The Structural Problem with Heath Insurance

So here’s the dirty secret about health insurance companies: They don’t really care what the rules of the marketplace are. They are insurance pools. They will price their policies based on whatever it costs to pay out the claims and have a little left over. (Health insurance companies average about 5% profits, FWIW). Change the rules so the pools are full of sick people, and they will adjust prices upwards accordingly. Let them exclude risky patients, and they will ruthlessly and relentlessly cull anyone who has a higher-than-average chance of getting sick. Force them to take everyone, and they simply price accordingly. Which is why the goal of the ACA was to force everyone into buying insurance; that is the optimal way to get a large pool of generally healthy people (keeping policy prices down). And to do this the ACA taxed people making over $200,000 to provide price supports so that people who couldn’t otherwise afford a policy could get one. Ryancare eliminates the taxes, greatly reduces the subsidies, and removes the mandate. As a result, the pools will be smaller and have a higher percentage of sick people. So prices will go up, and health insurance companies will continue to make 5% profit, because they don’t really care what the pool looks like. The rest of us, however, will be paying more and more for insurance. If you think health insurance plans are expensive now, just wait for 2018.

The other side of this problem is that health insurance companies really don’t care what medical care costs. They simply pay out whatever is set as the standard charge, and price policies accordingly. So we get this complete mis-alignment of incentives, where patients don’t know or care what a procedure costs, since the insurance policy pays, and health insurance doesn’t care what a procedure costs, since they just price all policies to cover whatever they are getting charged. That is the big picture. Now that doesn’t mean that health plans don’t fight with hospitals about “standard” prices for procedures; for planning purposes they have to know what to expect to pay for, say, a hip replacement. And no health plan wants to pay more than average for a procedure. So there will be some minor squabbling. But if the price of hip replacements goes up 10% from one year to the next, that just the cost of doing business. They will fight about paying for a particular hip replacement if they are charged more than they were expecting. But the price of hip replacements overall is just incorporated into the insurance policy price.

So if insurance companies only make 5% profit, why do they always seem to be the villains in the story? It is not so much the profit they skim. It is that the entire system of insurance is a huge tax on the healthcare system as a whole. Doctors, who otherwise make $300-$500 per hour, spend 20% of their time filling out forms for insurance purposes. Small practices hire two or three full-time people just to deal with insurance paperwork. Hospitals have entire departments just to interface with the insurance companies. And the insurance company has matching departments to interface with all the doctors, pharmacies, and hospitals. The entire insurance company – every dollar of their costs – is money wasted on bureaucracy to no patient benefit. The marketing department, the lobbying department, claims, benefits, IT, middle and upper management – all of it a giant drain on health care spending. Certainly, lots of people have good jobs in this system. It is just that structurally, it is all waste; none of it actually makes anyone well. While estimates vary, it is probably something like 20% to 25% of every dollar spent on health care is wasted administering or interfacing with insurance companies. And with total health care spending over $3 trillion per year, that is something like $700 billion wasted every year. Put another way, you could get the same health care for 25% less if there were no insurance industry in between you and your doctors. But how can that work? you ask. Well, look at the UK. Or Canada. Or most of Europe, for that matter. All have figured out how to do insurance without nearly as much waste. It can be done. But it would involve eliminating an entire $700 billion per year industry. Somehow I don’t see that happening any time soon.

Now it is certainly true that in any system there is going to have to be someone controlling costs and ensuring that the services billed are the services delivered. And cost control also means that everyone can’t have every procedure they think they want, right away. Some drugs won’t pass the cost/benefit analysis, and thus won’t be covered. People of means can always pay for them privately. Meanwhile, a standard set of reimbursements across the nation will end up with providers earning less for each procedure than they might under the current “bill whatever you can get away with” system. Some doctors and clinics will, of course, specialize in charging way more than insurance covers, and rich people will willingly pay the difference. But that will be a small market, since most people won’t be able to pay. Most doctors will have to treat regular patients at set rates. And they may well earn less than under the current system. There are plenty of ways you could screw up such a system, especially in the transition, and especially if you are determined to prove that it can’t work. But it does work. Because what I described above is standard in dozens of countries. What would be eliminated is this incredible duplication of efforts where dozens of insurance companies are all doing the same thing as dozens of other insurance companies, and each one has their own forms, own processes, etc. And every provider has to learn all of them.