We’ve all read the stories of people needing life saving treatment and being denied by their insurance companies, or even getting the treatment but, because of bureaucratic red tape it amounts to too little, too late. Mark Chu-Carroll over at Good Math, Bad Math has a great explanation of why private insurance doesn’t work out well for patients:
You’ve got a lot of people interested in finding ways to make you pay as much as possible for paper pushing, and a lot of people interested in finding excuses to not cover your medical care.
Insurance is a way for many, many people to share each others risk and (by sharing) decrease each individual’s risk. Chu-Carroll opens his description by talking about a system run by the insured, where everyone has a vested interest in using the pooled money as well as possible and making sure that individuals get the coverage they need.
The problem comes when people are involved whose interest is opposed to the insured. The manager of an insurance company (especially a publicly held company, whose share price must always increase to keep the shareholders happy) is more interested in the company’s bottom line than the health of the insured. The manager will make more money when the company saves money and the easiest and most effective way for the company to save money is to deny as much coverage as possible.
Interestingly, this is the same sort of situation that brought about the current mortgage problem in the US. The advent of mortgage brokers - people who are paid based on the size of the mortgages they help issue, but have no responsibility to either ensure the mortgage is paid off or cover the losses if the customer defaults - brought about a recklessness in loan issuance that hasn’t been seen in almost thirty years. This, however, will fix itself; the banks have the power to take back control of their loan issuance and make sure that this doesn’t happen again (at least for another thirty years).
In the insurance industry, however, things cannot be automatically fixed by the market. As long as the insurance companies have their bottom lines as priority number one, the patient will come last. The insured to not have the power to change this; all insurance companies work this way and it takes many, many people to distribute risk efficiently. We need the federal government to force creation of health insurance that puts the patient first. The only way to do this is to remove the incentive for insurance companies to improve their bottom lines by harming their customers. That may mean federally mandated not-for-profit health insurance, it may mean an expansion of federally managed health care. However it happens, it needs to happen soon, our health care system is a mess.
1 JJ // Dec 22, 2007 at 10:42 AM
You forgot one thing - insurance is the biggest legal ripoff - ever.
2 keith // Dec 22, 2007 at 11:09 AM
If government tries to run health or the insurance business, you end up with all the same problems of socialized medicine. Government dependency, poor standards, politicization of health etc.
Better to have a totally free & unregulated market in health care (so everyone enjoys the benefits of freedom and improving quality), and the government can simply offer direct cash or insurance to help our fellow citizens unable to pay or get insurance.
This way, government coercion is not destroying freedom or the health care industry, it is simply helping people in need
3 Jason // Dec 22, 2007 at 11:11 AM
JJ. I disagree. The basic concept of insurance - sharing risk amongst a large number of people to minimize the effect of individual catastrophic events - is sound. In an age when getting any number of serious diseases can lead to hundreds of thousands of dollars in medical bills, we need a way to keep sick people from going bankrupt. The problem is not the concept of insurance, it’s having the insurance companies goals at odds with those of the people they’re serving.
4 joe // Dec 22, 2007 at 11:53 AM
So, how about an insurance policy that bundles health with life and disability? If you die, the company pays your family. Get the incentives right, and private insurance will work just fine.
5 Jason // Dec 22, 2007 at 12:24 PM
Joe: That’s an interesting idea, but I can think of some problems. Who determines that it’s the insurance company’s fault that someone died or disabled. With so many parties involved, it would be too easy for them to point the finger at the doctors, the patient or the patient’s family. I doubt that the cost to the state related to litigation/determination of fault would be low enough to make it worthwhile.
6 Jesse // Dec 22, 2007 at 12:41 PM
Jason: I think you’re missing Joe’s point. Bundling health, life, and disability coverage means the insurer pays regardless of who is at fault. It gives the health insurer incentive to keep the patient well.
7 Jason // Dec 22, 2007 at 12:50 PM
Jesse: Hmm. That’s interesting. If you could get the insurance companies to stay in the game after enacting such a law, that might work. But I suspect we’d see one of two things (or a combination of the two) after it passed:
8 Tim // Dec 22, 2007 at 01:57 PM
Joe’s idea is pretty good. I’m sure it won’t cause insurers to close up shop.
