Moving Beyond the Heliocentric Doctrine of Health Insurance
A similar version of this Health Alert appeared at The Daily Caller.
Whether you have job-based health benefits, are in an Obamacare exchange or are on Medicare, you have likely recently gone through the difficult experience called open enrollment. As a result, you may have lost access to your physician or nearby hospital. Think about how little sense this makes. Did you change anything else in your life for the sole reason that the calendar turned a page? I’ll bet you’ve had the same car insurance and homeowner’s insurance for years. If you rent your business premises, your lease can cover whichever period you and your landlord negotiate.
I call this the Heliocentric Doctrine of health insurance: Designing coverage around the period of time the earth takes to revolve around the sun, instead of patients’ health status. It has harmful consequences.
Consider two identical twins, recently diagnosed with the same catastrophic illness last June. They both have the same health insurance. Whether it is through their employer or an Obamacare exchange or Medicare does not really matter.
They have been diagnosed with the same cancer. It is genetically determined: There is nothing that either of them could have done to avoid it. It will require many months of treatment by drugs and surgery, and the treatment will evolve as oncologists observe how the twins’ cancers respond to different therapies.
Generally speaking, both twins have been healthy up to now. All of a sudden, in the second half of 2014, they entered that small minority of patients who, in any period of time, account for a large share of health spending.
Because of the high cost of treatment, their insurer has likely put cancer drugs on the most expensive tier of their prescription formularies (the list of drugs that the plan will cover). This means that the twins might each face a 30 percent coinsurance rate for very expensive medicines. If they are enrolled in individual Obamacare exchange plans or non-grandfathered employer-based plans, they will pay directly out of pocket up to $6,350 ($6,600 in 2015). If they are on Medicare, let’s assume that they have a Medicare Advantage policy or one of two Medicare supplemental policies (also known as Medigap) that also limit out-of-pocket costs.
Here is the twist: Despite receiving exactly the same treatment and being covered by exactly the same plan, one of the twins might face little, if any, direct out-of-pocket costs, while the other might have to make complicated treatment decisions based on prices of different drugs and procedures.
How can this be? In this case, the one twin had no medical costs in the first half of the year. The other went on a ski vacation in February, had an accident on the slopes and spent a day or two in the hospital having his broken bones mended. It was not a big deal in the scheme of his life ― certainly not on the scale of cancer ― but it caused him to incur medical and hospital bills up to his out-of-pocket limit for 2014.
So, once diagnosed with cancer, the skiing twin will face completely different financial decisions than the non-skiing twin. Indeed, he may even be relieved that the winter accident ― now trivial in hindsight — has eliminated some of the financial trade-offs of his cancer treatment.
Anyone with experience of cancer in his family will protest that this illustration is overly simple. Nevertheless, these days almost all of us face significant deductibles, co-payments, co-insurance and maximum out-of-pocket costs. Although Americans are finding these obligations harder to meet, this exerts discipline on health spending and is surely one factor in the relatively tame rate of growth in health spending over the last few years.
However, when it comes to paying medical bills directly out of pocket, the meter goes back to zero on January 1, the date fixed by the Roman Republic in 153 B.C. for the start of the newly elected Consuls’ terms.
The result of this Heliocentric Doctrine is that neither patients nor health insurers take a long-term view of what the appropriate balance is between patients’ direct out-of-pocket payments versus claims paid by insurers.
Other countries where private health insurance dominates, with Switzerland being the prime example, do not tolerate this absurdity. Instead, patients and insurers have contracts that last multiple years, and each are rewarded for good behavior during the long term. This type of health insurance is especially effective for very sick people with lots of illnesses, who would no longer have to worry about losing their doctors because of having to choose a new plan every year.
New Year’s Day should not be a day of worrying about what your new health insurance will cover. The health reform that succeeds Obamacare should move beyond the Heliocentric Doctrine.
A good comparison is life insurance. With life insurance, the insurer has a perverse incentive to avoid people who are: 1) old, and 2) sick. This is not unlike health insurance. Yet, there is a robust industry for life insurance.
