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INSURANCE: Unbundling “Insurance”

November 17th, 2006

At a November 14 panel discussion, Health Affairs released its November-December 2006 issue, titled “Will Employer Coverage Endure?” One of the panel members at the event was the always thought-provoking Mark Smith, president of the California HealthCare Foundation. Mark offered some fascinating comments taking apart the meaning of the term “insurance.” Below are excerpts from Mark’s presentation:
–Christopher Fleming

What is it that people mean when they say everyone should have insurance? We toss that word around as if we all agree on what that is, and then it turns out we don’t. . . . When you hear the things that people desire in their health insurance, you’re struck by the fact that they are in some ways inconsistent. . . .

When you ask people why they want health insurance, they will give you one of four answers. . . . (1) “What if I’m hit by a bus?”; (2) “I need to be covered for my preventive services”; (3) “I can’t afford to go to the doctor, or to get my medicine”; and (4) “I’ve got a chronic disease, for which I can’t afford to pay over time.” . . .

Those are the reasons why people want health insurance. Please note: Only the first of those is insurance, in the sense in which anyone would understand that term — that is to say, protection of financial assets against the rare, unpredictable, catastrophic event. That’s what homeowner’s insurance is; that’s what renter’s insurance is. . . .

So that’s our starting point when you’re talking about insurance: I pay money against a circumstance which will probably not happen. Some component of what we call health insurance is that “what if I’m hit by a bus” concept. But the difficulty, we think, in trying to find a method of coverage which is acceptable to the various constituencies who are involved in health insurance — not only those who are covered by it, but also those who are paid by it — is that this thing we call health insurance is actually four different market items put together in one financial instrument which is increasingly unaffordable. . . .

. . . In the end, insurance is mainly a mechanism, other than its financial insurance function, to buy people into an underlying system of care which they can not afford. And no matter how much we tinker around with the insurance product, if in the end the care into which it buys you is unaffordable, it’s like getting increasingly creative with your mortgage for a house you cannot afford. A lot of Americans over the next few years are going to be very sorry they did that . . . because they were trying to buy a financial instrument that would get them title to an underlying asset they could not afford. . . .

And so, in our view, while many of these things in the insurance world are important, while we need to align people’s incentives and give them “skin in the game” and all those buzzwords . . . if in the end, reforms of the delivery system don’t make the underlying asset more affordable, all of our dickering around with the niceties of the insurance product which basically gets you in there will be unsatisfactory for this pressure which is documented in this issue of Health Affairs.

It does occur to us that if you’re trying to reform the delivery system, it puts you in a somewhat different attitude towards various reform proposals. . . . To the extent that insurers and providers both see the problem of the uninsured as a revenue problem — which is to say, there are all these people out there who aren’t part of our system, and we need to find a way to buy them into our system at more or less our system’s price, at more or less our system’s configuration, and more or less maintain the incomes of everybody in our system — that is a very different question from how can we make the underlying asset more affordable. . . .

It seems to us that part of where we’re stuck in this question of how to expand insurance is to unpack at least conceptually the jobs that insurance does for people and try to figure out: “Are ways to do those jobs differently?” For instance, many of the proposals that one sees at the federal and state levels about buying drugs or getting discounts on drugs, one can argue about how effective they will be, but they don’t necessarily depend on having an individual insurance product — coverage — in order to access one of the things that insurance does for you, which is get you discounts on drugs.

Similarly, there are various proposals, one from the New America Foundation, and others, which say that the way we ought to pay for prevention is to not necessarily assume that it’s covered under your individual policy and that your primary care provider does all those things; perhaps we have a special fund that buys preventive services for people where you can actually stimulate some innovation and get them done on a mass basis much more cheaply than they are done now.

My point, therefore, is not they shouldn’t continue with the quest for expanded insurance coverage but that in so doing, we try to understand what it is we mean by insurance in the first place, and the extent to which combining these functions in one financial package creates a package which is simultaneously attractive for some people and unattractive for others. And in a voluntary market you create this mismatch, because for instance, how many people would pay money to protect their assets if they don’t have assets to protect? Most of the uninsured are low income; most low-income people don’t have huge amounts of assets to protect. They know that the hospital won’t come after them in quite the same way as the department store will, even for the same bill, and so asking them to pay money every week or every month, to protect assets that they don’t have, in case of an experience which will probably not occur to them, strikes us as not a very likely way to expand coverage among that population.

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2 Trackbacks for “INSURANCE: Unbundling “Insurance””

  1. Cato @ Liberty
    December 17th, 2010 at 9:51 am
  2. Ramblemuse Touch Points » Health Coverage and Health Costs
    November 28th, 2006 at 9:19 am

2 Responses to “INSURANCE: Unbundling “Insurance””

  1. bett martinez Says:

    Dr. Smith (Mark)

    As an educator of grad students, and an insurance broker, I love what you are saying about “unbundling” the components, and about the categories of “insurance”/healthcare.

    One question: Do you have stats on the income/poverty levels of those who are uninsured?
    Seems to me I recall hearing at some conference at UCLA years ago, that 70% of the uninsured were under 40, could afford it, but were not inclined to “bet against themselves” so to speak.
    It was proposed that bringing these healthy folks into the risk pool would make a difference in terms of affordability. I’m pretty sure the person who delivered the message was Robbie Pearl of Kaiser, so that would make it credible. When I mentioned this to a cardiologist I know, who was complaining about the lack of technicians to run the Stress Tests, he admitted that his own daughter, age 25, was not insured!

    Arizona is making it possible for parents to cover their kids up to age 28 under employee coverage (I believe the parents pay most or all of the premium). Today in CA it’s still 19 unless they’re in school in which case the age limit expands to 23.

    I emailed this to Bruce Bodaken at Blue Shield, and he gave it to his chief actuary, who responded that it is probably a good idea; in times past, the only parents who’d need to insure their kids would be those with “Sickies” who couldn’t work. Today though, so many are in school and working in jobs that don’t provide coverage till much later in life, he felt it would be a reasonable risk. Again, it would lower % of uninsured. But do you know if those numbers would be significant?

    Also, have you read the proposal submitted by AHIP – America’s Health Insurance Plans – asking government support to expand Medicaid type coverage beyond the really really poor to the moderately poor?

    Last question: At that same conference, I questioned whether those insured were going to be able to afford the premium increases that would be passed on to them in the process of developing health IT, or Electronic Health Records. Now we have a bit of a scandal, exposed by an e-mail, from Kaiser, that is dealing with this same issue. What’s your perspective?

    Again, thank you so much for your thoughtful and insightful perspective, which I will pass on to students.

    And thanks in advnace for your response,

    Bett Lujan Martinez, M.Ed. CA License #0794318
    Martinez Insurance Solutions & Adjunct Professor, CIIS Masters in Integrative Health Program; 510-526-0312

  2. RobertBurney Says:

    The “insurance” concept is a hard sell when patients are used to first dollar coverage. Also, problems with preventive care need to be addressed. There is also a suggestion that health insurance contributes to the high cost of healthcare by paying those costs. There is no downward pressure on the costs of individual healthcare services.

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