The Cost of Healthcare

One thing that I've never been able to understand with regards to our nation's perpetual health care debate is why anybody thinks that insurance is the best way to pay for health care in the first place. If one looks at the insurance industry model in general, the whole system is geared toward pricing the probability of one-off events occurring among a certain portion of those who are insured. For example, automobile insurance exists to protect against theft and accidents; home insurance to protect against catastrophic loss from fire and natural disasters; and life insurance to protect one's family against the untimely death of the breadwinner. Insurance companies can stay in business because the risk of all policy holders making a claim at the same time is unlikely, and most policies never pay out anything substantial if they pay anything at all.

Now consider health care. The probability that somebody with a health care policy is going to make a claim, actually several claims over the life of the policy, is all but assured. What would happen to the price of auto insurance if every time you got a tune up for your car, or filled the tank with gas, you then submitted a claim? Where would home insurance premiums be if it was standard practice to ask for reimbursement after having your house painted or the hot water heater fixed? Would it be within the realm of possibilities that insurance companies would try any number of tricks to make the process of filing a claim more cumbersome so as to cut down on the number of claims they were bound to honor?

The way the system is now, going in for a health check up or a minor procedure and submitting the bill to your insurance company for payment is akin to submitting an automobile tune up receipt or a general home maintenance receipt to your insurance company. A health check up, car tune up and the upkeep of one's home are all similar inasmuch as they can be categorized as general maintenance. Items that fall under general maintenance should not be subjected to the insurance reimbursement maze. As Dr. Kellerman puts it in an opinion article in today's WSJ:

The health insurance model is closest to the parasitic relationship imposed by the Mafia and the like. Insurance companies provide nothing other than an ambiguous, shifty notion of "protection." But even the Mafia doesn't stick its nose into the process; once the monthly skim is set, Don Whoever stays out of the picture, but for occasional "cost of doing business" increases. When insurance companies insinuate themselves into the system, their first step is figuring out how to increase the skim by harming the people they are allegedly protecting through reduced service.

Insurance companies act as middlemen, and middlemen add layers to the cost of business, not take them away.

Insurance is all about betting against negative consequences and the insurance business model is unique in that profits depend upon goods and services not being provided. Using actuarial tables, insurers place their bets. Sometimes even the canniest MIT grads can't help: Property and casualty insurers have collapsed in the wake of natural disasters.

Health insurers have taken steps to avoid that level of surprise: Once they affix themselves to the host – in this case dual hosts, both doctor and patient – they systematically suck the lifeblood out of the supply chain with obstructive strategies. For that reason, the consequences of any insurance-based health-care model, be it privately run, or a government entitlement, are painfully easy to predict. There will be progressively draconian rationing using denial of authorization and steadily rising co-payments on the patient end; massive paperwork and other bureaucratic hurdles, and steadily diminishing fee-recovery on the doctor end.

Anybody that's ever been to an auto body shop knows that a 2-tier system of billing exists. Tell them you are going to submit the bill to insurance for payment and you will get a much different estimate than if you reveal you'll be paying out of pocket. The same 2-tier system exists in our current health care system:

Some of us are old enough to remember visiting the doctor and paying him/her directly by check or cash. You had a pretty good idea going in what the service was going to cost. And because the doctor had to look you in the eye – and didn't need to share a rising chunk of his profits with an insurer – the cost was likely to be reasonable. The same went for hospitals: no $20 aspirins due to insurance-company delay tactics and other shenanigans. Few physicians became millionaires, but they lived comfortably, took responsibility for their own business model, and enjoyed their work more.

Several years ago, I suffered a sports injury that necessitated an MRI. The "fee" for a 20-minute procedure was over $3,000. My insurance company refused to pay, so I informed the radiologist that I'd be footing the bill myself. Immediately, the "fee" was cut by two thirds. And the doctor was tickled to get it.

Like so many things in life, personal responsibility needs to be introduced into the health care equation. Being forced to pay for one's own health maintenance should in theory promote a more healthy lifestyle. Young, healthy individuals need little more than catastrophic health insurance to protect against the big unforseen bumps in life. As one gets older, perhaps the level of coverage could go up on a sliding scale. In any case, whatever system of payment for health services is eventually instituted needs to be market-based and portable so it is not dependent on a particular job or social circumstance. Once the tremendous amount of inertia caused by the millions of minute claims processed each day by insurance companies is reduced, maybe then they can focus on the efficiency of the system; or get out of the business altogether.