Barrack Obama, well-known Nobel Laureate, recently authored an article published in JAMA about the Affordable Care Act (ACA). I had half a mind to write one of my paper reports about it.
However, I thought it would be more interesting to have an open discussion on health insurance. I don’t pretend to be an expert, so please add your thoughts and/or tell me how wrong I am. Shorter posts encourage more reader discussion, so I’m splitting this into three bites:
Part 1: Why health insurance?
Part 2: Challenges to health insurance
Part 3: What does the ACA solve?
Health insurance seems really complicated to me, and I’m amazed that so many people think they understand it. It’s basically an exchange of money, for money. It’s not at all obvious how this is beneficial, and yet it is. Below, I list some possible reasons why it might be beneficial.
- Risk management – When you buy any kind of insurance, you are basically buying risk reduction. On average, you lose money from buying insurance, but you lose it at a more predictable rate. Predictability has value to you, and you prefer it over the money. The insurance company, on the other hand, can handle unpredictability and would prefer to have the money. The exchange is mutually beneficial. Of course, then it’s a mystery why health insurance also covers regular checkups or regular prescriptions.
- Efficiency – Health insurance might somehow improve efficiency. For example, they might do the administrative work of connecting you with the right health care provider. Or they could encourage people to get regular checkups, which might be cheaper than waiting until people need to go to the emergency room.
- Bargaining power – Health insurance companies are few and large enough that supposedly they can lower the price of health care with their bargaining power. In effect, buying health insurance is like joining a union. However, this strikes me as a double-edged sword. If insurance companies have the bargaining power to lower health care prices, surely they also have the bargaining power to raise insurance prices.
- Redistribution of wealth – Maybe for some people health insurance actually isn’t worth it. They get health insurance as part of their job, but are in good enough health that they would have preferred a larger paycheck instead. Other people working for the same employer might be in poorer health, and thus prefer the health insurance over the larger paycheck. Requiring employers to provide health insurance effectively redistributes wealth from people with less medical costs to people with more. Another more direct way to redistribute wealth through healthcare is by paying for people’s healthcare, such as through Medicare or Medicaid.
Of these four benefits, which do you think are most important? Least important? Are there other benefits that I’ve missed?
#4
One of the reasons Canada’s healthcare system is relatively cost effective is because everyone is paying into it, regardless of whether or not they need it. When people try to argue a compromise–for example, a sliding scale that allows healthy, able-bodied people to purchase cheaper plans–all that ends up doing is recreating the situation where the ill are disproportionately affected by driving up the cost of their insurance.
Single-payer and government regulated seem to produce the best results. Everybody pays into the system and nobody is turned away. It does create wait times for non-critical illnesses and injuries, but at least everybody is equally stuck in the queue until/unless their condition worsens. And all single-payer systems have triage built into their wait times, so people who need immediate care still receive it without being slapped with crippling debt.
Privatization seems positively backwards by comparison.
I don’t like the fact that it’s insurance. I mean, there is an insurance agency in the middle, and that has to be adding to the cost of even one transaction.
From what I understand, the agencies will pay up on inflated hospital bills, which raises the likelihood of getting the next bill wildly inflated, which leads to increased costs for private payers. Having expensive lawyers in the mix messes it up for everybody.
The government should get involved enough to drive bills down, at the least. A government program to pay for all health care would be good, if we could figure out a good one.
By the way, some folks think emergency rooms are obliged to treat people, which they consider to be the equivalent of government-paid hospitalization. Emergency rooms are only obliged to examine people, with treatment not required.
@Siobhan,
It’s not altogether clear what single-payer systems have to do with wait-times. I could certainly imagine single-payer systems without wait times or non-single-payer systems with wait times. Single-payer is an economic model, not a queueing model.
@Menyambal,
I’m not sure if you’re talking about the US, but we have the Emergency Medical Treatment and Active Labor Act. Wikipedia appears to directly contradict you:
I think your thoughts are too much stuck with the idea of for profit insurance. Single payer or public companies (Germany has a very weird system) with hospitals being incorporated drastically change your points 1-3.
As for #4: Every fit cat can have an accident. We’re not just talking about being in poor health. A single misstep on black ice and you’re looking at a several thousand bucks bill and a few weeks out of work… It also always breaks my heart when I hear that there was another mass-shooting in the USA and the victims of that horrible crime need a go-fund-me page.
