurance.

Of course, full coverage of general maintenance without co-pays tends to lead to the insured overusing medical services. If it’s free, there’s little incentive to err on the side of frugality. On the other hand, having co-pays tends to lead to the insured underusing medical services. Since many diseases are much less expensive to treat when they’re either asymptomatic or mildly symptomatic, people with co-pays are more likely to remain undiagnosed until the disease has progressed beyond the cheap-and-easy-to-treat stage. Since most Americans aren’t doctors, and since medicine is so complex today, few of us are able to adequately determine the ideal time to see doctors for diagnosis and treatment. Basically, general maintenance is simultaneously well-suited and poorly-suited to insurance.

Chronic conditions and elective services are badly matched to insurance. Chronic conditions tend to have relatively predictable costs, which are fairly constant over time (think asthma inhalers or birth control pills). Elective services are, by their very nature, entirely predictable, since they are entirely controlled by the person receiving the services. The necessary overhead of insurance makes coverage of chronic conditions and elective services more expensive than simply paying out of pocket. But many types of elective services are hard to distinguish from necessary treatments. At what point does reconstructive surgery become elective, for example?

Communicable diseases are worthwhile to insure against, but work best when everyone is covered. This is the same sort of situation as we have with fire protection (not fire insurance). Just as it is less expensive to put everyone’s fires out as quickly as possible than to have patchwork coverage, where some people are covered and others not, it is less expensive (and causes fewer deaths) to control communicable diseases as quickly as possible than to treat some people and leave others untreated. For communicable diseases, then, the best model is not insurance in the traditional sense, but rather universal coverage. Often these diseases are diagnosed at general maintenance appointments, further clouding the appropriateness of general maintenance coverage.

So, some healthcare is well suited to individual policies, some to universal coverage, and some to no coverage at all. And not all situations fall neatly into a single category, as evidenced by the bleedover between catastrophic internal and maintenance. Already it’s a mess. But it gets worse.

By far, the majority of Americans get their health insurance from their employers. This means that they have little or no choice about the coverage they receive, and from whom. Few of us have the luxury to choose our employer based on the specifics of the health insurance provided, and even if we did we probably would consider other factors to be more important anyway. It’s silly to be in that position in the first place. Imagine if the food we were allowed to eat was determined by the make of car we drive. Health coverage and employment are an equally absurd match, from a purely objective perspective. I am aware of the history behind it, but that hardly makes this model worthy of perpetuation.

Now, since most Americans don’t get to choose their health insurance providers, this means the providers have little incentive to please the consumers of their products. Instead, they need to please their consumers’ employers, and these employers’ needs may well be at odds with those of the insured. For example, an employer will typically want employees to be healthy, because healthy employees are more productive than unhealthy ones. However, once an employee has been diagnosed with a terminal degenerative disease, it is now in the best interest of the employer for the employee to not have the coverage at all, and furthermore to no longer be employed, because the employee has become a pure liability. Even an employee with, say, a child with muscular dystrophy would likely be a net liability to the employer.

In other words, we’re getting insurance for many things that aren’t well-suited to be insured, from companies that don’t need to satisfy us, paid for by people whose interests match ours, when they do, only by coincidence. Given that, it’s remarkable that our system works as well as it does!

And then we have some scenarios for which the current system is completely useless. For example, it has often been suggested from the right that young people (say, in their 20s) don’t need to be insured at all, or need only catastrophic coverage coupled with a Medical Savings Account (MSA). This presumes they will not be subject to catastrophic internal events. Granted, the likelihood of a catastrophic internal event is relatively low, but what is our plan for those cases where they occur? As I noted above, someone with catastrophic-only coverage + MSA is unlikely to go for maintenance, which makes the prognosis much worse and the cost much higher upon diagnosis of a catastrophic illness. Is a 22 year old going to be sufficiently well informed to decide the appropriate level of insurance? I’m not convinced anyone is, since humans are notoriously bad at gauging risk. But those in their 20s are particularly unlikely to have the financial wherewithal to survive even one such instance, fiscally speaking.

So what do we need to do in order to fix this? Anyone who says they know the answer is either misinformed or lying to you. There is no perfect solution, because medicine today is more complex and expensive than ever before, and we must make some hard choices. No matter what, we have to give up at least one of the following:

• Emergency care for all, regardless of ability to pay
• Maximizing the financial efficiency of medical care (i.e., most bang for the buck)
• Universal coverage against communicable diseases
• Affordable coverage
• Coverage of all treatments, regardless of cost

What we’re left with is a choice of which of those bullets are most important. This is where the discussions should start, because which features you choose will quickly lead to the optimal solution for that set of features.

One issue we have as a nation is an inability to have honest tradeoff discussions. Often, the conversations devolve based on an assumption that there is an easy way out, that there is so much money being wasted that we can get everything we want if we just focused on improved efficiency. From personal experience, I have never seen someone present that argument without being intellectually lazy about it. That is, when pressed to explain precisely where the inefficiency resides, the amount of waste described is always orders of magnitude smaller than the amount needed in order to close the fiscal gap between where we are and where they want us to be.

For example, tort reform is often, especially from the right, described as a way of eliminating much waste from health care. But malpractice insurance costs have not risen over the past couple of decades, and elimination of all malpractice judgments (which I can’t imagine anyone endorsing) would reduce our medical expenses by only 2%. Similar issues arise when the left points the finger at insurance company profits. I’m not arguing that these aren’t worth looking at, but they are very, very small compared to the rise inhealth care costs over the past decade.

Similarly, what is commonly referred to as “defensive medicine” is far less tied to malpractice costs than it is to the “Coverage of all treatments, regardless of cost” bullet point. We want to make sure nothing is missed, and our doctors know this. Defensive medicine is the natural result when the direct cost to us, the consumers of medical services, is low relative to the actual cost of the testing (because insurance picks up most or all of the tab), and doctors want to keep us happy as patients, and doctors don’t lose any money if patients have more tests. The “system” (usually our employers, ultimately) bears the bulk of the costs, and we as patients get all of the benefits. Is this something we want to change? I know a couple of people who, due to defensive medicine, were diagnosed with cancer. Neither would have been correctly diagnosed without the defensive testing. Both of them would have died if they weren’t diagnosed until they were sufficiently symptomatic. While I recognize that this is anecdotal, I can’t help but wonder if any of us are so firm in our beliefs about cost reduction in healthcare that we are willing to die for those beliefs.

I’ll discuss possible solutions, and the Patient Protection and Affordable Care Act (commonly referred to as the “Health Care Reform Bill” or pejoratively as “ObamaCare”) in particular, in a future article. In the meantime, I’ll leave you with a few questions:

 

• Which of the five bullet points are you willing to do without, and why?
• Are you willing to accept fewer tests in exchange for lower insurance premiums, but at a cost of higher risk of death?
• If you see inefficiencies in the system today, which ones are big enough to make a serious dent in the cost of medical care in the US if we addressed them?
• Which of the categories of medical care should be provided by health insurance, and why?
• Do you think health insurance should be provided by employers at all? Why or why not?