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Some Thoughts on Our Health Insurance Mess

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The news over the past year has brought some rumblings to my ears. There have been reports of panels and committees exploring mandatory health insurance in my state. The proposals in my state fall along the line of a state subsidized insurance plan. Employers not otherwise having health coverage for their employees would be required to join. There, of course, have the requisite newspaper editorials crowing about the success in Massachusetts for implementing mandatory health insurance.

In reflecting on current health insurance I see a number of problems. Employer-provided health insurance distorts the distinctions between customer and consumer. And finally the tax-privileged status of employer-provided health insurance distorts the decisions that are made regarding savings, salary, and benefits. Health insurance has degenerated at large corporations from protection against catastrophic losses to what amounts to a prepaid purchase plan.

Health insurance provided through the employer distorts the distinctions between customers and consumers. Who is the customer of an employer-provided health care plan? The employer or the employee? The health care plan is purchased by the employer. You, the employee, are not the customer. Therefore the health care plan is not crafted to meet your individual requirements or desires. One consequence of this is wretched “customer service.” It has not been uncommon in my dealings with my employer's health plan to find that they have lost forms and records that been sent to them.

Some basic economic reasoning reveals why this is. I am not in fact the customer who pays them. I have no ability to impose any economic sanctions on the insurance company providing my health plan. In this context “customer service” simply does not pay, it is simply an expense to be minimized. The “customer service” needs to be just good enough so the employees don't rise up and persuade their employer to change plans.

The distinction between customer and consumer are similarly muddied in the patient-doctor relationship. Who is the customer? You, or the insurance company that pays your doctor? I have heard from both friends and doctors stories of requisite health care being held up while the insurance company has to be persuaded of the necessity of the care. My wife's OB has told her of any number calls to insurance companies to explain and argue for extended hospital stays or observational stays that have to be cleared with insurance companies. This, unfortunately, is to be expected when the insurance company is the customer paying the doctor as opposed to the patient being the customer paying the doctor.

Employer-offered health insurance originally started in World War II as means of evading war-imposed wage and price controls. The offering of health insurance as a benefit was entrenched because employers could deduct the cost of insurance as a business expense, whereas, employees could not deduct the cost of health insurance from their tax liability. This makes employer-provided health insurance cheaper from the standpoint of the employee than some other possible alternatives.

One alternative is simply for the employee to purchase his own health insurance. This is what is done for car insurance or homeowner's insurance or for all other necessities of life like food, clothing, and housing. It is simply a historical and legal artifact that maintains health insurance as an employer-provided benefit.

A second alternative is for the employee to take the money and save it against the day it is needed for medical expenses. I work for a large employer who provides a relatively plush healthcare plan. The annual cost for a family to be enrolled is on the order of $15,000 a year. This is actually very close to the cost of the actual healthcare received by the employees at my employer. My employer is self-insuring and pays the insurance company the actual cost of health care received plus a management fee. $15,000 is not unusual for a family plan. I talked to the owner of an auto body shop and he pays $18,000 a year for family plans. I have talked to other small employers and $4,000 a year is not unusual for a simple individual plan.

I have been at my employer now for almost twenty years. Just imagine if that money had gone to me: I would have almost $300,000, or $200,000 if we allow for taxes. After deducting for medical expenses, births of children, assorted doctor visits, and emergency visits out of pocket, I would still have a substantial amount of money left.

I can hear the objection coming – what about people who have a catastrophic expense. I can think of two families of employees where I work who have had catastrophic expenses. The first had a child born with a congenital heart defect. The second had a wife who required a bone marrow transplant as a consequence of breast cancer. In both cases the expenses approached a million dollars. Catastrophic coverage insurance exists to cover such extreme costs that a self-insuring individual could purchase.

The whole point of insurance is to protect oneself from catastrophic loss or liability. You buy car insurance to protect you against the expenses of totaling your car. Car insurance does not pay for oil changes or new wiper blades, the routine expenses of owning a car. Health insurance has come to be seen as a prepaid purchase plan which is supposed to pay for every health-related expense no matter how routine – vaccines, child birth, the occasional stitches.

Another objection I can hear coming is what about lower-income workers whose employers do not purchase expensive health care plans. Even the cheapest health care plans cost about $4,000 a year. Barring a serious incident which would require exhausting the savings and using catastrophic insurance, twenty years of working allows building up a savings of $80,000.

A final complaint I have against the current employer-based health insurance scheme is that it restricts labor mobility. I have known several people who have developed a medical condition and live in fear of losing their jobs and refuse to look for another because they were afraid that they would be deemed uninsurable by another employer's plan. There is no reason that individuals should fear losing their medical insurance when changing jobs anymore than they fear losing their car or their house.

February 9, 2007