The Inefficiency of Privatized Health Insurance
Introduction
Healthcare is a topic I feel somewhat qualified to comment on, as it’s the field that I work in. While the US is not the only country with a combination of public and private health insurance, it is perhaps uniquely dysfunctional in the way that, compared to other wealthy countries, it combines enormous healthcare costs, relatively poor outcomes, and having huge swathes of the population with unreliable access to care.
There are a lot of things to critique about the American healthcare system, to name just a few:
- the main source of private health insurance coming from someone’s job serves to further the notion of wage slavery that the masses toil under. This is by design, it becomes vastly more difficult for workers to use the greatest tool at their disposal to advocate for themselves, withholding their labor in an organized labor strike, if they are barely being paid enough to survive and cannot get health care if they don’t work
- the enormous complexity of health insurance administration means a significant proportion of healthcare costs goes towards billing departments
- health insurance companies are able to dictate the healthcare that patients receive when they refuse to cover treatments recommended by their physician
- skewed reimbursement models that incentivize physicians to subspecialize and result in an overreliance on less qualified individuals for primary care such as Nurse Practitioners and Physician Assistants (the steep cost of medical school tuition also contributes to this)
- not enough emphasis is placed on preventative care, such that treating chronic problems once they’ve developed is more expensive and less effective than preventing those chronic problems from developing in the first place. This ties closely with systematic wealth inequalities that result in the poor in this country being less healthy and less able to implement a healthy diet and exercise into their lifestyle
- not enough emphasis is placed on preparing for end-of-life care, such that a huge proportion of medical spending is on prolonging life in individuals with very poor quality of life at the end of their natural lifespan
- while public health insurance options exist, they are underfunded to adequately cover sufficient people, such that there is a large proportion of the population that does not qualify for public health insurance, does not receive it from their job, and cannot afford to pay for their own health insurance themselves.
- the transition to a “big business” model for healthcare which has resulted in a tremendous amount of administrator bloat, such that the proportion of a given healthcare center’s employees who actually provide patient care (eg. physicians, nurses, medical assistants, lab technicians, etc.) have gone way down in the last few decades, while the proportion of administrative staff has gone way up
It’s obviously an enormously complicated and multifaceted topic. In this short essay, I’m going to focus on one aspect in particular: the inefficiencies inherent in the reliance on privatized health insurance.
Capitalism and Efficiency
Proponents of capitalism will laud its efficiency. That’s what capitalism is all about after all, it’s Darwinian. For living organisms, survival of the fittest means that the organism that is best able to propagate itself will outlast and outcompete and crowd out the others. The organism that is able to survive in the most efficient manner possible (ie. by expending less of its energy on survival) is then able to expend more of its energy on reproduction and will propagate itself. Those organisms that don’t expend enough on survival do not survive to reproduce. Those that expend too much on survival then expend less on reproduction: creating fewer offspring or less-fit offspring, and are outcompeted by those that are more fit.
While it is a mistake to think of this as a direct competition, it is nevertheless the consequence of multiple different organisms living in an environment with finite resources, and those that are best able to balance survival with reproduction will over time claim a larger proportion of those resources for themselves, over time resulting in extinction of those they “compete” with.
The fat is trimmed. If a protein that permits a bacterium to survive antibiotic exposure is slower and more costly to create than a version of that protein without antibiotic resistance, in an environment without that antibiotic, the antibiotic-resistant bacterium will eventually disappear from the population as the antibiotic-susceptible one out-competes it.
This is an oversimplification of complex biological processes, but it is a helpful framework to keep in mind when thinking about capitalism, because it is how an idealized version of capitalism is supposed to work. A company tries to gather as much wealth to itself, use that wealth to expand to increase the size of its customer base, thereby increasing the amount of wealth it is able to bring in. It does this by trying to balance minimizing their expenditures, maximizing profit margins, and reaching as wide of a customer base as possible. Companies which are able to do this well expand and outcompete those which are not able to do this well. It is inherently an extremely efficient system, and it is this theoretical minimization of waste which proponents of capitalism say makes it superior to the wasteful and inefficient public/governmental sphere. The Cold War is often framed as the efficient and productive capitalism triumphing over the wasteful and bloated bureaucracies of the socialist command economies.
But I did not use the word “theoretical” by accident. In reality, there are many ways that corporations or individuals are able to circumvent this idealized system. This system falls apart when a company is so successful that it no longer has competitors in its field, and becomes a monopoly. In this situation, inefficient policies and behavior are not “punished” the way they would be in a healthy free market, because no competitors exist that are large enough to exploit these inefficiencies. Something similar can occur when multiple large companies collude in a way that they do not directly compete with each other. Large and powerful corporations can take advantage of and manipulate governmental regulations to give them an edge against competitors despite their inefficiencies. This is not meant to be an exhaustive list of the ways that capitalism is bad, as I have not even mentioned the ways in which capitalism harms its workers, environment, and community. This is meant to give some examples of the ways in which capitalism, in reality, fails to be as efficient as its proponents might suggest. But I’m getting off topic a little here, the point is that capitalism is often framed as an inherently efficient system.
