Today’s Health Insurance Ain’t Insurance
Ever think about insurance? It’s not really a difficult idea, although the mathematics that goes with it — called “actuarial science” — can be hard going. But the basic idea is simple: you are making a bet with a bookie that some unfortunate thing will happen to you in some fixed length of time.
Usually, the one hard thing about explaining insurance is that you’re doing exactly what Pete Rose said he never did: you’re betting against your own team. If the unfortunate thing happens, at least you win your bet, and you get some money — or at least your heirs do. If it’s car insurance, you are betting you will have a car accident during the term of the insurance, and the insurance company is betting you won’t; if it’s life insurance, you’re betting the insurance company you will die during the term of the insurance, and they’re betting you won’t.
Stripped down to its simplest terms, figuring the premium is easy too. Let’s say you want to buy a life insurance policy that will pay your family $100,000 if you die during the year 2009. The insurance company looks at your age, your sex, your weight, your health, and whatever else they think might apply — do you make your living jumping monster trucks over school buses? — and figures the odds of you dying during 2009. If their figures tell them that the chances are about 1 in 20, the basic premium will be about 1/20th of $100,000, or about $5,000, plus some amount for administrative costs and for reserves.
So remember, if you ever feel like no one cares if you live or die, buy some life insurance. Then at least the insurance company cares; in fact, they’re willing to bet money you’ll live.
The bookie insurance company can make that bet with you because they will make the bet with lots of other people too. If the chances of your dying are really about 1 in 20, then they figure about 19 out of 20 people like you will lose the bet and won’t die. If they set the premium to be, say, $5,100, then they take in about $120,000 total, and if everything goes the way they expect, at the end of the year they will have about $2,000 left with which to buy naming rights on stadiums and build massive, imposing, conservative, businesslike headquarters so no one has to think about them being in the same basic business as the Golden Nugget Casino.
It used to be that health insurance worked more or less the same way. I remember when I was a kid, my Dad had what was called “major medical” — if I went to the doctor for a cold, he paid the doctor. The year I broke my right index finger by punching my brother, who happened to be wearing a cast because he’d just broken his arm playing bantam-league football — it’s amazing how hard those things are — Blue Cross paid for most of the X-rays, the emergency room visit, and the plaster.
At that point, it was still a bet. We didn’t go to the emergency room all that often, and no one had any really major illnesses, so my father’s business could pay a relatively small amount and the insurance company would bet him that they, on average, wouldn’t have to pay out more than that small premium amount for us and a million families like us.
Health insurance started to change, though, during the Truman administration. (I hasten to mention that I wasn’t actually there: I was born during the Eisenhower administration, when the process had only gotten started.) Truman wanted to implement the progressive new notion of a national health care plan, but couldn’t get it through; at the same time, post-war wage controls were still on, so employers bidding for new workers had to find other ways to compete.
Through a sequence of compromises, what came out of it was a system in which companies and only companies could buy health insurance and health care for their employees, and deduct the cost as a business expense. My father’s music store and the steel mill across town could buy health insurance, basically, at a discount. (My uncle the butcher couldn’t; he wasn’t a “business.”)
Years pass. (Insert visual of wind-blown calendar leaves here.) Medical care becomes more complicated, legal conditions change, and a lot of things that used to be major medical issues that mostly affected the life insurance rates become things that could be cured, or at least managed. Increasingly, what was “major medical” insurance became, simply, health insurance; we expected the insurance companies not just to pay for unexpected events, but for the normal sort of day-to-day maintenance we all need.
At this point, though, the “insurance” model breaks down. If the insurance company is going to pay for things that are nearly certain to happen, they have to charge a big enough premium to pay for that and some extra to pay expenses. For a long time, this wasn’t noticeable, because companies were paying in those nice pre-tax discounted dollars, but it’s always been true. If you sell a life insurance policy for a hundred-year-old man with failing kidneys and pneumonia, the premium is going to be a little bit more than the face value of the policy; if you have to pay for the health care that is almost certain to be needed, every year, you’re going to have to charge a little more than that health care will cost.
So now it’s election season 2008, and the candidates are talking about the “health care crisis.” It’s a funny sort of crisis in one sense, because people are managing to survive to be older and healthier than they were before the crisis. But if a politician insists it’s a crisis, who are we to argue? Certainly there is an issue that some people can’t afford to pay cash for day-to-day care, and old-fashioned “major medical” is hard to find.
The solution we have been offered on both sides of the aisle is something like the “Massachusetts Plan,” where everyone has to have health insurance. “Has to have,” here, being enforced by the government — Senator Clinton has spoken specifically of garnisheeing wages of people who don’t want to participate — with some kind of public funding for people who just can’t afford it.
Here’s where things start to get tricky, though. Some people — young people just out of school for example — aren’t making a lot of money, but then don’t really want to spend a lot of money on insurance. Normally, they wouldn’t have to: other than accidents and very rare diseases, a 25-year-old shouldn’t normally need anything more than minor maintenance and occasional hangover cures. The idea of the mandate, though, is that if you include these low-risk people in the whole insurance pool, the premiums they pay can be added back to the pot for older people and people with serious illnesses, which makes the insurance more “affordable” — for them.
It’s exactly the same situation as if we charge a 25-year-old the same amount for a year’s term life insurance as we charge his 75-year-old grandfather: it may make the insurance more affordable for Granddad, but it does so by overcharging young Elmo. Add in the “mandate,” so Elmo can’t opt out, and we have a universal care plan that forces Elmo to pay for services he doesn’t get so that Granddad can pay less for the services he gets. But it’s “voluntary” — you get to pick your insurance plan to some extent — and it’s not “tax-supported” because you are just paying the insurance company directly.
Except for the cost of administering the plan itself, and the wages they take through a garnishee if I don’t “volunteer.”
So in this mandated universal coverage plan, the government comes and makes me give someone money so it can be distributed to other people, and I don’t have any choice about participating. Where I come from, we call that a “tax.”
Whatever it is, it ain’t insurance.
Charlie Martin is a Colorado computer scientist and nearly-successful screenwriter who contributes to the Flares Into Darkness political blog as “Seneca the Younger,” and blogs under his own name at the aggressively non-political Explorations blog.
