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Health Insurance

Posted on:2/6/2006
Website: http://www.saagii.com/
Critics of private health insurance state that those who are sick should be able to get health insurance because they need it the most and that if everyone had health insurance, adverse selection would not be a problem.


Health insurance is a type of insurance whereby the insurer pays the medical costs of the insured if the insured becomes sick due to covered causes, or due to accidents. The insurer may be a private organization or a government agency. Market-based health care systems such as that in the United States rely primarily on private health insurance.

Private health insurance

Health insurance is one of the most controversial forms of insurance because of the perceived conflict between the need for the insurance company to remain solvent versus the need of its customers to remain healthy, which many view as a basic human right. Critics of private health insurance claim that this conflict of interest is why state and federal regulation of health insurance companies is necessary. Some say that this conflict exists in a liberal healthcare system because of the unpredictability of how patients respond to medical treatment. But proponents of regulation argue that too many health insurance companies put their desire for profits above the welfare of the consumer or patient.

The following is a hypothetical example of a situation that might confront an insurance company: Suppose that a large number of customers of a particular insurance company contracted a rare disease and the hospital charged 10 million dollars a patient to treat them. The insurance company would then be faced with a choice of paying all claims without complaint (thus losing money and possibly going out of business) or denying the claims (thus outraging patients and their families, discouraging potential customers, and becoming a target for lawsuits and legislation).

Since a health insurance policy is a legal, binding contract between the insurance company and the customer, the insurance company should pay all valid claims without question. Many insurance companies purchase re-insurance to protect themselves from a catastrophic loss due to an unforeseen event. But just like any other business, a health insurance company does not have a right to shirk its legal obligations just to make a profit or stay in existence.

Health insurance companies and consumer advocates agree that private health insurance faces unique problems. Health insurance companies use the term "adverse selection" to describe the tendency for sick people to be more likely to sign up for health insurance. Insurance companies say that asymmetry of information about a person's health and behaviour is likely to lead to adverse selection and (ex-ante) moral hazard. Health insurance companies say, that in essence, those seeking health insurance are likely to be those with existing medical problems or those who are likely to have future medical problems, and that those who take out insurance may engage in risky behaviour, such as smoking and excessive alcohol consumption, which an otherwise sane person would not do. Insurance companies say that the cost of providing health insurance to these bad risks raises the cost of insurance to the 'good' insurance risks, possibly pricing them out of the market, and could create a situation in a market where insurance was uneconomical for private insurance companies to provide.

One must also recognize that both public and private health insurance will also suffer from ex-post moral hazard. This phenomena is in essence the consequence of reduced prices for medical care. Since most insurance plans, whether public or private, reduce the out-of pocket cost of medical care, the behavior of individuals will be affected by those reduced prices. In the same way that people treat water with little care when it is very inexpensive, people will also tend to over-use medical care when the out-of pocket costs are small. Of course, medical care still needs to be financed, and so taxes or premiums will be higher than the optimal amount. This inflation of taxes or premiums to cover the choices made under subsidized prices is what is termed ex-post moral hazard, and is a different phenomena than the ex-ante moral hazard mentioned above.

Critics of private health insurance state that those who are sick should be able to get health insurance because they need it the most and that if everyone had health insurance, adverse selection would not be a problem.

With publicly funded health insurance the good and the bad risks all receive coverage without regard to their health status, which eliminates the problem of adverse selection, although it introduces a problem of moral hazard. As to the concept of moral hazard, those who favor public health insurance ask, do people play with matches in their homes if they have fire insurance or drive like maniacs if they have auto insurance, or do some people just engage in self destructive behavior for no rational reason.

Insurance companies explain the economics of insurance by saying that, in general, if many sick people buy health insurance from a private health insurance company, but few healthy people buy it, the price of the insurance rises. (Critics of private health insurance point out that few sick people are allowed to buy health insurance). Insurance companies also say that if more healthy people buy health insurance, but few sick people buy it, the price drops. In other words, the price drops if more money goes in and less is paid out.

According to the latest United States Census Bureau figures, approximately 85% of Americans have health insurance. Approximately 60% obtain health insurance through their place of employment or as individuals, and various government agencies provide health insurance to 25% of Americans.