@Gilliel,
My comments are mostly based on the state of US health insurance, yes. Although I don’t understand what you mean by saying that single-payer changes points 1-3. Surely single-payer health care also plays the role of risk management?
Yeah, that’s exactly what risk management means.
#1
The predictability of your own health and accident history are difficult for you to predict and the consequences of an adverse event are disastrous. In contrast, the Insurance company can readily predict its risk because it uses whole of population statistics which smooths out the variation to a manageable level. After that it’s just a numbers game. It also pays for them to pay for routine care as that sunk cost reduces the top side risk of major adverse events.
#2
I’m fortunate enough to live in a country that provides reasonably good care for accidents and major events through taxpayer funded public health care. Elective surgery is a rare beast though and for that you would likely go private if you could afford the insurance (via a premium or self insurance). GP’s (doctors) are heavily subsidised by the State and most people are also eligible for coverage from accident related events (including limited income protection) via a State owned and run insurance scheme, the flip side of that is it is almost impossible to sue someone for causing an accident.
At first glance the private health care appears to be more efficient than Public, but that is only because it parasitically feeds off the resources of the Public system in terms of emergency and accident care, specialist care etc. Basically if you are in private care and get dangerously sick they drive you to a Public hospital and dump you.
#3
See #2. All pharmaceuticals and items such as surgical prostheses are purchased and supplied to health care providers via a State run purchasing organisation. Our drugs are cheap, and if not cheap are at least cheaper than most other countries. the flip side is that there can be delays introducing some drugs that are very expensive and have marginal additional benefit over existing drugs.
#4
This is essentially a feature of our system. loved by many, tolerated by quite a few as a necessary evil. Hated with a passion by libertarians.
Isn’t that true of any type of insurance? The promise of an insurance policy is that in exchange for paying a premium, depending on what’s being insured, the insurance company is agreeing to pay money to make you (mostly) whole if an asset is damaged, or if you incur a liability.
On your first item:
I don’t know that it’s necessarily that mysterious. If regular checkups help catch health issues early, when it’s cheaper to treat them, then perhaps many insurance companies believe they’ll ultimately pay out less if they encourage that early detection. As for “regular prescriptions”, I’m not sure what you mean by that. If you mean prescriptions for chronic conditions such as hypertension, HIV, Crohn’s or diabetes, I think insurance companies would rather pay for cheaper prophylactic care than the more expensive interventions that they’d have to pay for if those cheaper options weren’t.
On your third item:
They always have. That’s why the suspicious part of me looks askance at the for-profit model of many health insurance companies. The interests of for-profit health insurers and their customers are fundamentally misaligned. (I believe, however, that the States do have regulatory power over insurance companies’ ability to unilaterally raise rates.)
On your fourth item:
I think you’re making a distinction without a difference. Medicare is simply the model of an insurance company in government form.
@Snoeman,
I was only saying that it’s mysterious if you consider risk management to be the only purpose of health insurance. Encouraging early detection falls under efficiency rather than risk management. The fact that health insurance is not *just* risk management makes it different from nearly every other kind of insurance. Car insurance doesn’t cover regular car maintenance (AFAIK in the US), even though mechanical malfunctions are the cause of many car accidents.
The particular medications I had in mind were anti-depressants, anti-psychotics, and a CPAP machine, because those are some things my boyfriend and friends make use of. In the US, there’s also a lot of political discussion about birth control pills.
Many people say this, but I’m never sure what exactly it means. Is it intended to point out a problem with health insurance specifically, with any kind of insurance, or with oligopolies, or with capitalism in general? After all, the interests of for-profit grocery stores are also fundamentally misaligned with my own.
@Rob,
Yeah, wealth redistribution is definitely a feature (not a bug) of health insurance. And yet here in the US, the wealth distribution aspect is so widely disliked. Libertarians and conservatives hate it, and even liberals prefer to speak of it in coded language. Few defenders want to admit that yes, some people are poorer because of health insurance. This frustrates me since wealth redistribution seems like the best part of health insurance.
@siggy who wrote in response to me writing, “The interests of for-profit health insurers and their customers are fundamentally misaligned.”
What it refers to is the ultimate reason for the existence of the health insurance company. If the role of the insurance company is for-profit, particularly if it is a publicly traded company, then it has an obligation to make more money than it spends. Its first objective is to make a profit. It can only do that if it spends less paying claims than it does collecting premiums. As a result, they have a built-in incentive to deny coverage, and you don’t have to work too hard to find examples of that happening.