Fact is, if you sell million dollar life insurance policies, you should ALREADY offer health insurance. It would be in your best interests to do so. The fact that companies are willing to offer life insurance payouts in the millions means that it’s possible already. They only win if the people they insure are forced to have health insurance. I’m surprised life insurance companies aren’t LOBBYING to have socialized medicine, or force bundling of health care with life insurance.
9 Joe // Dec 22, 2007 at 02:33 PM
Just add up the premiums. If you already buy life/disability insurance, as well as health insurance, put them together in a bundled product. Both products are profitable individually, so they should be fine together.
The numbers will change a bit due to the incentive changes, as the health insurance does better at providing benefits. But that’s exactly what we’re shooting for. And in the same process, life/disability payouts should decrease, so to some extent at least, it balances out.
And I don’t think there’s any particular need to legislate. If there are no federal regulations against it, an insurance company could simply offer it. The only real snags I can see are:
1) Most people rely on social security for disability insurance, and there’s no way to opt out of it. This means we can really only bundle life, not disability, unless people are willing to pay for duplicate coverage. (Or unless we get the law changed to allow opting out. Ron Paul is the only presidential candidate I know of who wants to do this.)
2) Young single people don’t really need life insurance. They might not be too interested in the bundled product, unless they see the benefit in the better incentives. But young married couples with kids buy life insurance, so it’s not like you lose all your young healthy customers. And the single kids could designate a charity or extended family as beneficiaries.
10 Jason // Dec 22, 2007 at 02:45 PM
So, are you really comfortable with insurance companies deciding to let a person die instead of treating them? If the life insurance payout is less than the projected cost for treatment, this would be likely to happen. What about terminal patients? The insurance company knows they will die, just not exactly when. What is the incentive then for the insurance company to improve the patient’s quality of life?
11 Joe // Dec 22, 2007 at 03:19 PM
If the life insurance payout isn’t high enough, you’re right, there would be some incentive to let them die. But it would be less of an incentive than they have right now. The higher the payout, the better the incentives, so this would be tweakable.
Life insurance is more profitable for the company, the longer a person lives. They get more premiums, and they get all the interest on the money they don’t pay out yet. If this isn’t sufficient, the bundled product could have life payouts that decrease over time.
To figure out the exact details, we’d need the help of an actuary familiar with both types of insurance. But I think it could be made to work.
If it at least works in most cases, we can probably avoid what we have now - corporate cultures oriented towards routinely denying benefits.
12 craig // Dec 22, 2007 at 04:55 PM
Your definition of insurance “Insurance is a way for many, many people to share each others risk and (by sharing) decrease each individual’s risk.” is incorrect.
Insurance is a way to spread the costs associated with risk, it does not decrease risk. Your risk of getting cancer doesn’t change because you have purchased insurance. However, the costs of treating your cancer might be substantially lower if you purchase insurance against the event.
13 Jason // Dec 22, 2007 at 10:14 PM
My apologies, I didn’t define my use of “risk” well enough. What I meant by “risk” was “risk of owing a ton of money because you get sick.”
14 Roger // Jan 10, 2008 at 01:12 AM
Isn’t it ironic that the current presidential candidates all have one way or another of trying to solve the health care crisis by throwing more health insurance at the problem? This just creates more people who are at odds with those being paid to ‘insure’ their health. When people buy health insurance, they often compare it to car insurance and assume when their bodies fail that the insurance company can always provide a repaired or new one, no matter how badly they maintain or care for the original. It has been my experience that those who provide the worst care for their health are usually also those who are the least likely to have health insurance—just another poor decision on a long list of bad choices. I take care of myself, why force me to share the risk pool of money with those who have made extremely risky choices with their health? Why force me to buy into a system more akin to an organized crime protection scheme than true combined risk sharing? Why should my government force me to participate with a business whose interests are at odds with mine? Throwing more health care insurance at the health care crisis will only add fuel to the fire. When the system fails, we will end up with a single payer system managed by the same people who brought us the VA Hospital system. Then the health care crisis with become a health care disaster. The only way to divert this is to stop paying for someone’s health care with someone else’s money. If I am paying for my own health care, I will be a shopper. If someone else is paying for it, I want nothing but the very best, no matter what the costs. For those unable to pool into true risk sharing health insurance, public funds could cover indigent care in state, county and community hospitals where the much needed training benefit would far outweigh the costs. For a look at the alternatives, go to Canada or England which has government health care which is really great until you get sick. Despite the health insurance middlemen running a scheme more akin to organized crime, we still have the best health care system in the world—for now.