Health-Insurance Basics

1. What is insurance?
2. How to cripple insurance
3. Deciding coverage
4. Competition
5. Portability
6. Conclusion
Addendum: Best Practices Panels

Unlike our Constitution, our present system of health insurance was not the product of intelligent design. It just grew. To say it “evolved” gives it too much credit. It’s like the Spanish villages in Goya’s paintings, whose buildings seems to have grown organically, in no particular order or arrangement, at odd angles to each other.

What would our health-insurance system look like if we could design it intelligently from scratch, knowing what we know now?

The ideal is never attainable in real life. But exploring the ideal gives us insight into how best to change what we’ve got. It lets us see basic principles that any rational system of health insurance must meet.

1. What is insurance? Let’s start with the most basic point. Modern medicine is marvelously effective and horrendously expensive. The average American family cannot easily afford a short stay in a hospital, let alone a major operation like a coronary bypass, kidney or liver transplant, or lifelong treatment for a chronic condition like diabetes or HIV infection.

We could let the rich live and the poor and middle-class suffer and die. But doing so would upset our egalitarian values. So what do we do? We have insurance.

Insurance is a very simple concept. It lowers risk for individuals, i.e., the cost of unforeseeable bad events, by sharing the risk among a large population. In the case of health care, the bad events are disease and injury.

Fortunately, most of our population is healthy most of the time. So the idea of insurance is to have everyone pay a premium and so spread the risk and cost of disease and injury around. As long as the incidence of sickness and injury among the entire population is low, the insurance will cover everyone and premiums will be affordable. Everyone will have access to the best care that modern medicine can provide.

2. How to cripple insurance. The idea of insurance is so simple even a child can understand it. The larger the “pool” of insured people, the more effectively it shares risks and lowers premiums. (Larger pools also lower administrative costs through economies of scale, but that’s a smaller effect.)

Unfortunately, children did not design our present system. It grew under the not-so-benign influence of self-seeking adults, including private insurers and state governments. The result is a system that cripples the very idea of insurance, i.e., risk-sharing in a large pool.

The first way our present system cripples the very idea of insurance is a product of so-called “insurers” themselves. Nearly all exclude “pre-existing conditions.” Think of it. The idea of insurance is to spread risk among the largest pool of insured people possible. So what do insurers do? To lower their costs of claims they exclude people who already have experienced bad events. They do so on the plausible theory that recurrence is more likely than disaster striking out of the blue.

Policies with these clauses may call themselves “insurance,” but they are not. They don’t share risk; they refuse to cover it. The same is true of all the more specific exclusions in modern insurance, from pre-natal to psychiatric care.

Reporter Karen Tumulty wrote a wonderful story about this practice’s reductio ad absurdum. Her brother bought a series of consecutive six-month policies of so-called “insurance,” each of which excluded pre-existing conditions. When he made a claim under one of them, the insurance company went over all his old medical records with a fine-tooth comb. It found evidence of a precursor to his illness under a previous six-month policy, since expired, and so rejected his claim, calling it a “pre-existing condition” under the current policy.

That’s not insurance. It’s sophisticated swindling.

The same is true, to a lesser extent, of all the specific exclusions in modern policies. Those exclusions occupy the vast bulk of the pages and pages of dense verbiage in modern health-insurance policies. But how many people actually read them? And how many of those actually weigh the exclusions’ probable consequences against the prices of alternative policies?

The theory is that every consumer reads and understands every exclusion in every available policy, and then compares them all (and their prices!) with accuracy and precision. Then—with prefect knowledge and memory of all those details in her mind—she selects the policy whose combination of coverage and price is best for her. According to this theory, the average consumer acts like a bionic hybrid: a lawyer (to read and understand the prose), a doctor (to understand medical terms and foresee the likelihood of various conditions), an economist (to foresee financial implications) and a digital computer (to get all these details right and compare them accurately and precisely).

Of course this is nonsense. The vast majority of people don’t even read any policy in detail. Those that do read only one: the one they already have purchased, after they’ve purchased it. Then they throw it in a file and don’t look at it until disaster strikes.

The result, from consumers’ perspective, is not insurance. It’s a crap shoot. When disaster strikes, they search for their policies in their files and read the dense prose to see what is covered and to what extent. If the prose is unclear, they hire lawyers to fight the insurance company, putting resources that could be spent on health care in advocates’ pockets.

This system narrows the insurance pool. It decreases money applied to share health risks and spends it on lawyers and administrators. It produces uncertainty, anguish and anxiety, and it vastly increases the administrative expense of insuring health. From the consumer’s viewpoint, it looks like a shell game; when the chips are down nothing is quite what it seemed when the policy arrived. Any relationship between this system and the fundamental risk-sharing idea behind insurance is purely coincidental.

