Could the problem with health care be health insurance?

In an article entitled,”Health Care in the Twentieth Century: A History of Government Interference and Protection”, Terree P. Wasley provides some insightful historical perspective on the development of health insurance in the United States. Wasley notes that from 1880 to 1930, America saw the establishment of a professionalized medical industry and the use of health insurance to prepay health care costs. As a result of the Great Depression, hospitals saw incomes per patient fall from $200 to $60. Hospitals turned to insurance plans as a way to guarantee revenues.

The first insurance plan was introduced in 1929 at Baylor University Hospital, where teachers prepaid their health care expenses to the hospital. Soon after other groups of hospitals formed multiple hospital insurance plans.

Insurance plans compensated doctors on a cost-plus method, which meant that doctors would be reimbursed based on “reasonable and customary” charges. According to Walsey, the plans reimbursed hospitals on a percentage of their costs as well as working and equity capital. Doctors and hospitals could charge what they wanted knowing they would be reimbursed and consumers had no incentive to manage their health costs given that care was being paid by money from a “third party.”

As we progressed thorugh the 1940s, America saw the establishment of employer-provided health insurance. As a way to attract quality employees and avoid higher taxes, employers began offering health insurance. The Internal Revenue Service provided some tax relief by allowing employers to deduct the cost of providing insurance as a cost of doing business. In 1954, Congress went ahead and codified the tax exempt status of health insurance benefits.

Labor unions got into the act and began negotiating for employer provided health insurance in the 1940s. Receiving additional cover from the U.S. Supreme Court’s resolving the issue of whether unions could negotiate for health care in collective bargaining in Inland Steel, coverage expanded via collective bargaining agreements and employer contributions. During the 1940s and 1950s, the U.S. saw an expansion of employer-provided plans that offered first-dollar and routine care coverage as opposed to just catastrophic coverage. This expansion of employer-based insurance eventually drove up the cost of health care, especially since it is more expensive to provide for and insure first dollar care i.e. doctor visits, flu shots, etc. than low probability, low frequency, high-cost events such as catastrophic injury.

This expansion of employer-based health insurance fueled the argument that health insurance should be expanded to the poor, elderly, and unemployed, thus the implementation of Medicare for the elderly, and state administered, federally funded Medicaid for the poor. Like private insurance, Medicare reimbursed doctors and hospitals for reasonable and customary fees.

Through his historical expansion, health care insurance has, according to Reason.com’s Ronald Bailey, managed to obscure the basic notion of insurance. In his November 2004 article, “Mandatory Health Insurance Now!”, Bailey notes that insurance was designed to protect against unexpected financial losses. Insuring routine activities such as flu shots and annual physicals drive up health care costs.

The irony of it is that most Americans who are typically concerned about catastrophic care could reduce their insurance costs by purchasing less costly catastrophic health insurance. Bonnie Erbe noted in her article, “Most Could Afford Catastrophic Health Coverage”, (U.S. News and World Report, December 13, 2006) that the costs of such policies is approximately $3,000, a fraction of the cost that most Americans incur for a standard health insurance policy.

Rather than revamp an entire $2.4 trillion health care services market to cover, at most, an additional 30 million uninsured citizens, some of whom do not want to buy health care insurance in the first place, wouldn’t it be better to subsidize a portion of their out-of-pocket routine care expenses and encourage the uninsured to purchase lower cost catastrophic insurance with their savings?

About Alton Drew

Alton Drew brings a straight forward and insightful brand of political market intelligence. Alton Drew graduated from the Florida State University with a Bachelor of Science in economics and political science (1984); a Master of Public Administration (1993); and a Juris Doctor (1999). You can also follow Alton Drew on Twitter @altondrew.
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3 Responses to Could the problem with health care be health insurance?

  1. William Fisher says:

    National Health Insurance?
    By William Fisher, D.Ed
    August 11, 2009

    There is great confusion in all of the current talk about “health insurance” and “national health care.” Further, the distinction between health care (personal responsibility) and medical care (medical treatment by doctors, hospitals and pharmacists) is also confused.

    As evinced by the number of immigrant doctors, nurses and/or medical students who choose to stay here, and the number of people who come here for medical care, we do not have a medical care problem in the US. We have the one finest medical care systems in the world. As demonstrated by rising obesity, diabetic and other health problems in the US we do have a number of people who ignore their own health. That problem cannot be solved by law but by education.

    We do have an insurance problem. Consider: Practicing medical doctors must charge their patients an additional 30% to cover the administration of insurance claims. Hospitals add 25% to hospital bills to cover the cost of processing insurance claims, and the insurance companies themselves add on another 40% in administrative overhead costs. Together these costs, along with the cost of medical malpractice insurance, add about 80% to the cost of medical care.

    Exacerbating the cost problem is the actual price charged a patient. This seems to follow an unpublished tiered payment system. The first level is the price charged over the counter to a discharged patient. The second level is the negotiated price charged to an insurance company, the third price is that charged to Federal Medicare. The fourth price is that charged indigents who are asked to pay nothing for medical services. But these services are not free. The last level is the generalized, non specific price extracted from local taxpayers in the form of subsidized hospital payments from the local and state governments.

    A solution to the cost of health care would seem to lie in the out of control pricing system we employ in the US. Creating a Federal insurance system solves nothing. The discussion of how to control costs should begin with the insurance industry. Ideally “insurance” is a business of insuring against future calamity, and at the end of the day paying out little on a policy.