The result of the wage and price controls was that every employee received health insurance. They really didn’t really have a choice over the matter. Soon thereafter, these same employees started to delude themselves that the insurance was free. The employers were supposedly picking up the tab. This resulted in them becoming indifferent about keeping costs down. But why should they be concerned? After all, wasn’t it free?
The original health insurance benefit should have been offered as an option. An employee could chose between the money or the insurance—but not both! The individual opting for the insurance benefit would then have instantly realized that the cost was coming out of his or her own pocket. They would have made damn sure the costs were kept low.
So in this mandated universal coverage plan, the government comes and makes me give someone money so it can be distributed to other people, and I don’t have any choice about participating.
C’mon Charlie, you start talking “insurance” and end up with “Social Security”.
Well, I realize you need to write a piece…. but having spent 35 years in the insurance business… the definition of insurance we learned is: making a (small(er))”affordable” regularly scheduled payment to avoid to possibility of incurring a catastrophically large, unaffordable, unscheduled payment.
I must respectfully point out an error in your math, bro. Under your system of 20 people paying a $5,100 annual premium, with one death/$100,000 payout over the year’s term, the insurance company is left with a profit of $2,000, not $20,000 as you stated.
Great article though! Thanks and keep up the good work.
Mike Foster
“…but having spent 35 years in the insurance business”
If you have actually spent 35 years in the insurance business—you should be well aware that most health insurance policies are billed to the employer. Thus, the employee is often deluded that the money is not ultimately coming out of their own pocket. And this erroneous mindset encourages them to believe the health care is cost free. Wastefulness is the the inevitable result.
When the govt runs a budget deficit and has to borrow, the party out of power always gripes about how we’re sticking our children and our children’s children with a huge bill that they’ll have to pay.
But with Hillary’s mandated “insurance” premiums, all of a sudden that’s a good thing! And that’s on top of the existing inter-generational wealth transfer from young to old that is Social Security and Medicare- which are getting worse.
It’s an expansion of the concept of social security — paying the financial costs of the individual’s bad luck or bad choices out of a common pool. I don’t have a problem with the bad luck part (“There but for the grace of God”), but the bad choices part is another story. The system subsidizes those, so of course we get more of them.
The car insurance analogy is a great explanation… if your car insurance included oil changes, tire rotations, break linings etc, how could you possibly be surprised when your premiums go through the roof?
The other end of this is that all the insurance paperwork and claims haggling has driven up the cost of doing business for doctors and hospitals so much that cash paying customers cant afford the rates for simple procedures, which creates more pressure to join the health insurance game.
I think you’re confusing expected value with expected utility.
When I buy insurance, I fully anticipate that the bet will have negative expected value, that is, the present value of all my future premium payments is more than the present value of all future payouts from the insurance company. That’s mainly how insurance companies make a profit — by aggregating risk. (They actually do somewhat better than that, because they take our money and invest it more efficiently than we can.)
So why buy insurance? Because I am purchasing utility, not value. (Try googling “Expected Utility Theory” if you don’t understand this statement). By allocating part of my earnings to insurance, I greatly reduce the disruption and unhappiness of a major medical bill, or a car wreck. In plain terms, a bill for $10,000 is far more than 100 times as inconvenient as a $100 bill — and a $100,000 obligation can definitely change your life for the worse, through bankruptcy, loss of home, etc. What I am purchasing is risk reduction, without the expectation of earning a net profit on the transaction.
I think your views would have more impact if you actually understood how insurance works.
Having said that, your fundamental point is still valid — for some people, their expected utility for insurance is negative and thus it is not a good buy. However, it’s not the young single person that is the paradigm — it’s Bill Gates. Consider when you drop by your local Best Buy to purchase a DVD player. You are always offered an extended warranty, and you should always decline, if you can afford to purchase a replacement DVD player. Similarly, Bill Gates doesn’t need to pay Blue Cross / Blue Shield for the peace of mind that he will never have to pay a $100,000 medical bill. But of course, working up sympathy for Bill Gates is a tough row to hoe….
Regards
BBB
10 million without. they go emergency room. hospital raises my rates and then insurance guys raise me. but that is good?
… plan that forces Elmo to pay for services he doesn’t get so that Granddad can pay less for the services he gets.
One more unfortunate piece of motivation for Elmo to whack Granddad.
C’mon Charlie, you start talking “insurance” and end up with “Social Security”.
Heh. Ever look up what “FICA” means? Two lies in four letters.
the insurance company is left with a profit of $2,000, not $20,000 as you stated.
Damn decimal points. Thanks for pointing it out, I’ll see if I can get it corrected in the text.
bbbeard, so how did insurance start picking up the tab for routine checkups? Thats the facet that doesnt fit anywhere into the theory. Granted, this wouldnt solve escalating health care costs (much of which is simply the product of people living much longer and hence suffering more illnesses which require expensive new therapies) but it would certainly mitigate to some extent by eliminating a ton of pointless red tape.
If young people started buying catastrophic insurance and opted out of their employer provided systems, the entire scheme would collapse overnight. But we might be better for it in the long run.
My father is a recently retired doctor who started practicing medicine during the Truman years. Add a few lines about the compound costs of malpractice insurance, and he could have written this article. Thanks for getting the word out.
One point is missing – in MA when the 25 year old single guy without insurance shatters the bones in his hand celebrating a Patriots victory goes to the ER – the rest of the state WAS subsidizing him.
I’m all for letting people opt out – but they really have to opt out. No freebie care because we feel bad. The state will be garnishing your wages to pay for any “free” care you accept.
The other reason that health insurance isn’t insurance that I think you’ve omitted above is that once you have a catastrophe occur that will result in increased costs for the rest of your life, the health insurer will do everything possible to make sure that they will either get rid of you or charge you a rate that covers all of the expenses.
Say, for instance, that you have cancer and now require expensive treatment for a period of some years…
Thanks for pointing it out, I’ll see if I can get it corrected in the text.
Thanks to the editors at PJM who picked this up from the comments and fixed it before I could even email them.
