Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

11 March 2017

Health Insurance for Dummies

[For some popular recent posts, click on the links below: Introduction
1. What insurance requires: a big risk pool
2. Balkanized and grotesquely inefficient administration
3. Sham insurance
Conclusion: what the future may hold

    “Nobody knew health care could be so complicated.” — Donald J. Trump

Why do we Yanks have the world’s best medicine and the developed world’s worst health insurance? The reason is simple. Up to now, our medicine has been based on science: rigorous testing of safety and effectiveness. In contrast, our health insurance has been based on the farthest thing from science possible: political ideology seasoned with fuzzy thinking and greed.

The designers of our health-insurance system have built it by ignoring the science of economics and all the self-evident practicalities of health insurance. Instead, they have been fighting the last century’s battles between “socialism” and “free markets,” with only the vaguest notion of what those words mean in this context.

To add insult to injury, most pols confuse health insurance with medicine, at least in part. Exhibit A is our current president, who confuses “Obamacare,” which is mostly about health insurance, with health care. Exhibit B is the GOP’s latest legislative proposal for health insurance, the so-called “American Health Care Act.” (emphasis added.)

But health care and health insurance are different. They are apples and oranges. Health care, or “medicine” is how we study, diagnose, manage and cure disease and injury. Health insurance is how most of us, including our pols, pay for medicine. Medicine is a matter of science alone. Health insurance is a matter of economics and finance.

Rarely the twain do meet. At least rarely should they, unless ideology and fuzzy thinking cloud our judgment.

To understand the difference, you just need ken two simple points. Virtually every system of health care worldwide—including those with all the single-payer insurance systems—still has private doctors and hospitals that work for private or religious institutions, or mainly for the wealthy. In these systems, the private health care providers can charge whatever the market will bear because their “customer base” includes billionaires, the 1% and the 0.1%.

For example, the Intercontinental Hotel on the main campus of the Cleveland Clinic has two whole floors set up for oil sheiks and their large personal retinues. It also has several channels of piped-in video in Arabic.

Cost is no object for these patients. Their generous payment and charitable donations increase the Clinic’s capital base and advance its medicine for the rest of us.

But neither the oil sheiks not their American counterparts need health insurance. Some of the latter have it, merely as a matter or economy and parsimony. But they don’t need it. The most doctors and hospitals can cost them—in the worst possible case—is a few million dollars, and that’s chicken feed to them. That’s why our 1% and 0.1% are more concerned with lowering their taxes than with affordable health insurance.

Likely “private” medicine (for self-funding patients who self-insure) will never die, anywhere in the world. There will always be rich people who can afford whatever medical miracles the latest modern science can provide. And there will always be doctors who work partly or solely for them. (The rich can also be special targets of sophisticated quacks and scammers, but that’s another story.)

Yet the rich are not what health insurance is all about. Health insurance is a means for people who are not rich to afford the best medical care that our nation can provide when they get sick or injured.

Health insurance is also a means of paying for the advances in medicine that come from treating the hoi palloi. The more people doctors treat, the more they learn, and the more medicine advances. So the more people who can afford treatment, the better it becomes. In a democratic society, that’s both a means of satisfying the basic goals of democracy and a means of advancing medicine.

Health insurance is also insurance against societal catastrophe. In a pandemic, having any significant portion of the population untreated creates a huge disease vector into society’s heart. If the untreated are mostly poor servants, they bring the pandemic right into the homes, bedrooms, and kitchens of the rich. If they have no vaccinations, they destroy the entire society’s “herd immunity” and allow a controllable outbreak to become a plague.

So there are medical, economic, social and practical reasons for insuring that every citizen has access to the best medicine a society can provide, or at least to a reasonable minimum of care. That’s the function of health insurance in our modern world. It saves citizens from suffering and death that modern science can avoid, and it makes society stronger and better able to withstand medical assaults.

