American Healthcare - Part III: Healthcare vs. Health Insurance
July 1st, 2012 | Back to Blog Listing

Before the United States can even begin to make progress towards sensible healthcare policies, Americans must first comprehend what is being debated. Over the past few decades, and certainly throughout the healthcare debates of 2010, the terms health insurance and healthcare have been increasingly used to mean the same thing. In fact, the phrases are frequently interchanged throughout interviews, debates, and occasionally even on the Congressional floor. It has not surprised me in the least that most politicians have carefully avoided clarifying the topics, at times even dismissing the differences as mere semantics. But however insistent politicians might remain on the synonymy, nothing could be further from the truth. Stated very clearly, health care and health insurance are two fundamentally different ideas. Health insurance is nothing more than a subset of any other insurance. In general, insurance is a system that hedges a fiscal value against the risk factor of potential financial loss. It is nothing more than a legitimate system of gambling, albeit there appears to be a great deal of reluctance to associate that term with it. Nevertheless, in the specific case of health insurance, it is responsible for covering the medical costs of the policyholder in the event of an emergency. This is specifically why insurance policies for those with pre-existing conditions have been significantly higher than those without. It is also why insurance policies for those who commonly partake in dangerous activities have been significantly higher as well. In both cases, the risk of financial loss is elevated and thus a higher wager needed to cover that risk, so to speak. Healthcare, by very stark contrast, is simply the treating of an injury or illness (both mental and physical) by trained medical professionals. The most important distinction between these two phrases is that healthcare has absolutely nothing to do with financial risk mitigation; it has only to do with the wellness of human beings.

When we allow politicians to intertwine these terms at their convenience, or when we do it ourselves, it makes it impossible to discuss obvious and costly flaws within the system. Whether some form of universal coverage were to exist or not, we all understand that some form of healthcare is required; this is fairly simple to comprehend as we all have been witness to injury and illness. But by conflating these terms, this also assumes that we need health insurance as well, and that is not necessarily true. One of the first things we have to remember about insurance is that it is a business, plain and simple. It is not a privilege for the public to freely indulge, and it certainly does not operate like a charity. Like all businesses, the two most important functions are keeping costs low and profits high. This in no way precludes a business from being altruistic, but if it is unable to be profitable, then it eventually ceases to be. Likewise, if a company is unable to sustain upward growth in the long run, then there is typically little incentive to continue improving it. In order for the business to succeed, it is imperative that a demand exist for the products or services the company sells. The insurance market is no exception to this rule; ask any insurance salesman. But slightly more counter-intuitive is considering where consumer demand comes from within the insurance market and understanding how politicians and insurance companies can manipulate this demand.

When it comes to insurance, there are two specific prerequisites that must be met in order for demand to exist. The first one is fear, and the second is high costs. This might sound like the introduction of a conspiracy theory, but it is actually quite logically sound and in fact exactly what drives the market. For example, consider the likeliness of someone from Omaha, Nebraska insuring a one million dollar home against earthquakes. Or for that matter, the likeliness of someone from Los Angeles, California insuring a five hundred dollar tool shed against earthquakes. In the case of Omaha, there is absolutely no history of earthquakes throughout the state, so there is no reason to fear such a cataclysm. And in the case of Los Angeles where earthquakes are fairly common, there is little reason to insure something of such inconsequential relative value. Even if the shed crumbled entirely to the ground, the total cost to rebuild would not exceed five hundred dollars and could hardly be considered financially devastating.

This is again why fear and high costs play such a vital role in creating the demand for insurance. Consumers must first be convinced that whatever they are buying protection from actually has a statistically realistic chance of occurring. If you purchase fire insurance for your home, you must first assume your home could catch fire. If you purchase comprehensive auto insurance for your car, you must first assume you could be in an accident. And if you purchase renters insurance for your apartment, you must first assume that your possessions could be destroyed or stolen. The complementary factor of high cost is what fuels the frenzy. Many families spend decades paying off their home mortgage. Should their home suddenly catch fire and burn to the ground, the valuation would be so high that they could not realistically afford to replace it; this would be a highly devastating financial loss for them. The same is true of most vehicles and personal estate belongings. The high value of these goods combined with the fear of losing them is what creates the demand for insurance. Historically speaking, the open market has shown that most people are willing to pay small reoccurring fees for a little peace of mind should the unthinkable occur. Despite what some people may wish to believe, it is important to understand that it is impossible to insure sentimentality, or that which is irreplaceable. Insurance cannot replace things; it can only repay their perceived valuation. Therefore, in order to insure anything, that which is to be insured must first be assigned a monetary value. It is probably fair to say that insurance is really nothing more than a service provider of financial security. But it is really only a useful service if we first believe, or are convinced that we could find ourselves financially insecure.