3. Deciding coverage. “But wait,” you cry. “Health insurance can’t cover everything!” What about hypochondriacs who go to their doctors twice a week, for every little ache and pain? What about cosmetic surgery? Should we spread the cost of mammoth mammaries, penile implants, and making vain people look years younger? What about pregnancy, which (in most cases) is a voluntary condition? What about experimental treatments that ultimately prove useless or counterproductive? What about milquetoast doctors who’ll do or prescribe anything (at others’ expense) just to appease their pushy patients? What about incompetent doctors and quacks?

And there’s the rub. Someone has to decide what risks to cover and share. There is no escaping that reality. The relevant questions are: (1) who makes the decisions; (2) whether the decisions are medically sound; and (3) whether the decisions get relayed to the public in a way that fosters informed and rational choices?

Right now, we have the worst of all possible worlds. Obscure private bureaucrats, deep in the bowels of private health insurers, make the decisions. They do so at two levels: (1) when they write exclusions into policies and (2) when they interpret the exclusions they wrote to deny claims. No one knows these private bureaucrats’ names, and no one (except their profit-seeking bosses) holds them accountable. They may have no medical or economic training at all.

Within the scope of coverage and exclusions set by these private bureaucrats, everyone makes the decisions. Every doctor has a say, often influenced (if not compelled) by insistent, anxious, and ill-informed patients. Every patient can “game the system” by going to a hospital, a doctor or a city with a reputation for offering expensive and perhaps unnecessary care. (Just think of how many years it has taken—and is still taking—to get doctors to stop prescribing antibiotics for viruses—against which they do no good—in order to retard bacterial drug resistance, and you get some idea of the problem.) And people who have or seek insurance have no idea of what they are getting, unless they resemble the bionic hybrids described above.

So our “system” is not a system at all. No one is in charge. The medical choices that we all pay for (through premiums and risk sharing) are haphazard, if not random. And few, if any, consumers are made aware of what’s covered and what’s not. No wonder health care is one of the worst—if not the single worst—sources of national anxiety and runaway cost!

The sad truth of health insurance is that someone must be in charge. Someone must play gatekeeper.

Oil sheikhs and other rich folk will always have access to whatever care they think they need, whether or not it has any sound medical basis, and no matter how much it costs. We do—and should always!—allow private insurers to charge whatever they wish for policies that support “oil-sheikh” care. But if we are to get serious about the basics of insurance—risk sharing in a wide pool with reasonable cost control—we need someone to decide what treatments are medically effective, which are best practices, and which experimental techniques are sufficiently promising to try in a broad population (and to charge the rest of us for).

We also need someone to make and maintain standard definitions. Right now, no one can compare policies because they all define terms differently. Is reconstructive surgery after an auto accident “cosmetic” and therefore excluded? Is counseling for diabetes or alcohol or drug addiction “psychiatric care”? Is jaw surgery after an accident or disease “medical care” or “dental care”? Having standard definitions for these and other common categories of coverage and exclusion would allow consumers, for the first time ever, to compare policies and premiums without becoming bionic hybrids.

Who should make these decisions on minimum coverage, which any insurer can exceed but none can deny? Who should define permissible exclusions and categories of coverage? Who should develop and maintain lists of standard and best practices as medicine advances and technology evolves?

Bureaucrats should not apply, whether private or governmental. Nor should lawyers, accountants or health-care executives. Nor should anyone with a profit motive in expanding or denying claims. What we need is a body of independent medical and scientific experts analogous to the Federal Reserve.

We trust people like Ben Bernancke and his fellow federal bankers to govern (and recently to save!) our entire economy. Not only that: we also give them extraordinary independence from the political process, so that their training and expertise can shine through the dust of political struggle.

We should create a panel of similar medical, health and scientific experts to make decisions about standard coverage, exclusions, and categorical definitions in health care. And we should take similarly extraordinary precautions to insure their independence from politics and special-interest pressure. [For more detail on these points, click here.]

4. Competition. For-profit health insurers love to praise “competition.” But the system we have today suppresses competition to the point of complete annihilation. It does so in three ways.

The first and most important is state regulation. Like all insurance, health insurance is subject to regulation by the several states, not the federal government. As a result, most states have monopolies or duopolies (two dominant firms) in health-care insurance.