Because of advances in medicine and medical technology, medical treatment is more expensive, and people in developed countries are living longer. The population of those countries is aging, and a larger group of senior citizens requires more medical care than a young healthier population. (A similar rise in costs is evident in Social Security in the United States.) These factors cause an increase in the price of health insurance.

Some other factors that cause an increase in health insurance prices are health related: insufficient exercise; unhealthy food choices; a shortage of doctors in impoverished or rural areas; excessive alcohol use, smoking, street drugs, obesity, among some parts of the population; and the modern sedentary lifestyle of the middle classes.

In theory, people could lower health insurance prices by doing the opposite of the above; that is, by exercising, eating healthy food, avoiding addictive substances, etc. Healthier lifestyles protect the body from disease, and with fewer diseases, the insurance companies would pay fewer doctor bills.

Under these circumstances, consumer would hope to benefit from the savings; however, critics of private health insurance claim that too much of the insurance premiums are paid out in executive salaries or retained as profits by the company.

Before buying health insurance, a person typically fills out a comprehensive medical history form that asks whether the person smokes, how much the person weighs, and has the person ever been treated for any of a long list of diseases. Applicants can get discounts if they do not smoke and live a healthy lifestyle, which might encourage some people to quit smoking or make other improvements in their lifestyle. The medical history is also used to screen out persons with pre-existing medical conditions.

Medicare/Medicaid

In the United States, health insurance is made more complicated by federal Medicare/Medicaid programs, which have had the unintended consequence of determining the price of medical procedures. Many suspect that these prices are set independently of medical necessity or actual cost. A physician who refuses to accept a Medicare/Medicaid payment will be banned from accepting any such payments for a number of years, regardless of the reason for rejecting the payment or the amount offered. In either case, this means that private insurers have little incentive to pay more than the government does.

It is worth noting that, beginning in 1972, the number of individuals in the United States who lacked any form of health insurance for any period during the year increased each year, every year with the exceptions of the years 1999 and 2000. The reductions in the number of uninsured individuals during those years was due entirely to the expansion of Medical Assistance (Medicaid) under the auspices of the Child Health Insurance Program (CHIP).

History and evolution

The concept of health insurance was proposed in 1694 by Hugh the Elder Chamberlen from the Peter Chamberlen family. In the late 19th century, early health insurance was actually disability insurance, in the sense that it covered only the cost of emergency care for catastrophic injuries that could (and often did) lead to a disability. This artifact of history persisted right up to the start of the 21st century in some jurisdictions (like California), where all laws regulating health insurance actually referred to disability insurance. Patients were expected to pay all other health care costs out of their own pockets, under what is known as the fee-for-service business model.

As the Industrial Revolution matured during the middle to late 20th century, traditional disability insurance evolved into modern health insurance as both employers and governments recognized the value of health care by encouraging patients to seek regular checkups from primary care physicians. It is usually much cheaper to treat diseases like cancer if they are diagnosed early.

Today, most comprehensive private health insurance programs cover the cost of routine, preventive, and emergency health care procedures, and also most prescription drugs, but this was not always the case.

Common complaints of private insurance

Some common complaints about private health insurance include:

