The Insurance Model for Health Care

I’ve written on this topic before, but it’s time to repeat some obvious—at least to me—truths in the matter of modern medicine, health care, and the insurance model that pays for most of the care in this country.¹ That model would seem to have outlived its usefulness.

The concept of “insurance” grew out of mercantile transactions in the coffee houses of 17th century London, when transoceanic shipping was a relatively new and dangerous business, subject to piracy, storms, navigation errors, and sudden groundings. The loss of just one ship could break the finances of the merchant who moved his goods with it. So the merchants as a group and the moneymen of the time got together and paid into a pool that would pay out on the loss of any covered ship and cargo that met with such a mishap. If nineteen ships out of twenty returned to port and only one foundered, the deal was pretty good for the insurers. They would collect nineteen initial payments and suffer only one claim of loss, keeping the rest of the money for themselves and future ventures. However, if only fifteen out of twenty ships returned, then the ship owners would be relieved of worry while the insurers might be broken financially. The transaction was all about the odds, and figuring those odds more and more closely increased humanity’s understanding of issues like probability and risk.

You insure an asset against an improbable—or at least not all that likely—occurrence: against your car being wrecked or stolen, or your house burning down, or the liability for face with operating a car or owning a house. The less likely the event, the less you pay to insure against it. Most drivers can keep their car in a locked garage and use it responsibly, so the risk of loss is negligible. Most homeowners can build with fire-resistant materials, install smoke detectors, and keep a fire extinguisher handy, so the risk of loss is again vanishingly small. Most people can afford to insure these valuable items, whose loss might be financially devastating, because the risk is low. On the other hand, people who live on a flood plain or in an active seismic zone will find that flood and earthquake insurance are prohibitively expensive, because the river rises every spring and the earth’s crust is constantly moving.

Some people think this is unfair. They believe insurance companies should cover everyone equally. The insurers should just expand the pool of risk so that the near-certainty of the homeowner living on a riverbank being flooded out will be covered by flood insurance payments from people living on hilltops or in deserts. And people living in Iowa and Nebraska should pay significant earthquake insurance premiums in order to cover the losses of people in California, so the latter can more easily pick themselves up after the next Big One. But that is not the insurance model. Instead, it would be some kind of disaster-relief fund. It would be the promise that, come what may, whatever you do as an individual, your choices will be riskless, your life situation without discomfort, and your future protected from all serious losses.

Now that’s a nice idea—a heartwarming idea. But at the same time it would remove individual choice, foresight, and responsibility from the course of one’s life. It would also raise the insurance rates for everyone to uneconomic levels. And the more completely any insurance carrier, even one operating at government expense, tried to eliminate all risk, the more money it would have to collect against the inevitable losses.

Finally, no one insures a house for the costs of routine maintenance like painting the walls and repairing the roof, or a car for oil changes and wear-and-tear on tires. These are the expected expenses of ownership, not the results of catastrophic loss. And yet those who want a risk-free life also tend to expect a cost-free life as well.

For years, people paid “health insurance” that was really protection against the unexpected costs of a “major medical” complication like a broken leg or cancer treatments. The insurance covered big hospital bills and doctor’s fees, but not routine checkups and minor coughs, colds, cuts, and abrasions. Then in the 1970s and ’80s, Health Maintenance Organizations were formed to cover more of an individual’s or family’s health bills, including those checkups and preventive measures. This reflected the growing realization that sickness wasn’t something that just fell on people out of the blue but a condition they could, to some extent, control through good diet, exercise, restraint from smoking and drinking, and early discovery of potentially harmful conditions.

It was a good idea. But it obscured the realities of the insurance model. People came to think that every procedure related to health should be paid for by someone else. Insurance was no longer coverage against the big losses due to catastrophic accident and illness, but instead became the way to pay for all routine health care, minus a modest copay that did not rock your pocketbook. This was not that much different from expecting your car insurance to pay for oil changes and new tires, or your house insurance to cover a painting crew every five to ten years.

The insurance model as it applies to health is broken in another way. Sooner or later every asset reaches the end of its design life and then of its useful life. The timbers of a hundred-year-old house become too old, eaten by termites, or infected with dry rot to support the structure. The frame and body panels of a car—or at least those in the East, where they put salt on the roads in winter—become too rusted to last another season. The cost of repairs, compared with the cost of tearing down the house or scrapping the car and building or buying a new one, no longer makes sense. Unless the house is a national monument, or the car a rare and valuable model, or one with sentimental value, the owner makes the inevitable decision.

We don’t do that with our bodies, even though they also have a built-in design life and a point at which further health care will only prolong life on a constantly diminishing scale. People invoke more complex and invasive procedures as they age, spending increasing amounts of health-care dollars, to preserve their quality of life and indeed to preserve life itself. Traditionally, a person’s greatest medical expenses come in the last six months of his or her life. This is like demanding a new engine and transmission, new suspension, and new paint and seat covers on a rusted hulk that has 300,000 miles on the odometer. And yet, people are not cars, and we innately resist the idea that anyone should suffer for lack of adequate care, no matter at what point in his or her life.