Unless HillaryCare mandates some minimum level of insurance, I don’t know how somebody won’t get smart and pull a fast one on the system.
Think of it like this. If you are legally mandated to purchase insurance, but you don’t really want to, you won’t care about coverage level, just cost. So I’ll start a company that charges you $1 a month for “health care coverage” that pays $1 whenever your medical bills go over $10,000.
Presto, you now have cheap, worthless, but legally mandated “health coverage” for $1 a month.
I think your views would have more impact if you actually understood how insurance works.
Having said that, your fundamental point is still valid….
Pretty good trick, huh?
“So in this mandated universal coverage plan, the government comes and makes me give someone money so it can be distributed to other people, and I don’t have any choice about participating. Where I come from, we call that a ‘tax.’”
Where I come from I call that theft. Government performing the act does not change the nature of the act but only serves to increase the scope and severity. Theft is theft regardless of the number of secretaries one hires.
Very good article though. The betting analogy really made it clear for me.
It does not take a high school Valedictorian to point out Charlie Martin has a problem. First of all, he fails to address the question of whether Insurance companies are a fiscally prudent and effective way to deliver quality health care. Second, the depth of his ignorance about health care can be found in his riff about the 75 year old granddad and the 25 year old Elmo. Granddad is for the greater part covered by Medicare, government single pay for the elderly. Elmo is not supporting gramps, but may actually be partially supported by Granddad. Let’s examine quality and effectiveness of health care delivery.
There are a variety of metrics that are used to compare health care delivery (infant mortality, life expectancy, etc) between countries. No matter how you slice it, dice it, or spin it, the US ranks near or at the bottom of these measured metrics, while per capita medical expense are the highest. Let’s simplify: Think widgets.
If US Heath Care is a factory, the widget it delivers cost more, is a defective product (as measured by health outcomes), has a large proportion of dissatisfied customers and its distribution system a fails to reach a significant portion of the population…
A reasonable manager, faced with a failing factory, would study successful factories. In this case, European systems with better widget outcomes and a distribution system that reaches all the population. Now then, the European widget factories differ, one from the other, but they have one thing in common: At the base of the widget, single pay, government sponsored program.
And thus, the argument is who should provide health care. Should it be Insurance and Health Care Corporations whose sole interest is profit, or the government, whose interest is the health and well being of its people. A few links for the inquiring mind:
An argument for single pay system (click on pdf file, left column):
http://www.ajph.org/cgi/content/abstract/93/1/102
Are Insurance Companies acting in your best interest?
http://www.cjr.org/campaign_desk/impressive_coverage_at_the_la.php
http://www.nytimes.com/2008/02/18/opinion/18mon1.html?em&ex=1203483600&en=9cabea39bba83519&ei=5087
Does Medicare improve Health outcomes (pdf file right hand column)?
http://jama.ama-assn.org/cgi/content/abstract/298/24/2886
Care to wonder around the European widget factories? Try Sweden, that horrible socialized medicine country?
http://www.euro.who.int/observatory/ctryinfo/ctryinfo
But, but, what about the children?!
If young people started buying catastrophic insurance and opted out of their employer provided systems, the entire scheme would collapse overnight. But we might be better for it in the long run.
Mark, the plan I have at my day job works very much like that. I get an annual allowance for basic care (about $750), and 100 pct of my basic care is paid from that — including drugs — until it runs out. If it doesn’t run out, the excess rolls over to the next year.
After it runs out, I cover everything up to some other limit as a deductible. (I think about $2000 but I don’t recall right now.) Then it works like normal insurance: they pay a big percentage, I pay a small one. I also have a healthcare flexible spending account, with which I can pay any deductibles and the like until that runs out. Since the $750 is, in effect, my money, my insurance costs are rather reduced. Of course, it would be even better if I could just do the money myself — the insurance company is taking something off the top — but it’s advantageous to me because, as part of my company’s coverage, it’s deductible as an expense to them, direct to the bottom line. For me, it wouldn’t be.
It gets worse. Currently Medicare and Medicaid pay for those over 65, funded out of our payroll taxes.
Thus the high cost of healthcare is really a wealth transfer from young, poor people to rich white Boomers. It’s no wonder so many affluent Boomers are Democrats. They’re on the best side of a regressive tax system.
An excellent article. It belongs on the front page of every paper in the country.
I’d like to see this question asked of a presidential candidate in one of those Youth Forums.
And the government, once this program is in place, will put all of the money in a dedicated fund just like they do with the Social Security money? Sure they will. The money will go into the general fund and will get used for dams in Wyoming, which is likely, or to cover the shortfall in Social Security, which is even more likely. No one wants to admit that saving Social Security as it now exists will require massive tax hikes; better to come up with yet another entitlement and use the money for that to cover the deepening hole at the SSA.
I’m pretty conservative, but I would support a Universal Catastrophic Insurance system. If you had Universal catastophic coverage kicking in at 2500/5000 for an individual or family, with an annual stop loss of 5000/10000, then it would be feasible for a people to either buy supplemental insurance out of their own pocket, or go naked for the deductable.
I think that system would introduce a lot more of the the free market into health care than the current system. The poor would still be covered with Medicaid like they are today for care below the catastrophic deductable.
While I’m essentially in agreement with your thesis — health insurance isn’t insurance. There is one problem with Elmo not having some sort of coverage. If he is in an accident or is diagnosed with a serious disease without insurance then we (society) are going to insist he be treated anyway regardless of his ability to pay so we’re going to pick up the cost.
Which then brings us to the issue of catastrophic coverage (the good old Major Med) — in both places I’ve worked it hasn’t been a good deal for me because the employer subsidy was set up in such a manner that the employer paid a couple of hundred less a month for catastrophic vs standard coverage but I would save maybe $50/month for family coverage because my company is subsidizing the standard more than the catastrophic. Saving $600 vs a several thousand dollar deductible wasn’t a good deal considering I would use most of that $600 with just a couple of doctor visits at which point I am left with no savings and just risk. However if my company paid X (say the cost of the catastrophic) and said choose your coverage then the deal would be better — save $2400 (the difference in cost between catastrophic and standard) vs a possible several thousand dollar risk and I’m more likely to take it. Especially since I know my normal bills don’t amount to $2400 so I can expect to save money. This works for my employer because the cost of 100% of the catastrophic is less than the subsidized cost of the standard. It works for me because I’m betting I won’t run up more than $2400 in bills and if I do I know what my exposure is. So now I still have coverage against the brain tumor, car accident, etc but I’m responsible for most of my day to day.