1. What insurance requires: a big risk pool.

Now that we know what health insurance is and how it differs from medicine, we must focus on the next most important thing about it. Health insurance is just a specific form of insurance. That simple, plain fact is both its most important feature and the single thing that most pols least understand.

What is insurance? It’s the system and business of pooling unpredictable risk among individuals and businesses. It uses lots of insureds (the “risk pool”) banding together to protect themselves against unforeseeable and unpredictable misfortunes by redressing them, insofar as money can do so, when they happen to one or more of the insureds.

Each insured pays a small annual amount, called a “premium,” into a fund. When disaster strikes one of them, the money from the fund pays to make him whole, up to any limits of the policy. This same basic rule applies to fire and disaster insurance on your home, accident and theft insurance on your car, and health insurance on your body.

There is, however, a big difference. Your body is infinitely more complicated than your house or your car. So there are infinitely more ways it can go awry or suffer. In addition, fixing your body using modern medicine is often far more expensive than fixing or even replacing your house or car. A single open-heart surgery or organ transplant, for example, costs far more than the average middle-class home.

What does this mean in practice? It means that health insurance is different from home insurance and car insurance because the pool of insured risks is infinitely larger and more complex. More important, whereas many home and car owners go through their entire lives without a single home fire, home disaster, car accident or car theft, very few people go through life without seeing a doctor, especially as they age.

So the pool of risk for health insurance is infinitely larger than for other common kinds of insurance. That means you need a much bigger “risk pool”—number of insured people—to lower the risk for each and therefore to lower the premiums.

Every advanced country but ours has concluded that you can minimize premiums only by insuring the entire population at once. That is, you must have a “single-payer” system that insures everyone.

This is not “socialism.” It’s arithmetic. The bigger the risk pool, the lower the premiums. It’s simple division, based on the essence of any insurance: lowering the risk for each insured by insuring as many as possible.

In raw theory, it’s conceivable that there might be some optimal level of insured population beyond which increasing the risk pool would not lower premiums. But to my knowledge, no one has ever so proved, and no one has ever even tried to do so.

There are four reasons why this is so. First, while there are good statistics for house fires and car accidents and thefts, there are no comprehensive statistics for every ill and injury that the human body may suffer.

Second, even if there were, those statistics would be a moving target. New diseases and maladies are constantly being discovered, as are new ways to diagnose, treat and prevent them. Unlike house fires and car accidents, which are slowly decreasing in number and severity under the advance of technology, medical services are increasing, as we learn about new maladies and find new (and often more expensive) ways to treat old ones.

Third, any attempt to base health insurance on a “snapshot” of the whole population’s risk profile would constrain medicine itself. For example, consider “personalized medicine” (medicine based on your own genome), which is coming to all of us soon. It’s going to make us all healthier and more resistant to diseases, including cancer. But it’s going to involve a lot more effort and expense, as we probe everyone’s particular genome to cure their ills.

Treating everyone, not just the rich, is going to advance the science and medicine of genomics far more rapidly than alternatives. Would we want to retard that salubrious advance in medicine by limiting its progress with an obsolete risk-pool snapshot?

The final reason why there’s no calculated optimum risk-pool size is that health insurance differs from house or car insurance in a crucial way. You can partially repair a house or car that gets damaged. Or you can buy a cheaper new or used house or car to replace a destroyed one. But you can’t do that with the human body. If you stop surgery or treatment when the money runs out, the patient will continue to suffer and may die. So you can’t have overall monetary “caps” on health insurance—not if you want it to perform its proper function.

A prohibition on caps is a sensible feature of any health-insurance legislation, just as it is with “Obamacare.” (That’s why the GOP’s “American Health Care Act” proposes to keep both “Obamacare’s” prohibitions on lifetime caps and annual caps.) But the absence of caps makes health insurance far different from other forms of insurance. It requires a much larger risk pool.

So as far as any non-ideologue can tell today, the best way to lower premiums for everyone is to have everyone—young, old, sick and healthy—in the same risk pool. That’s why President Obama, who started his presidential campaign without an individual “mandate,” enacted “Obamacare” with one. He wanted to get everyone in the pool.

