Saturday, June 24, 2006

The failure of Health Insurance

I don't think we have a health care crisis. What we have is an over-manipulated and politicized medical insurance industry.

Medical insurance is the only insurance that is primarily provided on an other than individual basis (life insurance for most people is both a group insurance AND an individual insurance).

Medical "insurance" is also the only insurance where routine occurances are "covered". Medical insurance is, for many, much more like an extended warranty coverage than an insurance coverage.

Medical insurance is hobbled by the "triangle" approach. Most insurance is a contract between the insured and the insurer -- a person contracts with the insurance company, and the insurance company pays for insured occurances. The insured has two goals -- cheap rates and high-quality service. The insurer has two goals -- make a profit, and customer satisfaction. The shared goal of customer satisfaction, and the competing goal of lower rates/higher profits makes this relationship "efficient" in economic terms, since with sufficient competition insurance companies will tend to provide a fair value, and customers will choose various policies based on their own cost/benefit analysis.

But medical insurance, provided mostly through employer group benefits, has three participants. A company finds and pays for most of the "insurance", and the employee uses the insurance (and pays a portion of the costs). The company has two goals -- employee satisfaction/retention, and cost savings. The employee has two goals -- cheap insurance rates and high-quality care. The insurance company has two goals -- keep the contract, and increase profits.

Because there is no direct shared goal among the three, and because the person USING the service is largely divorced from the cost of the service, the relationship is inefficient from an economic standpoint, with little in the way of valuable corrective feedback.

As with most insurance, there is an independent operator, the provider of services. This always provides some tension, with the service provider wishing to maximize income, and the insurance provider wishing to minimize services.

HMO insurers attempt to "solve" this problem in part by increasing co-pay amounts (giving the insured an disincentive to using the service) and a complex system of reviews and pre-approvals to protect against insurance padding by doctors. They also use their size to force doctors, hospitals, and pharmacies into long-term contracts providing cut-rate service in exchange for a guaranteed supply of consumers.

Meanwhile, the employers attempt to control their costs by using their size to force insurance companies into long-term contracts providing cheaper costs to the employer in exchange for a guaranteed supply of customers.

The employee's cost of insurance is almost entirely divorced from the service provided, except that larger companies can offer a small choice of insurers at different price points. Whatever the case, there is almost no "competition" for the employee's service because the employee is restricted to the few companies that sign deals with the employer. The cost the insurance companies charge was set between them and the employer, and the amount the employee is required to pay is also set NOT by the insurer, but by the employer, based on what they think they can charge as part of an overal benefit package and still retain their employee loyalty.

The result is insurance companies with little reason to respond to individual needs EXCEPT if the employer cares, and an industry with no incentive to cut prices to "compete" for customers since the customers cannot "choose" between health providers, being locked into exclusive contracts through their employer/insurance provider agreements.

About the only way the health care consumer can feel they are getting a better deal is, perversely, to use the service MORE, since most "co-pay" values are low compared to the overal cost of insurance. Much like people at an "all-you-can-eat" buffet will take too much food because they "paid for it", people who have high-cost medical insurance with low co-pay values will use the service as often as possible because "they paid for it".

Normally doctors wouldn't discourage this because they do get some money on a per-visit basis. The insurance company may offer incentives to doctors who sluff off patients to "nurse practitioners", but negative publicity has largely prevented outright clauses in contracts to discourage people seeking medical treatment.

People need cars, but we don't have a system where everybody's car insurance covers mechanical repairs and yearly checkups to ensure cars keep running smoothly. And yet people seem to know to get their cars fixed when they break, to buy insurance that covers catastrophic problems like accidents, and if they care to they buy long-term "maintainence agreements" which are like throwing money away but do limit the downside of expensive repairs.

But you would NEVER get a system like that for health care, because there is NO incentive for employers to provide that kind of care. Since it largely leaves customers in charge of paying for their own "service", it would mean less money paid to the insurance companies. Since the doctors aren't guaranteed patients, they won't sign long-term agreements.

What we need to consider is BANNING employers from providing employee health care, forcing employees to get it on an individual basis, like they do car insurance and homeowners insurance.

Then we can force people, like we do for car insurance, to have certain "minimum" coverage either in personal investments, or in catastrophic care plans, so that there is money set aside for major expenses. Then we need to "punish" people for not having insurance, just as we do now for people and their cars and houses -- a person without car insurance crashes their car, they have to come up with their own money to buy a new car.

With such a plan for most of us, money would be available to provide indigent medical care, not the best care in the world but reasonable care for free. As much as it seems 'unfair' to "punish" people for not having money, it is a simple fact of life that, in our economic system, people with money do better than people without money. That provides incentives for people to work hard to earn money -- if there was no value to having money, most people would not work. If the "universal minimum" services are generous enough to satisfy a majority of the people, nobody will strive to earn enough money to pay for "better" services.

And in a world where things ARE rationed, where there may not be enough to go around, any system that determines who gets things will be unfair to those who do NOT get them, even if the choice is random. Better those things be given in a rational way to those who earn them. Not that wealth is the best indicator of earnings -- but it's what we have.

1 comment:

Greg L said...

That analysis proves to me that you are more qualified to determine economic and healthcare policy than the current Democratic nominee for the 10th CD. I am posting a call on BVBL that they should draft you as a candidate.

And yes, I know you'd never accept. But you make more sense than a harvard PHD who is a dean at Georgetown. Well done.