Agree totally with this post.
If I was still young today, I’d be totally opposed to another government plan that would make me pay more to subsidize older Americans wants/needs. We already have Social Secuity and Medicare that massively do that; now we are going to tax younger American’s even more through forced medical coverage to subsidize medical care for older American’s who are not yet on Medicare.
The different rates charged for life insurance is a good example. Another is car insurance rates which are normally much higher for younger people, particularly those under age 25. Young people should demand ‘nationalized car insurance’ with everyone paying the same regardless of your driving experience and history. For once, that would be a plan that shifts resources from old to young.
Virtually all the wealth in this country is already held by people over the age of 50. American’s under 50 as a group are net in debt. Yet we continue an assinine system of tranferring more and more money from the young to the retired and elderly. Which in turn causes more and more problems with families and child rearing, more and more reliance on grandparents/parents subsidizing their children longer in life, and far fewer financially independent citizens.
Mark Buehner: The “routine care” can be looked at another way.
If the routine checkups show a reduced chance of a catastrophic event (for example a physical showing high blood pressure, and meds prescribed to treat that), it’s actually in the insurance companies interest to have these checks done and for patients to take those meds. A physical and a daily prescription cost FAR FAR less than a heart attack and a rush to the emergency room and perhaps time spent in intensive care.
So, it is wise for the insurance company to promote such things (by making them more affordable for the user). We’re not quite to the stage where they are REQUIRING folks to get check up or take meds, as much as they’d probably like too.
If a regular oil change, brake tune up and tire rotation had a reasonable reduction in accident or theft claims to the insurer, I’m betting that your car insurance company would be sending you vouchers to encourage you to get the work done on your car.
Mind I understand the point about how (I feel) most folks view insurance as a discount plan, but there is some method to the madness.
Comment on Brendan :
“One point is missing – in MA when the 25 year old single guy without insurance shatters the bones in his hand celebrating a Patriots victory goes to the ER – the rest of the state WAS subsidizing him.”
Hmmm, you assume that a 25 year old who breaks his hand won’t pay his medical bills. This is classic liberalism thought… that if one is not covered by some state or federal scheme that there is no way for that person to pay for services. Lack of insurance = inability to pay. Nice try.
Insurance is not a ‘bet that something bad will happen’; it’s a contingency plan in case something does. You carry a folding umbrella in your briefcase/backpack not ‘betting’ that it will rain, but so that if it does rain you won’t get soaking wet.
Health insurance isn’t betting that you’ll get sick; it’s so that if you do you don’t pay too much out of pocket to get well, or you have access to a particular doctor/health care plan that you believe will be of benefit to you if you get sick. Insurers aren’t betting that you won’t get sick – that’s a sucker’s bet. What they’re “betting” is that they’ll earn enough interest off the premiums they receive that they can both afford to take care of their clients and not go broke.
Our Paul wrote:
“Granddad is for the greater part covered by Medicare, government single pay for the elderly. Elmo is not supporting gramps, but may actually be partially supported by Granddad.”
Um… who’s paying for Medicare? It sure isn’t Granddad.
I think the knife in the back is the way that Blue Cross and other insurance companies force health care providers like hospitals and doctors to charge them a roughly 50% lower rate than they charge everybody else. This is yet another way they “lower” the cost of health care by shafting people who pay out of their own pocket. In a situation like that, the person needing to make a decision about his own health care has to sign up for a similar insurance plan to defend himself against the mandated price gouging of the insurance companies.
Our Paul makes an amusing plea for socialized medicine by stating “First of all, he fails to address the question of whether Insurance companies are a fiscally prudent and effective way to deliver quality health care.”
He might have a point if Insurance Companies were in the health care delivery business. Sorry, Our Paul, insurance companies are middle-men so your argument reduces to who is the better middle-man, the government or private industry?
The fallacy here is that the 25 year-old who does end up with something will actually pay the bill. They won’t. They haven’t the assets to pay a really big bill (like from an motor vehicle accident which is the most likely thing to land them in the hospital). So, ultimately, those who can pay (you and me) get stuck with the it.
That’s a tax, too. I’d rather have the tax paid upfront by the person who at least benefits from it somewhat, even if it’s out of proportion to what they might gain, than have it passed through a few more layers of hospital/insurance company middlemen which just adds to the cost of everything in the end.
The other point to make is that that a 25 year-old WILL eventually be older or acquire an unforeseen condition and use more resources. Risk is not static. It can change in the blink of a red light or a kink in the of strand of DNA, if not with the passage of time.
And unlike Social Security, it’s a pay-as-you-go plan. No one is pretending that mandatory universal health insurance is saving up money for the future, as they do with Social Security. At least they’re honest about that part.
Oh good lord, don’t you socialist morons ever get tired of repeating this? The methodology for computing these outcomes varies from country to country:
Blue Cross was never, properly understood, a health insurance program. It was originally a network of hospitals that agreed to provide services to subscribers who paid a flat monthly fee–with no assessment of risk–for services at the hospital. Technically, Blue Cross was called a health care contractor or health care service contractor (and, in many states, it still is). Hospital health care service contracts were pretty common in the years before the war–as were other kinds of service contracts (shoe repair, farm equipment repair, etc.) Pay a flat monthly fee, get the service. The Blue Cross association revolutionized this by making hospital services available on a region-wide or nationwide basis by creating a hospital network that allowed an increasingly mobile post-war population access to hospital services outside their community.
The hospital service contracts weren’t like a making a bet at all: there was no underwriting, monthly charges were relatively uniform, and access to hospital services was generally uniform. But it was too much of a good thing, and there was no real way to control subscribers’ overutilization of hospital services–which, in turn, dramatically increased costs. So, over time, the hospital service contracts offered by Blue Cross franchisees tended to resemble more traditional “health insurance” products, with risk-assessment, underwriting, co-pays, and the like.