A whole life policy has a savings/investment component where a portion of the potential payout is cash value, while a portion is underwritten risk. As years go by and the insured individual begins to get older, the risk is still relatively low because the life insurance policy increasingly builds up cash balances. On the other hand, term life insurance is for a fixed term — and is pure insurance for risk.
I may have oversimplified the topic. But, it seems analogous to how health insurance should work. Life insurance doesn’t necessarily follow a calendar to determine eligibility — other than the anniversary of the insured individuals’ birth.
Yes, and I bought a life policy ten years ago and haven’t thought about it since! It would not matter how my health status changed over the period, the premium remains the same.
Sorry, your complaint is just another variant of “I want the best coverage YOUR money will buy.”
If there is to be no point of purchase cost sharing (including new cost sharing each calendar year (or plan year) or if point of purchase cost sharing is limited to a one time application of deductibles and expenses maximums), you end up with much, much higher premiums (employee contributions) that will be applied to all covered individuals (including those healthy folks). You also end up with massive increases in utilization of services – as the financial incentive to consider cost of treatment is removed, and those who need substantial services essentially access other covered individual’s wealth to pay their costs.
If those who incur expenses are to be excused from shouldering a portion of the cost of services, and if others in the same pool are somehow to be insulated from those expenses as well, who is left to pay – taxpayers? the French?
Simply, just one more complaint that few are willing to admit that health coverage is expensive, and that even fewer are willing to pay for the coverage they want.
Finally, the twin that did not have the ski accident, assuming she had the same financial situation as the twin that did have the ski accident, probably has $6,600 more in her savings account – as she did not have to satisfy the deductible /expense maximum earlier in the year. Are you suggesting that she would make different medical decisions about obtaining treatment for cancer than she would when it comes to treating injuries after a ski accident? If so, your challenge should be to having ANY maximum on point of purchase cost sharing.
Cost sharing should be applied to the diagnosis, not the period of time, and it should apply from first dollar to last dollar of treatment costs. Even for very expensive inpatients surgery, patients should have a role in price formation. Indeed, that is why the medical-tourism market exists!
I think there is a confusion between deductible resetting annually and open enrollment.
With the first the deductible resets no matter the deductible chosen nor whether one is covered by employer-sponsored plan, private policy, or Medicare as you pointed out.This allows the actuary to have a more precise estimate of the insureds potential out of pocket and thus a more accurate premium to determine risk.
Open enrollment is when one may choose an alternate plan or continue with last year’s plan. Of course Obamacare forced many groups and individuals to change to a “compliant” plan during an imposed open enrollment period.
Prior to Obamacare, private policies in most states did not have open enrollment periods, but, instead, an anniversary/renewal date at which time the new rate was assessed.
This is worth mentioning because applicants could enroll online at any given day, often for a following day effective date. No threat of a fine, but a threat of the only option being the high risk pool if they delayed purchase until they developed a high risk condition.
Thank you. When you write “private” do you mean “individual”?
I had the same thought as Beverly. Since we seem to be talking mostly about the annual deductible reset, one idea might be to break it into quarterly or monthly periods instead of annually.
Another is an idea I tossed out a couple of weeks ago (I doubt I’m the first) to use some sort of logarithmic formula to calculate co-pays, replacing the fixed deductible and out-of-pocket amounts as well as the standard co-pay schedule.
Years ago, and perhaps still today somewhere, expenses used to satisfy a deductible in the last quarter of the year rolled over to the next year.
Also, some plans had deductibles set as a function of earnings. The higher your pay the more dollars you had to pay.
Thank you. I recommended that a few years ago for Medicare means testing.
The true beneficiaries of Obamacare are BIG government whose bureaucracy gets fed, big pharma who gets insured,& insurance companies which are backed up by taxpayers in the event losses occur. Drug companies can raise prices, so insurance premiums rise, you are mandated to buy.
Hospitals will be OK, as government will keep open who they want to keep open
Losers are who is left over; physicians, RN’s and patients, who will be left with higher premiums, penalties and deductibles.
This is an attack on the middle class remainders.
