Tuesday, January 19, 2016

One Asshole's (Informed) Opinion: Brought to you by the number 3

If ever you find yourself arguing about health insurance, think of the number 3.

Why the number 3? Because there are only 3 ways to structure health insurance, and 3 pieces to the puzzle if you want health insurance to cover the people who need it most.

Despite all the jargon and fine print, health insurance is a pretty simple product. You pay X dollars in premiums, and are insured for Y dollars in products and services. The "products" are medications, and the "services" range from a doctor's visit, to immunizations, to physiotherapy, to a week in the intensive care unit. Any other part of the math--deductibles, co-pays, coverage caps--is a function of the structure of the insurance scheme, and whether the scheme is designed to be for-profit or non-profit.

A health care system doesn't necessarily need to be based on insurance. It's possible for a government to directly fund hospitals and clinics, and pay doctors and nurses by salary only. The hospital or clinic provides whatever care its budget will allow, (or perhaps bill the government directly for services rendered), and that's that.

In North America, however, we have insurance-based health care coverage. So what are the possible ways for health insurance to be structured?

  1. Universal single-payer health insurance (Medicare). This is how Canadian provinces cover their populations for doctors and hospitals, as does the U.S. for seniors. The government pays the benefit, funded through tax revenues. There might be some form of co-pay or deductible, but the key is that everyone carries insurance automatically.
  2. Non-mandatory, based on actuarial principles. This is how your car insurance and travel insurance work. Your premiums and benefit are dictated by your risk profile. If you don't smoke and aren't overweight, your premiums are reduced. If you have health problems, either your premiums are increased, or your benefit is limited (smaller cap, no coverage for previous conditions). Before the Affordable Care Act (Obamacare), this is how the U.S. system was structured for adults without workplace health coverage.
  3. Community rating. This is how a workplace health or dental plan is structured. A group of people together form a "risk pool". Some need more in benefits, some need less, but everyone in the pool is covered on a mandatory basis. So long as the total paid out is no more than the total collected in premiums, the system is solvent. This is what Obamacare aimed to set up through its exchange-subsidy scheme. 
Without question, experience everywhere in the world has proven single-payer insurance to be the most cost-efficient way to insure a population. Administrative costs are much lower, and the system is simpler for the population to use...the service side is hard enough to navigate, without the added complexity of trying to figure out the financing as well.

So why is a non-mandatory setup so bad? Why was the old American system so problematic?

There were major problems with the old U.S. system, mostly due to bad-faith acting and outright corruption. As it was originally designed, the intent was to have employers cover working-age adults and their families. As time wore on, employment became less secure, and employers became skilled at not providing insurance for their workforce (Wal-Mart wrote the rulebook on it). That left millions at the mercy of the private market, where insurers were notorious for mistreating their customers and buying off members of Congress. Moreover, many people that couldn't afford decent insurance simply went without, either going bankrupt in a crisis or relying on publicly-funded hospitals for emergency care.

So how is a Community Rating setup better, if not optimal? It comes back to the number 3.
Picture a tripod or three-legged stool. In order to achieve a Community Rating, three pieces need to be in place.
  • denial of coverage for pre-existing disease is outlawed
  • coverage is mandatory
  • financial aid is in place to ensure everyone can afford coverage.
If any of the three "legs" aren't in place, the insurance system isn't viable. If you're denying coverage for pre-existing conditions, there's really no point...the people that need the care don't have it. You need to mandate coverage to spread the risk. If healthy people aren't mandated to buy insurance, the risk pool is made up of sick people only...costs can spiral out of control. Lastly, if people can't afford coverage, the scheme also collapses, hence the need for financial aid.

That's really all there is to it. Nothing too hard to understand, as long as you can work with the number 3.

In the last post in this series, I asserted that the notion of doctors providing services in a market was misleading. Why? Because the rules of market economics and medical care simply don't apply to health care. That's the topic of the next post. 

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