A family friend was recently admitted to the hospital after a traumatic motorcycle accident in Colorado. He’s not in great condition, but he’s hanging in there. In light of having just written this post about the cost of highly acute care, I couldn’t stop pondering about his health insurance.
Health insurance is a bizarre creature. Unlike other forms of insurance, people actually want to consume what they’re insured against, defying the very premise of the insurance model!
Confused? Let’s dive in.
No one wants to consume traditional insurance
People never file claims for traditional forms of insurance unless something bad has happened, like car or home accidents, natural disasters, or death (covered by life insurance). In some of these cases (like minor fender benders), the insured customer often elects not to file a claim in order to avoid a premium increase. When people do file traditional insurance claims, that means something sufficiently bad has happened, and the insurance system kicks in place to recoup the damages.
People do want to consume healthcare insurance
Healthcare insurance is a wildly different animal. Only a small percentage of total hospital admissions are highly acute, catastrophic cases. A large majority of the care delivery system services non-catastrophic cases, from preventive care to counseling, scheduled (and elective) surgeries, and skin rashes, for example. Patients want as much (non-catastrophic) healthcare as reasonably possible, and they want their insurance companies to pay for it.
This is a classic principal-agency problem. The person making financial decisions isn’t bearing the cost of those decisions; in fact, the person making financial decisions is empowered to blindly spend without thinking. To make matters worse, many healthcare providers encourage patients to consume costly diagnostics and procedures with little regard for value, knowing that insurance companies will pick up the tab.
As it currently stands, this system breaks most of the basic assumptions of capitalism: the principal-agency problem, pricing information, and ability to compare producers/providers.
Reducing demand and utilization of healthcare resources is impossible. Since patients are currently incentivized to demand unlimited care without caring about cost, supply will always find a way to satisfy demand. So, how can we realign the incentives to fix the system?
The only way to reduce demand is to make patients accountable for their own healthcare expenses. With the insurance customer suddenly conscious of the cost and value of their subacute healthcare consumption, providers will be incentivized to compete and offer lower costs.
Thus, insurance companies should provide patients “catastrophe-only” plans. These plans would fully and generously cover highly acute care needs, like trauma, cancer, or stroke care. However, like a vehicle insurance plan without comprehensive coverage, the cost of treating the medical equivalent of a keyed car (e.g. a purely speculative blood test) would fall to the individual.
As CEO of a company in the healthcare space, it pains me to know that I’m contributing to the healthcare incentive problem by providing employees with a traditional healthcare plan. But until healthcare insurers offer catastrophe-only plans, patients will continue to blindly consume. In fact, even the Affordable Care Act failed in this light; the national and state-based exchanges don’t offer a single catastrophe-only insurance plan. They are all bundled and are ripe for unbundling.