Saturday, January 10, 2009

Understanding Health Insurance

The Health Insurance system in America is a mess, no doubt about that. But the reasons why Health Insurance is so screwed up is not the reasons you may think. Everyone wants to blame "greedy health insurance companies" or "greedy doctors" or "greedy malpractice attorneys" but no one thinks about the other player in this game - greedy patients.

Patients, unfortunately, bitch and gripe about how high their premiums are, or how unobtainable coverage is, while at the same time moaning and groaning about how their insurance didn't cover their last bottle of aspirin. In order to understand the entire picture, you have to understand where each player has fallen down here - and that includes patients.

Patient - heal thyself!

To understand what went wrong with Health Insurance, we must first understand what insurance is, and then how, when applied to medical treatment, often works at cross-purposes.

1. What is Insurance? To many people, this sounds like a dumb question. And yet, most people in America today have a fundamental misunderstanding about what insurance is, or how it is supposed to work.

Traditionally, insurance was a technique whereby people would pool risk, in order to spread risk out among a large number of people, so that no one person is adversely impacted by catastrophic events

So, for example, in the old days, you bought a "fire" policy for your home, along with a large number of other folks. The odds of your home burning down were very slim, so the premiums were pretty small. If your home burned down, the premiums from all the people whose homes didn't burn down would pay for replacing your house

It was a great idea, and for the most part, it was a system that worked. Actuaries could calculate with extreme precision what the odds of your house burning down were, and then calculate an exact and fair premium, with a reasonable profit for the company built in. Unless everyone's house burned down, there was no risk that the insurance company would go broke.

Somewhere along the way, however, the insurance companies got lost. To begin with, in an effort to generate more business, many insurance companies started offering increased coverage. Instead of just "catastrophic" coverage, homeowners were now covered for such mundane things as a broken window, which formerly would have been paid for out-of-pocket. As a result, the number of small claims increased, and the insurance companies had to hire an army of adjusters and clerks to manage such claims (and prevent fraud). Homeowners became more adept at filing claims and less adept at repairing their homes. The idea of insurance as being more of a "cradle-to-grave" coverage took root.

This illustrates the first problem with traditional insurance: People became too used to insurance covering every little thing, instead of just catastrophic losses.

And as people started building homes in flood plains, hurricane zones, and the like, the number of claims shot up. In some regions, this meant that insurance coverage was nearly impossible to obtain. So State-mandated plans were enacted, along with Federal flood insurance, to allow homeowners to build homes in places that they perhaps shouldn't. Beach homes, which were formerly throwaway shacks meant for occasional summer use, became waterfront estates, all insured with government regulated flood and wind policies - at considerable cost.

This illustrates the second problem with traditional insurance: the risk was no longer being spread.

Hurricane insurance in Florida, for example, is so expensive that many homeowners can barely afford it. For many a homeowner, doing home repairs is a foolish waste of money. If your roof is 20 years old and needs replacing, the last thing you want to do is repair it yourself with your own money. Rather, it makes much more sense to wait for the next hurricane to blow the roof off, and then have the insurance company pay for the repairs.

Insurance in Florida is no longer a matter of spreading risk out among a large number of people, but instead, spreading risk for individuals out over a period of time. You may pay $5000 a year in homeowner's insurance, but over time, you end up collecting about the same amount in claims, as the odds of a hurricane hitting or damaging your home are about even. In Florida, it is not a matter if IF you will get hit, but WHEN.

So your homeowner's policy becomes less of a catastrophic coverage vehicle, and more of a home repair piggy bank that you pay into over time, and then cash out of whenever there is storm damage.

As a result, insurance is now "expensive" for individuals. But considering that most people get out, in terms of claims, a substantial portion of what they pay in, it is really not as costly as one might assume.

The problem with this "everybody gets paid" approach to insurance is that the overhead costs can be quite high. If a homeowner wants to put a new roof on his house, he is motivated to find the best bargain possible. If the insurance company is paying for the roof, the homeowner doesn't care how much it costs. Throw in the overhead of claims adjusters and forms and processing, and a $15,000 roof can easily cost $30,000. So while the homeowner is getting a "free roof" out of the deal, the overall cost to society is much higher than it should be.

