Wednesday, June 4, 2008

The Proper Role of Health Insurance

Poll a hundred Americans and ask them what the purpose of health insurance is. The majority will tell you that it is important to have health insurance in case something happens to them medically that they can’t afford.

The general understanding of insurance is as follows: A large number of people make periodic, relatively small payments (insurance premiums) to a common fund. The payers do so with the understanding that, in the off-chance that physical hardship should strike, they will have access to the common fund so they won’t be ruined financially. Each payer must anticipate that they will probably not ever get back the money they put into the system. They are paying for insurance- the assurance or security that should something really bad ever happen to them, there will be funds to cover the medical care necessary.

The system makes sense. Each individual payer parts with the money paid as periodic insurance premiums, knowing that they will probably never see that money again. They are paying for the “just in case.” Their payment leaves them with enough income to cover their standard of living, and it is worth a small sacrifice to prepare for the future. They feel they are doing something responsible and they probably are.

Contrast the generally understood, common-sense version of insurance with what Americans are doing in practice. Americans forfeit significant percentages of their income, either personally or through their employers, to cover a different kind of medical insurance. The money paid is not dedicated to in-case-of-a-rainy-day medical problems. It is paid to insurance companies to cover routine prescriptions, health screenings, runny noses, ear aches, and allergies- health situations not in the least bit unexpected or catastrophic.

Comprehensive insurance moves beyond covering just the rainy-day emergencies. It expands beyond- is more comprehensive- than a catastrophic plan. It serves to allocate and manage routine medical payments and spread those medical costs among the customer base. Comprehensive insurance buyers pay insurance companies to manage their funds and even make some medical decisions for them. These managerial decisions include which medications they can purchase, which doctors they can see, and even how much money they can spend on medical expenses in a year.

The majority of Americans have bought into the comprehensive insurance system. But it is apparent that Americans are not happy with the system they are practicing. They gripe about the costs of their premiums. They mutter as they pay hundreds of dollars per person per month for health insurance. They rage when after paying a hefty premium, they are stuck with a co-pay at the end of each doctors visit. They complain when their insurance will not allow them to buy their medications of choice. Why, after dropping $250 as an insurance premium, should the payer still have to pay out $40 out of pocket as a co-pay for a $150 visit?

Americans have forgotten that they are no longer paying for the insurance of possible catastrophic problems. They are paying for comprehensive management of their every-day health problems and every-day health expenditures. That comprehensive management costs money. That comprehensive management requires extensive manpower. In fact, Americans are paying the salaries of nearly 500,000 health insurance personnel with their insurance premiums. That is the salary of 500,000 individuals that they are covering in addition to the cost of their medical care with each monthly payment.

Comprehensive insurance is not for all Americans. In fact it probably isn’t for most Americans that are now on it. Many Americans pay for a policy, thinking that it will somehow save them money. The brutal truth of the matter is that the average American MUST by all the laws of logic, mathematics, and physics pay more money for their health insurance than they would otherwise pay if they directly managed their health care. In using comprehensive health insurance they are paying to have medical decisions made and their medical funds managed, a service most Americans would probably rather perform themselves. In so doing, they are covering the salaries of nearly 500,000 health insurance employees (see reference). How could they save money in the process?

In addition, we should not forget what the insurance industry costs the clinics. To maintain contact with insurance companies and maintain a current understanding of the ever-changing policies, medical practices must hire individuals especially for working with insurance companies. Primary care clinics often must hire MULTIPLE “insurance people” per physician to work with insurance companies. Thus American consumers are doubly charged for their health insurance: once when they pay for comprehensive services with their premiums, and a second time when clinics raise their rates to cover the manpower to correspond with insurance companies.

And so, in a time when America looks to decrease spending on health care, suggestions to legislatively increase the numbers covered by comprehensive insurance should appear absolutely ridiculous. Assertions that comprehensive health care should become mandatory should appear perfectly insane. Those who make such suggestions either do not understand the nature of health insurance or have sinister and damning plans for America’s future.

Rusty Scalpel


Mike G said...

Interesting piece…

The tendency of insured Americans to exploit their insured status creates an overlooked burden on the system. Arguably, the push for preventive medicine may also be a contributing factor to such burden

Like you said, the bureaucracy involved with managed care is another aspect that is often overlooked. I’ve ranted about this in my blog. As future providers, I see a dim future for our health care system…

Stephen Gashler said...

Another enlightening post.

This might sound backwards in a "free market" blog, and while I agree with the principles of free market concerning the health industry, I wonder if the insurance industry might be different. Why not turn insurance (all kinds of insurance) over to the government? If government employees were given a fixed income in order to manage insurance, there would be no incentive or margin for profit, so how could any for-profit company compete? (Usually a loss of competition is a bad thing, but in this case it means a more direct and efficient use of the majorities' money.) It's at least one step closer to throwing out the middleman. Of course, no coverage or types of coverage would be mandated. There wouldn't even need to be any regulation, and it wouldn't truly be a monopoly, because if government-managed insurance could offer lower rates than companies, then prices would naturally be driven down. Just an idea.

Rusty Scalpel said...

In response to Stephen's post, I don't think a government-run insurance system would be any cheaper than private insurances.

I can't see how a government insurance company would have lower operating costs than any other company. It's employees would still have to be paid, facilities would have to be paid for, etc. Having the employees work at salary instead of commission may be instrumental in gettin people on plans appropriate to their health and budgets, but it would probably also result in a decrease in productivity. This would necessitate the need for more employees. The only way I can see a government policies being cheaper is if the policies are being partially funded by tax dollars. Of course, this does nothing to decrease the overall cost of health care.

I also see the danger in the government entering the market as a competitor. Any government company would assume the backing of the government itself. Too easily we could end up with a sequel to Fanny Mae and Freddie Mac's influence on the housing market. If they command enough of the market share and begin to utilize unwise business practices, such as insuring those who will bankrupt the system, just like Fanny Mae and Freddie Mac began extending home loans to individuals who would not ordinarily qualify for such loans. A federal insurance company could drive the insurance market into a financial crisis, just like the federal lenders did to the housing crisis.

I can see no good coming of the government entering the insurance market. If I misunderstood your comments, feel free to correct me.