  1. Insurance companies do not announce their health insurance premiums more than a year in advance. This means that, if one becomes ill, he or she may find that his premiums have greatly increased. This largely defeats the purpose of having insurance in the eyes of many.
  2. If insurance companies try to charge different people different amounts based on their own personal health, people will feel they are unfairly treated. Some states require that insurance companies cover all who apply at the same cost, or that rates vary only by age of the insured; this rule has the effect that healthy people subsidize sick ones, and thus frequently only those in poor health buy insurance, making the premiums very expensive.
  3. When a claim is made, particularly for a sizeable amount, it may be deemed in the best interest of the insurance company to use paperwork and bureaucracy to attempt to avoid payment of the claim or, at a minimum, greatly delay it. Some percentage of insureds will simply give up, leading to lower costs for the insurance company.
  4. Health insurance is often only widely available at a reasonable cost through an employer-sponsored group plan. This means that unemployed individuals and self-employed individuals are at a disadvantage.
  5. Employers can write some or all of their employee health insurance premiums off of their taxable income whereas traditionally individuals have had to pay taxes on income used to fund health insurance. This reduces the employee's bargaining power in negotiating service with the insurance provider and also increases their dependence on the employer. In the U.S., COBRA and more recent legislation has been passed in an attempt to address the latter concern, and full tax deductibility for health insurance premiums paid by the self-employed has recently been passed by Congress as well.
  6. Experimental treatments are generally not covered. This practice is especially criticized by those who have already tried, and not benefited from, all "standard" medical treatments for their condition. It also leads to many insurers claiming or attempting to claim that procedures are still "experimental" well after they have become standard medical practice in many instances. (This phenomenon was especially seen after organ transplants, particularly kidney transplants, first became standard medical practice, due to the tremendous costs associated with this procedure and other organ transplantation.)
  7. The Health Maintenance Organization (HMO) type of health insurance plan has been criticized for excessive cost-cutting policies. The least justifiable of these efforts, according to critics, is having accountants or other administrators essentially making medical decisions for customers by deciding which types of medical treatment will be covered and which will not.
  8. As the health care recipient is not directly involved in payment of health care services and products, they are less likely to scrutinize or negotiate the costs of the health care received. To care providers, insured care recipients are essentially seen as customers with relatively limitless financial resources who don't look at prices. The health care company has few popular and many unpopular ways of controlling this market force. In response to this, many insurers have implemented a program of bill review in which insureds are allowed to challenge items on a bill (particularly an inpatient hospital bill) as being for goods or services not received; if this is proven to be the case, the insured is awarded with a percentage of the amount that the insurer would have otherwise paid for this disputed item or items, usually 25% or occasionally even 50%, with a ceiling so that the insured will not truly become wealthy from this procedure.

Common complaints of publicly funded medicine

  1. Price no longer influences the allocation of resources, thus removing a natural self-corrective mechanism for avoiding waste and inefficiency.
  2. Health care workers' pay is often not related to quality or speed of care. Thus very long waits can occur before care is received.
  3. Because publicly funded medicine is a form of socialism, many of the general concerns about socialism can be applied to this discussion.
  4. People are afraid that they cannot choose their own doctor. The state chooses for them.
  5. Countries which have publicly funded medicine don't do as much medical research and development as there is very low payoff to developing new drugs and medical techniques.

Future challenges

With the advent of DNA testing, previously unknown risk factors involving genetic makeup will become known and this is expected to lead to greater pressure on the private health insurance industry as they try to limit their exposure to high-risk individuals. As larger groups of these individuals are identified and charged higher premiums (if they can get coverage at all) the pressure on privacy laws to limit the flow of personal medical data will only increase.

The shift to managed care in the U.S.

Through the 1990s, managed care grew from about 25% of U.S. employees to the vast majority.

Rise of managed care in the U.S.
Year conventional plans HMOs PPOs POS plans
1988 73% 16% 11% NA
1993 46% 21% 26% 7%
1996 27% 31% 28% 14%
1998 14% 27% 35% 24%
1999 9% 28% 38% 25%
2000 8% 29% 41% 22%
2001 7% 23% 48% 22%

 

Fewer U.S. employers offering retiree health benefits

According to 2000 U.S. census data [1], the percentage of large firms (200 employees or more) offering health benefits to its retirees fell between 1988 and 2001 (excepting a spike in 1995).

  • 1988: 66%
  • 1991: 46%
  • 1993: 36%
  • 1995: 40%
  • 2000: 37%
  • 2001: 34%

Disparity in the rates of uninsured between U.S. states

According to 2000 U.S. census data [2], people living in the western and southern U.S. states are more likely to be uninsured.

  • High (19%+) rate of uninsured: Alaska, Arizona, California, Florida, Idaho, Louisiana, Montana, New Mexico, Oklahoma, Texas, West Virginia
  • Medium (14%-18.9%) rate of uninsured: Alabama, Arkansas, Colorado, Georgia, Illinois, Kentucky, Mississippi, New York, North Carolina, South Carolina, Virginia
  • Low (7%-13.9%) rate of uninsured: all other states. Wisconsin and Rhode Island were tied for the lowest rates of individuals who lacked insurance at any point during the year (4% each).

  
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