The Nature of Insurance
Before we discuss health insurance specifically, I want to talk about insurance in general. Insurance is, in a way, inherently inefficient. With insurance, multiple individuals pay some amount to a company so that if they are unlucky and something bad happens, the insurance company will pay for them to recover from that unfortunate event.
For an oversimplified example, let’s say an individual pays $1000/year to a company for homeowner’s insurance, and after 6 years there is a bad storm and the house needs to be rebuilt, the insurance company will pay them the $30,000 needed to fix their house. This is obviously not profitable for the company, they spent $30,000 on this individual, and only got $6,000 in return over that 6-year period.
So how does the insurance company make a profit? There are multiple methods:
- They have multiple customers at a time and count on the majority of those customers not making a claim
- They calculate the likelihood that a claim will be made and raise premiums such that even if a claim is made, they can still make a profit
- They refuse to insure those who are likely to make a claim
- If a claim is made, there are limits in place to prevent the insurance company from paying out too much money, or else there are many exclusions put in place so the insurance company can avoid paying money
Because insurance is being provided by private companies, insurance as a concept can only exist if the companies are extracting more wealth from their customers than they are giving back. This does not necessarily mean that they do not provide value to their customers. It is a form of bad-luck-protection.
Sticking with our earlier example. Let’s say that the individual paid $3,000 a year in home insurance, and after 15 years a storm knocked in his roof, and the insurance company paid him $30,000 to fix the roof. Over those 15 years, he has paid the insurance company $45,000 and only got back $30,000, but this individual may still deem it worth it if he did not have the $30,000 laying around to fix his house when the storm hit. Obviously if he had been saving that money and setting it aside for just such an emergency he would be better off, but the nature of unpredictable events is that you don’t know when they’re going to happen. If that storm had hit when he was 2 years in, he would not have had the time to set aside the requisite money.
Insurance is prevalent across many industries: homeowner, car, flood, fire, health, dental, vision, malpractice, umbrella, life, disability. All of them operate on the principle that they need to receive more money from their customers than they ever give back, at the end of the day, they’re businesses.
Keeping that principle in mind, it only makes sense for an individual to have insurance in the following settings: it is legally mandated, it is provided as a free or inexpensive job benefit (or governmental benefit), or if it protects against an event which, if it occurs, would be financially ruinous. Otherwise, it makes more sense to save your own money rather than spend it on insurance, and set money aside for an unlucky event and unforeseen expenses.
The key here is insurance makes the most sense when it is covering major, unpredictable events. And as an aside, I would argue that the fact that insurance companies by definition must extract more wealth than they ever give back makes them inherently predatory, and in a more just society, they would not exist. Instead, for specific qualifying events (the product of bad luck, rather than negligence), the government would get that person back on their feet. Whether that involves disability payments, rebuilding a house, getting a car (all within reason). This would be paid for by taxes and its nature of being a governmental service that is not profit-oriented would make it inherently less predatory and beneficial to society at large. But once again, I get off-topic.
Health Insurance
Health insurance (and when I say health insurance, I will be specifically referring to private health insurance) is subject to all the same principles we just discussed: they need to receive more money from customers than they provide back. There are other aspects to health insurance that make it a little more insidious however.
First of all, this may be obvious, but it operates in the healthcare field, and there is something particularly heinous about needing to profit off of illness. Profit should never be a motivation in matters of healthcare: individuals dealing with trying to maximize their preventative care, trying to survive a serious acute illness, dealing with the pain and misery of a chronic condition, or facing the end of their life should not have to worry about whether the system that is “helping” them is more concerned with their welfare or with making money. I’m not naïve, obviously finances matter for a healthcare organization, but the priority should be on being financially stable enough to continue providing patient care, and not filling shareholders’ pockets. And yet, despite the inherent vulnerability of patients in the healthcare system, they are subject to those machinations we outlined earlier as the insurance company implements its policies and premiums to make a profit.
While this may be immoral, it is not in itself emblematic of an inefficiency. Where it becomes inefficient is the fact that it adds no value to the system. Patients need healthcare, healthcare workers (eg. physicians, nurses, medical assistants, lab techs, phlebotomists, sonographers, etc.) can provide healthcare. A hospital or a clinic provides the setting and equipment/materials for this interaction to occur. What, then, is the insurance company adding? Health insurance companies simply act as middlemen, they sit in the middle of that relationship between patient and healthcare worker, and have devised an immensely complex system of billing bureaucracy whereby they can control what care the patients have access to, how much patients have to pay, and how much healthcare workers can be paid, while simultaneously funneling enough of the money within the healthcare system to themselves that they can make enormous amounts of profit.
