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Health Care and Insurance: An Odd Theory

Updated on January 13, 2011

The cost of health care is out of control. Most conservatives won't argue this fact, and on the other side of the aisle, this has become the rallying cry of many progressive democrats. Of course when you are messing with re-ordering the health care delivery system for over 300 million people, well you are going to step on some really big toes. Let's face it - we are talking about enormous sums of money here.

The Current Business Model:

Traditional insurance is based on the pooling of risk. In other words, insurance only "works" when the insurer can group similar "risks" together into classes. Let me give you an example. If you are selling life insurance then your younger clients, by virtue of the fact they are, well, younger and presumably healthier, get the best rates - the chances of them dying are very slim in other words. So the premium dollars this low-risk class of people pay go to cover claims filed when older, less healthy people finally meet their demise. And as long as things are priced right - by class - then the system works. Claims are paid out, premium dollars are collected, reserves are met, and the "profit" is invested in the stock market, government securities, etc. And most people have some form of life insurance - even if it's a smaller policy provided by an employer. And for younger people, say people under 40-45, it's cheap because, again, older people don't die as often as older people, the young tend to be healthier than the old. So the young and the healthy are considered to be a "good risk" while the old and sick are considered to be "high risk." And this basic principle holds true with all insurance - homeowners, auto, disability, etc. And losses (claims) are paid out on a per occurrence basis and are meant to cover what is sometimes referred to as "catastrophic losses." In other words, insurance proceeds from a claim are designed to replace money that you don't have to cover a sudden and accidental shortcoming or potential financial short-come. Bottom line is this: if you use insurance only when absolutely necessary and you don't use it often, it stays relatively affordable for you and relatively profitable for your insurance carrier. This is known as marginal utility.

Now, this is the same model oddly enough that private health insurance uses. Are you seeing a potential problem here? In theory, good health is maintained by nipping problems in the bud early on via routine visits to the doctor's office, annual screenings, maintenance medication, etc. And in theory, doing so prevents catastrophic problems from developing later on. When a 68 year old man shows up in the hospital with a multi-hundred thousand dollar life-threatening illness and proudly tells his E.R. nurse, "I haven't been to a doctor in twenty years," well that's why he's in the hospital now. And that is why, in part, the system is broken. The insurance business model doesn't factor in the "maintaining of health" into the core of its business model. In many instances it covers preventative medicine, but internally this preventative care throws the business model into a tail spin because, again, the current model only works when insurance is used sparingly. And using health insurance sparingly often leads to disaster; and this is the vicious cycle we have in America today.

A lot of rhetoric has come out of Washington over the Obama Administration's health care reform law. And in truth, there is a lot wrong with the current law - it is far from perfect. Conservatives railed against the future mandate for everyone to buy health care coverage. It has been termed "obtrusive," "socialistic," and my favorite "anti-American." Conservatives argue that it should be everyone's right to not purchase health care. And maybe they are correct in that assumption. But the downside of not buying health care insurance is rooted in the insurance model we just spoke of. By having a mandate, you effectively increase the pool of policyholders. When you increase the pool of policyholders, you have more money with which to spread the risk. Without a mandate, you have the healthiest, lowest risks consumers - the 18-34 crowd - who aren't paying into the system. And this demographic typically doesn't carry health insurance. And if you remember, the "good risks" help to pay for the "bad risks" and money keeps flowing into the system, etc. As it stands now without a mandate, those of us who are insured are paying ever high premiums because medical providers treat (at least to some extent) the uninsured and under-insured and pass the cost onto the insurance companies who, in turn, pass the cost onto us.

In summary, I don't see much of a future for the current business model. It is based on the fee for servicemodel of health care delivery from the 1950's and 60's. As America ages and as medical technology inevitably increases, maintaining health will be far more important than simply placing a catastrophic band-aid on the problem once it erupts.


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      Howard Schneider 7 years ago from Parsippany, New Jersey

      Great Hub and I don't think your theory is odd at all. I agree with you that the new Healthcare Reform Law is far from perfect. But it includes these state insurance exchanges which will have mandates and this should bring down costs. I wrote a Hub on this. I believe health insurance should have the mandate just as we have with autos. No one is refused health care so why shouldn't younger healthier people pay some smaller amount into it. They can still have accidents and those costs should not be borne by the rest of us. I believe health care is now a de facto right since everyone gets it in the emergency rooms. Therefore everyone should pay and benefit according to income and risk.


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