It’s Time to Unbundle Health Insurance and Health Care

In December 2003, a 52-year old Harvard-educated actuary quit his lucrative consulting job with health benefits to enjoy leisure time reading books and playing cards.  With his savings and extra income from seasonal accounting work, he could have afforded to buy health insurance, but he decided against it.  He also could have received cancer screenings—his family had a history of cancer, after all.  He decided against that, too.  He also might have seen a doctor when he began experiencing pain while urinating. Still he declined.  Even blood in his urine did not engender the requisite urgency.  If not for a debilitating fever that forced his hand, one wonders whether Scott Androes ever would have sought medical attention for his advanced stage cancer.

In an op-ed last year, Nicholas Kristof argued that even though Androes undeniably “blew it” when it came to the basics of taking care of himself, he shouldn’t be left to die of cancer without health care.  Kristof’s position was surely colored by the fact that Androes was his childhood friend and Harvard roommate.  If not, surely Kristof would have to confront the free-rider problem and the fundamental unfairness of making the rest of us pay the price of Androes’ admitted negligence. Surely he would have to grapple with the question whether this is a bad case that makes bad policy.

Still, he’s right. There really is no good reason Androes should have to die without affordable health care. And there’s also no reason why anyone but Androes should have to pay for it.

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In Priceless: Curing the Healthcare Crisis, John C. Goodman identifies the bundling of health care and health insurance as a basic genetic defect in our health care system.  What we need, says Goodman, is to unbundle these concepts and give individuals more control over their choices.  Patients could pay out of their own pockets for non-urgent, routine, easily managed health care, and would purchase insurance only for rare, financially devastating events.  This kind of system is far more intuitive than the current health care system, and resembles the kinds of transactions with which people are already familiar.  Androes, who opted to avoid the fuss of carriers and networks and primary care physicians and referrals, might not have found a simple visit to the nearest oncologist not so prohibitively obnoxious.

Most importantly, unbundling these concepts would solve the vexing “pre-existing conditions” problem.

How did the system get so unintuitive?  It began a century ago, when the doctors’ trade union—the American Medical Association (AMA)—lobbied for occupational licensing laws and essentially gained the power to certify medical schools.  The AMA imposed sanctions for “unethical” practices like price-cutting, quality competition, and quality comparisons.  When BlueCross and BlueShield were formed in around the 1930s, their clients were hospitals and doctors, respectively—not patients—with the goal of ensuring that hospitals and providers were paid.  Occasionally, the model resulted in patient care as a happy byproduct.  With the help of protectionist legislation, BlueCross was the dominant insurer in almost every state by the 1950s, forcing its competitors to conform to their billing and payment model.  In this way, the AMA’s aversion to transparency in pricing and quality became institutionalized.

Along the way, the federal government during the New Deal installed a tax exemption for employers who offered health coverage to employees.  The policy eased the pain of wage controls and massive taxes on profits, as were the style at the time.  The New Deal ended, but not the subsidy.  More importantly, Congress has never extended the subsidy to individuals, further alienating patients and health insurance.

So our “private” health care institution as of the 1960s was a network of carriers designed to benefit hospitals and doctors, and a federal tax subsidy designed to benefit employers.  These are the fundamentals upon which the Great Society, ERIA, HIPAA, COBRA, and now ObamaCare “improved.”

The pre-existing condition problem was created by these two genetic defects of our health care system—managed competition (Goodman calls it “private sector socialism”) and employer dependency. The problem only arises when a patient seeks new insurance, such as when he leaves his job.  In this event, the former carrier reaps a windfall:  It gets to keep all the down-payments-toward-future-care the patient has made, though it will never have to actually pay for that care.  The new carrier, on the other hand, is in a bind.  It is obligated to pay for lots of expensive services for the new patient without receiving the down payments.  “In popular discussions of this problem,” says Goodman, “the tendency is to blame the new insurer, but this condemnation is surely misplaced. Remember, the person with the pre-existing condition has been paying premiums (perhaps for many years) to the original insurer. Does it make sense to allow the original insurer to collect all the premiums but force the new insurer to pay all the bills?”

This leads us to yet another institutional anomaly:  the conflation of health insurance and health plans. The point has been rehearsed elsewhere so the casual observation will suffice:  We buy health plans because of known expenses.  We buy insurance to because of unknown expenses.  Neither one is particularly vexing if not for our health care system’s genetic defects.  Actuaries are quite good at planning for the unknown, and no one has suggested their efforts would be advanced by subsidizing employer-provided fire or car insurance.