2. How does this apply to Health Insurance? Well, OK, there are problems in the homeowner's insurance market, you say. But how does this apply to Health Insurance? Well the same problems afflicting the homeowner's insurance market are also afflicting the Health Insurance industry.

Traditionally (e.g., 1950's and before), one would purchase a "hospitalization" policy to cover the possibility of a catastrophic accident or illness. For most people, the chances of having such an event in their lives was small, so the risk was low and premiums were low. In addition, hospitals were not as expensive as today, and the basic treatments were not as costly. So the payouts were smaller.

Old-school hospitalization insurance was a classic example of spreading risk out over a group of people.

But as the Health Insurance industry expanded, coverage increased, in part to sell more policies, and also as a means for employers to offer a tax-free form of compensation to employees. For example, to appease striking UAW workers back in the 1950's and 1960's, General Motors offered increasingly lucrative health insurance plans. These were attractive to workers, as they were not taxable, like wages, and moreover encouraged workers with families to stay with the company. At the time, costs were relatively low, so it was an easy giveaway for the company. The long-term costs of such plans was a problem for future management. And so long as the company maintained a 60% market share, it was not foreseen as a problem.

So instead of just catastrophic hospitalization coverage, more and more people started demanding coverage of everyday items - doctor's visits, prescription drugs, tests, routine physicals, dental coverage, mental health, outpatient treatment, and the like. At the heyday of the Health Insurance business, if you worked for a major Corporation in America, nearly everything was covered, with no "co-pays" or deductibles. But then things started to unravel.

Just as in the homeowner's example above, costs got out of control. If the roof on your house is being paid for by the insurance company, then there is no incentive to shop around for the best prices. Rather, you'll shop based on what is perceived to be the best roof, period, regardless of cost. And if the insurance company will replace your roof every year, well, you might want to put on a new roof just to change the color, right?

The same thing happened with medical. Once everything was "free", there was no incentive to shop around or reduce costs. When I was younger, it was routine to go to the doctor for a head cold. The cost? Nothing. Insurance covered it. One never even saw the bill.

Since insurance companies were not as astute as individual consumers in scrutinizing costs, doctors and hospitals charged what the market would bear, which turned out to be a lot. Costs started spiraling out of control. In the 1980's, many insurance plans started instituting co-pays and deductibles. Insurance carriers started negotiating flat fee prices with doctors, in order to reduce costs. And lamentably, insurance companies started pressuring doctors to limit costs per patient by offering bonuses and the like to doctors who spent less per patient.

The insurance industry took some wrong steps at that point. One was the idea of positing themselves as "Health Maintenance Organizations" (HMO) rather than a simple insurance company. The very name implied that the company would maintain your health. When HMOs cut costs and refused to pay for certain treatments, they were soundly sued in court when patients died as a result.

This was the fault of the insurance companies themselves, to some extent - by training patients to look at their services not as insurance, but as a "pay for everything" maintenance organization, the insurance companies took themselves out of the insurance business and got into the medical business - a business best left for doctors.

Another problem caused by insurance itself was the standard of medical care. In the old days, there was not much a doctor could do to bring you back to health, other than use antibiotics, some primitive forms of surgery, and bed rest. More esoteric forms of medical care did not exist, and the number of drugs available was pretty small. With insurance money paying for nearly unlimited medical care, the amount of care increased proportionally.

There is no argument that this aspect of the "health care crises" is arguably a good thing. We have treatments and drugs available to us today that were not dreamed of back in the 1950's. To some extent, we have the explosion of insurance-money to thank for this explosion in treatment options. But none of this was free, of course. The MRI is a great diagnostic tool, but a simple scan can run $1500 or more.

Doctors order tests such as these because they can - and to avoid malpractice. In the old days, as they used to say, a Doctor buried his mistakes. Today, a Doctor is not allowed to make any mistakes at all. Medical Malpractice has become such an industry that it has enriched hundreds of thousands of lawyers. The son of a mill worker can now become a multi-millionaire, Senator, and even run for President, thanks to the lucrative nature of Medical Malpractice. It is such a lucrative and powerful industry that they can afford to hire lobbyists and insure that their business remains unregulated. And, as noted, they can even afford to run a candidate for President.

