Challenges to health insurance

This is an open discussion about health insurance. I don’t pretend to be an expert, so please add your thoughts and/or tell me how wrong I am. The discussion comes in three parts, and this is part 2.

Part 1: Why health insurance?
Part 2: Challenges to health insurance
Part 3: What does the ACA solve?

Despite the obvious societal benefits of health insurance, there are a lot of obstacles that prevent it from functioning properly. Mostly focusing on the US, I list some possible challenges below.

  1. Adverse selection – Generally, when people have greater risk of health problems, they have an inkling of it, and are more willing to buy insurance. This raises costs to the insurance company, which raises costs to customers, which blocks out people with lower risk, and creates a vicious cycle. One solution is for insurance companies to charge different rates for different risk groups. However, separating people into risk groups can be expensive, and adverse selection still occurs within each risk group. For some risk groups, the market collapses, and many people (including my robot boyfriend) could not buy insurance prior to the ACA.
  2. Insurance tied to employment – Another way to deal with adverse selection is to sell insurance on the company level. A typical company will have a mix of employees in different risk groups and it all gets averaged out. This also leads to redistribution of wealth, as mentioned in “Why health insurance?”. However, this leaves unemployed people out, even though it seems that unemployed people stand to benefit the most.
  3. Denying insurance claims – When you file an insurance claim, insurance companies are incented to deny claims as much as possible.  While a friendlier insurance company might attract more customers, there’s no way from the outset to distinguish a friendly insurance company from one that simply claims to be friendly.  As a result, they’re all unfriendly.
  4. Bad payment models – Obama mentioned in his paper that most health insurance companies use a “fee-for-service” model, meaning that health care providers are paid by the quantity of service, rather than quality. Under this model, doctors encourage patients to make many visits, even if inefficient.  But it’s hard to find an alternative, since quality of service isn’t easily measurable.
  5. Redistribution through emergency – In the US we have the Emergency Medical Treatment and Active Labor Act, which requires that hospitals give people emergency care even if the patients can’t pay for it. Hospitals make up the loss by charging more to wealthier patients. Redistribution is great, except that this is a particularly inefficient way to do it. Waiting until people have health emergencies is expensive and has worse outcomes for patients.

Of these five challenges, which do you think are most important? Least important? Are there other challenges that I’ve missed?


  1. Some Old Programmer says

    Actually I think you have it upside-down in item 5. In the US (which is exceptional in this case, as I know of no other country that does something this stupid), the wealthy pay less for heath care and the poor who are unfortunate enough to seek medical care pay the most.
    Insurance companies put strong incentives in place for their subscribers to use “in-network” service providers, i.e. physicians, hospitals, prescription drug providers–the whole panoply of providers that can be paid for health care. Those providers are under contract to provide services at a cost which is substantially discounted. Providers agree to discounted rates as this provides them with a group of potential clients so they can stay in business. The cost for anyone without insurance is the most expensive. I have even heard rumblings (NB: I’m not an expert or healthcare policy wonk) that contracts may bar providers from offering discounts to the general public.
    Thus we in the US have a perverse (and, IMO, immoral) situation where the well-off will likely have good insurance coverage, and pay the least amount out-of-pocket for medical services, while those that cannot afford insurance will incur huge bills. Medical bills have been (prior to ACA, not sure now) the leading cause for personal bankruptcy filings.

  2. drsolly says

    I’m not a health expert either, but I’m jolly glad that I live in a country that has a National Health Service, giving healthcare free to all at time of need, paid for out of taxation. Just like every other Western country … except one.

  3. says

    @Some Old Programmer,
    I’ve always been puzzled by the fact that health insurance on average costs LESS than paying for health care directly. That’s the stumper that makes me think nobody really understands what’s going on.

    As you explain it, it’s a marketing thing: Providers would rather not advertise to individual patients, so they contract with insurance companies to provide a group of clients. But if a hospital happens to find a client without health insurance, that client is already guaranteed, so why charge higher prices to them? You could explain it with contracts, but then why are the contracts like that in the first place (if that is what they’re like)?

    And then there’s the EMTALA explanation, which is that uninsured patients are likely to default, so hospitals charge higher prices to make up the difference.

  4. Pierce R. Butler says

    Yet another non-expert weighing in here – but you left out a key factor that may matter more than any of those listed.

    Each insurer has their own schedule of what they will and will not cover, both by diagnosis and by treatment. If a given patient’s problems don’t quite fit the insurer’s list, some wangling has to go down to get anything to happen. In consequence, every hospital, clinic, or other medical practice must devote significant staff (and physician) time to filling out a dizzying array of forms, and long arguments over the phone, so as to get each case through the system.

