Health Insurance Is Broken, And I Don't Know If It Can Be Fixed

Health insurance used to be a relatively inexpensive way to protect yourself against big medical bills. But it's not really working any more. What broke?

Healthcare at its core is doctors and patients (I’m using the word “Doctors” to represent all the many kinds of providers of healthcare). Doctors study up on how to treat medical problems and wait for patients who are sick and need help. When someone gets sick, they get treated and then pay the doctor for their care. If the patient gets very sick, it might be a really big, very unexpected, bill. Conversely, even when nobody is sick, somebody needs to keep the doctors in business so they will be available when needed. Both parties benefit from a system to level payments out. That system is what we call health insurance.

Getting really sick could result in bills that are too expensive for one person to afford, but most people are well most of the time. The easiest way to protect patients from unexpected medical bills is to collect a small fee from everyone (all those mostly healthy people), and from time to time pay the expenses of a few people who get sick. As long as most people stay well, and the cost of the care that the few people need is not too onerous, it works.

Note that “health insurance” just means any third party that collects premiums from the many and pays out the expenses of the few. That can be the government or it can be a non-profit entity or it can be a for-profit entity. In some countries the government provides health insurance to everyone. In the US the government provides insurance to seniors (thru Medicare) and the poor (thru Medicaid). Everyone else has to get their insurance elsewhere. About 60% of health insurance in the US is provided by employer plans.

The earliest non-government insurers in the US were Blue Cross and Blue Shield, initially two separate agencies that later merged into one. In some ways, they proved that a health insurance system could work. Later lots of other insurance companies emerged, including both non-profit and for-profit entities.

One important premise of insurance is that for it to work, most people must have expenses that are less than the amount that they pay in. That excess is what will be used to pay the expenses of the people who get really sick. That means most people who get insurance should not “need” it. This is the reason why insurance systems have mandates that require people who don’t need it to participate. It’s pretty easy to understand if you think about it. If people don’t need to buy insurance until they need it, they won’t. Then instead of a big pool of mostly well people, the insurer will have a big pool of mostly sick people. Mathematically, that won’t work out. The government might decide to accept the losses that go with a system like that, but no one else could do it. Even non-profit entities will go out of business if only sick people sign up for their programs. This problem is called “adverse selection”.

How do insurers make sure they have a pool of healthy people? In the United States, one way they do it is by providing insurance mostly through employers. Tying health insurance to employment is one of the goofiest aspects of the US healthcare system. But it also solves the adverse selection problem. Anyone who is working could be assumed to be generally healthy. So a pool of employees is actually a perfect target for an insurance company plan. It’s a big group of mostly healthy people.

Conversely, an individual who tries to buy an individual health insurance plan is riskier, therefore hard to price. Insurance companies generally require “medical underwriting” for individual insurance plans, which means they want to know the medical history of the applicant. If the applicant looks like they might be expensive, the insurer will either deny the application or try to price the insurance very aggressively to protect themselves.

A government insurer can solve the adverse selection issue by requiring participation from everyone in the country, sick or well. Medicare and Medicaid aren’t mandated, but they have rules about when and how you can participate and you can be denied later if you don’t follow the rules. That discourages people from waiting until they are sick to enroll in the government plans.

One big controversy around Obamacare was that it originally included a mandate that everyone had to participate. They didn’t want only sick people signing up, they wanted a big pool of well people to sign up too. Political pushback finally killed the mandate and many of Obamacare’s other problems were inevitable without the mandate. Insurers had to charge more because they didn’t know if there would be enough well people in the pool.

The history of why employers provide healthcare insurance in the US is interesting. The practice emerged after World War II. Inflation was a problem and the government was trying to control inflation wage caps. Employers couldn’t raise wages but needed to do something to entice the workers they needed. They responded by adding health insurance as a new benefit. At the time, health insurance was very inexpensive. It was a cheap benefit that didn’t violate the wage caps. If health insurance cost then what it costs now, I’m not sure employers would have ever jumped into the fray! But of course, they didn’t know where it was headed. Later employer coverage was required by union contracts, and then the federal government threw in tax advantages to encourage employers to offer plans. For lots of reasons, it would be really complicated to eliminate that now.

Insurers need to have a balanced pool of well and unwell participants. They also need to be able to predict the costs. Predicable costs are essential to deciding how to price the insurance. The costs of healthcare have been surging, for lots of reasons. There are expensive new drugs and expensive new treatments, along with big increases in traditional medical costs. As new expensive treatment options emerge, they generate discussions about who is “entitled” to those treatments.

One interesting podcast describes the challenges employers face when they have multiple “Million Dollar Patients” in their health care plans. As they note, it used to be rare to see a million dollar healthcare bill, now it is common to have multiple million dollar claims. As healthcare costs increase, that changes the mathematics for whoever (government or private party) is providing insurance.

Federal or state governments dictate what must be covered by private plans. If the government mandates specific coverages, insurers have to adjust their calculations, and that ultimately will affect the premiums that they charge as well.

Ironically, one reason that healthcare provider costs have increased may be because of healthcare insurance itself. Insurance plans originally paid whatever the “cost” was, which encouraged providers to mark costs up. Then insurers tried to find other ways to control costs. This has resulted in a very gamified system where providers try to find creative ways to get insurers to pay more, while insurers try to find creative ways not to pay.

Finally, the insurance system adds a new cost to the doctor/patient equation, the administrative cost of the insurance program itself. And, in at least the case of for-profit insurance companies, some profit has to be carved out too. Even a government-run insurance program has administrative overhead that has to be covered. All of this increases the cost of the insurance.

So where do we go from here? We can’t eliminate insurance and go back to everyone choosing to pay their own costs or do without care. We can’t ask everyone to quit being sick for a year (or two, or ten) while we build a new system from scratch. I don’t know what the solution is, but I do know that the starting point is to understand what we have, and how it works now.