America Needs Healthcare, Not Health Insurance

In Friday’s New York Times, Paul Krugman argues that the Supreme Court conservatives grasping for reasons why Congress lacks the power to do anything that they don’t like have forgotten an important distinction: the one between a judge and a politician. We’re not sure this is correct. It’s always been the case that for all of their lofty protestations of being “above politics,” the Supreme Court has been political, whether it be the Warren Court or today’s Roberts Court.

That said, we’re not sure the Supremes are wrong to question the constitutionality of a private health insurance mandate that Krugman seems so keen to defend, asking: “Is requiring that people pay a tax that finances health coverage O.K., while requiring that they purchase insurance is unconstitutional?”

Historically, Krugman has been one of the most eloquent critics of the insurance-based model. Yet he makes the mistake common to many progressive defenders of Obama’s healthcare bill: He conflates two distinct issues and thereby masks the fundamental flaw underlying the entire approach. Private health insurance is not synonymous with healthcare. There is a big difference between levying a tax for a public good (i.e. healthcare) versus forcing people to buy a service from a private health insurance company, which is by no means synonymous with healthcare.

Using insurers to provide funding is a complex, costly and distorting method of financing healthcare. Imagine sending your weekly grocery bill to an insurance clerk for review and having the grocer reimbursed by the insurer to whom you have been paying “food insurance” premiums—with some of your purchases excluded from coverage at the whim of the insurer. Is there any plausible reason for putting an insurance agent between you and your grocer? No. Then why should an insurer stand between you and your healthcare provider? And why should you be forced to contribute to such an arbitrary scheme?

Furthermore, it is important to note how unusual the United States is—no other comparable nation (in terms of high per capita income) lacks universal healthcare coverage, and many nations that are much poorer provide universal access. And in most of the nations that are similar in other respects to the United States, government plays a much bigger role in healthcare delivery and in financing the system.

“Reform” measures actually promote the status quo by pulling more people into an expensive healthcare system that is managed and funded by insurers. Since two-thirds of household bankruptcies are due to healthcare costs, forcing people to turn over an even larger portion of their income to insurance companies will further erode household finances and exacerbate the problem. This is despite the fact that research by, among others, David U. Himmelstein and Steffie Woolhandler, demonstrates that single-payer reform could save about $380 billion annually that’s currently wasted on insurers’ overhead and the unnecessary paperwork (and screen-work) they inflict on hospitals, doctors and patients.

Even under today’s “reforms” in the Affordable Health Care Act, healthcare remains a function of employment, which preserves a significant cost disadvantage for U.S. corporations and is particularly unappealing during periods of high unemployment.

The U.S. is the only country in the world where healthcare has become a marginal cost of doing business, thereby putting American corporations at a significant cost disadvantage vis a vis their foreign competition.

The reality is that healthcare is not a service that should be funded by insurance companies. An individual should insure against expensive and undesirable calamities: tornadoes, fires, auto accidents. These need to be insurable risks, or insurance will not be made available. This means the events need to be reasonably random and relatively rare, with calculable probabilities that do not change much over time. We need to make sure that the existence of insurance does not increase the probability of insured losses. This is why we are not allowed to insure our neighbor’s house.

Insurance works by using the premiums paid in by all of the insured to cover the losses that infrequently visit a small subset of them. Of course, insurance always turns out to be a bad deal for almost all of the insured—the return is hugely negative because most of the insured never collect benefits. The insurance company’s operating costs and profit margins are more or less equal to the net losses suffered by its policyholders.

Ideally, insurance premiums ought to be linked to individual risks; if this actually changed behavior so that risk fell, so much the better. That would reduce the costs to those policyholders who do not experience insured events, and would also increase the insurance companies’ profitability. Competition among insurers would then reduce the premiums for those whose behavior modifications had reduced risks.