    Per one estimate I saw years ago, this accounts for a total of 15% of all hospital costs; quite likely more in a one-doc physician’s office. It also means that that treatment is fragmented: hardly any facility works with all insurance corporations (and vice-versa), in large part because of the contradictory requirements they impose: if your doctor refers you to a specialist who doesn’t deal with your plan, you will probably have to settle for someone else.

    Not only does this arrangement throw a lot of sand in the gears, it provides exactly zero added value for its major financial and operational costs.

  5. snoeman says

    IMO, speaking solely of the US, numbers 3 and 4 are the biggest challenges. I don’t think either of those items are addressed by the ACA in any significant degree.

    Insurance companies do have incentives to deny coverage, particularly if they are for-profit. But, they have other incentives to do so as well, such as not wanting to pay for certain treatments that are more expensive, even though less expensive alternatives may not be as medically effective. In some other countries, insurance companies are simply required to pay the claims, and thus this isn’t an issue. I don’t think the ACA deals with this at all, except perhaps indirectly.

    The fee-for-service model is indeed a problem, and as you note, viable alternatives are hard to find. One challenge I think you missed that’s related to this is the lack of transparency for medical costs. If you were to call up hospitals and ask what the cost is for various procedures, you’d get all kinds of different answers – if you could even get answers. You certainly wouldn’t know what each insurance company had negotiated with the provider to pay. So, as a consumer, you really have no idea what the true costs of care are. Not knowing what the true costs are makes controlling them much more difficult. In comparison, in many other countries (such as France) the costs of medical procedures are all itemized and openly provided.

    A few other comments:
    Adverse selection: This is indeed fundamental to the economics of healthcare in general. For health insurance to work, you need a large pool of healthy people with low care utilization rates to make up for the higher utilization rates of those who are sick. Otherwise, you get the vicious cycle (or “death spiral”) you describe. Adverse selection is going to be a problem in any system (e.g., the pre-ACA USA) where having health insurance is optional. The ACA attempts to address this, but it hasn’t solved it yet.

    Insurance tied to employment: I don’t think that this is really a way of trying to mitigate the problem of adverse selection. In the US, insurance being tied to employment is more an accident of history than anything else. It grew out of the need for businesses in the Second World War to find ways to attract employees in a tight labor market. At the time, they were unable to offer higher wages due to wage controls and thus offered health insurance as a substitute. But, again, the ACA does begin to address this.

    Redistribution through emergency: I don’t see this as necessarily a “challenge” to health insurance. It’s an outcome of not everyone having access to health insurance. There’s some evidence that the expanded Medicaid benefits in the States that chose to accept them have led to a decrease in the amount of uncompensated care borne by hospitals. It’s not a perfect measure, but it may indicate progress.

  6. Some Old Programmer says

    Healthcare, particularly hospital care, tends to have inelastic demand (NB again, not an expert, and using economics phrases with layman’s understanding of economics). So while we do get ads for hospitals, they tend to be for common chronic conditions (e.g. treatment of obesity, diabetes, dialysis) or treatment that can be planned (e.g. childbirth, non-urgent surgury).
    Also, being covered by health insurance is a class marker. The middle class have insurance. No insurance is a strong indicator that payment will be a problem (modulo a very few with libertarian leanings and the ability to pay full freight for treatment). The poor know full well that medical care is expensive. So they will avoid treatment until compelled. This also means that chronic conditions that need monitoring (e.g. diabetes) will likely shorten a poor person’s life.
    Any hospital admission is going to include a “wallet biopsy,” and if insurance isn’t in the offing, many hospitals will start posing sharp questions about how they’re going to get paid. The US “safety net” (such that it is) generally includes a county hospital that is required to accept patients in need of treatment regardless of their ability to pay (while beds are available). Other hospitals have been known to ship the uninsured over to the county hospital (“patient dumping”), complete with a bill for the privilege of having them plant a boot in your ass. The county hospital (many of whom do an excellent job, given a patient base that includes a substantial number of sicker people) will bill you too–prompt payment is appreciated. Non payment is referred to debt collectors.
    I’ve had dealings with a few major medical events. The most difficult was in ’89-’90 when my first boyfriend was busy juggling debt and disability due to HIV. He lost his insurance when he became disabled and couldn’t work. By coincidence, I received the legal paperwork the day after he died declaring his bankruptcy final.
    The most astonishing was when my husband was hospitalized for 6 weeks with an acute streptococcus infection, including 3 weeks in the ICU and at least 2 near brushes with death due to flash pulmonary edema. (Pro tip: if you have dry skin in winter, scratch it and break the skin–just smear some OTC antibiotic on it, ‘K? THX). The hospital bill was well into 6 figures. We paid nothing. The hospital submitted the paperwork to the insurance company late, who simply said that nobody owed anybody anything–by the terms of the contract.

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