We Call it Insurance, But That’s Not Healthy

Published April 1, 2002

Most efforts to improve the nation’s health care finance system involve tinkering with the present insurance-based model. Such efforts are likely to fail in the long run, because insurance itself is the wrong model for part of the system. An “insurable event”—from traffic accidents to tornadoes—is something that: first, is very unlikely to happen; second, will come without warning; and third, is not something the person who is insured ever wants to happen. That definition applies well enough to such catastrophic health events as serious illness or injury. But it does not apply to routine health maintenance.

A Built-In Contradiction

The current health care system tries to finance both catastrophic and regular health care with one insurance system. This effort contains a built-in contradiction. The insurance system works best when the fewest people use it (i.e. make claims); the health care system works best when the most people use it (i.e. get checkups and tests and vaccinations). The goals are incompatible. Managed care was developed in an attempt to reconcile these differences … and that system satisfies nobody. * Managed care infuriates health care practitioners and consumers when it limits or denies payments on the grounds that some treatment or service is not medically necessary. * Legislators respond to the public outrage by mandating payment for routine services, whether or not they are really necessary. * That, in turn, frustrates insurers, because mandated benefits throw off the underwriting calculations made when the plan was priced, and therefore result in losses or price increases or both.

As D.C. commissioner of insurance and securities, I hear complaints from all quarters.

Third-Party Flaws

There’s a second basic flaw with the health care payment system: Unlike virtually any other commodity or service, contracts for health care services are negotiated not by the affected parties—physicians, hospitals, and consumers—but by insurers and employers. Most health insurance is acquired as a benefit of employment. A worker who gets a job with “health benefits” may not learn just what is covered and what is not until a claim is made—often too late for the information to be useful. For good and competitive reasons, employers try to find the least-expensive plan they can. Insurance companies know this, and try to hold down costs—either by paying providers less or by covering fewer conditions and services for employees. Since employees don’t pay for their insurance coverage, and employers don’t benefit from generous benefits, the system is designed for conflict and turmoil, for political posturing and lawsuits. It is definitely not designed for providing the best health care at the best prices.

Two-Tier Solution

So, is universal, government-provided health care the answer? I don’t think so. I don’t think government can solve these issues any better than private insurers have been able to, and the notion of a monolithic health care system run by government frightens me. Instead, I would look to more modest changes, but changes that nevertheless go to the heart of the problem. To begin with, we must recognize we are dealing with two different tiers of health care needs that should be financed through two different payment systems. One tier is catastrophic illness—and for that tier, insurance is the answer. Policies that carry a high deductible (say, $5,000 a year) are relatively inexpensive, even when the upper limits of the coverage are very high ($1 million or more) or even unlimited. That is because most people do not get catastrophic illnesses or injuries. Such insurance would also cover the cost of any chronic illness treatment that exceeded the deductible. I recently priced such catastrophic coverage for my 30-year-old son. An individual policy was not much more than $900 a year—less than a quarter of what he would have had to pay for full coverage. Certainly the price would be higher for older purchasers, but high-deductible policies will always be far less expensive than their full-coverage counterparts.

Maintenance and Routine Procedures

The second tier comprises health maintenance and routine medical procedures. For this tier, insurance is not the answer. Instead, I see three possible options. One is for people to pay these costs out of pocket, the way we now pay for many other routine needs, such as car and home maintenance. There are all kinds of benefits to this approach, including the prospect of direct negotiations between providers and their patients, no managed care, and less paperwork. For many people, coming up with the cash to pay routine medical bills would not be difficult, especially if they know that any major illness or injury would trigger a backup insurance plan. For others, however, paying for even routine care would present a problem. Here, an employer-based system could be useful … but not a system that tries to insure routine health care. Instead, employers might be asked to put money into individual “medical savings accounts” for their employees. That is, instead of an employer having to renegotiate a health insurance contract every couple of years, trying to determine what should be covered and what should not be covered, the employer would take the money that would otherwise go into the purchase of health insurance and put it in the pockets of each employee. The employee would then determine how to spend the money—that is, whether to pay for dental care, doctor’s visits, alcohol treatment or mental health therapy, or even whether to join a health maintenance organization that would cover those needs. Federal law makes this an attractive option for small businesses and the self-employed, because medical savings accounts are deductible to those employers and not taxable for employees, as long as the funds are used to pay for health care, defined very broadly. Moreover, the funds can accumulate in the accounts of the employees and roll over from year to year. According to federal law, once an employee turns 65, this tax-free money can be spent on anything its owner wants, not limited to health care. Legislation now pending in Congress would extend these favorable tax provisions to all employers and employees. The third option would be for those who are not employed and cannot afford health maintenance or routine medical costs at all. The most effective way to cover their costs is to have the government purchase a membership for them in a prepaid health care plan. That is essentially what Mayor Anthony Williams had in mind when he proposed enrolling Medicaid recipients in HMOs.

Tried and True

Rational buyers of health care coverage should free themselves from the current insurance-based model. Instead, they should use the two-tiered system, and purchase a group “catastrophic” health insurance policy for all employees—a policy that would be very inexpensive and would cover all major illnesses and accidents—and use the money saved to help employees pay for routine health care, through medical savings plans or some other form of assistance. How do I know this would be sensible and cost-effective? Because what I am proposing is not entirely new. This is what the very largest employers—including large health insurance companies—do for themselves, even if their employees aren’t always aware of it. They do it for one reason only: It is the least expensive, most easily administered system. If it works for them, it will work for the rest of us.

Lawrence H. Mirelá is the District of Columbia’s commissioner of insurance and securities.