The Patient Protection and Affordable Care Act (PPACA) that passed in 2010 was ostensibly designed to extend individual health insurance coverage at fair rates to all Americans. Indeed, it included rules that require employers to provide health insurance or pay a penalty, and rules for individuals to obtain health insurance or pay a penalty. It was sold to insurance companies as vastly expanding their customer base and so increasing the scale of their business. This would seem to be a resounding government investment in the health insurance model.

And yet, the Affordable Care Act included many features that work against this all-inclusive vision. For one example, the penalties for employers and individuals are substantially less than the projected costs of the insurance which the act mandates. By forcing employers to offer coverage for all of a person’s health costs, including such maintenance items as birth control—similar to requiring auto insurance to include oil changes—the act increases the potential cost of that insurance. Although the employer penalties have been artfully delayed for political reasons, the actual effect will be to discourage employers—who are by far the greatest source of individual and family insurance coverage since the wage controls of World War II—from continuing to provide this benefit. For another example, the act requires insurers to cover all individuals at the same rate, regardless of their state of health. This “community rating” is like charging homeowners the same for fire insurance regardless of whether the house is made of brick or wood, or drivers the same for auto insurance regardless of their accident and arrest record. The actual effect will be to increase rates for everybody, like charging people in deserts for flood insurance to pay for the losses of people living along riverbanks.

In my mind, all of these conflicting features cannot be explained simply as sloppy rulemaking—politicians trying to give everyone on both sides of the deal, insurers and insured alike, everything they want. Instead, I think the act was actually designed to break the insurance model of health care. And then, when the insurance companies have been forced out of business, the state will be required to step in and provide public health care on the Medicare and Medicaid model. In my mind, this act was very carefully designed to destroy the existing payment system.

But then, I don’t like the insurance model in the first place. People are not like houses or cars. Human life is a different order of proposition, and its maintenance and continuation should not be subject to economic considerations. And finally, as explained in my earlier blog, the current and future advances in medical technology, from genetic analysis to stem cell reprogramming, are blowing apart our earlier conceptions of health, sickness, aging, and even death itself. Two hundred years ago—before the germ theory of disease and during the reign of the four humors, black bile, and bloodletting—medical practice was a matter for royalty and the very rich. Everyone else went to the local wise woman or witch doctor. Today, modern medicine serves a real purpose in life improvement and extension. It has become a necessity of life.

It is my belief that in twenty or thirty years, through the combined action of institutional and academic researchers across the country and around the world, we will have defined every chemical process and reaction in the human body. We will be able to manipulate and regenerate tissues. We will be able to address the causes of sickness and aging, repair broken and deteriorating bodies, and reshape the human destiny far beyond “three score and ten.” And because these technologies will be applied on the model of the printing press and the assembly line, with modularized components, the costs will come down dramatically.² This is the point of my most recent novel, Coming of Age.

So I should be happy that the Affordable Care Act is rushing us toward a large-scale remaking of the health care industry. Except … I distrust large bureaucracies and globalized offerings. When the state tries to run everything along top-down, command-and-control principles—as it did in the Soviet Union for seventy years—the result is always stagnation, smothering of innovation, and loss of individual choice. As they say in the clothing business, one size does not fit all.

Instead, I would look for a multitude of patient-and-provider options, along the line of cooperatives and subscription services. Kaiser Permanente is a good model of this, where the doctors and support staff form a provider organization, and patients buy its services on the installment plan. Of course, it is common knowledge among users that the quality of your experience with Kaiser depends on how the local organization is run. Some areas provide great service, others not so much. But this is only a problem if restrictions exist on the formation of new, competing service organizations. When choice is restricted, the incentive to do better goes away. The tendency of people and organizations to excel when faced with competition on price and service offering is a built-in feature of free markets.

Taking the long view, I’m not too much bothered by the havoc that the Affordable Care Act will create in the current health care industry. A collapse was coming anyway, due to the changes in medical technology that are barreling down upon us like an express train. The old system of paying for catastrophic coverage and pre-existing conditions could not survive when every illness has its detectable precursor and every accident has its optimum repair.

But in the meantime, to paraphrase Bette Davis in All About Eve: “Fasten your seatbelts, it’s going to be a bumpy ride.”

1. See Personalized Medicine and the Insurance Model from December 26, 2010.

2. Anyone who doubts this should compare the cost of pioneering medical procedures, from organ transplants to laser vision surgery, with the cost of these services today. With widespread use and improvements in practice, the price comes down tenfold. For that matter, consider the cost of the first personal computers or cell phones with the equipment and prices available today. In a technologically oriented world, everything becomes relatively cheaper. See Gutenberg and Automation from February 20, 2011.