As any economist will tell you, monopoly (or duopoly) is not competition. As compared to competition it offers higher prices, lower output, less efficient administration, and slower innovation. Health insurers love to say that federal-government insurance would bring on Soviet-style efficiency. But we already have Soviet-style efficiency, not just in one jurisdiction, but in close to fifty.

The second impediment to competition is the very “product variety” that private insurers love to tout. Like snowflakes, no two health-insurance policies are alike. Busy consumers can’t comparison shop because they have no hope of comparing policies and premiums quickly and easily. Present policies’ uniqueness and complexity elude comparison, except by our hypothetical lawyer-doctor-economist-digital computer cyborg.

Finally, the present system all but precludes vigorous competition among insurers because different insurers have different pools. Their pools are balkanized not only by state lines (and consequent state regulations) and differing coverage and exclusions. Under the present system of employer-based insurance, their pools are also balkanized by employer. Employees of big companies can choose only among insurers that their own big company selects, and competition among those insurers is limited at best.

Most large employers select plans that are not directly competitive, in order to give their employees “consumer choice.” For example, they may offer an HMO like Kaiser-Permanente, a limited-provider-network plan, and a (more expensive) choose-your-own-doctor plan. Some of them may also offer a stripped-down plan covering only basic preventative and catastrophic care. These different plans do not compete in the same market, so “competition” in health insurance offered by major employers is nonexistent.

Could an ideal system create real competition among private insurers? You bet it could! First, by pre-empting state regulation of health insurance, it would create a uniform national system of minimum coverage and maximum exclusion. That system could allow insurers to offer more, but not less, than the minimum. It could also require every insurer to price minimum coverage separately, for ease of comparison. Second, an ideal system would create nationally uniform definitions of categories, such as “psychological care,” “dental care,” “cosmetic care,” and “natal-prenatal care,” so that comparison-shopping consumers could compare prices without having to worry about the details of coverage (except for optional “extras”). Third, an ideal system would allow all insurers to sell policies across state lines, subject to uniform federal regulation for minimum coverage and defined terms.

Health insurers, of course, don’t want any of this. It would make them compete for real and work harder. They’d much rather tout the benefits of competition in the abstract without having to suffer any in practice.

5. Portability. The biggest political problem in “selling” health-insurance reform is numbers. Some 47 million of us don’t have health insurance, but that’s only fifteen percent. The other 85% of us have health insurance and are deathly afraid of losing it. So politicians have to convince the vast majority that reform won’t rock the boat by making health insurance scarcer or more expensive, or by producing other unintended consequences. That’s a hard sell.

The trick is to “sweeten the deal” for the already insured by giving them something they want badly. That something is portability.

Even today, the vast majority of health insurance is employer-provided. If people lose their jobs, retire or quit, they lose their health insurance. A federal law called COBRA allows coverage to continue at (usually higher) individual rates for a limited period of time, up to three years. But the thought of paying more for health insurance or even losing it (even if later) causes enormous anxiety among workers. It also impairs employee mobility, as people stay in jobs they hate to avoid the greater evil of losing access to health care.

COBRA’s conditions make no sense. An employee who is a qualified member of an employer’s insurance group today does not change his identity, medical condition or health status simply because he is fired, laid off, retires or quits tomorrow. He is the same person and should be treated as a member of the same insurable group, at the same group rates.

And why not until retirement? An insurer that covers an employer’s workers generally agrees to cover them all until retirement. It doesn’t impose conditions on, or generally even investigate, the employees’ career paths or success or failure inside the company. Why should it do so outside?

Congress could amend COBRA to allow all employees to keep their employer-provided health coverage after termination until Medicare, at the same group rates and terms that apply to persons still employed. Those rates and terms might change with time, as do employer-provided plans nearly every year. But there is no excuse for charging separated employees more on an individual basis or for refusing to cover them at all; they are the same people (and in the same risk pool) that they were before separation.

Full portability of this sort would assuage much of the angst of current insurance holders and provide much-needed political impetus for further reforms. But it would also do much more. As former employees moved around among companies and self-employment or small business, portability would create a larger pools of insureds—always desirable in insurance! Eventually, it would establish the economic and psychological conditions for a national, private health-insurance system independent of employment. Instead of writing 1,000 pages of transition rules, Congress could let natural attrition do the job.