The problem with the Medical Malpractice industry is that it does little to prevent malpractice and it does little to help patients who are victims of malpractice. Lawyers take the lion's share of money from the settlements in these cases, not the victims. And some "victims" are less than real victims. In Washington DC, for example, one "Med/Mal" law firm advertises on television, suggesting to viewers that if their child is not doing well in school, that perhaps they should sue their pediatrician - for some alleged harm from childbirth years ago.

The Med/Mal lawyers will argue that the total amount of damages paid out for their cases amounts to small percentage of the overall cost of medical care in this country. However, what this calculation fails to take into account is the additional costs incurred by Doctors who spend more time covering their potential malpractice liabilities by ordering unnecessary tests than they do treating patients. The "make one mistake and you're dead" mentality of the Med/Mal business increases costs dramatically for the overall industry. Oh, and by the way, even if the cost of malpractice suits is "only" a few percentage points of the overall cost of health care in this country, that is still a staggering amount of money.

3. What's wrong with Health Insurance Then? As illustrated in the Examples above, risk is no longer being spread out, as in traditional "insurance". Each of us pays into a system now, and expects payouts as part of that process. Like a homeowner in Florida, we pay high premiums, but fully expect to be paid back every few years with a new roof.

In fact, the largest gripe most patients have is that they are not "getting back" enough in payouts from their plan, for the amount they put it. This model stands the entire insurance concept on its head - it no longer is spreading an occasional (rare) risk among thousands and thousands of people, but rather is just shifting money from one pile to another, adding administrative costs and a profit margin along the way.

In order to remain "competitive", Insurance Companies have resorted to "cherry picking" their clients to keep rates low. Thus, if you are young, healthy, and male, you can get health insurance at a fairly low rate. However, if you are older, have a history of health problems, and are female, well, you might find yourself insurable.

Again, this stands the entire model of "insurance" on its head, as by cherry picking clients, the risks are being artificially lowered, which in turn lowers premiums. But that leaves other patients out in the cold.

Now, granted, insurance companies have done similar things in other arenas. For example, if you own a brick house with a built-in sprinkler system and fire alarm, your premiums would be a lot lower than if you had a wood-framed house with no sprinkler system. But, rather than cover only the brick houses, the insurance companies cover all homes, but adjust premiums to encourage homeowners to install these systems.

Health is often something that one has no control over. We might be able to quit smoking and lose weight, but cancer hits almost randomly. It is not fair to deny coverage or to jack rates based on health, when it is less in the control of the patient.

As a result of these practices, Health Insurance, like the homeowner's policy in our Florida example, is no longer an example of spreading risk over a large number of people, but a matter of spreading risk for a single person over time. For many people, the cost of health care premiums is equal to their health care costs.

For example, if you are between 60-65 years old, you are not old enough to receive medicare. However, if you don't have insurance through a place of work, you might find your health insurance premiums staggering - $20,000 a year or more, in some instances. The reason the premiums are so high is that the insurance company is betting that you will file a claim in that amount during the time of the policy. Your risk is not being lumped in with the risks of a 20-year-old, but only with yourself. In effect, we are all buying group policies, with everyone in a group of ONE.

Now to be certain, we do desperately need some mechanism to control costs in health care. Patients should be cognizant of costs and try to pick doctors and treatments based on what is the best value and also what is really needed. Health care might initially seem like an inelastic commodity. If you need a heart transplant, you need a heart transplant, and there is no acceptable substitute. However, experience has shown that this is not always the case for other, less dire, conditions. Surgery might help a 40-something with a pinched nerve in their back or neck, at the costs of tens of thousands of dollars (and risk to the patient), but on the other hand, some patients outgrow this condition or find massage and other treatments to be just as effective, if not more so.

