Monday, January 05, 2009

Healthcare and Health Insurance

I work in Healthcare IT. I see my job as a ministry. My job helps to lower the cost of delivering health care to people. I've worked both in private insurance and in the Medicaid/Medicare fields for various clients.
As health care become more and more expensive we are approaching a crisis (some would say that we are already in a crisis) where "normal" healthcare is too expensive to afford without insurance. A large part of the problem is the use of insurance and the different models of how to best pay for health care.

Healthcare as a Scarce Resource
Let's start out with some basics. Healthcare is a scarce resource. There is a limited amount of healthcare to go around. So, it has to be rationed. In a "relatively" free market, scare resources are rationed based on the ability to pay. For example, automobile ownership is determined by who will pay what price for which car. People with more money generally drive nicer cars. Likewise food (particularly premium foods such as beef and fresh vegetables) is rationed based on ability to pay. The government does not give out free prime rib to its citizens.
So, we have to ration healthcare. There is not enough healthcare to meet the demand for it - particularly if the payment of services is divorced from the delivery of the service. But healthcare is a different form of commodity than premium foods. There are several cases where withholding of healthcare would result in death or permanent injury. No one ever died because he didn't get a medium rare prime ribeye steak. So, some basic services should be available to those who cannot pay.

The Purpose of Insurance
Second, insurance is designed to help people pay for unexpected catrastophic loss. We insure our homes (and our mortgage holders demand we do this) because no one (or very few people) can afford to purchase a new house if the current one burns down. In the healthcare arena, insurance started out paying for catastrophic loss.

Today's Health Insurance
Today, we have health insurance that pays for known and planned (or plannable) and routine expenses. Health Insurance pays for check ups, well baby care, routine doctor visits for sickness (such as colds and flu) and other knowable and plannable events. Today's market is moving towards a high deductible plan where the insurance starts to pay after a $1000 per person per year deductible. The problem is that, in order to reach this deductible, even routine doctor visits are still filed with the insurance. This increases transaction costs for the doctor's office and for the insurance carrier. Like all business expenses, these costs are borne by the customers - the patients.

The Genesis of Employer Provided Insurance
One problem in our society is that health insurance is normally acquired from your employer. This really started in WWII when the federal government imposed wage limits to help industries and reduce inflation during an inflationary period (war almost always brings inflation). To attract the best talent, companies could no longer compete on price (skilled labor is also a scarce resource), it had to find other ways to compete, so they started offering "perqs" like health insurance. Everyone who wanted talented labor had to offer health insurance and the health insurance industry was rather new, so this distribution method (employers providing insurance) became the de facto standard.

A Thought Experiment
Using insurance like this divorces payment for services from the delivery of services. Thus, there is no incentive to minimize or self-ration health care services. As an anology, imagine if your employer offered "Lunch Insurance." Your employer will pay 50-80% of the cost of your Lunch Insurance (LI). LI has an annual deductible of $200 per person and will pay 80% of the cost of your lunch after you reach that deductible. Now, what do you think will happen to the price of lunch in general? How would your own lunch eating habits change? Would you continue to bring your lunch to work or would you go out more often? Eventually, the cost of lunch would increase such that you had to have insurance to pay for lunch at all - unless your were independently wealthy.

What Should We Do?
I'll address that tomorrow or Wednesday. In the mean time, leave your own recommendations in the comments.


YBIC,
Phil Snyder

3 comments:

robroy said...

What we shouldn't do is to place all the advantage with the insurance companies. Currently the insurance companies are merging into mega-organizations.

We have this about the department of Justice:
In the past 12 years, out of more than 400 mergers, the DOJ has challenged only
two.


While large health insurers have posted very healthy profits since 2000, premiums for consumers have increased without a corresponding increase in benefits. In fact, during the same time period, consumers have faced increased deductibles, co-payments and co-insurance. This has effectively reduced the scope of their health benefits coverage.

In Colorado, I think that three insurers now control ~90% of the business. Patients and physicians are powerless. How can I has a small business owner tell Well-pointe that their premiums on my 10 employees is too high? Also, as a physician, I can't get together with the other specialists in town and tell them their reimbursements don't cover my expenses. The DoJ would come after us for collusion! It is crazy.

plsdeacon said...

Hi Robroy,

I would agree that Insurance Companies have too much power in many states - particularly in the Medicare and Medicaid businesses. What we need is a way to reduce the costs of delivering medical care. Reducing the insurance companies' influence is part of it - as is discovering better ways to deliver non-emergency care.

YBIC,
Phil Snyder

Bryan Hunter said...

One reason in particular for Health Care being more than insurance against catestrophic loss as you defined is that it is a competitive advantage for companies to provide this coverage for their employees. For example, I am a member of a PPO (Preferred Provider Organization), and as long as I go to the doctors who are on my plan (agreed to cost containment as defined by the insurance company) it doesn't cost me much to go to the doctor. It is also hassle-free, in that I don't have to spend my valuable time reconciling EOB's against what the doctor charges. Overall I pay more for this arrangement, but for me, a single dad with 3 very active teenage boys, it works.