No matter what you call it, or how you “spin” it, any health-insurance system that doesn’t meet that requirement is going to have higher premiums than otherwise. Again, this is not ideology or politics; it’s arithmetic.

Our developed-country allies get everyone in the pool by making health-insurance a part of citizenship and financing it with taxes. That’s a relatively unobtrusive way of insuring everyone. But it’s something that, for historical reasons, we Yanks are unlikely to do, at least at present.

So we now have a proposal for the so-called “American Health Care Act,” which will drop the mandate that individuals buy health insurance and try to entice everyone to buy it with incentives. Good luck with that! Virtually no one, including its authors, expects that such an approach will produce more insureds. And if it doesn’t, arithmetic, not ideology, will keep premiums higher on average.

There is a delicious irony in this “new approach.” If the GOP succeeds in breaking down the state-line and employer-by-employer barriers that now balkanize our national health-insurance risk pools, it may eventually produce a single-payer system all by itself. Here’s how.

When the interstate and other barriers come down, the largest insurers will have a huge competitive advantage. Assuming all insurers are equally efficient, the largest ones will be able to offer the lowest premiums, just because they have the biggest risk pools.

Over time, the biggest insurers will gobble up the others with smaller risk pools and higher premiums, or will put them out of business. After a couple of decades, a single winner in the merger competition might become the sole, national private insurer—a monopolist. (Antitrust authorities would be foolish to resist, because insurance is a unique business, in which larger size in risk pools produces lower prices.)

But as we all know from the stories of the Epi-Pen and other pharmaceutical price gouging, monopolists like to gouge. So the huge, last-standing insurer would, by public demand, have to become a regulated monopoly, just like most local electric-power and natural-gas companies. Prices for insurance would be regulated by a Public Utilities Commission at the national scale, in order to prevent price gouging and force the last-standing insurer to offer the low premiums that its whole-nation customer base in arithmetic theory allowed. (For more on the economic reasons why we run private-utility monopolies as regulated monopolies, click here.)

2. Balkanized and grotesquely inefficient administration.

The second reason why we Yanks have the developed world’s worst health-insurance system is balkanized administration. Not only do we have many separate, private firms doing what a single-payer does in our advanced allies. Not only does each of those separate firms have to make a separate profit. We also have divided those firms by state lines and, in may cases, by the many private employers in which individual insureds work.

In other words, we have turned our national motto E Pluribus Unum (“From many, one”) on its head. Whereas we could have single payer just like our allies, we now have many insurers, whose risk pools are balkanized not just by private ownership, but by the legal jurisdictions of our fifty states (and additional territories!) and by the innumerable employers whose employees they insure.

It would be hard to imagine a better way to divide up the risk pool and produce higher premiums.

But premiums are not the only things that skyrocket. So does administrative expense. Each of these separate private insurance programs has distinct: (1) contracts, (2) administrators, (3) insurance forms, (4) claim forms, (5) rules for claims, (6) procedures for claims, (7) rules and procedures for appealing claim denials, (8) computer systems, (9) websites, and (10) mobile-device interfaces. As compared to a single payer system, this unnecessary duplication is astronomical.

No wonder our private health-insurance system has administrative expenses estimated between 10% and 17%, while Medicare has 4%! No wonder that, on a visit to my local health lab, I once saw four workers drawing blood and urine and five taking and verifying insurance information! From an administrative standpoint alone, a health-insurance system with so may small, rival contenders is about as inefficient as one can imagine.

And that’s not even accounting for the direct, arithmetic effect of smaller risk pools in raising premiums. Nor is it accounting for the private profit that each of these balkanized firms must draw in order to stay in business.

