Put the Risks on Health Insurers, Where It Belongs

Put the Risks on Health Insurers, Where It Belongs

When it comes to the U.S. health insurance market, the adage about communist economics is apropos. In this instance, instead of being “they pretend to pay us, we pretend to work”, it is “they pretend to sell insurance, we pretend to buy it”.

What we call health insurance in the U.S. is not insurance at all. In its simplest form, insurance is a financial transaction where an insurance company bears the financial risks associated with an unwanted event in return for monthly (or annual) payments.

Disability insurance exemplifies the typical arrangement. Most families face large financial risks if an income earner suffers a debilitating accident. Disability insurance enables families to transfer this financial risk to insurers. In this instance, in exchange for regular premiums, insurance companies agree to pay families a pre-arranged amount that reduces the financial costs the families must bear if a debilitating accident occurs.

If priced properly, disability insurance arrangements are mutually beneficial. Companies benefit by earning a profit, because most of their insured clients will not suffer a debilitating accident. Insured families benefit from either having the peace of mind from being insured or receiving financial payments from the insurance company should they be unfortunate enough to suffer an accident.

As exemplified by disability insurance, the entire raison d’etreof an insurer is to bear the financial risks on behalf of the insured. Any insurance company that does not bear financial risks on behalf of the insured, is not, for all intents and purposes, providing insurance services. Yet, this is what is happening to the health insurance markets. The U.S. health insurance system fails patients because it is continually covering fewer health insurance risks.

Two seemingly unrelated events exemplify the pervasiveness of this problematic development.

Reading like a medical mystery, a recent New York Times Magazine article describes the case of a 68 year old mother from rural Alabama who was suffering from an unknown disease that caused high fevers, pain, rashes, and nausea. Due to the unique combination of symptoms and test results, it took the medical community years to finally figure out that she had a rare disease called Schnitzler syndrome.

The diagnosis was a great achievement, but the story glosses over the role that the health insurance company played in this process. Presumably, her health insurer paid for all the diagnoses (both the wrong ones, and eventually correct one) and covered the costs of medicines along the way. What the story did make it clear is that when it came time to pay for the new, and expensive, medicine for Schnitzler syndrome, her coverage had apparently run out.

In this case there was a happy outcome as she was able to receive her medicine, but the broader problem is clear. While health insurance typically covers the costs of routine check-ups, and relatively lower-cost medicines for illnesses that are not true medical risks (e.g. antibiotics for strep throat), often health insurance coverage lapses at the precise moment that patients are facing true medical risks. This is the exact opposite of how insurance should work.

As another example, there has been a coverage problem that has plagued Medicare Part D – the drug benefit program received by millions of seniors eligible for Medicare. Medicare Part D has been a success by encouraging private firms to compete against one another to provide seniors with drug coverage. However, a gap in coverage (referred to as the donut hole) has existed between the coverage limit of the private plans and the catastrophic coverage paid for by Medicare.

This gap is quite problematic for many seniors, and recent legislation has changed the rules to close it – a good thing. The problem is that insurers were not held responsible for covering these costs; in fact, insurers coverage responsibility was lowered. Failing to have insurers bear the financial risks of expensive medicines for Medicare Part D is another example of the health care system preventing health insurance from functioning like actual insurance.

These examples are, unfortunately, not unique.

The U.S. health insurance markets are designed such that insurers cover routine costs but fails to pay for the actual health risks patients face. This is the opposite of how the health insurance market is supposed to work. Perhaps most importantly, the problems of declining health care quality and rising costs will only be achieved once this problem is fixed and health insurance becomes effective insurance.

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