Our Broken Health Insurance System

by Jonathan Wallace jw@bway.net

Recently, I changed jobs. At the new company, I was told I would have a three month wait before I became eligible to join the insurance plan. In order to avoid being uninsured, it was therefore necessary for me to elect COBRA coverage. COBRA is a federally-mandated program under which health insurance companies are required to continue coverage, if you request, for up to eighteen months after you leave, or lose, a job. You must pay a quarterly premium for the extended coverage.

I filled out the paperwork and waited with trepidation to be told the premium. I expected it would be about $400 to $500 a month for me and my wife, a substantial sum on the modest salary I make as an emergency medical technician. When the bill came, however, it was for $1000 a month--a sum beyond the reach of almost anyone who makes what I do.

The COBRA law, which was intended to ensure that people don't lose insurance when they leave jobs, has been rendered ineffective. What good does it do to guarantee access to insurance I can't afford? But that's just one of many elements of our health insurance system that don't work any more.

How insurance is supposed to work

Health coverage, like any other type of insurance, is supposed to be a bet you make against the house. You are betting that someday you will need health services beyond your ability to afford. The house is betting you will not. People make these bets in groups; the house does better that way, because the larger and more randomly selected the group, the higher the odds are that it will contain a substantial number of healthy people, many of them young, who will pay in more in premiums than they will draw out for health services. Thus, insurance also, like social security, has a Ponzi scheme aspect: the unhealthiest people in the group are paid with the money of the healthiest; if everyone tried to draw out simultaneously, the system would crash.

There are natural limits on insurance premiums. I would not expect annual premiums for the insurance covering repairs to my house to exceed the cost of buying a new house. In a betting pool, some risk typically exists on both sides. There is no risk for a health insurer who charges you a premium equalling, or exceeding, the full dollar amount of the damage which will result from the harm you are insuring against. The company is effectively asking you to put up the full price of the services or more, and then is simply gambling it will never have to return the money to you.

This is exactly what has happened to health insurance. In my case, the COBRA premium exceeded by far the amount I would spend in a year on medical services, barring a catastrophic event. I am a healthy fifty year old male; I exercise, do not smoke, or drink in excess, and have never had a serious medical condition, knock wood. I am able to run seven and a half miles without stopping, even if nothing is chasing me. In an average year, I might make one or two visits to my primary care physician for a check up, for a total of about $1000 or $1200 in fees. Add on a few hundred dollars more in tests, and I figure I might incur $2000 in medical costs in the average year. I don't take any medication and therefore will not incur any drug costs. (A note in passing: two grand seems extravagant for two brief visits to the doctor and some tests. I'll come back to the issue of the price of services.)

In that average year (if I took the COBRA coverage) I would be paying in $6,000 for myself, and drawing out $2,000--not a very good deal for me. At this point, my medical insurance has mutated into a somewhat different species of animal: it is now catastrophe insurance. I am gambling that a more remote contingency will occur: something will happen, or go so badly wrong, that I will require much more than $6,000 in medical care, this year.

What kind of an event would this be? It's probably not going to be a car accident, as my medical bills would be paid for by the other guy's auto insurance, or, if he doesn't have any, by my own. It's probably not going to be a workplace injury, as that would be covered by workers' comp. So I am really betting on two kinds of events. The first is the possibility I will be shot or stabbed by an impecunious felon who cannot afford to pay the bills resulting from his actions. The second is the possibility that I will get cancer, heart disease or some other very serious ailment.

The crime rate has dropped, and the possibility that I will be badly injured in an assault is quite small. On the other hand, the odds are quite good that I will get cancer or heart disease one day; after all, these are two of the leading causes of death in our world. However, the insurance company is not really betting that I will never get ill. It is simply betting that I will come down with a serious ailment so late in my life that I will no longer be covered by medical insurance. The company really doesn't care how sick I get as long as the taxpayers are footing the bill (via Medicare), rather than the insurance company itself.

Given that the insurance company's odds are quite good that I will not require catastrophic coverage while I am still a group member, why are my premiums so high?