6. Conclusion. Twenty months ago, at the beginning of the long presidential primary campaign, I wrote the following:

“Any [health-insurance reform] will take some tinkering to get right. The really important goals are five things . . . . First and foremost, we have to get all the people who want insurance and can’t find or afford it insured. Second, we must make sure that everyone’s insurance is ‘portable’ and employer-independent. Third, we need to get rid of ‘pre-existing condition’ exclusions so that everyone can buy insurance, whatever their current medical condition (this will, of course, require some adjustment in cost). Fourth, we have to put in place uniform national rules preventing private insurers from gaming the system through misleading sales practices or ‘cherry-picking’ customers from limited insurance pools. Finally, we must make sure that all medical insurance covers all medically indicated care (within the dollar limits of the policies), so that doctors, not insurers, regain control of the practice of medicine.”

As the analysis above reveals, these points are still the logical centerpieces of health-insurance reform. Not only will they make the terms “insurance” and “competition” apt again (if they ever were). They will also help sell reform to people who already have insurance.

Along with abolishing state balkanization and establishing independent panels of experts to fix minimum coverage and define terms, these simple reforms could begin rationalizing our health-insurance system. As private insurers adjusted to the larger pools (including ex-employees), mandatory minimum coverage, and standard definitions, a truly competitive private market would emerge, national in scope, to replace the balkanized Soviet-style state-by-state monopolies that exist today. The transition would be largely natural and driven by market forces.

Today, state monopolies (or duopolies) and haphazard coverage make comparison shopping and competition a joke. They also leave 40% of insureds with inadequate coverage. And of course there are those 47 million of us with no coverage at all.

I support a public insurance option because it is the quickest way to teach the public what real insurance looks like, and how much it differs from the sophisticated swindling that masquerades for insurance (and “competition”) today. But we are in the thrall of small minds from small states. It is unclear whether even a president as politically skilled as our own can beat the special interests and make the public and their representatives understand that a public option need not feed on government subsidy or bankrupt the private insurance industry.

Whether or not the public option succeeds and keeps private insurers honest, any reform bill must force insurers to offer real insurance and engage in real competition. To that end, any reform should follow five simple principles, to wit:

1. No exclusions for pre-existing conditions

2. Immediate portability for all existing insurance

3. No cherry-picking (groups must be defined by conditions unrelated to age, gender, race, ethnicity, medical condition, and previous treatment)

4. Minimum standard coverages defined by federal law or regulation, with standard definitions for minimum and additional coverage for comparison shopping.

5. A independent panel of distinguished experts to advise on and prescribe standards and definitions, review and report standard and best practices, and pick experimental treatments (if any) worthy of inclusion in standard coverage

Even Congress should be able to make these points in 100 or fewer pages. (A non-lawyer could do it in five.)

Points 4 and 5 may be politically difficult. But they are essential to any serious effort to rationalize health care, control costs, and foster real, not illusory, competition among private insurers.

With these reforms in place, the stage would be set for transition to a fully competitive private market independent of employment. One of the standard coverages could be a bare-bones policy of minimum care, whose low prices would attract the uninsured. Then, if Congress balks at the price of subsidizing the uninsured, we could deal with subsidies later, as economic conditions improved and private insurers, having survived real competition for the first time, became more confident.

Footnotes:

1. Karen Tumulty, “So You Think You’re Insured? (Think Again.),” Time Magazine, March 16, 2009, page 26.

2. See recent on-line study in Consumer Reports (subscription required).

Best Practices Panels

The foregoing essay introduces the concept of “best practices” panels. These are panels of distinguished doctors and scientists—leaders in their professions—who review the evidence and decide what constitutes best practices in various fields of medicine.

The first thing that readers should know about these panels is that they already exist. Every field of medicine—indeed every disease—has them. Their function is to review the medical, epidemiological and statistical literature (both national and global) and write reports summarizing best practices for a specific disease or condition. Because medical knowledge and practice advance so rapidly, these panels revise their reports every few years.

The reports are not simplistic prescriptions for a single treatment in all cases. Although they try to be brief and avoid unnecessary medical jargon, they also try to be comprehensive. They discuss all currently accepted and experimental treatments and exhaustively review (insofar as then known) their relative risks, benefits and expected outcomes, including side effects. They recommend which treatments are best for the general population, and which are best for patients with known risk factors, such as pregnancy, allergies, heart disease, old age, etc.

Every hospital and health insurer has access to these reports. So do most competent doctors. I know because I saw one on my doctor’s desk years ago, when I was considering treatment for benign prostatic hypertrophy (BPH). I asked him to lend me a copy, and he readily agreed. (Letting me read the whole report was a much more efficient and accurate way of informing me than answering my interminable questions orally in his office.) The report was book-sized, about 150 pages. It gave me all the information that I needed to make informed decisions about my treatment.