3. Sham insurance.

One of the greatest discontents of a private health-insurance system was the contractual shenanigans that private insurers pulled to save and make money. “Obamacare” eliminated the worst of them, and the so-called “American Health Care Act” would refrain from reviving at least the worst of the worst (pre-existing-condition exclusions and lifetime and annual caps). But it’s worth reviewing them briefly just to show how bad our private health-insurance system once got, and how far it strayed from what most people think of as “insurance.”

The worst offense, by far, was excluding pre-existing conditions. From the insured’s point of view, an “insurance” policy with such an exclusion is not insurance at all. Why? Because from a medical-scientific point of view, the risk that a pre-existing condition will reoccur, or that a closely related malady will, is much higher than the risk of other conditions as yet unsuffered. So what good is an “insurance” policy that doesn’t cover the most likely risks? Not much.

Anyway, recurrence of a pre-existing condition can make you suffer or die as much as any “new” disease and injury. So at best a policy with a pre-existing-condition exclusion is not really “insurance” because it doesn’t cover all relevant risks.

Finally, whether or not a particular individual previously suffered from a particular condition is irrelevant to the risk of the whole pool. If everyone were insured, as in single-payer systems, when and to whom a particular condition occurred would be statistically and economically irrelevant. It’s only relevant to a balkanized private system because it threatens decreasing one individual private insurer’s profits without hitting the others’.

The second contradiction in terms with health “insurance” is an overall (or annual) payment cap. What kind of health insurance has such a cap? If your house burns down or your car is hit and the insurance money runs out, you can buy or build a cheaper house or get a cheaper car. But you can’t get a cheaper body or a cheaper life. Nor can you stop surgery in the middle, when the money runs out, without killing the patient or increasing his suffering.

The whole point of having health insurance is to allow modern medicine to do what it can for you while you are still alive. The cost of doing so is part of the general risk pool, and the possibility of its exceeding predetermined limits is part of the risk that motivates having the largest risk pool possible, i.e., the whole population. In a single-payer system, likely no one would ever have thought of such caps; they arose only because insurers used to other types of insurance borrowed them inappropriately from house, car, life and casualty policies.

A third discontent of our private health insurance system is non-portable, employer-provided health insurance. If you have that kind of insurance, you can’t change employers without risking losing your health insurance. And with exclusions for pre-existing conditions, you might also have risked your health.

Many workers have stayed in jobs they hated, or which were literally killing them, for precisely that reason. That’s not health insurance: it’s a form of feudal servitude.

Not only that. As I outlined in detail some years ago, our entire employer-provided health-insurance system has become a burden on American industry, making it uncompetitive as compared to equivalent foreign industry that has non-private health insurance that employers don’t have to pay for. Thus does the GOP’s desire to assist all business ultimately disadvantage private businesses outside the health-insurance field, especially manufacturing. A small but significant part of our loss of manufacturing jobs over the past two decades is undoubtedly due to this private health-insurance burden that few, if any, foreign manufacturers have to bear.

A single-payer system, whether public or private, would get rid us of these discontents once and for all. At the same time, it would lower many premiums dramatically by expanding the risk pool from the employees of a single employer to the entire national population.

The last discontent of our private health-insurance system worth mentioning here is what happens to youth at the outset of their careers. Normally youth is a time for experimenting and testing, during which young people find themselves by trying out different jobs in different places. An employer-based system of private insurance is ill-suited for them, not the least because its insurance isn’t portable.

“Obamacare” tried to solve this problem by putting children on their parents’ health-insurance policies through age 26. But that’s a stopgap measure. Among other things, it assumes that the parents have private health insurance policies, and that they’re portable. Otherwise, putting kids on their parents’ policies is just another chain in the feudal bondage of employee to employer.

If policy makers want a maximal risk pool, including children still finding themselves, they are going to have to address those children specifically. If they don’t, the children probably won’t buy health insurance at all, for everyone knows that youth are invulnerable (until they aren’t).

The risk-pool tranche of healthy kids who feel invulnerable was much of what “Obamacare” tried to capture with its mandate. If other pols try with mild incentives, they are just going to have a still-smaller overall risk pool and higher premiums. Only single-payer can get these kids into the risk pool for sure, thereby maximizing its size and consequently minimizing premiums.