In a consumer-driven market, most businesses have a desire to see the costs of goods and services remain low; this generally allows them to sell more products. Insurance companies are unique in that they have a vested interest in seeing the costs of goods and services remain high. That is to say, the more expensive things become, the more expensive they become to replace. Consequently, the service of selling a financial safety net appears all the more necessary. This is perfectly fine when we consider most insurance markets because there is no way to significantly influence or alter the marketplace. In other words, it is virtually impossible to predict any sort of truly calamitous event, the very things that insurance is designed to protect against. Nobody can predict that their house is going to burn to the ground one morning, or that they are going to be in an accident while heading out for a drive, or that they will be burglarized while away on vacation. Furthermore, unless insurance agencies began secretly committing acts of arson, reckless endangerment, or larceny, respectively, then they have no way to increase the likeliness of these occurrences. Over the years they have used hundreds of fear-based marketing campaigns to increase the perceived need for insurance, but even these tactics can only have so much of an impact given basic day-to-day observation. This is specifically why most insurance works rather well; it relies on true actuarial calculations that factor the likeliness of incidents versus the costs of loss and base both on historical and market factors. But in the case of health insurance, the problem is that the calculations are no longer exclusively based upon unpredictable calamitous events. This allows the risk factors we paying to be insured against to be directly manipulated by the same companies providing the policies. Americans have become convinced that health insurance should serve as some sort of financial subsidy for even the most basic of healthcare needs. This creates a goldmine of business opportunity – for health insurance companies.

Imagine for a moment if we relied upon our homeowners insurance for all of the minor repairs we made to our house, or if mechanics had to collect payment from our auto insurance provider after every oil change. It might sound a little ridiculous, but these are exactly the same types of expectations that we have deemed acceptable within the specific realm of health insurance. It would certainly be possible in both cases for insurance agencies to handle these rather mundane necessities, but not without significant base cost increases. If we allowed those changes to take place, we would no longer be paying for a financial safety net to cover the unpredictable losses of our homes and vehicles respectively; that would only be part of it. The other, and more significant part would consist paying a middleman to manage our personal business dealings with other private companies. And this is exactly how modern health insurance companies have managed to alter the face of the American healthcare system. They have slowly propped themselves into the position of executing most healthcare decisions in the country. But given how susceptible routine healthcare is to the influence of regular markets, this creates an unbelievable conflict of interest, and Americans are the ones who are suffering as a result. We need to again be reminded that insurance companies, just like medical service providers, are businesses. This means that most Americans who hold health insurance policies are just paying one corporation (the insurer) so that corporation can pay another (the medical service provider). Only in doing so, the insurance company attaches whatever restrictions it wishes to the transaction and still takes money off the top. This is not the premise of insurance. The fact that we schedule doctor appointments weeks and months in advance with the intention of using insurance as the method of payment is evidence of this. It shows exactly how ignorant we have become of this fiscal reality. But at the same time, it is hardly fair to blame insurance companies for their part. As we have already examined, their objective as a business is to maximize profits, not to indulge in altruism. The system described above presents them with a lucrative way in which to accomplish their objective. Americans need to be willing to take their share of responsibility for carelessly buying into their practices. This mentality has been in place for over two decades and the problem is only worsening.

There are a host of very serious consumer drawbacks that arise from giving a business this type of control over personal monetary decisions. Specifically, health insurance abstracts the cost structure of goods and services. In the traditional sense of how insurance works, this is not the case because the policyholder is only compensated for his or her financial loss. If one’s house burns down, or one’s car is destroyed, an adjuster determines the valuation and a check is paid in that amount. How that check is spent remains the decision of the policyholder. We have developed the expectation that health insurance should be used more like a credit card or gift card; provided we can show proof of our prepaid policy, the bill is paid for, or at least most of it is. When every single transaction is routed through an insurance claim like this, regardless of how minor it is, the ability to know what we are spending money on becomes exceptionally difficult. The need to care about what we are spending money on is removed from the equation entirely. When the financial transaction is abstracted and insurance simply “covers it”, the consumer has little reason to exercise any fiscal responsibility at all. The customer could have been charged for dozens of unnecessary services, but what is their incentive to dispute these charges given they are not the one paying the bill? This is similar to arguments against a number of welfare practices. The fact is that reckless consumerism is easily observable in any marketplace deprived of fiscal consideration. Although it might make goods and services appear to be free, or at least inexpensive, in the long run it is something we all wind up paying for while somebody else profits.