The second thing to know about “best practices” panels is that they don’t make decisions about individual patients. They don’t decide whether to “pull the plug on grandma” or anyone else. They do decide, based on their expertise and volumes of hard evidence, what works and doesn’t work generally under various conditions. And they exhaustively list the risks and benefits of various courses of treatment so that readers (mostly doctors and insurers) can make well-informed decisions on patient care.

What the essay above proposes is that these panels, which already exist, be formalized and take on three additional duties. First, they would condense their best-practices reports into standard coverage and exclusionary clauses for health insurance. Second, they would define insurance terms for optional or “extra” coverage. These tasks would, for the first time, standardize basic insurance coverage and make possible real comparison shopping by consumers of health insurance, including employers. Third, economists added to the current panels would take the cost of alternative treatment options into account, without compromising quality of care.

Here are two example of how this process might work. Medical science has proved that so-called “statin” drugs have great value in reducing the risk of coronary artery and heart disease. There are a number of different statin drugs, but the patent on Zocor (simvastatin) has now expired, so its generic form is the cheapest. A best practices panel of cardiologists therefore might decide to make generic simvastatin the standard treatment (i.e., first resort) for patients needing cholesterol-lowering medication. But for patients who cannot tolerate that form of statin (due to allergies or for other reasons), the standard clauses would allow doctors to prescribe alternatives at higher cost.

A second example relates to the burgeoning field of “personalized medicine.” Medical science has discovered that cancer patients with certain genetic variations respond to targeted “miracle drugs” that exploit the peculiarities of their genes, while patients lacking those genetic variations don’t. By successfully targeting cancer cells alone, the miracle drugs make patients suffer far less than general chemotherapy, which kills off a whole range of cells in order to get cancerous ones. A best practices panel might decide that all patients should be tested for genetic amenability to the limited-scope miracle drugs before undergoing general chemotherapy, in order to avoid the greater expense and suffering of general chemotherapy when more targeted treatment might work.

Decisions like these are just common-sense applications of public-health criteria with an eye on cost. But they are hardly simple decisions. They require detailed, expert knowledge of the precise state of medical knowledge as it advances. They also require the ability, based on long experience with medicine and public health, to weigh and balance risks and benefits of alternative treatments. Finally, they require complete independence from special interests, including drug and medical-device firms that want to sell more product and patients (and their doctors) who believe that more expensive is always better and want the “best.”

It bears emphasis that standard insurance clauses written by these panels would work both ways. They would entitle every insured patient to best-practices treatment, regardless of previous medical condition and age. In so doing, they would eliminate the randomness and haphazard quality of insurance coverage today, which gives some patients best-practices treatment automatically, others an exhausting process of legal appeals, and still others the privilege of suffering and dying while coverage is denied or offered too late. Under standard clauses written by internationally respected best practices panels, every insured patient would have equal access to appropriate care.

At the same time, best practices panels would control costs by restricting access to secondary and more expensive treatments to those whose medical condition warrants it. If a patient, for example, wants Lipitor rather than simvastatin (generic Zocor) for no particular reason—or because he thinks more expensive is always better—that patient should have to pay the extra cost himself. While making sure that all insured patients get medically indicated treatment, the panels would insist that patients who want more than medically indicated treatment don’t force the rest of us (through insurance premiums) to pay for it.

These best practices panels already exist. They are doing a fantastic job of digesting and summarizing the vast bulk of leading-edge medical research for the busy practitioner. What legislation would do is formalize them, give them national visibility and stature, pay them better, and protect them assiduously from political pressure and other improper influence (like our Federal Reserve). The law would then have them write nationally applicable standard clauses and exclusions that, for the first time, would allow real competition in health insurance.

At the same time, the panels would keep standard insurance abreast of medical advances as they occur, just as they do for best practices today. They would insist that no insured patient be denied appropriate care, no matter how advanced, but that no patient be allowed more expensive care than medically indicated at the expense of the rest of us.

Members of these panels would not be government “bureaucrats.” They would be distinguished national leaders of their fields of medicine, just as they are now. Or they would be distinguished health economists, recommended by private economic and academic societies. All would be confirmed by the Senate, just like Supreme Court judges and the Chairman of our Federal Reserve Bank. Governing law would impose these requirements and would provide for removal of panel members for malfeasance, crime, or conflict of interest.

Someone has to decide what best medical practices are. The question is whether we want nameless private bureaucrats making those decisions haphazardly—and differently—in every private insurance company, out of the public eye and with an obvious profit motive. Or would we prefer a process, which we have in limited form now, that involves the best medical minds in the nation and that is open, transparent, and public? That choice should be an easy one to make.

permalink