In practice, people are put into classes—say, “over age 55 with no accidents or moving violations” in the case of auto insurance. Some people are uninsurable—the attendant risks are too high. For example, someone who repeatedly wrecks cars while driving drunk will not be able to purchase insurance. The government might help out by taking away the driver’s license, in which case the insurer could not sell insurance even if it were willing to take on the risk. Further, one cannot insure a burning house against fire because it is, well, already on fire. And even if insurance had already been purchased, the insurer could deny a claim if it determined that the policyholder was at fault.

The insured try to get into the low-risk, low-premium classes; the insurers try to sort people by risk and to narrow risk classes. To be sure, insurers do not want to avoid all risks—given a risk/return trade-off, higher-risk individuals will be charged higher premiums. Problems for the insurer arise if high-risk individuals are placed in low-risk classes and thus enjoy inappropriately low premiums. The problem for many individuals is that appropriately priced premiums will be unaffordable. At the extreme, if the probability of an insurable event approaches certainty, the premium that must be charged equals the expected loss, plus the insurance company’s operating costs and profits.

However, it is likely that high-risk individuals would refuse insurance long before premiums reached that level, since they will be better off paying out of pocket. With costs skewed toward the less healthy part of the population that bought this insurance, the insurance company would invariably seek to mitigate this impact on cost through a process of prescreening to identify those likely to require expensive treatment, and either rejecting their applications or charging significantly higher premiums to compensate.

Again, this tends to guarantee that the uninsured pool is the most at risk. In any event, once an insurance policy is written, the insurer does its best to deny claims. It will look at the fine print and try to find exclusions and uncover preexisting conditions (say, faulty wiring) that would invalidate the claim.

From the narrow perspective of the insurance companies, all of this is good business practice. Even under a system which denies coverage on the basis of pre-existing conditions (the quid pro quo for the mandate), the legislation gives ample scope for the insurance companies to limit coverage. Sarah Palin was right. There are death panels in our healthcare system: they’re called health insurance companies.

And the reality is that as human beings we are all a bundle of “pre-existing conditions.” From the day of our birth, each of us is a little bundle of preexisting conditions—congenital abnormalities and genetic predispositions to disease or, perhaps, risky behavior. Many of these conditions will only be discovered much later, probably in a doctor’s office. The health insurer will likely remain in the dark until a bill is submitted for payment. It then must seek a way to deny the claim. The insurer will check the fine print and patient records for exclusions and preexisting conditions. Often, insurers automatically issue a denial, forcing patients to file an appeal. Again, good business practice for an insurance company, but lousy if the objective is guaranteed healthcare provision.

Given today’s political constraints, perhaps a full “single-payer” option might not be feasible, but one earlier variant of the proposed healthcare legislation did feature a Medicare buy-in. In effect, if the Supreme Court does strike down the major provisions of the Obama healthcare plan, Congress could easily use Senate reconciliation and expand Medicare via the Senate’s buy-in provisions (the House can approve this on the basis of a simple majority vote). The Congressional Budget Office has already signed off on this as a means of saving money (“budget savings” is in some respects a nonsensical concept, but it provides the necessary political cover to deploy what is essentially a budgetary procedure).

More important, the expansion of Medicare would provide a genuine “public option” that, by competing against private insurance companies (which would presumably no longer have any genuine cost constraints given that the ban to deny coverage on the basis of pre-existing conditions would likely be struck down with the individual mandate), would help control costs. It would also help solve the problem of preexisting. And because Medicare does not deny coverage on the basis of pre-existing conditions, it is actually far more cost effective than private health insurance. As James K. Galbraith notes in The Predator State (2008):

Public health insurance entities such as Medicare do not evaluate risk because they are universal. Therefore, they save the major cost associated with private health insurance. They pay their personnel at civil servant salary scales and are under no obligation to provide a return to shareholders via dividends or meet a target rate of return. Insurance in general is therefore intrinsically a service that the public sector can competently provide at lower cost than the private sector, and from the standpoint of the entire population, selective provision of private health insurance is invariably inferior to universal public provision.

In other words, this brings us closer to the “ideal” low-cost universal insurance plan that has long been advocated by people like Paul Krugman. Allowing a Medicare buy-in to Americans under age 65 would give people a genuine alternative to private health insurance and thereby render the whole issue of denying coverage on the basis of preexisting conditions moot. And it would substantially enhance the global competitiveness of American corporations.

