Healthcare Insurance: Higher Costs With Worse Outcomes
The heavy reliance on insurance as a mediator of healthcare in America has contributed to a system riddled with barriers to access, complexity, and financial burdens. We believe that using insurance for routine healthcare makes most everyone involved worse off and we’re doing our small part to change that.
A somewhat recent study from Harvard T.H. Chan School of Public Health, the Harvard Global Health Institute, and the London School of Economics found that “in 2016, the U.S. spent nearly twice as much on health care as other high-income countries, yet had poorer population health outcomes.” The main drivers of the high cost were found to be 1) high administrative costs, 2) high per capita spending on pharmaceuticals, and 3) high physician salaries. Our contention in this piece is that health insurance contributes dominantly to the first and second problems.
Here are some of the reasons why the use of insurance in healthcare contributes to these negative outcomes. But first, how did we end up with the healthcare insurance system in the first place?
Due to a change in tax laws during World War II, most people’s insurance plans are now tied to their employment. As soldiers were deployed into the war, the United States was concerned about employee compensation being driven too high due to the dwindling supply of workers. In response, Congress passed the Stabilization Act which, among other things, froze employee wages. Since employers could no longer entice workers with higher wages, they began to enhance the benefits they offered. The IRS then made these benefits tax-exempt, making it more cost-effective to obtain health insurance through an employer rather than privately.
It ties your healthcare to your job. You may stay in a job you otherwise would leave merely because of this historical artifact of WWII. Additionally, losing your job now carries additional health risks.
It’s regressive. Because the benefits are tax-exempt, they are more valuable the higher your income is and worth less the lower your income is. This makes the system more profitable the richer you are and less profitable the poorer you are; which is definitionally regressive.
It encourages unneeded consumption which drives up the price for everyone. The money which you & your employer pay into health insurance is not paid back to you if the benefits are not consumed. This implies that people lose out on their benefits by not using them even if they don’t need them which increases their use. In general, increasing the consumption of a service without correspondingly increasing the supply of that service leads to higher prices ceteris paribus.
Here’s everyone who’s made better by this. Actually, we forgot to count Jeff - who owns the insurance company.
Insurance is most effective when employed as a safeguard against substantial losses that are improbable for an individual but probable when considering the collective. This concept is readily applicable to situations like car or home insurance. The probability that your house will catch fire this year is low, but the probability that someone’s house in your city will catch fire is high. However, insurance becomes less viable when applied to inexpensive, routine purchases. This explains why people typically don't seek insurance coverage for car repairs or house cleaning. Nevertheless, let's imagine a scenario where insurance is used for grocery purchases. By exploring the potential outcomes, we can draw striking parallels to the repercussions witnessed in healthcare.
Limited Food Choices: Insurance policies typically have specific coverage limits and restrictions. If people relied solely on insurance to buy food, their choices would likely be limited to what is covered by their policy. They may not be able to purchase certain types of food or specific brands they prefer, as insurance coverage for food would likely prioritize basic nutritional needs rather than personal preferences.
Increased Administrative Burden: Using insurance for food purchases would require extensive administrative processes. Individuals would need to submit claims for each food purchase, provide receipts, and wait for approval before receiving reimbursement. This could result in additional paperwork, delays, and potential administrative errors, leading to frustration for both consumers and insurance providers.
Higher Food Prices: Food retailers and vendors may increase prices to accommodate the administrative and reimbursement processes associated with insurance claims. This could result in higher overall food prices, as businesses try to cover the additional costs and potential risks associated with accepting insurance for food purchases.
Limited Availability: Insurance policies typically have specific networks or approved providers. If insurance companies were to implement similar networks for food purchases, individuals might face limitations in where they can shop for groceries. They would need to find stores or vendors that are part of their insurance network, potentially reducing options and convenience.
Potential for Fraud: Introducing insurance as a payment method for food could create opportunities for fraud. Some individuals might attempt to exploit the system by submitting false claims or inflating the costs of their purchases to maximize reimbursements. Insurance companies would need to implement robust fraud detection mechanisms, which could add complexity and costs to the system.
Shift in Responsibility: Using insurance for food purchases would shift the responsibility of meeting basic nutritional needs from individuals to insurance companies. This could have societal implications, as it would require insurance providers to assess and determine what types and quantities of food are essential for coverage. It might also reduce individual accountability for personal spending choices and budgeting.
It’s clear how all of this directly translates to identical issues when we try to use insurance to pay for routine and relatively inexpensive healthcare. However, that’s just considering the effects on the buyers of groceries. Insurance also has deleterious effects on the suppliers as well. Since no price is displayed at the grocery store, the supplier now has no incentive to compete with other suppliers to deliver the most value to you. After all, you’re not the one paying and you don’t know the price. This introduces many extra inefficiencies into the system the result of which is a degradation of quality and an increase in price.
We don’t have to just reason in a vacuum about the effects of insurance on the suppliers of healthcare, we can directly see those effects in action when we look at the areas of healthcare which insurance does not pay for: elective procedures.
Someone undergoing inexpensive high-quality LASIK eye surgery. (Probably Jeff)
When LASIK was introduced in 1995 it cost around $2000 per eye. In 2023 dollars that comes out to about $4000 per eye or $8000 total. Today the price of LASIK for both eyes is around $4400: a 55% reduction. Additionally, the LASIK technology & procedures have not remained stagnant but have gotten better so that you are paying almost half as much for a much better product. The American Refractory Surgery Council writes:
. . . there has been a tremendous amount of innovation that has gone into today’s advanced LASIK technologies – making what was already a very good procedure even safer and with better visual outcomes.
Today’s LASIK treatment profiles are significantly more precise, achieving 20/20 vision for more than 90 percent of patients and more than 50 percent achieving better than 20/20. This precision translates into an even higher safety record. LASIK’s exceptional safety is further supported with more advanced diagnostic technology that helps not only guides a more customized vision correction procedure but also provides valuable information to surgeons to help screen out those patients who aren’t good candidates for LASIK.
So we know the costs don’t have to always go up and the outcomes always come down. Exactly the opposite happened here. Instead of paying more for less like we’re used to in healthcare, we can pay less for more. “Wait a minute”, you interject “that only works for elective procedures. It can’t work across all healthcare. After all, there’s no way we can do without the completely artificial supply restrictions on medical providers. If we get rid of those then quality will go down.”
In that case, dear reader, I’ve got a great example for you: The Surgery Center of Oklahoma which has been posting its prices transparently since 2009. They cut out the insurance middleman. Their rates are cheaper with no shadow prices, their patients have better outcomes with lower risk of infection, and they pay their physicians more. Here’s a short introduction:
I realize the problems in healthcare aren’t all due to insurance companies. The healthcare system has many moving parts and inputs. However, as I’ve argued above, it heavily contributes to misaligned incentives and bloat which results in poorer outcomes at higher prices. At Paloma Primary Care we’ve eschewed insurance and are working to decrease prices and increase quality. Take a look at our pricing and read our reviews; we’re here to help!