In contrast, if the first duty of a health insurance company is to ensure the well-being of its insureds, and is not-for-profit, then their initial motivation is not necessarily to spend less than what they receive in premiums, but not to spend more. So, while those companies may well want to cut costs, they also don’t have the same motivation to maximize gain. Every single example of a comprehensive health care system I’m aware of makes the payment system for health care not-for-profit, but doesn’t necessarily make its delivery not-for-profit.
By the way, I don’t think your example of the grocer makes sense. Both you and the grocer benefit for your direct payment to her for the bag of groceries. It’s when you introduce a third party, such as an insurer, that the interests start to become misaligned.
Siggy
I think you’re still thinking about this too much within the framework of capitalist for profit healthcare.
The most important goal for a health care system should be to provide the best possible health care and ensure the best possible health of the people. While economics do play a role (we’Re talking about finite resources after all), individual risk management is not a top priority.
It is not what most people* living in countries with socialised healthcare have in mind when they think about healthcare. They think about their personal health. Because your health is actually not like your car. It’s really hard to do without it.
@Giliell #11,
I was not saying that risk management is the top priority of health insurance. I was just saying it was a priority. All you said was that #1-3 were “drastically changed”. I was just asking you to elaborate.
@snoeman #10,
Your explanation is difficult to parse, so could I ask a few further questions about it? You didn’t directly answer my questions, but I take it that you’re saying this is a problem with any for-profit insurance. On the other hand, you pointed out a lot of things that apply equally well to the grocery store. Grocery stores also have an obligation to make more money than they spend. I definitely do not benefit from “direct payment to her for the bag of groceries.” They also have motivation to skimp on the quality of goods, as long as they can still fool customers (e.g. see this). But you’re saying that grocery stores are different. Why?
You also made a distinction between payment and delivery, and I just don’t know what this refers to. If I were to guess, I’d say payment refers to insurance prices, where delivery refers to the choice of when to honor an insurance claim?
@Siggy OK, I’ll try again. When you pay the grocer for the bag of groceries, you both directly benefit. The grocer gets money. You get groceries. Could the grocer cheat to increase their profits unfairly? Sure, but it’s not relevant to the basic tenet that you received something of value in exchange for your money.
That’s different from the health insurance model. In the health insurance model, aside from a possible co-pay, you aren’t paying directly for the care you receive. You are paying a third party (the insurance company), who then pays the healthcare provider. If the insurance company is for-profit, that gives them an incentive to deny (or delay) payment. That incentive doesn’t apply to not-for-profit insurers.
No, in a healthcare system, the delivery system refers to the private and/or public network of hospitals, clinics, doctors, nurses and technicians who provide (“deliver”) the care. The payment system refers to how and by whom providers are compensated for that care. In a lot of cases, those systems are separate. (Medicare and most private insurers in the US pay the bills. They don’t treat the patients.) In any modern healthcare system providing universal coverage, the laws generally require those making the payments to operate on a not-for-profit basis. Part of the reason is the one I stated above. Being a for-profit insurer gives an incentive to deny (or delay) payment for medical claims in order to increase profit. Again, that’s not an incentive a not-for-profit insurer has.
Your interest as a purchaser of health insurance is in having your medical care paid for by the insurer. The interest of the for-profit insurance it to make a profit, and one way of doing that is to deny (or delay) payments for healthcare claims. That represents a fundamental misalignment of interests.
I feel like I’ve repeated myself, but I’m hoping my point was more clear.
@snoeman,
Thanks for the explanation. I will mention some of this in the next post (“challenges to health insurance”).
It is true that when I pay for groceries I receive something of value. But that is true with insurance as well, otherwise why would people buy it? This is the main question that the OP is trying to find answers for: what is the value of health insurance?
I think there are major differences between the grocery store and the insurance company, but I wanted to see what you thought the difference was. IMHO, the incentive structure is the same in both cases, but the problem is that insurance isn’t nearly as transparent. Insurance claims have an element of subjectivity and insurance companies are incented to be uncharitable as possible. Insurance companies advertise their own reliability, but since there’s little way for them to guarantee reliability, the ads are basically cheap talk.
Grocery stores can use misleading packaging, but that will only go so far. And in fact, plenty of regulation is still necessary. For instance grocery stores cannot legally call something “ice cream” in the US unless it obeys certain constraints.
For profit health insurance companies make no sense but if they must exist they should be required to offer life insurance with every policy. That would reduce their incentive to deny clients access to potentially life saving but expensive treatments.