Health Insurance: How Does It Work?
Yonatan Zunger

You provide a nice summary which is helpful to the novice on health insurance, but not really why it is so expensive and there are also other reasons why health care is different.

So here is some supplementary information. First, while there are national health insurance companies. Health care is a locally provided services, so except in the case of government health care programs, the cost of health insurance depends on the aggregate expected cost of the services to the insurance company. So in markets where there are lots of providers and competition providing health care services the same exact service is likely to cost far less than in markets with little competition. Increasing consolidation in health has meant competition is declining and so providers can increase prices even when costs don’t demand they do so. These higher prices show up in the cost of the product.

Unlike auto insurance where depreciation means the old the car the less risk an insurer has (since its maximum value is declining), the opposite is true in health care. As we age we need more health care and usually more expensive health care… so as the average age of Americans increase… so does the average cost of health care. So life saving and life extending innovations may be “good”, but they are also expensive not just with respect to the new product or procedure, but in the extra claims that will come by virtue of living longer and older.

We are also redefining health care. So birth control, pills for erectile dysfunction, and many medical procedures once considered outside of “health care” have been moved into health care. Doing this has more impact that shifting costs, since as a “covered” benefit people will take advantage of the procedure when in the past they might live without it or manage its use more carefully.

Expanding regulations more than in other fields of insurance have dramatically added costs to the system.

Adding all of these together creates what is known as “the claims trend” and in the media is sometimes referred to as the “cost curve”.

Another thing not totally unique but more unique in health care than other insurance arenas are that a great deal of the care given (the government at one time estimated it at more than 30% does nothing to improve the quality or longevity of life.

In my career in health care study after study has shown disturbing correlations between things that should not exist from a quality of care perspective. For example, open heart procedures are often tied to the number of cardiac surgeons instead of population factors. C-section rates are often tied to whether the provider is legally able to perform C-sections (generally an OB/GYN) or not (like a mid wife).

So any form of health care reform intended to make health care more affordable must have a logical approach for impacting the unit cost of health care (that in a normal free market is done through competition, but does not necessarily work in the US health care market from many products and services). Secondly, there must be a way to get at the unnecessary care being delivered in this country.

And even after all of that there will be cost pressures for the reasons noted above.

The writer did a good job of explaining that given that a small number of people account for a large share of the nation’s health care cost and in many cases these people can be determined in advance and are not random events because they have a chronic health condition, any reform proposal that does not address these individuals will leave many of the without coverage.

Also, as a society we are pretty clear that life insurance, home insurance, car insurance, etc. are not a “right”. But more and more our society is viewing health care as a “human derivative or secondary right”. In other words, as humans we cannot pursue the God given rights of life and pursuit of happiness without health care (the other primary right is “liberty”). So in the same manner as the 2nd Amendment where the right to own a gun is seen as a secondary right that allows people to protect their lives… health care is beginning to move in that same direction.

In health care reform this takes the form of how are we going to pay for health care for those that cannot afford it. The ACA used a combination of expanding Medicaid and subsidies to attain this goal.

So there you have it… health care reform must address health care costs, the utilization of health care services, the access of it for those that are virtually “uninsurable” and financing of health care for those that cannot afford it. Of the four points the first two in my mind are where the ACA failed the most and why it is doomed either now or soon… it did a better job of addressing the second two points, but without addressing the first two (cost and utilization) eventually the system blows up… and whatever reforms we put in place will not solve the problem…

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