October 11, 2015

Flaws in Health Insurance Reform

One of the fundamental issues with health insurance reform, and the reason it has been so difficult to get done is that health insurance differs fundamentally from other risks. One of the basic principles of insurance is that an insurer creates a mechanism to protect against a defined risk event, with a defined financial payout, by collecting an amount in advance from each policyholder that, along with investment returns, allows for the insurance company to make an adequate profit.

This plays out very well in insurance products like life insurance, auto insurance, and property and casualty insurance. Life insurance is the simplest because the insurance company determines, for an entire policyholder population, when people are likely to die, and sets premiums to make sure it can pay out when people die. Auto and property and casualty insurance work similarly, with the defined benefit being either the fair market value of the auto or the legal liability level of the policymaker. Because the definition and scope of fair market value and the potential risk of legal liability have not changed very much over time, these are relatively stable risks to insure.

Health insurance is different. Medical conditions that give rise to the need for care keep expanding, either because patients or doctors expand the frequency of health care system usage, or lawmakers expand the coverage mandates over time. For example, 30 years ago, it was inconceivable that many states would require insurance companies to cover fertility treatments, since infertility is not a disease, illness, or injury. While fertility may be a societal good that we should encourage, it is not of the same kind of risk as diabetes, cancer, or clinical depression.

Additionally, the range and cost of treatments has expanded. The particular dilemma insurance companies face today is that there are many treatments that “work” consistently with the definition of covered treatments that have “worked” for patients in the past, but the cost has skyrocketed. For example, we now see cancer drugs that extend life by an average of 4 months that currently cost $100,000. While an insurance company may make a policy decision that the risk-benefit calculation does not justify covering that drug, elected officials have a hard time leaving alone a decision that will cause a low-income patient to die four months earlier than would have been the case if he or she had access to the drug.

When we hear about under-insurance, we are often dealing with extremely expensive, marginally effective treatments that, if subjected to a cold-blooded economic calculation, would not be covered. Unfortunately, elected officials are confronted by flesh-and-blood human beings who demand the treatment for themselves or their loved ones, and who can be very vocal and passionate.

These kinds of decisions do not work well inside a government-run or government-regulated health system. It is always easier to mandate coverage to extend life for the few people that are affected, at the expense of higher insurance premiums for the many that will have to pay more. No single decision makes insurance prohibitively expensive for policymakers, but the cumulative effective of many decisions to force marginal health care treatments into the mandated coverage system inevitably drives up cost to punitively high levels for low and middle-income people.

Over time, the end result is that health insurance payments become a gradually increasing tax on the many to benefit the few. Elected officials then decide that they must increase other taxes on “wealthier” individuals to make sure that “the middle class” and “the poor” do not pay too much in health insurance premiums. They eventually discover that there is not enough “wealthy person” income to cover costs, so they move to the next set of tactics, which are to reduce payments to doctors, hospitals, and other providers.

Unfortunately, the burden of these reduced payments does not fall evenly and fairly on providers. Large academic medical centers, which have to be part of an insurance plan’s network to make it viable, usually have the clout to prevent themselves from being dialed back in terms of reimbursements. Smaller, more financially shaky, community hospitals will end up being the victim of a disproportionate amount of payment reductions.

Similarly, expensive and powerful specialist physician practices retain their pricing power at the expense of smaller and less powerful primary care practices. The latter end up getting the brunt of price reductions on their services.

Over time, the better of the primary care physicians leave practices and insurance networks, and move into concierge practices that are designed to give participating physicians an appropriate reimbursement for their services. The poor and the middle class end up with a generous insurance plan, but fewer and fewer doctors and other providers willing to serve them.

If all we do with health care legislation is create health insurance reform that broadens insurance access and prevents higher-risk participants from being denied insurance, we will end up with a scenario of the kind I have described here.