Dental coverage is an excellent example of this phenomenon. While visiting my (former) Dentist, she told me I needed to have an extensive treatments for my gums, and that my bite was wrong and I would need my jaw broken and reset. And have I considered braces and teeth whitening? From this description, you'd think I had "British Teeth", wouldn't you? When I asked about the cost of all this, the Dentist said, "well, your insurance will cover most of it!"

When I explained that I did not have Dental insurance, suddenly all these "necessary" treatments were no longer needed. I went to another Dentist for a second opinion, and he said my teeth were fine. Brushing and flossing and regular cleanings were all I needed to have healthy teeth for the rest of my life. The treatments recommended by my other Dentist were mostly cosmetic in nature, and would have been handy should I decide to become a television anchorman. But for me, entirely unnecessary.

The example illustrates, however, how the perception of available money skews recommendations for treatment. One would think that medical treatments would be recommended based on technical need, based on expert opinion. But as in any human endeavor, there is a wide range of variation. Once costs are considered "free", the range of options increases accordingly.

Thus, co-payments, deductables and the like are bound to be permanent part of the landscape. Socialized Medicine, as illustrated by the examples in other countries, may make medical care available to all, but often results in the rationing of medical care, as systems become overwhelmed by patients demanding "free" services.

Experiments in medical savings account plans have largely failed, mostly because insurance companies do not support them. Such plans would have set aside pre-tax money for patients to spend as they chose on medical care. Early plans were draconian - if money was not spent by the end of each year, it was lost. Not only did this discourage participation, it forced patients to spend money on medcial care (eyeglasses, dentists, etc.) or lose it - the opposite of what a rational spending control system should do.

Later medical savings account plans failed as well. Congress limited participation, on groudless fears that such plans would be a "giveaway" to taxpayers. As a result, few insurance companies participated in such plans, and as a result, premiums were higher than in traditional "cradle to grave" health insurance plans. The entire franchise was sandbagged from the get-go.

Given the troubles in the economy, it seems that some sort of Health Care Reform is inevitable in the long run. American corporations cannot compete with their overseas counterparts, largely due to dramatic differences in health care costs. When consumer activists rally for Health Care Reform, Congress can safely ignore them. When General Motors pushes for it, something will get done.

4. So What Can I Do? In the meantime, many of us are "stuck" in the middle, with high health insurance premiums, or unobtainable health insurance. If you are still able to obtain health insurance, however, you should do so, even if the plan covers very little.

Even a high deductible ($5,000 to $10,000) plan has benefits. To begin with, such a plan is more of the traditional "insurance" that we all should be expecting, rather than the "cradle to grave" coverage we all want. If you need a kidney transplant, you'll come up with $10,000, trust me, even if means selling a car. Expecting the Insurance Company to pay for every little thing, while keeping premiums low, is unrealistic.

In addition, another benefit of such a plan is that it provides you with access to pre-negotiated pricing for many health care services. Thus, even though you may have to pay for some services yourself, at least you are getting the lower prices that Health Insurance Companies have negotiated. Paying as a "cash" customer (uninsured) generally means you often have to pay 50%-100% more for any given service. So even a minimal health care plan is better than none.

And of course, a plan like that will give you the coverage you really need - catastrophic coverage for life-changing events. They are far less likely to happen (and let's hope they don't!) but that is where your real risk lies - in a debilitating illness or accident - than in daily health care problems.

* * * * *

Our Health Insurance industry, like the insurance industry in general, is a mess. This mess, however, is not the fault of any one actor, but something we all share the blame for. So long as patients demand extensive coverage and low premiums at the same time, the insurance companies will continue to "cherry pick" their customers and move further and further away from the insurance model and toward the "health care provider" model.

One sure way to fix this problem is to go back to treating insurance as insurance - something that covers unlikely and catastrophic events. If we keep demanding our insurance pay for our Asprins, the cost of Asprin is sure to contine to rise.

No comments:

Post a Comment

Sorry, Comments have been disabled due to the large amount of SPAM and TROLLING as well as GROOMING comments. Thanks for reading, though.

NOTE: Blogger says below that "only members may comment" - however comments have been disabled and I have no idea how to make someone a "member". Sorry!

Note: Only a member of this blog may post a comment.