John introduces an important concept – providing insurance which is long term possibly even lasting a lifetime
As Devon mentioned this type of insurance must charge a higher initial premium than the term type cost of medical insurance
At least the ACA has addressed this by charging modified community rated premiums
What we provide at NPLH is higher initial up front costs for self funded employers of 200 employees or more
The higher the up front costs the more reserves accumulate the following year
Our maximum premium of $300 per month per person provides a break even at year 6
By year 13 the employer has received more in benefits than premiums paid
This would be like surrendering a whole life policy after 13 years and breaking even
We break even with medical benefits
Life insurance breaks even with cash
Contributions range in $50 increments from $100 to $300
The lower the contribution the lower the initial payment and the less time it takes to break even
The higher initial contributions provide higher reserves while the lower contributions provide lower reserves
It really depends on how far into the future the employer wishes to pre pay his medical expenses and to what level
To learn more go to nationalprosperity.com
Don Levit
John –Keep with this idea, as the structure of insurance coverage is so flawed that it cries out for a better model.
In addition to the questions of deductibles and co-pays, I look for a time when there is a “mutual” aspect, whereby subscribers could benefit from improved health on the part of all of them, or their special group. I happen to think that there need to be incentives to do a better job of self-care, not just to be more price conscious in using health services.
Note the continuing refusal of many educated mothers to have their kids vaccinated.
There are many problems with setting the level of deductible–of which personal income is one. But so is the stages of illness through which people go. From year to year the same person may go from healthy to stage I Colon Cancer to Stage II, all the way to Stage IV before it is detected and acted on. The patient does not know he has it until he is at death’s door. Neither does the provider or the health plan. Neither has much of an incentive to track stages of illness, as they can always just drop him out or raise the deductible. It’s not so much “Prevention” but “early Detection” that is so needed, yet policies and behaviors still work at the acute stage. For example, if you have heart disease and are in house for an Echo cardiogram, you could have breast cancer, peripheral neuropathy and cervical arthritis and they would never be detected.
Cheers. Really, stay with this topic.
Wanda Jones
San Francisco
Thank you. That is very good thinking: Get the group involved in the health of its members. Fraternal societies used to do that, and employed moral suasion.
Term life insurance is typically priced for a number years, five, ten or twenty, depending upon the number of years the purchaser thinks they will need life insurance. A five year term is cheaper per year than a ten year term. The term life market is VERY competitive. The only government regulation is an attempt to prevent fraud at the state level. And, they don’t do a very good job of even that.
It may be entertaining to try to devise some better or even perfect plan, but that’s how we got Obama Care and Medicare. Nobody is that smart. That is one of the most basic fundamdntals of economics. “No man, no council, no senate has the wisdom to invest the capital of the community.” Adam Smith, The Wealth of Nations. (That quote may not be exact but it’s close.)
It would be better to let the millions of consumers in a market decide what they want. Insurance companies would fall all over themselves trying to figure out what the consumer wants and then selling it to them. Would some people make bad choices? You betcha! But that’s better than somone else making a bad choice for them.
To have a properly regulated market, end government regulation and let the consumers regulate it. It’s not perfect, just better than anything else. It works everywhere that it has been tried.
Term life gets cheaper because no one buys it intending to file a claim. With a quick blood test and a check of the Medical Information Bureau, the insurance company can be confident that virtually the only claims in the next 10 years will be for accidents. (and checking the MVR’s will reduce those claims too)
I am in the insurance business so I am involved in this process.
Health insurance is very different. When sold on an individual level, many buyers do indeed make their purchase because they anticipate a claim fairly soon.
The individual market before the ACA tried to deal with this through tough underwriting and pre-existing exclusion clauses. This led to decent premiums for about half the applicants, and denial of coverage for at least 20% of applicants.
I was never opposed to high risk pools or a public option for the rejected applicants. But a pure free market in health insurance will never work.
“Health insurance is very different… many buyers do indeed make their purchase because they anticipate a claim fairly soon.”
That’s why we need a type of lifecycle saving for health security. My idea includes catastrophic coverage, with high-deductibles coupled with personal health account that the individual has deposited funds in for a lifecycle. Fifty years ago there was an assumption in the public health/health policy community that nobody wanted to see that doctor unless they’re sick. Thus, over-utilization would not be a problem with comprehensive coverage. Most of us now know that’s not correct; health care is increasingly a consumer good (there’s a pill for every malady whether, trivial, real or imagined).
