This is the fourth post in a multi-part series, Insurance Foundations.
Now that we’ve defined what insurance is, and taken a look at what makes something insurable, we can finally turn our attention to health insurance. Or, more properly, health coverage. I often prefer the latter term for a very simple reason: we don’t really have health insurance anymore.
That said, I still use the term “health insurance” at times because it’s the more recognizable phrase.
The reason we don’t really have health insurance anymore is simple: medical costs aren’t insurable.
Medical Costs Violate the Criteria for Insurability
Medical costs violate several of the criteria for insurability that we discussed in the previous post:
- Losses are guaranteed. Nearly everyone will need medical care at some point in their lives.
- Losses are neither uncertain nor random. Many healthcare expenses are predictable, especially for people managing chronic conditions or ongoing treatment.
- Losses can’t be easily quantified. The cost of medical care varies widely depending on the provider, location, and circumstances of treatment.
- Losses are predictable and widespread. Routine care, prescriptions, and age-related conditions affect large portions of the population at the same time.
- The beneficiary with the insurable interest is unclear. Medical care involves patients, providers, insurers, employers, and government programs, all of whom participate in the financial structure.
How Insurance Got Involved In the First Place
Health insurance as a concept emerged in the early 20th century as an extension of life insurance. In 1929, the Baylor Plan became the first recognizable health coverage plan, and it was structured as an insurance policy. Health insurance became tied to employment during the wage freezes of World War II, when employers had to compete for workers in ways other than higher pay.
A quarter-century after health insurance became tied to employment — and thus widespread as a fringe benefit — there were already strains on the system. The rise of managed care in the 1970s reflected insurers’ attempts to manage those pressures, and can reasonably be considered the point when health insurance began to evolve into health coverage.
How Insurers Coped With the Problem
However, because health coverage was still administered by insurance companies for historical reasons, the carriers turned to the tool they knew best: traditional risk-control methods. These included:
- Cost Sharing, through tools such as deductibles, coinsurance, and copays, attempts to manage costs both directly (by passing some expenses to the consumer) and indirectly (by creating incentives for patients to seek lower-cost care first).
- Utilization Management, through mechanisms such as prior authorization, step therapy, and case management, attempts to control how medical services are used by requiring additional review before certain treatments or procedures are approved. Preventive care incentives also fall under this category.
- Provider Networks, through negotiated contracts with doctors and hospitals, attempt to control the price of care by steering patients toward providers who agree to specific reimbursement rates.
Why It Still Got Worse
By the late 1990s, insurance companies were recognizing that their products weren’t true insurance anymore. This was part of the reasoning behind the introduction of healthcare spending accounts — Flexible Spending Accounts, Medical Savings Accounts, Health Reimbursement Arrangements, and, in the early 2000s, Health Savings Accounts.
The idea behind the use of healthcare spending accounts was that, if health insurance was retooled back into being administered as a true insurance product (frequently called an indemnity plan in industry parlance), that might help control the problem. The spending accounts were meant to incentivize that return.
Over the decades, many of the innovations surrounding health insurance, and later health coverage, worked — for a while, or for certain groups. But none of them changed the core reality at the heart of the problem: medical costs don’t meet the criteria to be insurable risks. Or, in other words, insurance products are the wrong tool for managing them.
In the next post, we’ll take a deeper dive into why this is, how it developed*, and the most current stressors on the market.
* Just to be clear, this series isn’t meant as an apology for insurance carriers. They are still a part of the larger multi-pronged problem, and can still be a part of the solution.