One of the benefits of having been in the federal workforce and addressing the economic side of projects, plus having to justify one’s own job during a study to see if one should be replaced by the private sector, is running across the actual efficiency rates of the federal government. This was broken out by Agency and it was shocking to discover that the workplace I was in was actually one of the most ‘efficient’ in the government. Here efficiency is the percentage of time each individual actually spends doing productive work out of a given day, with the rest taken out by administrative overhead or other things that eat up time while not being productive. That industry average was 80% (meaning out of an 8 hour day, an individual was expected to have 6.4 hours of productive work time). In my agency the percentage was 65% which was good compared to the rest of the government that averaged 55%, and some notable offices at 45%.
For the administrative overhead of tracking to make sure everyone is covered, the federal government will spend almost 3 individuals to get what 2 could do in the private sector (when compared on job equivalent work). Strangely enough when contractors come to a government worksite, their efficiency decreases to near the norm of the workplace they are in, thus rendering ‘savings’ of site work useless. When done out of that environment, or off-site, efficiency returns. This is why ‘savings’ of going contractor on-site only show that for the first year or two, and then costs ramp up to cover the time needed to complete increasing workloads as efficiency of contractor staff drops.
Now consider that on top of the ‘health care system’ which is famous for having high amounts of clerical paperwork to address billing, legitimacy of bills, and ensure that the company involved is not being defrauded (the federal government has similar problems on contract work, requiring contract officers and their representatives to do similar work, but at lower efficiency). John Stossel looked at this last year in Bad Medicine, which looks at these overhead costs and their increased overhead being added into the cost of health care.
Doctors, by that view, now spend 14% of their costs on just tracking insurance paperwork, and having numerous conditions I have noticed that doctors have hired ‘non productive staff’: non-medical individuals to track paperwork. Of the non-doctor staff, I have seen this go as high as 50% of the total staff being clerical staff to track paperwork. The money you pay into ‘health insurance’ covers all the paperwork systems and individuals in the insurance part of the system, with additional amount going to the pay of non-medical staff for physicians and their increased insurance overhead against malpractice suits… the actual amount paid to medical practitioners, then, if you remove these portions, lost doctor time in having to justify medications and diagnoses, plus the non-medical overhead from private companies and staff, yields a small percentage of one’s budget to health care actually going to doctors and medical staff.
What we now pay for is a paperwork tracking system (even when electronic) that, as a minor output, provides some medical care. In trying to cover the ‘uninsured’ that paperwork will escalate and so will the needs of all the players to track, verify, check payment, cross-check and then run checks against fraud. This will increase the cost of the entire system while providing little, if any ‘added benefit’ to all involved.
In that era before ‘health insurance’ covered so much, hospitals would offer longer term plans for poor individuals to pay off a large debt, and charitable institutions also ran hospitals for the poor and destitute. Today those institutions are failing because we give less to charity and more to insurance companies and business to over-charge us in the long run for care needed in the short run. There used to be a time when Americans took care of the poor via charity and utilized their own outlook to find efficient institutions to do good work for them. Government was never considered to be that place as its role as punisher is directly opposite to that of charity. By confusing society with government we, as Tom Paine points out, replace the source of good with punisher of evil. And that is not progress in anyone’s book.
Paul, I’m not quite clear how anything you’re saying has anything much to do with anything I’m saying. Unless you’re asserting that health insurance actually is insurance, I think you may be commenting on the wrong article.
Dj, I think you’re right, and that I for reasons of economy conflated “Blue Cross” with “Blue Cross and Blue Shield”. I don’t think it changes my point (or, for that matter, that you suggested it did.)
Kent G. Budge :
Our Paul wrote:
“Granddad is for the greater part covered by Medicare, government single pay for the elderly. Elmo is not supporting gramps, but may actually be partially supported by Granddad.”
Um… who’s paying for Medicare? It sure isn’t Granddad.
Kent, Kent, Kent, don’t you see the obvious? Medicare is a government program so it’s paid by the government! Where the government gets the money to pay for Medicare is a mystery!
“Add in the “mandate,” so Elmo can’t opt out, and we have a universal care plan that forces Elmo to pay for services he doesn’t get so that Granddad can pay less for the services he gets.”
Gee, this sounds like the reverse side of school taxes. Granddad pays MORE for services he doesn’t get so that Elmo (and the NEA and ilk) can get services for less. Hmmmmm.
And as an independent business owner, I can’t pool (without difficulty) my health risk like a larger company can.
I agree completely. Having health insurance cover annual checkups is like having car insurance cover annual tune-ups. It doesn’t make sense to insure a sure thing. The insurance company will increase the premium by the amount of the checkup, plus expenses. And you are right about Elmo generally. Perhaps it makes sense to require Elmo to have catastrophic coverage. But the schemes in play now are little more than a regressive transfer of wealth from the young (on average relatively poor) to the old (on average relatively rich).
In reply to Evan, Jim Durbin, Curley Smith, Ken Budge, Jordan, and others:
Ah yes, from the land of the living dead, the ever lingering bête noire, socialized medicine. Funny, it is always thrown on the table, or lingers in the background like a malignant ghost. Ignored is the fact that this dreaded beast is corrupting members of our Armed Forces and their dependents, but there it is a recruitment tool, or a retention tool or a benefit, or whatever… But when you define its evil consequences, they do not seem to occur in single pay, government sponsored health care (ref in my original post, pick your country).
