For Profit Health Insurance Is A Stupid Way To Pay For Health Care
Using private, for-profit health insurance as a method to pay for healthcare hasn’t worked and isn’t going to work. Because it can’t work.
The problem isn’t with insurance in general, but health insurance specifically — it’s the wrong tool to get the job done.
It is precisely because of how badly private insurance works as a method for financing health care that that we have the convoluted, inefficient and expensive healthcare system we now suffer with.
In fact, it is wrong to even claim we have a single healthcare system. We have a mishmash of programs each created in isolation to address one symptom or one failure caused by for-profit insurance.
We have Medicare for the elderly.
Medicaid for the poor.
The VA for veterans.
In 2013 49.2% of Americans were on some type of government health care/insurance program. So if you are worried about a government takeover of healthcare — too late. That train has left the station.
These programs aren’t random things that just fell from the sky. Medicare and Medicaid don’t exist in nature.
We had to invent them to solve problems that the free market couldn’t solve. They weren’t part of a government takeover. They were created to solve the unnecessary suffering our citizens were experiencing because free market insurance failed as a way to get these groups the care they needed.
The evidence shows that private insurance isn’t working very well for the other 50% of Americans.
And all of the most popular “ideas” or solutions that have been proposed as a way of improving the private health insurance market don’t work.
Allowing sales across state lines. High-Risk pools. Low-benefit high-deductible plans (what the insurance industry likes to call “consumer-driven policies”). They have been tried to one extent or another and have not worked. If the industry, and the Republicans, had solutions to the built-in problems created by for-profit health insurance they would have shared them with the rest of the world by now.
The reason they don’t is that the industry’s product is the wrong tool to get the job done.
The insurance industry is always in panic mode — using an array of marketing techniques and lobbying efforts to try to protect the status quo. Distract us with failed ideas and promises. As if we are just one new idea away from finally having that affordable health care system we keep hearing about in other countries. Scratch beneath the surface and you find that most ideas put forth by the industry are just new ways for them to collect premiums from lots of people without ever being in danger of having to pay out too many claims.
Wendell Potter — a PR executive for almost 30 years in the industry put it this way in his book Deadly Spin:
The business model had failed, and the only way the insurers could continue to meet shareholders’ expectations was to find a new way to avoid paying for healthcare.
The reason health insurance has not worked is that health care is not like the other areas of life where we use insurance to support and protect us.
How insurance works — when it works
First, let’s look at the logic and mechanics of how insurance is supposed to work.
When you buy an insurance policy you are joining what is called a risk pool — a large group of people who are all insured by the same company. And your premium dollars go into a pot with everyone else’s premiums.
Get lots of people into a pool and insure them against the bad, expensive thing that will only happen to a few people in the pool.
Each customer makes their monthly contribution to that pool. Providing the money to pay off the few folks who suffer the negative outcome. Only some wind up needing the coverage. So the insurance company pays out to the ones in need and has enough left over for overhead and profits.
And the people who didn’t need the payout got the peace of mind that came with having coverage.
Everybody wins. In theory.
It works better for some things than others.
One product that works well for most of its buyers is life insurance.
Let say we have a young couple who just had their first child.
And to simplify things, let’s say Mom is a stay-at-home mom. So they live on dad’s income.
If he makes enough to make them happy great.
Unless he dies.
So the new parents buy a term life insurance policy on dad.
If he is young, let’s use 25 for this example, in good health and doesn’t smoke, the family can buy a 30-year term life insurance policy with a face value of $500,000 for about $32.00 a month.
When the 30 years are up the policy expires.
The company collected premiums for 30 years and is obligated to pay nothing.
But the family benefits too. When they were young and at their most vulnerable, they had the coverage they needed. Just in case. They had the peace of mind that their child would be provided for if the worst happened.
And for a small number of people who were in that risk pool with our dad — the worst did happen. And their loved ones did get the payout.
In our example — the premium is just $32.00 because the father is so young. This is why term life insurance works — parents need the coverage the most when they are young, so it is relatively inexpensive at that time in life when they need coverage the most. The exact opposite is true with health insurance.
Most people won’t experience the thing they are insured against and the insurance company won’t have to pay off. (this is the 2nd difference between life and health insurance.)
And when the life insurance company does have to pay out, their liability is capped at the face value of the policy. (this is the third big difference between life and health insurance)
It is very possible — with an honest life insurance company — that everybody can win.
Because life insurance was invented to cover the “Just In Cast” scenario.
Same with auto insurance. It covers you just in case you hit someone else. Just in case your car gets totaled. Just in cast your car gets stolen.
Do some people receive less than the replacement value when their car is totaled.? Yes.
The system isn’t bulletproof.
Customer satisfaction isn’t 100%.
But the underlying premise of these insurance products is sound and works for most people most of the time.
The auto insurance industry also serves a highly important function within the economy — without it, it would be very hard to get a car loan.
If auto insurance didn’t exist car manufacturers would have to invent it or no lender would take the risk to finance the purchase.
Private, For-Profit Heath Insurance — The Wrong Product At The Wrong Time
Life and auto insurance cover you for all the bad things that can happen “Just In Cast”.
With health insurance — instead of “Just In Case” scenarios — insurers are promising to cover people for something that is “Only A Matter Of Time”.
But if you are a young person it may seem like that time is well off in the future.
Young people are frustrated because that are FORCED to buy something they don’t want.
Like life and auto insurance, health insurers need big pools of people to be profitable too.
And they need that pool to include only a limited number of folks who will need a payout. (which happens naturally with life insurance)
The young father with a new baby needs life insurance. The motive for buying life insurance is not that the man thinks he is going to die.
The new car buyer with a new car loan needs an auto insurance policy. The motive to buy insurance is not that he or she just got into an accident.
Many young healthy people don’t feel they need health insurance. They would rather not jump in the pool. And when you let the free market reign, many don’t. No motivation.
A feature of free-market health insurance is that you have risk pools with a higher number of payouts than other types of insurance.
That’s called adverse selection. Health insurance products naturally attract people who need the coverage the most.
The pool is not crowded with a cross-section of folks.
But the product (health insurance) isn’t profitable for the supplier of that product (the insurance company) unless the pool of insured includes mostly people who won’t ever need the payout.
That’s how insurance works. That’s not how health insurance works.
The Health Insurance Industry Is Nothing More Than An Unneeded Middleman
Instead of guaranteeing you get the care you need when you need it, the health insurance industry serves a completely different and useless function.
They are a middleman. And nothing more.
They stand between the person and the health care services they need.
Along the way, they take out up to 20% of what they collect in premiums for overhead, administration, (which includes all the effort they expend to deny claims) marketing expenses and profits.
So now we have a sicker-than-average pool, and only 80–85% of their premiums are available to pay for healthcare services.
And history shows that 80% is not enough to provide for this sicker-than-average pool of policyholders.
One reason that 80% isn’t enough is that, unlike life insurance there is no guaranteed caps on how much care a person will need.
How much will your cancer cost? Nobody knows.
If you go into remission will your cancer come back? Nobody knows.
If you are doing better and the doctors send you home will you get into a car accident on the way home and need even more medical care? Nobody knows.
There is no cap on what a illness (or multiple illnesses, as sometime happens with human beings) can cost.
But when left to the free-market — there are always caps on how much is covered.
That is one reason why, of all the Americans who filed for bankruptcy because of health care costs in 2014, 72% had some form of health insurance.
If private, for-profit health insurance worked this statistic would be impossible.