Fixing Health Insurance Will Improve Medical Innovation

In John Goodman’s latest book, Priceless: Curing the Healthcare Crisis, he describes “ideal health insurance.” One of the characteristics of such insurance is that it is owned by the individual, not his employer. This is something which the current tax code effectively prohibits. As a result, employers contract on an annual basis with health plans to buy group insurance for their employees.

We usually discuss this government failure in the context of its harm to beneficiaries — that we are trapped in health plans of our employers’ choice, and laws designed to prevent us from falling through the cracks if we lose their jobs or choose self-employment are inadequate. In a market unburdened by this government failure, people would choose to buy guaranteed-renewable health insurance, like we buy life insurance today. Nobody would buy a 20-year term life-insurance policy if the insurer was able to re-price the premiums according to future annual changes in the policy-holder’s health status.

There is also a more dynamic harm caused by the government’s flawed design of health insurance: It impedes medical innovation. Here is a video of an interview with David Pyott, CEO of Allergan, discussing his company’s decision to sell its lap-band technology, after having failed to secure its adoption by third-party payers.

Pyott makes the case that lap-band surgery has a huge payback in reducing the costs of morbid obesity, especially dramatically reducing the risk of Type II diabetes. And yet, insurers declined to pay for the technology. At an average cost of $21,000, lap-band surgery’s costs are paid back within 2.3 years, according to Pyott’s analysis. However, the average beneficiary in a commercial health plan is enrolled for less than three years. Assuming the average patient who would benefit from lap-band surgery is indicated for it halfway through his tenure at a job, the lap-band surgery does not pass insurers’ hurdles.

If individually owned, guaranteed-renewable health insurance were the norm, health plans would take a life-cycle approach to the costs and benefits of innovative new technology, increasing the likelihood of their adoption.

Unfortunately, even when medical-technology executives identify this flaw, they accept it as the natural state. I’ve never heard a CEO of an innovative medical-technology company call for reforming health insurance along the lines advocated by this blog. Their failure to do so ensures that their innovations will continue to fail to meet their market potential.

Comments (9)

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  1. Ken says:

    Very good insight.

  2. Evan says:

    The very idea that we must tacitly accept the status quo holds our society back from great progress. We must not accept or adhere to “the natural state”.

  3. Benedict Popplewell says:

    There are many instances of insurance companies not paying for procedures or care that data indicates will save money in the long-run. Adopting a more long-run approach would invariably save more money.

  4. Studebaker says:

    It makes sense that insurers would not cover the cost of lap band surgery. Most people who develop obesity-rates disorders will experience health problems as they approach Medicare eligibility. This suggests health plans are unlikely to bear much cost related to obesity. Moreover, employers tend to change insurance often — about 20% of employees change insurance in any given year. This makes it hard for an insurer who pays the $10,000 cost of a lap band to actually recoup the investment.

    Another observation: health coverage provides people with a false sense of entitlement. But at the same time, people tend to assume that if insurance doesn’t pay for it, then they must not need it. The result is a situation where insurance restricts what medical services people can have, but people are unwilling to pay for services that are convenient when their health plan doesn’t cover it (such as telemedicine). I would think more overweight people would be willing to pay the cost of $10,000 of a lap band out of pocket. But, the interaction of having insurance makes them unwilling to do so. I don’t understand know why this phenomenon works this way. Even if the health benefits are not immense, other positive externalities would flow to the surgery patient.

  5. Andrew O says:

    I would suppose that this problem is closely related to our retirement policy contention. For example, 401k’s are company-based plans that in so many cases don’t even communicate the plan’s policies adequately to the employee. As a consequence, several cases of employees counting on their 401k money for emergencies that sometimes are not “hardship” reasons laid out by the IRS are unpleasantly surprised when they cannot get their money. It isn’t exactly related, but similarly, health group insurance provided by employers often have similar or more control over the employee’s plan and, therefore, disallowing the employee from educating himself and buying/choosing a plan appropriate for themselves.

  6. Peterson says:

    “is also a more dynamic harm caused by the government’s flawed design of health insurance: It impedes medical innovation.”

    – When has the Govt ever encouraged innovation.

  7. Sebastian Alexander says:

    Andrew O: I agree fully. I’ve even lobbied Pamela Villareal to promote the idea in her blog.

    I’m certain that one reason management fees on 401(k)s are so high is that workers are not free to choose their own plan. This would be easily changed by allowing workers to contribute an equal amount to an IRA as they can to 401(k) – kind of like a self-employed person can.

    Remarkably, my previous salaried job had a bad 401(k) but an HSA-eligible CDHP that was not bundled with an HSA offered by a preferred bank. Neither my employer nor the health plan cared where I held my HSA. So, I made my own choice and instructed my employer to deduct contributions from my salary just like they directly deposit my net salary into my checking account.

    So, it would be easy to do the same for an IRA.

  8. Gabriel Odom says:

    @Studebaker: according to CADTH, lap band surgeries have “been shown to produce a significant loss of excess weight while maintaining low rates of short-term complications and reducing obesity-related co-morbidities.”

    Ergo, obese patients who undergo this procedure are less likely to suffer these excess health problems you mentioned.