A Medicare buy-in would also have the added benefit of getting us closer to a single-payer system, which is a far more rational way to control healthcare costs, largely due to the administrative complexity associated with our current patchwork system and the corresponding inability to bargain with suppliers, especially drug companies, for lower prices. Residents of the United States notoriously pay much higher prices for prescription drugs than residents of other advanced countries, including Canada. This proposal would also give American healthcare consumers far more bang for their buck than the current legislation. It would indeed be the height of historic irony if the Roberts Supreme Court was the instrument that led us away from a private health insurance based system toward something approaching a rational, affordable healthcare provision.

Cross posted from Alternet and naked capitalism and is posted with permission.

12 Responses to "America Needs Healthcare, Not Health Insurance"

  1. R. Coutinho   April 2, 2012 at 7:13 pm

    It would be ironic; it would also be great! We need to get the insurance companies out of the (standard) health care business. They have an objective that is at odds with their customers. That is, generally, the nature of the insurance business. The concept that because businesses are competitive with one another they will automatically cause costs to be lowered fails to look at the dynamics of the situation. Since the insurance company (usually–HMO's may be different) is not the employer of the entire health care system for its buyer, the company actually has very little capacity to lower the costs.

    When it comes to car insurance, the insurance company pays what IT thinks is a fair cost for repairs–the mechanic can set any price he wants, the insurance company does not pay his set price. With health care, some insurance companies act similarly (i.e. they set what they believe is a fair price and pay that regardless of the bill). The difficulty comes in that people want to pick their own doctors, hospitals, pharmacies, etc. This picking and choosing separates the payer from the chooser–thus competition does not lower the prices.

  2. Stuart J Greenfield   April 2, 2012 at 9:39 pm

    what's so ironic is that the percentage of our population now covered by a government insurance plans, Medicare, Medicaid, government employee insurance is probably 30% – 40% of the population. I would hope they would create a single government plan and then allow others to buy in.

  3. George N. Wells   April 3, 2012 at 3:57 pm

    To me the issue is far more complicated. For starters, Health Care is what I do to take care of myself in the form of managing what I eat, amounts of sleep, exercise, et cetera. Health Management is where I employ a professional (MD, Nurse Practitioner, et cetera) to monitor my bodily systems including regular exams, blood and other tests. Also are drugs used to manage conditions that are part of my bodily systems. Then there is disease treatment and management. Again professionals are part of the process. Finally there is crisis management: this is generally a result of ignoring an ongoing problem or the result of an accident and this requires immediate attention and treatment by a professional.
    Insurance is how this gets paid for.

    Can the government simply eliminate private insurance? It could, but at the cost of thousands of jobs and the disruption of the value of all those corporations. Politically that isn't going to happen.

  4. Sierra7   April 3, 2012 at 6:05 pm

    Would iit not be fantastic if we were all born "perfect"?
    Single payer non profit universal health care is the only "reform" we should stand for.
    Everything else is pure BS.
    As fas as being "politically feasible", either it is or we take to the streets!

  5. Guest   April 5, 2012 at 12:04 pm

    True but unless we bite the bullet we will be. Gained to this private insurance industry indefinitely. This of course can and should be gradually staged in for such a massive transition for so large a portion f the economy, the suggestion to start with buy in is excellent, so would be extending Medicare or Medicaid to all those under the age of 26 ….I am inclined to go with Medicare as Medicaid varies too much across states and is often really inadequate. Insuring this age group is very cheap and very cost effective…unintneded synergies exist as well …imagine every teenage smoker , drinker , darug abuser getting a lecture from a trusted primary care doc for ten staight years…

