Insurance is misused to fund healthcare
Imagine if comprehensive car insurance was the norm, paying for accidents and theft but also for all of your car needs. Because it would be rather costly(but rates would only ever increase for the group, not individually), most of us would get oil changes just as often as possible. And replace the windshield wipers, get new tires, and so on as quickly as the insurance company would allow. Mechanics would encourage us to do so to keep our vehicles in tip-top shape, and add to their bottom line, with little fear of us customers balking at the price that would be paid by that stingy old insurance company. Behind closed doors the providers would negotiate with the insurers for ever higher charges for fluids and parts, with Geico and Progressive fighting a never-ending losing battle to keep payouts low, sending our rates ever higher.
This is what we do with health insurance, and it’s why healthcare is so expensive. Negotiations between service providers and payors result in prices such as $15 for a single tylenol pill or $23 for one alcohol swab. It can mean that the charge for the same surgery can be tens of thousands of dollars different in one city than it is in another. And of course it means that the amount we spend on healthcare spirals upward into the stratosphere.
Much of the problem is that most people don’t really quite get insurance. No matter what it’s for, people are either legally required to have it or understand it to be a good idea and just pay the premium without thinking much about it until the rates jump up for one reason or another. When the cost increases there is an adverse reaction and a desire to see the insurance company in the worst light possible. It certainly doesn’t mean that every premium increase is justified, but insurance has one simple purpose and it would help if everyone understood what it was. Insurance has one job, to protect the insured from risk.
Insurance has one job, to protect the insured from risk.
It might help also to understand what risk is, and is not. Risk, in insurance terms, is the possibility of some negative occurrence taking place that would have heavy consequences such that the insured would have great difficulty in bearing the cost of it. A house fire can leave an uninsured individual without a place to live. But routine maintenance is not a risk. A homeowner knows they have to mow the lawn, paint, fix the plumbing and replace burned out light bulbs. Thus, insurance doesn’t cover those things. Oil changes and tires are not covered by car insurance, crop insurance won’t buy a farmer a new tractor, shipping insurance doesn’t guarantee the customer will like what they get. The only type of insurance that does try to cover routine costs is health insurance.
Routine maintenance is not a risk.
There’s something else that we do with health insurance that we don’t do extensively with any other type of insurance. In most jobs, it’s a benefit. The Industrial Revolution did result in many businesses implementing company doctors, but the primary factor for causing healthcare to become tied to one’s employer was a World War II measure that froze wages but exempted benefits from the calculation. Unable to compete for labor by increasing the paycheck, companies used the loophole to increase compensation by offering to pay for healthcare. When wage controls went away, the loophole stayed and had the advantage of preventing benefits from being taxed. The use of tax dodging employer health insurance naturally increased to include ‘major medical’ followed by vision and dental plans.
As with our comprehensive car insurance analogy, if an individual is paying for(or getting paid through) insurance that covers everything and doesn’t get penalized in a direct manner for using it, they won’t have any incentive to care about costs. Just the opposite, it makes sense to use it as much as possible. Naturally, the increased demand drives up prices. Retirees, no longer able to access employer-provided health plans, suddenly found medical problems to be much more expensive. The result was a government-funded plan modeled on private insurance, covered people 65 and over, and was called Medicare. Comprehensive health insurance paid for by a third, or fourth, party had become the norm. With prices continuing to climb, the federal government created managed care organizations with the HMO Act of 1973. The Affordable Care Act(Obamacare) is merely the latest effort to somehow make insurance do something for which it isn’t designed, backed this time with subsidies, and fines.
Comprehensive health insurance paid for by a third party became the norm.
There is no doubt that the way we pay for healthcare in this country is not working. The consumer who even thinks momentarily about price while receiving healthcare only does so in terms of co-pays and deductibles, insufficient tools implemented to brake consumption. Providers not only don’t bring up the dollar amounts, they actively hide those numbers, often with legal support. Consumer and political pressures leave insurance companies in a weak bargaining position to hold down prices which they will simply pass along to the consumer, so the confidential negotiations are ever upward. The only way to bring down the price of healthcare is to bring market forces to bear, and that will require giving consumers and providers a reason to care about costs at the time of purchase.
Healthcare costs will come down when consumers and providers have a reason to talk about the price.
Laura Ingalls Wilder wrote “There’s no great loss without some small gain.” A small gain in the fiasco of government pushing everyone into comprehensive health insurance and the resulting price madness is that more and more providers are bailing out on insurance and dealing directly with consumers. More and more primary care physicians are moving to a membership-based system where patients get better access to their doctor who can also provide medications and in-house lab tests at pennies on the dollar compared to the insurance price, all for a monthly fee. There are even hospitals that offer surgical procedures out-of-pocket with upfront pricing. This doesn’t mean they want you to do entirely without insurance. An illness such as cancer or an accident that requires an extended hospital stay is the type of risk that all of us face, but not all of us will experience, exactly the sort of thing for which insurance can prepare us.
Insurance can prepare us for the risk of cancer or an accident that requires lengthy hospitalization.
Federal policy has put us in the hole that is universal comprehensive health insurance, with prices piling ever higher and threatening to cave in and bury us. If we can increase understanding of the purpose of insurance and that we are misusing it to pay for routine healthcare, we can begin to dig our way out. Rather than subsidies to go through the price-inflation machine, we could directly subsidize those with low-incomes or special medical needs to utilize the membership-based medical practice of their choice. We can move to ensure that catastrophic health insurance is available with as many options as the market desires, placing power in the consumer’s hands to negotiate and choose. In so doing all of the artificial price supports will be knocked out from under the entire system. And everyone will benefit as healthcare becomes affordable again.