If you introduce single pay universal health insurance than the only inequality is that younger will pay more than older over the their life span until the younger cohort ages out. This true even if the “younger” is 21, and the “older” is 22. But, their total health care cost over their life span might well decreasse…
Medicare/Medicaid is a pay roll tax, in place since about 1964. If you started working at age 20, on that year, well, etc. etc. Most Medicare recipients have been paying into the system since their 20′s. I think we can put that Zombie to rest…
The most successful companies cut out the middle man (Insurance companies) or work decrease their over head costs. Enough stuff out there to satisfy the most assiduous data hound. But the basic question remains, who has your best interest at heart?
http://query.nytimes.com/gst/fullpage.html?res=9B02E4D8173FF93BA15751C0A96E9C8B63&scp=5&sq=robert+pear&st=nyt
Ah yes, Wikepedia as the arbitrator of Infant Mortality, which in turn invalidates all metrics used in health care comparisons. Next time Jordan, go for some real Center Right publications with know credentials:
http://archive.newsmax.com/archives/articles/2005/3/9/184540.shtml
Alternatively, you could explore the effect if health care coverage on infant mortality in the US:
http://www.kaisernetwork.org/gsaresults/search?q=infant+mortality&hl=es&site=%28KFForg%29&filter=0&output=xml_no_dtd&client=kff&getfields=*&sort=date%3AD%3AL%3Ad1&stylesheet=kff_middle.xslt&search_pdf=1&sp=kff
No matter how you spin it, you really need health insurance, not for your well being, but for the health of your wallet.
http://www.businessweek.com/bwdaily/dnflash/content/nov2007/db20071120_397008.htm
“First of all, he fails to address the question of whether Insurance companies are a fiscally prudent and effective way to deliver quality health care.”
— Don’t mix meanings here, Our Paul, insurance companies deliver insurance, not health care.
— Since when is it the government’s responsibility to make sure a company is fiscally prudent or effective. Most of us think that market conditions, when left to themselves, do a better job of keeping companies effective and prudent then governments.
Our government was founded on the principle that the state tends not to care for the well-being of the nation if it has more to gain from protecting its own well-being. This is in the nature of all things. We wish not to give the government the power to tax us for health and would prefer to limit this corruptible beast’s ability to further corrupt an already near broken system.
Insurance companies, with malpractice coverage and having to cover for doctors who inflate their prices precisely to take advantage of the bureaucratic nature of insurance companies, in an unintended manner, have led to the sharp rise in the cost of health-care. Hospitals have also built into the system an incredibly inflated cost to healthcare.
Just a few weeks ago we were billed $500 for the use of an ultrasound machine. This machine costs about $100,000, give or take. That means that by the time 200 people have had an ultrasound its been paid for. Each machine is used by a hospital 5-15 times a day. In just over five weeks, at most, the machine has paid for itself. Then add to it the cost of maintenance, the techs salary, and the doctor who will read the ultrasound you will have a machine that pays for itself in two months or much less. How are such profits justified? Not to say that we were using the machine due to catastrophe. The opposite. We were paying to have a look at the health of a child in my wife’s womb.
The market seems to have created the conditions in which hospitals, doctor’s visits, and clinics costing much more then they should. The major issue is that insurance companies, due to the syndicate nature of the business, has artificially dictated the price of being insured against catastrophe and everyday maintenance of a human body. This has to be addressed and government control of the national health service is not the sort of solution that leads to choice, freedom or competition. Instead it is another syndicate dictating cost and reaping benefits for its bureaucrats.
It does not stop being insurance even when a payout is a virtual certainty. It just costs more.
All insurance socializes risk by transferring money to those with greater needs from those with lesser needs. That’s why we have it — none of us know for sure which group we are in.
All insurance creates free-rider problems, since all of us would prefer that our carriers pay and that we not pay. Insurers are thus adversarial to the insured, whether the insurer is the government or a private carrier.
Any insurance policy can cost more and cover first dollar losses or cost less and carry a deductible. In this respect, there is no difference in principle between car insurance and health insurance. If you want first dollar coverage for your car repairs, it will cost you a lot. Same for your doctor bills.
Nor does a generational subsidy from healthy young people to less healthy old people make it “not insurance”. After all, with car insurance, older “wreckless” drivers subsidize young reckless ones.
Well-written column, but I think fundamentally wrong unless I missed something.
Martin, I think you’ve missed pretty well every point in the article. First, let’s look at: Nor does a generational subsidy from healthy young people to less healthy old people make it “not insurance”. After all, with car insurance, older “wreckless” drivers subsidize young reckless ones.
Where in the world did you get the idea that older drivers subsidize younger ones, at least in the absence of state regulation forcing it on them? Certainly where I live, the rates for 18 year old males is much higher than what I pay, not to mention people with poor driving records. Why? because their individual risk is higher.
But I think the really core error is here:All insurance socializes risk by transferring money to those with greater needs from those with lesser needs. That’s why we have it — none of us know for sure which group we are in.
Insurance, at least regular free-market insurance, doesn’t “socialize” anything. You don’t need to have any “social” aspect whatsoever except for the contractual relationship between the bookie, er, insurer and you, the insured. I do suspect, though, that the confusion that leads you to think of insurance as a “societal” thing may be at the heart of a lot of the misunderstanding I’m hoping to help resolve.
Thank you for explaining what the public has chosen not to examine.
As long as the majority as happy with doling out their co-pay and letting the rest of the bill magically disappear into insurance oblivion, there will be no true solutions to insurance.
The smug consumer thinks they are getting a great bargain never realizing that without knowing the true cost of services, they will continue to be at the mercy of the insurance company and health providers.
Reminds me of the Americans in Cancun who always seem to be so proud of their ability to get a “deal” from the street vendors, never knowing how badly they have been taken.
Charlie, if the skiing is good, don’t tarry over this response. That health Insurance is not health insurance is apparent, and I completely agree with the premises of your original post. There is enough evidence that Medical insurance, and so called Health Maintenance Organizations (HMO’s), exist to make money for themselves and their stockholders.
Unfortunately, you presented no solutions to the problems. We are left with (1) do nothing (nobodies favorite); (2) increased regulation of Insurance companies and HMOs (gasp, there goes the market place); (3) pure market place, out of pocket expenses (big $$ will not like that); (4) single pay, Universal, government supported; (5) combination of (2) and (4)…
P. Ami, I urge to explore the links I posted above, specifically those that explore single pay, government sponsored health care. Pick Sweden, Germany, France and see if your fears of “national health service is not the sort of solution that leads to choice, freedom or competition” is valid.
