Philadelphia Reflections

Traps, Pitfalls and Fallacies in Insurance Alternatives

As a general statement about insurance: it's a little surprising any of it works as well as it does. Most of us know the storyline of Shakespeare's Merchant of Venice . It boils down to describing how a fairly decent merchant got into big trouble by pledging his life (in effect) to fulfill the terms of his maritime insurance, which of course he never should have signed. There have always been terms of insurance no one should agree to, and no court should enforce; this was certainly one of them. However, there has long been a real need for maritime insurance, so over a period of several centuries, an honorable, profitable and workable scheme was gradually patched together. Today it is possible for a shipowner with doubtful finances to make enforceable arrangements with insurers thousands of miles away, under terms of a contract written by shrewd lawyers, to pledge substantial sums derived in turn from investors who know very little about insurance, ships or navigation, to cover ships sailed by captains over whom they have no physical control, commanding crews who are often of the worst sort. It actually seems to work, if everybody involved is careful. And the same thing is true of health insurance. A workable system can be constructed, but some schemes forget their premises.

Regulations vs. Incentives. There was once a time for example when the State Insurance commissioner was expected to protect the customer from claims against an insolvent insurance company. Insurer insolvency is a risk in buying any insurance. In recent years, however, insurance commissioners have appeared to have the main goal of protecting the customers from being overcharged. The two goals are in conflict, one pushing premiums up, the other pushing premiums down. Accounting procedures have grown arcane, dual systems of cost accounting are imposed, reserves are hidden. Many states require solvent companies to bail out an insolvent one, so an occasional slick operator escapes with a quick profit before the surviving competitors can protest. And so forth. When the state Medicaid program becomes an abuser it is difficult to trust the state's insurance commissioner to protect anybody. This resembles the environment which existed before the business community organized the non-profit Blue Cross plans. The deficiencies of service benefits and rising costs then seemed a small price to pay for a workable system. After a century, unfortunately, the employer-based system has trouble defending them.

Dread Diseases. And there once was a time when newsmedia agitated worries about certain diseases, so Dread Disease policies quickly appeared, ensuring against polio or cancer, or whatever else was in the news. When hysteria subsided, people dropped these policies, and the insurance company could legally walk away with unpaid claim reserves. As a matter of fact, much of the profitability of life insurance even today resides in expired policies of those who drop their policies; like exercise clubs for the flabby, who could never actually accommodate the number of subscribers they vigorously enlist.

It is not possible to separate insurance for the other stages of life until you stabilize the ACA since the employed third originates most of the revenue.

What Has This to Do with Health Insurance? Health insurance, being of more consequence to survival than exercise is, badly needs a system of multi-year coverage to protect customers from this hustle among others, And nowadays, against the same sort of dangers from government as it crowds itself into the health field, with eminent domain, escheat laws, devalued currency and just plain corruption. Unfortunately, health costs are still too unpredictable to permit cost predictions over long time periods. We would greatly like to go from "term" health (and retirement) savings accounts, to multi-year ("whole life") ones, but the prospect of predicting health costs a century ahead is too daunting for a major corporation which actually intends to pay its bills. Ultimately, almost all revenue for health insurance at any age derives from the one-third who are employed. Therefore, it is not possible to separate insurance for the rest of life, until you have stabilized the ACA in some way or another since that third originates essentially all the revenue to subsidize the other two thirds.

On the other hand, it raises a question of whether employer-based health insurance would also be dropped by good persons who get into non-medical financial difficulties -- except they mostly don't own their policies. Set aside the tax dodge and its inequity for small employers, prevention of employees dropping term insurance is still most likely the underlying purpose of businesses giving health insurance to employees. They want to make sure their employees are treated for illness before the business itself gets disrupted by absenteeism. They can't give lifetime coverage, because today most employees change employers frequently. It's important to see this motive is legitimate because it must somehow be modified without the use of brute force.

Employees who own their policies might very well drop them, so the potential value of having insured employees with improved health must be balanced against its evident unsatisfactory features. As costs rise, at some point almost any IRS agent would question the imbalance of purposes. What seems to have tipped the balance was the discovery that tax exemption without loss of control could be created by giving it to employees as a gift, where the higher tax rate for corporations actually creates even higher tax exemptions for the employer than the employee. Times and attitudes change, but the argument that volume purchasing and other features secondarily make the health insurance cheaper for the employee seems to have been persuasive. The fact that non-union employees of competitors were treated unfairly, was highly unpersuasive until job mobility significantly increased. And converting high corporation taxes into high corporate tax deductions is increasingly seen to be just a step too far.

