Overinsurance Problem Is Unnecessary, Costly

Published May 1, 2009

We all know the situation, which is going on every day amidst our current economic woes: Employers squeezed by the downturn pare back insurance benefits. The press showers endless attention on the plight of the uninsured and “underinsured,” while politicians promote more insurance for more people as a desperately needed cure for all that ails our health care system.

The drumbeat for ever more insurance for ever more people is so steady that no one ever asks if, where health insurance is concerned, there can be too much of a good thing.

In fact, overinsurance is real, and it is an epidemic in the United States. Its detrimental effects on our health care system are both immediate and long- term.

Covering Too Much

Most health insurance policies today cover costs that aren’t good candidates for insurance. Insurance is generally meant to cover large and unpredictable costs, but health insurance today covers small expenses and predictable outlays alike.

A $100 prescription is typically at least partially covered. Families with young children can expect to make two or three annual trips to the pediatrician and urgent care, but they use insurance to cover these costs rather than setting money aside and paying them directly.

Unnecessary insurance equals unnecessary premiums. Overinsurance also causes increased utilization of health care, often without improving health.

A landmark study by the RAND Corporation on the effects of cost-sharing—shifting some of the cost of health care from insurance companies to the consumer—found “participants with cost-sharing visited the doctor less frequently … and were admitted to hospitals less often,” but “in general, the reduction in services induced by cost-sharing had no adverse effect on participants’ health.”

‘Terrible Waste of Resources’

While exceptions can be found, for most Americans it’s a terrible waste of resources to have an individual deductible of less than $1,000 (as did 82 percent of covered workers studied in the 2008 Kaiser/HRET employer health benefits survey).

But the greatest cost imposed on the system by overinsurance is the distortion of market forces that is caused when providers are paid by insurance companies rather than consumers (referred to as third-party payments). In our health care system, consumers of health care are disconnected from providers. Because the people who consume health care aren’t the ones who pay for it, they have no incentive to find and reward better and more efficient providers.

Little Incentive to Improve

Providers therefore have little incentive to improve. LASIK surgery and breast augmentation—two medical procedures that tend not to be covered by insurance plans—provide a great illustration: Even as these procedures become more affordable, their outcomes improve.

Recent innovations at the state level further underscore the folly of blanket prescriptions for more insurance:

* Indiana’s Healthy Indiana Plan is built on careful analysis of which Hoosiers lack which types of care and coverage. The plan strives to minimize the distorting effects of third-party payments to providers.

* Utah is exploring a cheaper alternative to COBRA insurance that carries higher deductibles and covers less than typical COBRA coverage—and costs less than half as much.

* Tennessee’s innovative CoverTN program provides limited, inexpensive coverage to people who otherwise would probably have no insurance at all.

‘Smarter Insurance’ Needed

Health insurance continues to be vitally important to our society, in the right situations and amounts. And insurance companies, for their part, are starting to take smarter approaches—the innovative states mentioned above all partner with private insurance companies.

But tempting as easy “solutions” like mandatory insurance and single-payer systems can be, smarter insurance is the real key to effective health care reform.

William Snyder ([email protected]) is a policy advisor to The Heartland Institute. This article originally appeared in the Omaha World-Herald. Reprinted with permission.