But what if fire insurance did suffer from the same genetic defects as health insurance?  Suppose your home burned down in a fire and your carrier began the work of restoring it.  Just as work was getting underway, however, you lose your job and with it your fire insurance.  Assuming fire insurance were structured like health insurance, in which the obligation to provide continued services for covered events depends on the continued receipt of premiums, the loss of your job and fire insurance means the work stops on restoring your home.  No one could fairly expect a new fire insurance carrier to pick up the work for merely the price of a monthly premium, so your poor house and its charred pre-existing condition is helpless.

The concern with one’s house catching fire is not so unlike the concern with most chronic health problems, like diabetes, asthma, cancer, or heart disease.  The concern is not that they will arise when you’re uninsured. Instead, what keeps people up at night is the notion that, once the condition arises, they’ll lose their job, and with it their insurance.  So long as the patient and his employer continue to pay premiums, the carrier can allocate them toward expected future care to guarantee the arrangement makes sense for everyone involved.  Because the chronic health problems are known, what the patient pays are more like down-payments toward future care, rather than premiums paid to insure against future unknown risks.

Thus the solution presents itself:  Unbundle health insurance and health care.  Employers can continue to provide health care packages if they like.  But health insurance—and all the down payments patients make to cover their pre-existing conditions—must stay with the patients.  Neither private carriers nor the government has any business “bundling” patients’ future health care security with any other product or service.  Health insurance should be bundled with the patient, full stop.

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If Androes is a typical case, Obamacare won’t help.  Instead of breaking up the bundling of health insurance and health care, and instead of keeping insurance with the patient, Obamacare tries to “solve” the pre-existing condition problem through yet another layer of subsidies and industry protectionism.  It requires insurance companies to accept all patients regardless of pre-existing conditions.  But don’t feel sorry for the insurance companies:  In exchange, the government requires every citizen to pay them premiums, regardless of their need for any health services.  To put it in terms of our fire insurance hypothetical, it requires a new insurance company to rebuild your house before you’ve paid them dollar one.  And to make up for the insurance company’s loss, the government creates huge new pools of customers by requiring all citizens, even non-homeowners, to pay fire insurance premiums.

But the dirty secret is that the individual mandate actually has no force of law.  As Ezra Klein openly revealed,

the Affordable Care Act doesn’t include an actual enforcement mechanism for the individual mandate. If you refuse to pay it, the Internal Revenue Service can’t throw you in jail, dock your wages or really do anything at all. This leads to one of the secrets of Obamacare: Perhaps the best deal in the bill is to pay the mandate penalty year after year and only buy insurance once you get sick. To knowingly free ride, in other words. In that world, the mandate acts as an option to buy insurance at a low price when you need it.

This is true, except for the part about paying the mandate penalty—the government can’t even make you do that.

I doubt Kristof meant that we have a moral imperative to let the Androeses of the world free ride roughshod over the rest of us.  I suspect like many of us he got caught up in the easy scapegoating of the “greedy” health insurance company.  Or that too few Americans are smart enough to buy health insurance and need Uncle Sam’s gentle encouragement (for that, it turns out, is all it is).

In fact, Androes is getting the care he needs—not through Obamacare or some other munificent government program, but through private charity.   And in fact Androes had the means to get both health insurance and health care.  He simply chose not to.  Obamacare wouldn’t have helped him.  What does Androes say might have helped him?  Cheaper insurance.  But as we’ve seen, insurance isn’t the issue.  Androes was averse to doctors, not costs.  In a system where care and insurance were unbundled, Androes would have been free to opt out of pre-paid health services he wasn’t going to use anyway, and still could have obtained health insurance in the case of devastating illness, which it turned out he had.  Androes would have suffered for his choice to go without preventative care, but he still could have gotten the care he needed through insurance without imposing costs on everyone else.

For so many of us who live with the confused conflation of care and insurance, and the nonsensical subsidies and regulations piled on top of that basic defect, Androes’ seems like a hard case.  And instead of dispelling the confusion and revealing it as actually an easy case, our policy makers perpetuated the defect and turned the hard case into bad policy.  As G.K. Chesterton put it, “It isn’t that they can’t see the solution. It’s that they can’t see the problem.”  It’s time to see the problem.

(Image credit: Patricia Downs Burger)

[revised 9/27/13 -tmk]