That’s why I used the (albeit imperfect) analogy of whole and term life insurance. Whole Life builds up cash balances, while Term Life insures against unlikely events for a fixed number of years. (In Switzerland, some health insurance contracts are multi-year.) I envision a combination of products. A multi-year, say 5-year Term Health, major medical policy that is age rated. This could have a $10,000 to $25,000 deductible, but a annual or lifetime cap of $250,000. It could function like a stop loss. This coupled with a health rated “whole health” policy that has a substantial amount of cash value built up by the individual over the years.
Years ago John Goodman wrote about Ideal Insurance as a product that would be portable. A good risk moving to another insurer would require the new insurer to compensate the previous insure for losing the preferred risk customer. A poor risk customer moving to a new insurer would require the previous insure to compensate the new insurer. If an enrollee had a portable policy where a cash value is accessible to pay a portion of the claims, the insurer would be less apt to avoid those who are higher risk enrollees.
It’s interesting that with auto insurance and home owners insurance, the deductible is linked to a specific claim and not to the amount of loss for a time period. This approach is designed to avoid minor or frivolous claims and to keep premiums lower. With health insurance the deductible is meant to keep premiums lower but also, with the higher deductibles in the thousands of dollars, designed to keep the insurance from covering claims for some policyholders at all.
On the brighter side, from a market oriented viewpoint, higher deductibles have the insurance policy performing more like a catastrophic coverage policy. This , in my opinion, is what insurance should be. A lot of health services wouldn’t be covered; however, over time, this would force physicians, hospitals and other providers of health and medical services, to compete on price – or ideally a combination of price, quality and service.
“A lot of health services wouldn’t be covered… over time, this would force physicians, hospitals… to compete on price…”
Another perverse result of the way deductibles are calculated is that Blue Cross still has to adjudicate claims and count my annual expenditures even though I have an HSA and $5,000 deductible. That’s a waste of resources and inhibits my doctor from competing on price. The last time I went to my primary care doc, he couldn’t tell me what I owed him because he had to file the claim to find out.
If certain services were never covered by insurance, those services would be competitive. For services within the hospital setting, reference pricing would induce hospitals to compete at the margin.
Yes, it is ridiculous. The payments through an HSA should be determined by patients and providers, not insurers! Processing these claims creates to much bureaucracy.
Yes! Yes! You have nailed it! Whatever the cost sharing is, it should be attached to the diagnosis (diagnoses) not the time of year. We have covered everything from HSAs to medical tourism at NCPA, and the evidence shows that when patients participate in price formation everywhere along the spectrum from first dollar to last dollar, costs go down.
Should a patient diagnosed with cancer face a deductible and max out of pocket costs? That makes little sense. However, giving her choices of therapy based on some price differences makes sense.
John, your idea of having a choice of therapy vs deductibles is a great concept. As you note, a $2000 or $5000 deductible plus another $4000 in coinsurance is just financial cruelty when it comes an illness like cancer.
However, the progress in medicine is such that I am not sure an insurance company can even write a contract which says
“we will cover therapy X for a lower premium, but if you want the choice of any therapy in the book you will pay a higher premium.”
We want people to keep their health insurance for more than one year at a time.
If I bought the cheaper policy above and had cancer 7 years later, by then the therapy I signed up for might not even be available.
Thank you. That is a very good point. The best solution would be simple indemnity insurance. We cannot fully avoid the fact that we do not now what future innovations will be or what they will cost. However, we at NCPA are confident that the reforms we propose will reduce costs.
I am still in the benefits business, and have a good knowledge of indemnity policies.
In other for them to catch on, I think there has to be some limit on balance billing.
In most states you can buy an indemnity policy today that pays $25,000 for hospitalization.
But you are horribly exposed if you are charged ten times that.
I feel that somewhere in this process we must challenge the legal ability of hospitals to charge anything they want to. I suspect this will be decried as price controls, but I see no other way.
Well, for scheduled procedures, an indemnity model would lead patients to ensure they had a full, packaged price in advance. However, because the current insurer model is so dominant, we don’t see that very often. However, when foreigners come to the U.S. for treatment, they get a packaged price in advance.