How the system broke

The main flaw in the system today is that we have been conditioned to become consumers of medical services in a way that our grandparents never were. For them, a visit to the doctor was a catastrophic event; medicine was something you took only if you were very ill. Today, a surprising percentage of the population is taking "maintenance" drugs, especially psychological medications such as Prozac, Paxil and Zoloft. Their kids, who in our generation might simply have been thought to have short attention span, to be "a little scattered" in the way that children are, all now have diagnoses of ADHD and are taking Ritalin or other meds to cope.

I am not saying that these drugs are never necessary. I am saying that the question of who will take them, and for what, has been answered not by medicine, but by marketing.

We live in a world of tests and scans which did not exist a generation ago. Once you received an MRI or CAT scan only because you suffered a serious trauma, or were showing symptoms of a brain tumor. The medical fad of a couple years back was the "full body scan", which would in theory disclose problems before they had a chance to mature. Such scans may be digital, but they must be read by doctors with analog eyes. Artifacts on these scans can be highly ambiguous; even an experienced doctor can miss a tumor, or see one where none exists. I remember reading the story of a man who underwent expensive and painful surgery as a result of a scan disclosing anomalies in his lungs. These turned out to be harmless remnants from a childhood medical condition.

A few years ago, cancer was a much simpler proposition. You detected a growth, it was removed and biopsied, and if advisable, you underwent chemo or radiation. Today, a routine test discloses the existence of "precancerous" cells in a woman's breast; even though these may never develop into a tumor, a needle biopsy is recommended to confirm the diagnosis; once confirmed, the stunned woman, who is completely healthy and has never had cancer, finds herself in conversations about mastectomies, and talks to earnest doctors who want her to take cancer drugs which have powerful potential side effects, including major systems damage and death. But read the medical literature, and you learn not only that "precancerous" cells may never become cancer. You also learn that it has not yet been scientifically demonstrated that the prognosis is better for women who have done all this preventive maintenance.

All of this supposed prevention is driven by drug and technology company marketing. Just as a department store which does not carry Gucci or Prada cannot compete effectively in the free market, a doctor unwilling to prescribe the latest "little purple pill" heralded on television may lose patients. While medical ethics may, in its purest form, dictate that sometimes you should tell a patient that he or she does not need a particular medicine or scan, everyone privately understands that a patient denied will eventually drift to another doctor willing to prescribe whatever is requested. The end result is, with gradually lessening qualms (because consciences wear out like anything else), the doctor constructs a rationale for doing what the patient requests.

Driven by market pressures, doctors go into hock to purchase expensive scanning equipment, and must charge as much as possible in order to pay it off.

My insurance becomes expensive because, even though I avoid maintenance medications and "preventive" scans, other members of the pool do not. My insurer must pay for these procedures to remain competitive, and passes the cost back to me, via my premiums.

The role of hospitals

Hospitals are subject to the same temptations and competitive pressures as individual physicians, but there is an added element. Under applicable rules of medical ethics, and social expectations, hospitals must provide care to people unable to pay. On the spectrum in between the younger, employed and insured, and the old, retired, and covered by Medicare, there is a widening zone of people with no insurance whatever. Some earn too much money to qualify for Medicaid, but not enough to obtain insurance. Others simply are too ignorant, or too chaotic, to get the Medicaid coverage to which they are otherwise entitled. When these people are injured or ill, and walk into an emergency room, they receive expensive treatment. The hospital (either a for-profit entity, or a nonprofit responsible to a board of directors, or to local government, for sound fiscal management) then raises its rates to the insured to recover its costs for treating the uninsured.

Malpractice and liability

The runaway train known as medical malpractice liability plays an indirect role as well. Awards are huger than ever, the science and causation behind them looser. The annual malpractice premiums payable by specialists in the highest risk fields, notably OBGYN, are now in the hundreds of thousands of dollars. Doctors are leaving these fields in droves. Those who remain are raising their rates, to pass the costs back to the insurance companies, who pass them on to us.

Malpractice attorneys, defensive about their huge awards and opulent lifestyles, claim that the real reason for the grotesque rise in malpractice premiums is not their activity, but insurance company greed and mismanagement. In reality, its everyone's fault: the attorneys, for their constant expansion of the boundaries of liability; the judges who countenance absurd awards; the insurance companies for mismanagment; doctors who are careless; and the rest of us for being so damn litigious.