Guaranteed in none of the countries mentioned above would you be paying 500 dollars for an ultra sound ordered by a physician. You would have your choice of doctor, you would have your choice of hospital, your “insurance” would be valid as you moved around the country, you would remain covered, with the exactly the same benefits as everybody else if you changed jobs, or lost your job. There is no such thing as “pre-existing conditions”, and your family history, DNA profile, does not invalidate your participation, or force you to pay at a higher rate.
“Most of us think that market conditions, when left to themselves, do a better job of keeping companies effective and prudent then governments. Precisely why I am repeating some of my previous links:
http://www.cjr.org/campaign_desk/impressive_coverage_at_the_la.php
http://www.nytimes.com/2008/02/18/opinion/18mon1.html?em&ex=1203483600&en=9cabea39bba83519&ei=5087
http://query.nytimes.com/gst/fullpage.html?res=9B02E4D8173FF93BA15751C0A96E9C8B63&scp=5&sq=robert+pear&st=nyt
You are right that modern “Health Insurance” is not very much like insurance – it covers much more than catastrophes.
Many here, however, may not appreciate that private insurance simply does not work. There are about 45,000,000 without medical coverage in the US. There are only about 6,000,000 people (2% of the population) who buy their own coverage.
The reason is not just the weird system where employers pay. It is also that there is a complete market failure in individual health insurance. You have to be very healthy to buy it at all. If you can’t buy it, you either get a job that has it (if you can), or you risk all the assets you acquired to the first significant medical event that hits.
Many people work for corporations ONLY because it’s the only way for them to get insurance. This results in economic friction. Older, more experienced people are more likely to have pre-existing conditions, which means they can’t participate in entrepreneurial start-ups without risking all their assets on a health event.
Not only that, but the individual is raped by the medical institutions. I saw a procedure that retailed for $50,000 (cardiac ablation) where the insurance company only had to pay $14,000 and that was accepted as full payment. If you needed this procedure and didn’t have insurance… well, you owe the whole $50,000.
Americans are properly concerned that the medical payments system in the US has broken down, putting all but the rich and the very poor at risk of losing their assets when they fall through the cracks. Medical bills are the largest cause of bankruptcy in the US.
The free market will simply not “solve” this problem – unless we institute a policy of only treating people to the extent they can pay. Since that will simply not sell, the government is going to be asked to settle this and ensure some form of universal coverage. Accept that *fact* and the debate becomes a bit more clear.
Insurance is the TRANSFER OF RISK.
Insurers are in the business of SPREADING, not TAKING risks. It is not a betting game.
Health Care is a provision of SERVICES that may or may not arise out of a risk (births, marriage counseling, etc.)
Politicians have forced service provisions into insurance contracts to the point that insurers today are basically administrators of service provisions.
Imagine what would develop if politicians were to require standard Homeowners policies to provide coverage for house maintenance, insects in the lawn, horticulutural counseling, etc. maybe even lawncare and leaf removal services.
50 years ago the original Blue Cross concept dealt with Health Care needs, basically prepaid. That too SPREAD the costs over time and numbers of persons.
Until we separate INSURANCE from health care SERVICES, the issues can never be resolved. But, what politically oriented person would want such a valuable issue to disappear?
Things the health insurance company I work for pays for:
1. Breast Reductions
2. Botox
3. Acne Treatments like Chemical Peels
4. Orthotics
5. Cold Therapy (basically a really expensive ice pack)
Guess whose money is paying for crap like this? That’s right – ours. Do people NEED stuff like this? Is it a real medical necessity? Nope but people want all sorts of unrealistic crap from their health care providers. Guess whose premiums go up to pay for completely unneccessary crap like this? Yep, ours.
Welcome to the imperfect world that is our health care. If you think any other health care system is better, you’re wrong. If you think any other health care system is worse, you’re wrong. They all work out in the end to be about even.
P.S. Chemotherapy often costs upwards of half a million dollars. Good luck finding anyone anywhere who can afford that. But understand one thing – health care bills in America are rarely paid in full. Trust me.
Paul: You’re right, didn’t offer any answers; if I were smart enough to know the answer, maybe I’d be a politician. I just don’t like it when politicians lie about what their answers are.
Richard: I think you are, in the main, right: we’re confusing paying for normal health care with “insurance”. But you’re simply mistaken on one point: as soon as you say insurance is about “risks”, you’re saying it is a betting game.
I must conclude that young single people, who substantially favor Democrats, can’t do simple math.
Or they just figure that someone else will be paying all their living expenses soon.
With Social Security heading for oblivion, and Medicare much worse, and Dems promising higher taxes on everything that moves, and the screwing via health care mandates described above, and the premium that unmarried people pay on income, can’t they see that virtually ALL of their disposable income will soon be absorbed?
Are any of them seeing this? I haven’t read a single thing on this by anyone under 40.
Thank you, Charlie, for an insightful article on how far health insurance has strayed from its original intent.
Attorney Lin Zinser and I have written an article on health care history and policy that also covers many of these issues, including the destructive effects of government policies (such as benefits mandates, guaranteed issue, and other mandates) have had on the insurance industry.
It’s entitled “Moral Health Care vs. ‘Universal Health Care’” and it recently appeared in the Winter 2007-2008 issue of the journal, “The Objective Standard”.
We argue that the current crisis in American health care is the result of decades of government interference and violations of individual rights in health insurance and medicine. Hence the only moral and practical solution to the problem is not more government controls but instead to gradually and systematically transition to a rights-respecting, fully free market in those industries.
The full text of the article is available online for free at:
http://www.theobjectivestandard.com/issues/2007-winter/moral-vs-universal-health-care.asp
or http://tinyurl.com/25zffu.
Paul Hsieh, MD
E-mail: paulhsiehmd(at)gmail(dot)com
Freedom and Individual Rights in Medicine: http://www.WeStandFIRM.org
Minor Correction:
The TinyURL link for the article should be:
http://tinyurl.com/25zffu
(No period at the end.)
Sorry about any inconvenience!
Bu-bu-but, you hateful person you, think about the CHIIIIIIIIIIILDREN!
/unhinged lefty
Dr. Hsieh’s article offers mere assertions that removing all government mandates will make things better, while admitting that some people will end up without coverage. Such hand waving may be popular among those who value freedom (and most of us do), but is totally unconvincing.