Healthcare is also one of those things that it is inherently stupid to build insurance around, because much of it is predictable. Unlike a hurricane flooding your house, a lot of healthcare is predictable. Annual visits to your PCP. Prenatal visits if you get pregnant. Colonoscopy every 10 years once you’re 40 years old. Diabetes screenings and cholesterol tests every few years. Virtually all preventative care occurs in a predictable, scheduled fashion. We’re expected to use health insurance to pay for this care, but the only way a health insurance company can make money covering a predictable expense is if the patient is charged too much for it, if the healthcare worker is paid too little for it, or both. The main benefit behind the concept of insurance, protection against an unpredictable event, is largely absent in this scenario. That having been said, there may still be benefit to health insurance for covering a sudden illness or hospitalization, but we’ll come back to that.
A Single-Payer System
If one were looking for ways to reduce spending in healthcare, then an obvious target would be to get rid of this parasitic industry that siphons wealth from the healthcare system for the sole purpose of propagating itself. Replacing it with a single-payer model (ie. having the federal government cover the cost of the provision of healthcare) would have many benefits:
- Individuals who suffer a sudden, unexpected catastrophic illness will not need health insurance to cover the costs or face bankruptcy. This is hardly a system that would be abused as those who willfully get themselves hospitalized are few and far between
- This would go a long way in reducing barriers to regular preventative care for individuals. By preventing a chronic disease from developing in the first place, this would reduce costs and improve individual quality of life in the long run
- Healthcare costs that stem from having a large portion of the workforce dealing with corporate administration and billing could be eliminated
- Individuals would not be as reliant on having employment in order to have access to healthcare
- The cost of healthcare (ie. the amount the health system is reimbursed by the government for services provided to patients, costs which are passed on to the populace at large in the form of taxes) could be determined in a more logical fashion, where costs (ie. salaries for employees, maintaining facilities, cost of equipment, cost of medication) are determined by what is needed to allow the health system to continue to function rather than maximizing profits for private companies
Critics of this idea might point out that such a system would lead to longer wait times for a medical visit, and this is probably true. However, this would occur because more people have access to healthcare rather than just those privileged to have private health insurance. Such a system would be more just, rather than favoring those with greater wealth. As it is, public health systems have fewer resources than private hospitals, and so patients relying on public health insurance already have relatively longer wait times than those with private insurance. A single-payer system would essentially force private hospitals to see all patients in order to continue to function, and in this way would more fairly distribute the available resources with how and where they are needed.
Such a system would also likely lead to lower reimbursement for highly paid physicians. The government would essentially be responsible for determining what reimbursement is sensible for a given healthcare role in order to allow the system to continue to function. If the pay is too low, people will flock to other careers. It is important then, that such a change not happen in a vacuum. The financial barriers to becoming a physician (as an example), would need to be reduced, so that those graduating physicians don’t find themselves saddled with a tremendous amount of debt just to go into a low-paying field. Such a change would also encourage more individuals to go into primary care, as the financial incentive of becoming a subspecialist to more quickly pay off their debt would be reduced.
Some critics might say that it would lead to overutilization of health care. That if people don’t have to pay for the healthcare they utilize, they’ll overutilize it. I think this concern is overblown, because how often do you come across people who just love going to see the doctor or love going to the hospital or love getting surgery? Ultimately, it can still be left in the hands of the healthcare providers how often a patient needs to be seen, or whether a procedure is indicated. It may also help to restructure compensation systems for healthcare providers such that performing unindicated procedures or scheduling unindicated follow-up clinic visits is not incentivized, though at the same time this could have other unintended consequences as well. That having been said, the best way to reduce healthcare costs is through preventative care, and while making sure people have access to regular preventative visits will help, this is fundamentally something that needs to happen outside of the healthcare system. Greater emphasis needs to be placed on removing societal structural barriers to ensuring that people eat healthy and exercise.
Another drawback of a single-payer health system is that it would also offer fewer financial incentives for pharmaceutical companies to invest in research for new drugs or medical devices or medical science in general, as the likelihood that they will then be able to turn these new discoveries into massive profit is greatly diminished. The government would need to step in to make up this difference in research funding, though this would have the added benefit of prioritizing research where it can be most helpful, rather than which breakthrough would be most marketable.
Which brings us to the greatest criticism of a single-payer health system: taxes. All of this is going to be expensive, and can only be funded in a sustainable way through taxes. However these are already expenses borne by the people, except these expenses are being paid to insurance companies who siphon off much of this wealth into their own profits before it gets to the health system. As a whole, it would be massively more financially efficient to society to pay taxes into a system that then allows them to reliably get healthcare when they need it, without having to worry about copays, deductibles, or an insurance company declining to cover any of it at all. And yes, there will be those who pay their taxes and end up not utilizing it much (other than maybe for their regular preventative visits), while there will be those who pay their taxes (and maybe don’t pay much, depending on their income) and end up utilizing it a lot. It’s the same idea as paying taxes for building a road that you don’t drive on. This is a requisite aspect of living in a just and equitable society that makes sure all of its constituent members are taken care of.