Managed care

In the good old days, every health insurance plan was an indemnity plan: you picked your own doctor, he or she sent a bill to the insurance company for his or her normal fee, and the company paid eighty percent of it. In more recent years, the few remaining indemnity plans have adopted the dodge of setting reasonable and acceptable maximum fees which have nothing to do with what doctors actually charge. For example, a woman obtaining the needle biopsy mentioned above, to verify the existence of the "precancerous" cells, received a bill for $3000 for the procedure. Her indemnity plan, which was supposed to pay 80% of her actual cost, instead paid 80% of $1250, the insurer's highly arbitrary determination of a "reasonable" fee for a procedure for which all real world doctors in large cities charge $3000.

The answer to the rising costs and faltering performance of indemnity plans was supposed to be managed care. By providing you with a primary care physician serving as a gatekeeper to all other medical services, these plans would control costs. The gatekeeper was the honorable sentinel who would tell you that you didn't need a full body scan or Prozac, and that your child didn't need Ritalin. Instead, the gatekeepers have been coopted by the same medical marketing and competitive pressures as everybody else, and are ordering way too many unnecessary procedures, writing prescriptions for way too many unneeded drugs.

While technology products such as computers and cell-phones go through a development cycle where they are manufactured less expensively while becoming more powerful, and therefore become less expensive over time, no such objective factors determine the price of services. The Tandy 1000 computer I purchased in 1987, which had 514K RAM and a ten meg hard drive, cost approximately six times what I would pay today for a Dell with megs of RAM and gigs of hard drive storage (not to mention a high multiple of the chip speed). But the lawyer I used, or the doctor I visited, that same year, are not less expensive today.

The libertarian utopia

Libertarians argue that free markets set prices and determine supply. If everyone wants medical services at an affordable price, the unregulated free market will serve as the mediator, looking for the overlap where the maximum services may be delivered at the most reasonable price.

Because libertarians start from the premise that the market can do no wrong, problems such as monopolies and price-gouging must always be explained away as an effect of regulation, rather than of greed or the misfiring of free markets. Thus most libertarians will cheerfully explain that health insurance has gone haywire, not because the free market failed, but because regulation did. Any partially free market allows government, no matter how slight its intervention, to be blamed for every problem.

To a nonlibertarian, American business history seems full of examples of monopolies and price fixing which occurred in the absence of any government intervention. Just as we could capture any number of oil-producing countries without necessarily seeing a decrease in the price of gasoline, it is hard to see what free market influences will bring about a decrease in the price of medical services. I understand the theory, which says that doctors, chasing market share, will cut prices; but this never actually happens on the ground.

I have written elsewhere that there are two kinds of libertarians: idealists who believe that free markets will solve all social problems, and those who are quite comfortable with the inequities and depradations that will actually occur. While the idealists believe that a total repeal of all regulation will result in the maximum number of people getting optimal insurance coverage, the realists are quite comfortable with the actual state of affairs: that some number of people will live without insurance; that some subset of them will die because unable to receive adequate medical care. Libertarians of both stripes object to government compelling hospitals to treat those who cannot pay. The idealists say that if hospitals weren't forced to treat everybody, they would do a better job treating more people; and the realists privately believe that, if millions can't afford insurance, and some die, well, that's the price of doing business.

Health insurance as a leash

One more item in the litany of plaints, and its a major one. Individual health insurance became unaffordable many years ago, and is now largely unavailable. If you are self-employed, not a member of a larger group, you simply can't get coverage. Workarounds for this which used to exist--nationwide organizations providing one huge group for small businesses everywhere--have pulled out of some states, or radically scaled back the terms of their plans. The result, of course, is a strong societal incentive not to be an entrepreneur, not to be self-employed, not to be independent.


In a New York Times op ed piece for April 29, 2005, Paul Krugman notes that 20 million Americans currently have no health insurance. He blames vested interests-- the industry itself, which exists "not to deliver health care, but to pass the buck to other people"; but also, the conservatives who believe that U.S. health care "is doing just fine" despite huge expense, low life expectancy, growing infant mortality: "it's a market-based system, so it must be good." He calls for universal health care. I agree.

The free market inevitably creates inequities in availability of health care, and inefficiencies in its distribution. Medical services should be delivered to everyone, as a routine function of government. Countries like Canada and Britain have systems that are working fairly well--certainly better than ours. Ideology and greed have prevented us from adopting a similar solution.