The current system is indeed a mess. A system with no government at all would probably find it impossible to socialize risk in a way that is socially acceptable.
Health care is an unusual commodity – because some of the most expensive health care is simply not optional – it is life or death. Thus the examples in the article (Lasik and cosmetic surgery) are irrelevant – those are almost always purely optional – luxury goods rather than necessities.
I fear an acceptable solution will require some government mandates to insure universal coverage. But it should be for true insurance – that which protects one against unexpected catastrophic costs – rather than routine care.
Of course, if we ignore the idea of universal coverage, but do all the other reforms, we leave many people (especially those of us already trapped in the current system) completely uninsured. A market where many people cannot purchase insurance to protect their savings is a market that discourages savings!
Also unmentioned in this debate is the pathetic state of automation in the medical industry. Hospitals and doctors are decades behind other industries in automation, even though they are buried in paperwork. Many patients die due to mistakes that could be avoided with automation of care. Care is delayed, and costs raised, by the lack of modern ways of transmitting medical records. Dealing with any insurance system that has anti-fraud provisions (i.e. even that which the free market would produce) requires lots of information exchange, and automation could greatly reduce this.
And yet, our much vaunted medical system uses scribbled prescriptions, hand written hospital orders and records, and employs many clerks to deal with payment and authorization issues.
When I was a child, my parents (in the so called middle class) were eminently capable of paying a doctor for every day, non catastrophic illness or injury.
When I got sick with childhood illnesses, the doctor would come to our house and give me a soothing little shot in the behind. His presence and involvement in my “healthcare” (à la the principles of Hippocrates) was always encouraging.
The only time we used insurance was when my sister broke her arm.
Then, somehow, the behemoth grew, the federal government got deeply involved through sundry medicare this and medicaid that, insurance companies started seeing big $ on the horizon, HMO’s evolved, “medicine” started costing an arm and a leg, doctors started exploiting government programs with egregious charges and performing sundry unnecessary “tests” to justify and pay for expensive technological equipment…
…and the whole thing spiraled out of whack.
For some insight into the federal government insinuating itself even further into “healthcare” than it has already, I turn to the words of the inimitable P.J. O’Rourke…
If you think health care is expensive now, wait until you see what it costs when it’s free.
For many reasons, I fear a goverment run health care system. As someone pointed out above, all will be required to pay for bad health decisions of others. This will only provide the goverment with more leverage to dictate by regulation what it deems to be a “healthy lifestyle”, with the corresponding erosion of freedom.
I love to eat fatty foods (yummy fois gras) and enjoy adult beverages and an occasional cigar. However, I will probably never sky dive, mountain climb or operate a motorcycle – but support everyone’s RIGHT to do so.
We have already seen efforts to ban many aspects of my lifestyle on the basis of its alleged costs to society. Universal healthcare will only exacerbate pressure to limit other lifestyle choices.
This is why socialized medicine is inevitable. Business didn’t care when it was a trivial cost; now it’s a big hunk of payroll costs, and they want out from under it. Especially businesses who have to compete with foreign companies that don’t have to pay it.
We had an opportunity to do things differently a few decades ago, and business would have supported those reforms. We didn’t do it. Now they just want out, and don’t care about how.
preaching to the choir
I am way under 40 and I believe as a STAUNCH LIBERTARIAN that it’s YOUR RIGHT to do whatever
you wish in your lifestyle…however it’s NOT your right to make ME pay for it!
Therefore I say that the best way is that the young and fittest survive and the old and sick MUST DIE !!!!
If you can’t afford insurance or smoke or drink to drunkeness, then it’s YOUR RESPONSIBILITY
to change your lifestyle or PAY for the resulting medical treatment.
AND I also believe that if you get Cancer or get injured in a car accident,
well That’s Life! You either get well on YOUR OWN or you simply DIE !!!!
YOU ALL HAVE ABSOLUTELY NO RIGHT TO A PERFECT LIFE !!!!
YOU DO HAVE A RIGHT to do whatever is NECESSARY to ensure YOUR OWN HEALTH
and to ensure that if you ever DO get sick or seriously injured that you
have SUFFICIENT FUNDS or insurance to PAY FOR YOUR CARE.
If you can’t afford it, then IT IS NOT MY RESPONSIBILITY NOR SHOULD IT BE
to pay for something that YOU didn’t DO!!! which is to BUY medical insurance
OR ensure that YOUR OWN INCOME is sufficiant to allow you to PAY
for catastrophic injury or disease!
I AM a Darwinist and and TRUE LIBERTARIAN and if you can’t survive
on YOUR OWN, then either rely on close family members/friends
or if you can’t, then make peace with your maker and accept
that LIFE IS NOT FAIR and you will have to die or TAKE
matters into your own hand…..
Why should —I— HAVE TO PAY for the STUPIDITY or BAD GENES
of ANOTHER? … Again, I feel it’s survival of the FITTEST….
If you’re NOT FIT…THEN YOU MUST or SHOULD DIE !!!!!!
I watched “sicko”. It’s an older movie by Michael Moore. It’s about health insurance. 18,000 people die every year because they don’t have it. Personally I think we should focus back on having a plan that makes it so EVERYONE has health insurance. Obama is focusing on having younger people getting it but it should be everyone. old, young, hispanic, black, white. These companies don’t care about you, all they care about is making their millions. They don’t care wheather you live or die. I’m young. I don’t know a whole lot about politics, but I still have an opinion. I don’t know how we can make it happen, but i’m pretty sure it’s possible.
I am just a little fish in a great big pond,I FEEL THINGS ARE NOT GOING WELL FOR THE AMERICAN PEOPLE AT THIS TIME.WE HAVE NOTHINGATHIS TIME.Let us have health insurance.I AM A DIABETIC ,HYOPERTENSIVE,LUPES,BACK PAIN;i WENT TO SEE A DOCTOR IN A SMALL TOWN IN Nevbecause I could not pay for the blood work that had been done ,the doctor tore up the lab sheet ,he stated that was their lpolicy. It was my blood they drew and they did not give me the results of the test.
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