Consider for a moment what it might be like if we really did expect our auto insurer to pay for routine oil changes and other minor maintenance. If that were to become the case, auto insurance companies would find themselves in the position of having almost complete control over the marketplace. They could begin dictating what type of services could be performed, what brand of oils could be used, and even how frequently cars could be brought in for service. They might even begin requiring mechanics to send in logs of the car’s computer. This could help to ensure that the driver was driving within “appropriate” limits since they would legitimately have a vested interest in the operating conditions of the car. There might be various lawsuits over consumer privacy rights, but with such an enormous marketplace, lawyers and lobbyists could be hired to sort that out. And on the other side of the equation, what would prevent mechanics from acting in their own self-interest and performing more comprehensive and expensive tests on vehicles? Like all other businesses, their objective is to maximize profit margins as well. The insurance company would likely impose some fixed limits, but they would still not have many practical ways in which to control spending. And even beyond that, what incentive would exist for limiting spending in the first place? If the cost of regular maintenance began to rise (as it undoubtedly would), the insurance company would just pass those additional costs onto their customers. Given the volume of their customer base and ability to track statistical usage, they would be in the unique position to raise their rates slowly while the actual costs of goods and services simultaneously rose rather quickly. It would even be in best interest of the vehicle’s owner to request every possible test, to make every minor repair, and to replace anything that was remotely showing signs of wear. Since the bill would already be paid for, in advance no less, what would inhibit the owner from requesting the utmost of care for his or her vehicle?

If we apply some numbers to this, imagine that the mechanic tells the customer they can get a standard oil change for $35, or a comprehensive oil change for $40. In both cases, they are informed that insurance will cover the full cost. Naturally, most will pick the more expensive option since it will be perceived as better and is paid for by insurance regardless. That seemingly small increase just by itself already represents a base cost increase of over fourteen percent! Since the insurance company is the one paying the end bill, they know exactly how much customers are spending on oil changes, and how often they are paying for this service. The math is a bit more involved, but if most consumers began to take the more expensive option and required service an average of 4.25 times per year, the insurance company would need to cover an additional $21.25 per customer per year. If we also assume that the insurance company took an additional dollar off the top, they would have to raise rates by $22.25 per customer per year to cover their costs and also increase their profits. This is where basic marketing principles and human psychology play a vital role. By itself, an additional $22.25 seems like a reasonably large jump in price. But when this rate is spread across the entire year, insurance policy holders would only see an increase of about $1.85 per month, far below the threshold of any real concern. This is exactly how the insurance bill would look, and exactly how an insurance salesman would explain this to a client. But now the mechanic is routinely charging more, the insurance company is routinely collecting more, and the customer winds up paying more for a supposed higher-end service that they have never previously required in the first place. As more and more people begin purchasing the expensive options, the perceived market value of the service begins to rise in accordance. In other words, there is an illusion that the market is demanding a better service and that people are willing to pay more for that service, when in fact neither is really true. As the costs begin to rise, those who are uninsured quickly find themselves having to spend more and more for the same routine car maintenance since the perception is that the market will bear more for these services. Eventually this allows the insurance company to further justify how they can help the consumer, but only because they are responsible for artificially driving up market rates in the first place! This is how health insurance providers have a tremendous ability to manipulate the price of the market.

This is a purely fictitious example, but also a parallel of how modern health insurance companies have fundamentally changed the landscape of expectations within the United States. Moreover, how Americans have willfully bought into the practices. They have blinded people from the reality that routine healthcare service would otherwise not be unusually expensive to begin with. This is especially true when compared to the high monthly costs that most modern health insurance plans charge. Statistically, the need for routine healthcare does not occur all too frequently and is relatively predictable in nature. In the wintertime for example, North Americans experience an elevated risk of colds and flus and will be more likely in need of doctors. In the summer months, this need drops off rather precipitously. So why then is the country paying such high rates to have these uncertainties accounted for, when in fact the alleged uncertainties are relatively predictable to begin with? Why not just let customers pay doctors directly for their basic services and let insurance protect against truly unpredictable medical needs? What originated as a legitimate branch of insurance has devolved into a bureaucratic and corporate-driven system of healthcare administration. It has become, in every way imaginable, a bloated and completely unnecessary component of the American healthcare system.

This is in no way to suggest that health insurance is not beneficial or that it should not be purchased. To the contrary, and like many other insurances, health insurance can be invaluable in its ability to protect against financial loss when unpredictable accidents and medical emergencies occur. We should ask ourselves both as individuals and as a nation whether we are purchasing insurance to cover our medical losses, or just to manage our routine healthcare costs. If it is the latter, then we need to understand that this is not insurance at all; it is just an abstracted and convoluted corporate hegemony of financial manipulation and administration. Whether various industries associated with American healthcare are intentionally engaging in collusive behavior is purely speculative and a matter for debate. However, if the health insurance industry has the ability to drive costs upward, inadvertently or otherwise, and we know that the fundamental purpose of business is to maximize profits, then how can we ignore the glaringly obvious risk this places upon us? Is it actually reasonable to expect that businesses should act in the interest of consumers? This is why it becomes imperative that people understand how healthcare and health insurance are fundamentally different terms. The blurred relationship between these is two ideas and the resulting ignorance is a significant factor in why American healthcare costs have continued to rise for years. And as of March 23rd, 2010, President Obama and the 111th Congress of the United States legally intertwined the two as one.

continued in "Part IV: An Unpredictable Event"