    Accidental death policies are an industry favorite since (1) (Need), accidental untimely death can devastate a family, and (2) (Reality), only 1.5% of all deaths in the US are accidental. With this type of policy, family fears are assured and the industry seldom has to pay a claim. Even life insurance is a no brainer for the insurance industry since most people will pay the policy fees for a time (or their employer or union will pay for a policy) and the policy will be allowed to lapse before the policy holder actually dies. Whole life policies are a little better for the consumer, but this “protection” can be beaten hands down by a simple low interest bank savings account (which pays no insurance industry overhead costs).

    On the other hand, automobile insurance and health insurance represent a huge problem for the insurance industry. Small claims are made daily against policies and the insurance industry has to pay out vast sums evaluating, denying and reducing claim costs. I suspect the insurance industry would gladly drop all health and automobile insurance policies.

    With automobiles, the industry has lobbied to enact laws that require all vehicles (not drivers) to be insured. Miss a payment, and the State will invalidate an automobile registration within 24 hours. What other “service” industry can call on the police to enforce late payments? In the future, look for the insurance industry to lobby for “driver” insurance that will require all holders of a driver’s license to be insured regardless of vehicle ownership. (The industry will argue that insurance costs will be reduced if the pool of the ensured can be enlarged.) Vehicles will still be insured against property damage and property liability “caused” by the vehicle.

    In the recent Health Insurance debate, unlike the debate that occurred during the Hillary Care debate, the insurance industry is silent. Why? The only answer can be the insurance industry wishes to shed the liability of health insurance by forcing the general public to pay these costs through taxation. Likewise, the labor unions who have burdened themselves with insurance costs are rapidly shedding health insurance responsibilities. The automobile industry and the UAW debacle are prime examples. The automobile industry and the union, who cannot afford to continue to pay the medical insurance costs they have negotiated into its contracts, have chosen to foist these costs off on the general public.

    What about the uninsured? For the most part, the uninsured are people who are young or who can afford “insurance” but wisely choose not to purchase what they do not need. (Insurance, after all is a form a gambling for both the individual and the industry.) For the truly indigent, who are a burden on local hospitals and county governments, if the Federal government (who refuses to enforce immigration laws) wishes to pay for these costs; it could do so by expanding support payments to local state and county governments.

    The real solution is relatively simple, but do not count on political implementation.

    The first step is to recognize that all insurance is gambling. If people wish to establish hedges against future calamity there exist far less expensive ways to do this than employing a vast behemoth bureaucracy with a bad reputation for payouts.

    More directly, some medical doctors already practice cash and carry policies that reduce medical care costs by 80% or more. Hospitals will also negotiate medical care costs (for cash payments) down to “insurance industry” levels if a demand is made to do so. If the political process is to be involved, law could require a one national actuarial group and a one level payment system for medical care. If an individual desired “insurance” that person, who would have to pay his medical costs upon demand, and would collect directly from his or her insurance company. Get the doctors and the hospitals out of the insurance middleman business. Let the market and competition establish price. Allow individuals to be responsible for their own behavior.

    Should the government get involved in price fixing? Price fixing is already here. The cost of Veteran’s hospital medical care is now the lowest in the country while quality remains high.
    Involve the Federal government in the “insurance business” and we will have all of the efficiency of public schools and the post office imposed on medicine. We should consider that both the post office and the public schools are going the way of the old USSR. The reasons for this failure are the same in all cases. Must we recreate the old 19th century “infirmary” hospital where people went to die, before we can face reality?

    Ten Specific Recommendations to Control Insurance Costs:

    1. Keep insurance competitive. As it is practiced today, allow people to opt out of medical insurance.

    2. Keep insurance competitive. As it is practiced in all other forms of insurance, require insurance providers to offer nation wide policies. Use national group actuarial tables to assign insurance rates. Discontinue the practice of assigning different rates for different groups according to local or group actuarial table statistics.

    3. Keep insurance competitive. Individuals are allowed to change insurance providers at will. No application for insurance can be denied. Competition between insurance providers will hold cost down.

    4. Keep insurance competitive. Insurance policies are contracts between the individual insured and the insurance company, group polices or workplace policies are not allowed.

    5. Insurance middleman administrative costs are eliminated. Direct Medical payments are not made to medical providers. Insurance compensation payments are made to the insured individual.

    6. Establish a Medical Cost “Bluebook” based upon current best practices, similar to the one used by the automobile repair industry. Submit unusual cases to arbitration.

    7. No cancel policies or preexisting conditions clauses. New medical conditions are not considered when issuing new policies. All insurance rates are based on national actuarial tables.

    8. If pre existing conditions are considered, use Assigned Risk policies to cover the “uninsurable”

    9. Consider possible government subsidies to aid foreign travelers or new immigrants and the indigent or the uninsurable.

    10. Eliminate medical malpractice insurance, thus making the individual responsible for accepting the risk of agreeing to medical treatment. Publish medical (individual or institutional) success/failure rates.

  2. Truman Julca says:

    Discovered your web blog via msn the other day and absolutely adore it. Carry on the fantastic work.

  3. William Fisher says:

    Mr. Drew;
    I see you have posted my healthcare eassy of August 2009. I am honored.
    I write about one such essay a week for my own amusement. If you would like to see other pieces I have written, please contact me.

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