  6. RayPhenicie   April 12, 2012 at 6:31 pm

    "Competition among insurers would then reduce the premiums for those whose behavior modifications had reduced risks." Good and well and that is happening to some extent. This idea of competition among insurance carriers needs to be broken out into a separate post because it has a likely chance of happening- the day of Medicare for everybody is something our grandchildren may see in their old age-or not. We never will in this lifetime.
    However we need to first discuss what is driving health care costs to the moon because that is really the key to understanding this whole situation and is the key to successful competition and business models for insurance carriers to be aware of; I am only going to list these for now-any readers who need more information should submit a comment.
    1. Increasing Toxicity in the water, air, and soil is linked to serious problems in disease management. Only Congress can control this by writing and setting up enforcement of environmental protection and cleanup. We will wait a long time for this one too.
    2. Uneven or poor quality of care across the country is the second major cost driver; repeat operations are the most obvious but missed or wrong diagnosis, are also another factor. Quality of care overall is not very good in this country-which is to say it is spotty. Poor delivery (go here to get diagnosed, over there for X-ray or MRI or CAT scan-back there for further analysis and diagnosis, around and around we go and wait for results) plagues the system and causes it to break down for many people. Some have estimated over 100,000( some say 260,000) people die /yr. because of poor quality standards and unskilled care giver clinics, hospitals and professionals within our system. That is expense given a death mask; millions more each year have their medical conditions made worse by low quality of care. Yes, we have good, some excellent care givers; but some are not so very good-at all.
    This is not to say that quality of care is poor everywhere, again we have some of the best in world-depending on where you stand-or lie.
    3. Over utilization of care is third on our list of devils-unnecessary treatments are very common and cost hundreds of billions every year.
    4. Under utilization of care is the fourth devil plaguing our health care system. Men typically may avoid traveling to the doctor until dragged by the spouse or driven by pain-usually too late-but others may seek avoidance of short term costs which are sometimes relatively high in the way of out of pocket copays, coinsurance or deductibles; this is a real devil working harm.
    What do do?
    There are already health care provider groups who have found elegant solutions to keeping costs lower than others. These groups follow a best practices view to training and do this by tracking the outcomes of patient treatments; in short, if a procedure or method is not working-stop doing it. Sounds simple but unless the outcome of long years of treatment (the care devoted to chronic conditions eats up the lions share of care dollars spent) are tracked and scored we will not know who the low quality care givers are. And track we must.
    This is where insurance companies could compete-they have huge depositories of patient outcomes and could use these to group a base of the best available providers together and talk it up in marketing drives-with some real numbers to show it could work a positive change in our system. Now there is one obstacle to this-the AMA is not always going to allow scoring providers on patient outcomes but I understand that in the field of cardiac medicine and organ transplants it is already being done.
    So yes, health care for everyone, but unless we exorcise these (and other) devils, we are not talking real solutions-only cost shifting.
    The cost shifting schemes revealed -and Medicare currently indulges in this maneuver, will have to be the next scene to this drama. Another day.

  7. RayPhenicie   April 13, 2012 at 6:49 am

    Cost shifting-with the patient on the short end of the stick-just took place earlier this year. Congress always makes Medicare recipients pay more each year.

  8. RayPhenicie   April 13, 2012 at 6:54 am

    Wasted funding for tests and procedures not needed is documented in the article here. Until real progress is made in these situations of over-use, a one payer system would only have us perpetrate them.

  9. samanthamadhurr   January 17, 2013 at 5:17 am

    Totally accept with the post, not only the America even all the people around the globe needs health care not health insurance, as people without the right equipment and right way of treatment by the physicians there is no use of health insurance to anyone !

  10. Heath Davilla   June 3, 2013 at 3:37 am

    This is a wonderful discussion which will be very useful discussion because you have posted a such kind of handy discussion because you have posted about the health care insurance.We need to get the insurance companies out of the (standard) health care business. They have an objective that is at odds with their customers. That is, generally, the nature of the insurance business

  11. Pamela   August 27, 2013 at 2:27 am

    Americans are been giving more importance to the health care services and they will be more be pretending the new and recent health care services so that they receive the best health care treatment and services and according to a recent survey it was found that people are more requiring health care and but not health insurance. So it is better that we provide them health care and not insurance.
    urgent care locations

  12. replique montre   April 7, 2014 at 10:39 pm

    America Needs Healthcare, Not Health Insurance