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Wednesday, March 09, 2005

Health Insurance

Health Insurance is a type of insurance whereby the insurer pays the medical costs of the insured if the insured becomes sick due to covered causes, or due to accidents. The insurer may be a private organization or a government agency. Market based health care systems such as that used in the United States rely on private medical insurance.

Private health insurance

Health insurance is one of the most controversial forms of insurance because of the conflict between the need for the insurance company to remain solvent versus the need of its customers to remain healthy, which many view as a basic human right. This conflict exists in a liberal healthcare system because of the unpredictability of how patients respond to medical treatment. Suppose a large number of customers of a particular insurance company were to contract a rare disease costing 10 million dollars to fight for each patient. The insurance company would be faced with the choice of either charging all its future customers astronomical contributions (thus losing customers and going out of business), paying all claims without complaint (thus going out of business) or fighting the customers in an attempt to deny the costly treatment (thus outraging patients and their families, and becoming a target for lawsuits and legislation).

There are further economic problems with private health insurance. Asymmetry of information about a persons health and behaviour is likely to lead to adverse selection and moral hazard. In essence, those seeking health insurance are likely to be those with existing medical problems or high likelihood of future medical problems and those who take out insurance may engage in risky behaviour, such as smoking and excessive alcohol consumption, which they otherwise would not. These problems may lead to 'good' insurance risks being priced out of the market or even insurance being uneconomical to provide. With publicly funded health insurance the good and the bad risks are all included in the coverage and the same moral hazard applies. Further, every risk must subsidize the unhealthy, and those that take care of their health have no opportunity to avoid this subsidization.

Publicly funded medicine

Many countries have made the societal choice to avoid this important conflict by nationalizing the health industry so that doctors, nurses, and other medical workers become state employees, all funded by taxes; or setting up a national health insurance plan that all citizens pay into with tax or quasi-tax payments, and which pays private doctors for health care. These national health care systems also have their problems.

Some of these countries have citizen groups which protest bureaucracy and cost-cutting measures that unduly delay medical treatment. Similar issues exist with private health management insurances (HMO) in countries with privately funded medicine.

Medicare/Medicaid

In the United States, health insurance is made more complicated by Federal Medicare/Medicaid programs, which have had the unintended consequence of determining the price of medical procedures. Many suspect that these prices are set independently of medical necessity or actual cost. A physician who refuses to accept a Medicare/Medicaid payment will be banned from accepting any such payments for a number of years, regardless of the reason for rejecting the payment or the amount offered. In either case, this means that private insurers have little incentive to pay more than the government does.

History and evolution

Today, most comprehensive private health insurance programs cover the cost of routine, preventative, and emergency health care procedures, and also most prescription drugs, but this was not always the case.

Back in the late 19th century, early health insurance was actually disability insurance, in the sense that it covered only the cost of emergency care for catastrophic injuries that could (and often did) lead to a disability. This artifact of history persisted right up to the start of the 21st century in some jurisdictions (like California), where all laws regulating health insurance actually referred to disability insurance. Patients were expected to pay all other health care costs out of their own pockets, under what is known as the fee-for-service business model.

As the Industrial Revolution matured during the middle-to-late 20th century, traditional disability insurance evolved into modern health insurance as both employers and governments recognized the value of encouraging patients to seek regular checkups and preventative care from primary care physicians. It is usually much cheaper to treat diseases like cancer if they are diagnosed early.

Common complaints of private insurance

Some common complaints about private health insurance include:

  • Insurance companies do not announce their health insurance premiums more than a year in advance. This means that, if one becomes ill, he may find that his premiums have greatly increased. This largely defeats the purpose of having insurance in the eyes of many.
  • If insurance companies try to charge different people different amounts based on their own personal health, people will feel they are unfairly treated. Some states require that insurance companies cover all who apply at the same cost, or that rates vary only by age of the insured; this rule has the effect (called adverse selection) that healthy people subsidize sick ones, and thus frequently only those in poor health buy insurance, making the premiums very expensive.
  • When a claim is made, particularly for a sizeable amount, it may be deemed in the best interest of the insurance company to use paperwork and bureaucracy to attempt to avoid payment of the claim or, at a minimum, greatly delay it. Some percentage of insureds will simply give up, leading to lower costs for the insurance company.
  • Health insurance is often only widely available at a reasonable cost through an employer-sponsored group plan. This means that unemployed individuals and self-employed individuals are at a disadvantage.
  • Employers can write some or all of their employee health insurance premiums off of their taxable income whereas traditionally individuals have had to pay taxes on income used to fund health insurance. This reduces the employee's bargaining power in negotiating service with the insurance provider and also increases their dependence on the employer. In the U.S., COBRA and more recent legislation has been passed in an attempt to address the latter concern, and full tax deductibility for health insurance premiums paid by the self-employed has recently been passed by Congress as well.
  • Experimental treatments are generally not covered. This practice is especially criticized by those who have already tried, and not benefited from, all "standard" medical treatments for their condition. It also leads to many insurers claiming or attempting to claim that proceedures are still "experimental" well after they have become standard medical practice in many instances. (This phenomenon was especially seen after organ transplants, particularly kidney transplants, first became standard medical practice, due to the tremendous costs associated with this proceedure and other organ transplantation.)
  • The Health maintenance organization ("HMO") type of health insurance plan has been criticized for excessive cost-cutting policies. The least justifiable of these efforts, according to critics, is having accountants or other administrators essentially making medical decisions for customers by deciding which types of medical treatment will be covered and which will not.
  • As the health care recipient is not directly involved in payment of health care services and products, they are less likely to scrutinize or negotiate the costs of the health care received. To care providers, insured care recipients are essentially seen as customers with relatively limitless financial resources who don't look at prices. The health care company has few popular and many unpopular ways of controlling this market force. In response to this, many insurers have implemented a program of bill review in which insureds are allowed to challenge items on a bill (particularly an in-patient hospital bill) as being for goods or services not received; if this is proven to be the case, the insured is awarded with a percentage of the amount that the insurer would have otherwise paid for this disputed item or items, usually 25% or occasionally even 50%, with a ceiling so that the insured will not truly become wealthy from this procedure.
Common complaints of publicly funded medicine
  • Price no longer influences the allocation of resources, thus removing a natural self-corrective mechanism for avoiding waste and inefficiency.
  • Health care workers' pay is often not related to quality or speed of care. Thus very long waits can be had before care is received.
  • Because publicly funded medicine is a form of socialism, many of the general concerns about socialism can be applied to this discussion.
Future Challenges

With the advent of DNA testing, previously unknown risk factors involving ones genetic makeup will become known and this is expected to lead to greater pressure on the private health insurance industry as they try to limit their exposure to high-risk individuals. As larger groups of these individuals are identified and charged higher premiums (if they can get coverage at all) the pressure on privacy laws to limit the flow of personal medical data will only increase.

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