The health insurance system in the U.S. has been getting a lot of attention lately, focused primarily on Republicans’ efforts to repeal and replace the Affordable Care Act, often referred to as Obama Care. The policy alternatives that have been presented would increase the number of people without health insurance and increase costs or reduce coverage for consumers with health insurance. They would, however, reduce the government’s costs.

Little attention has been given to ways to improve our health care system by decreasing the number of people without health insurance, improving the quality of services and outcomes, and reducing overall costs. From an international perspective, among countries with similar advanced economies, the U.S. health care system is the most expensive on a per person basis, has far more people without health insurance, and produces worse outcomes. [1] Clearly, our private sector health insurance system has failed to provide affordable health insurance for all Americans and fails to provide good health outcomes despite spending huge amounts of money. There are three core problems with our private health insurance system.

First, a central problem with our private health insurance system is that it undermines the basic theory of insurance, which is to have a large group (i.e., pool) of people with different risks and different (and unknown) future events. Then, when someone experiences an adverse event that requires payment under the insurance plan, the pooled insurance can cover their loss or expenses. With many private health insurers and many different insurance plans, the insurance pool is split into multiple small groups of people. In addition, our private market approach lets people who don’t believe they have much risk or who can’t afford it to opt out of having insurance. These characteristics of private health insurance undermine the basic theory and efficiency of insurance.

When multiple (and often for-profit) health insurers are allowed to split up the pool of people, they have a strong incentive to avoid people who are or are likely to become unhealthy and to attract customers who are and are likely to remain healthy. This reduces their costs and increases their profits. They do this by refusing to cover people with pre-existing conditions. They also tend to make it difficult for people they cover who develop health problems to access the services they want or to receive the insurance payments they are due. These people, therefore, have an incentive to leave this insurance company and go to another one.

When the insurer of last resort is a public program such as Medicaid or the public version of Medicare, the result is that the private insurers take the healthiest and least costly customers and dump the least healthy and most costly patients into the public programs. They also work to attract the healthiest customers up-front with advertising and targeted benefits, such as providing reimbursement for the cost of joining a fitness center. Once again, the basic theory of insurance – having a large and randomly differentiated pool of insurees – is undermined. [2]

Without universal participation in health insurance, those without health insurance undermine the insurance system and are what are referred to as “free riders.” They know that in an emergency they will get health care. However, because they haven’t paid for insurance, they get care for free or at low cost and the rest of us, through insurance premiums or tax dollars, pick up the tab.

If everyone is required to have insurance, costs are more equitably shared. In addition, with more people in the insurance pool to share the overall costs of the health care system, the cost to each individual is, on average, less. If we only buy insurance when we get sick, get injured, or have an accident, or as we get older and are more likely to need health care, the cost of insurance will be higher than if everyone participates in the health insurance system and the costs are spread more broadly.

Second, long-term incentives to keep people healthy are, unfortunately, not present in a fragmented, private health insurance system. If a health insurer knows they are going to have you as a customer for a long time (or even for your whole life), then it has an incentive to pay for programs that will maintain and promote your long-term health. It has a reason to spend time and energy to encourage you, for example, to exercise and eat healthy foods, to avoid smoking and excessive use of alcohol, and to regularly take drugs for chronic health conditions such as diabetes, high blood pressure, or asthma.

Because customers tend to change health insurers every couple of years, the insurers have no financial incentive to focus on long-term health maintenance. Due to the fragmented health insurance market, we change insurers frequently, such as when we change jobs, when our employer switches health insurance company offerings to save money, or when we change insurers to save money or access a different set of providers or benefits. Therefore, insurers have little or no incentive to invest in their customers’ long-term health; their goal as a private business is to minimize payments for their customers’ health care and maximize profits.

Finally, a large portion of private health insurance premiums go to non-medical expenses, i.e., overhead. Private insurers tend to spend about three-quarters (75%) of the money they receive in premiums on customers’ medical expenses. The rest goes to advertising, profits for shareholders, and administrative processing due to the complexity of the multiple plans they usually offer, each with its own different co-pays, drug payment schedules, and negotiated rates for providers. (By way of comparison, about 95% of Medicare and Medicaid spending, the two biggest public health insurance programs, is for medical expenses.) Furthermore, doctors, hospitals, and other service providers spend lots of time and money dealing with the multitude of variations in paperwork and procedures that are unique to billing each insurance company and plan for their services.

My next post will present a solution to these problems with our private health insurance system.

[1]      Goodman, A., & Moynihan, D., 6/30/17, “Medicare for All: It’s a matter of life and death,” Common Dreams (https://www.commondreams.org/views/2017/06/30/medicare-all-its-matter-life-and-death)

[2]      Johnson, J., 7/21/17, “Message to Democrats: Get on board with Medicare for All or go home,” Common Dreams (https://www.commondreams.org/news/2017/07/21/message-democrats-get-board-medicare-all-or-go-home)


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