Conclusion: what the future may hold

The primary reason we Yanks have horrible health insurance is our balkanized, private health-insurance system. It has horribly sub-optimal risks pools for most, if not all, of the separate private plans. In addition, it has grotesque duplication and administrative inefficiency, resulting in astronomical administrative expense. This expense cramps not only the insurance industry itself, but the health-care providers and patients who have to deal with it. It’s like imposing the complexity of our income tax on the entire health-care industry.

We Yanks will not have an even passingly acceptable health-insurance system until we have some form of single payer, with the largest risk pool (and therefore the lowest premiums) that our national population of 320 million can provide. In comparison, do you know how many people your own health-insurance plan covers?

We might get single payer under another Congress and another Administration, as our pols and our people come to realize that the crux of the matter is not ideology, but arithmetic. The larger the pool of insureds, the lower the premiums will be. It’s that simple. Not all the spin, ideology and propaganda of pols and insurance-company mouthpieces can change that simple fact.

It’s early days yet, but discussion of the so-called “American Health Care Act” may actually help to illuminate these points. Because it dispenses with individual mandates, it will inevitably insure fewer people, thereby increasing average premiums by decreasing the total risk pool. (Individual policy premiums might go down if individual companies’ respective shares of the overall risk pool go up, for example, in a merger or consolidation across state lines.)

It’s hard to believe that the GOP proponents of this proposal have anything in mind other than: (1) justifying their eight-year mindless opposition to Obamacare and (2) pandering to their big donors’ desire to let the health-insurance industry’s mindless inefficiency and rewarding profits roll on. But if they did have something more in mind, it might be this. Their proposed new interstate insurance regime would create huge opportunities to increase separate private risk pools through expansion, merger and consolidation. So it’s possible that, on a time scale from two to ten years, some premiums might decrease (or slow their increase) somewhere, as a result of insurance-company mergers and remaining competition.

Yet eventually, if given the chance, the industry will consolidate and concentrate. Without government intervention, it will become an oligopoly or monopoly, just as has, for example, the airline industry. As it does so, the public will likely demand regulation, and the whole industry likely will become a regulated monopoly.

There will still likely be millions of uninsured, and so our society will still be vulnerable to disease vectors. Maybe poor and working people will suffer and die for lack of adequate or any insurance. But barring pandemic, the result for the insured will look something like a single payer (albeit private) system. Most or all of the grossly inefficient administrative duplication will have gone away. There will be one or a small set of contracts, claims, claim forms and procedures, and one or a small set of computers, software, websites and mobile apps.

Then the GOP can claim “victory” because the whole system is still private. Progressives can also claim a sort of victory because those who have health insurance at all will have something like a single-payer system and nothing quite like the grotesque administrative expense of today’s atomized multiple-payer system. So then we might all celebrate, most of the year, until the annual regulatory hearing, when all the agonies of the last eight years will come out again.

What this means is that allowing insurers to work across state lines is by far the new bill’s most important positive feature. Small, single-state and less efficient insurers will fight it tooth and nail. The big, efficient ones will support it. Together with other reasons for opposition, this provision could sink the bill, if only because there are many more inefficient and legally protected health insurers than efficient ones.

If the interstate provision fails and the the rest of the bill passes, it will cause massive insurance gaps and massive premium increases and basically set us back a decade. Even if something like the interstate-insurance part passes, the resulting industry consolidation could take twenty or more years.

A much shorter path to paradise would be to use discussion of the “American Health Care Act” as a means to inform our ignorant pols of the joys of arithmetic, and the agonies of ignoring it. Then, although nothing may happen under this Administration, a future President Warren, who understands arithmetic, might give us single payer far more simply and cleanly. If so, we Yanks, at last, would come into step not only with all our advanced allies, but with simple math and the common meaning of “insurance,” too.



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