The time increasingly moves toward corporate willingness to surrender the tax inequity, with only unions belligerently opposed. The easiest way to accomplish it is for HSAs to be able to purchase it since the rest of HSA is also tax-exempt. Employers might possibly prefer to use surrender as a bargaining chip in general tax reform legislation. At this point, it scarcely matters which approach is adopted, either giving tax exemption to everyone or denying it to everyone. In the present climate, giving it to everyone probably has the edge. The price of not extending the tax shelter to the catastrophic insurance portion of an HSA is an unnecessary price for everyone who signs up for an HSA. The cost in Treasury revenue now begins to be less of a consideration than restoring fair play to the basic economy. Revenue can be restored by other means, but regaining a general atmosphere of equity is much more difficult.

Aside from this issue, catastrophic indemnity insurance continues to be confused with dread disease insurance. Let's ensure cancer, but not indigestion would be a general idea. One supposed alternative is: Let's insure illness, regardless of cause. But our goals have become confused; we should be advocating insurance against major health costs, regardless of medical cause. When you come right down to it, the underlying reason behind all this medical investigation of claims is to prevent providers and patients from milking the insurance company. And a better way to accomplish that is to have the patient pay cash and beat subsequent risk seeking reimbursement for his payment. The relative cost of the two approaches needs to be re-studied. In particular, it would be important to seek ways to separate direct from indirect costs, since the system of burying research in indirect overhead essentially makes research and teaching into beneficiaries of reimbursement abuse. In the outpatient area, however, the experience of HSAs has been the issue is not a significant one. For helpless patients in a hospital bed, a more sensible revision of diagnosis-related payment still makes sense.

Disability Insurance Has been praised by some as an alternative to funding health insurance and amounts to concentrating funding into diseases which entail extended disability from employment. It is true the really astounding health costs have usually included a big dose of disability rehabilitation, and in fact, organized health groups have concentrated considerable attention to it. However, these efforts have largely been subsidized experiments, and they have yet to demonstrate overall cost-effectiveness, themselves. When teams of six to eight professionals devote up to two months to a stroke patient, the cost can be overpowering at any income level, and only 4% of stroke victims currently receive fibrinolytic therapy. Extending the same generosity to 96% of stroke patients would be ruinous to this approach. Important standard of care conclusions can only be reached when 80-90% are treated, at least in a few regions, followed by 80-90% rehabilitation, followed by observation of the cost-effectiveness for some time afterward. You almost don't need to do the experiment.

When the net benefit to the patient is often meager, the question is whether the rehabilitation approach must change or disappear when the current research subsidy does. Extending it to a helicopter and police rescue, we do not have even preliminary data to encourage this essential rehab approach as a cost saver, but it certainly sounds expensive within the present state of the art. The current price of ambulance service suggests this is an area of considerable abuse. At a recent medical symposium on the topic, the audience was asked how many would prefer a disabled outcome in 30%, to dying of the disease, and very few hands were raised. These investigations must be conducted before final decisions can be made, but the early results are a warning. The advanced age of most stroke victims suggests this noble effort at best will not cause much economic improvement unless the rehab becomes much less elaborate. We hope treatment advances will appear quickly, but national cost-effectiveness changes are so far, only partially encouraging.

Home Health Care is also quite expensive, but most people would prefer it to institutional care. At the moment, home health care insurance encounters its main problems from government caprice. If Medicare cannot be depended on, or if a benefit can be removed at the stroke of a bureaucrat's pen, the finances of this sort of insurance will remain precarious. The retirement village is probably a more viable approach, because most of them are located in suburbs, and could also serve the suburb as a partial substitute for hospitals, with doctors' offices, laboratories and radiology serving a dual community. They are not cheap but are probably cheaper than holding on to oversize, underused, private homes, inconveniently located for medical service. By far the greatest problem with out-of-hospital settings is the instability of rulings by insurance companies and governments. Whatever problems the teaching hospitals may have caused, they have historically been reliable in this one.

Originally published: Sunday, March 20, 2016; most-recently modified: Friday, June 07, 2019