The Five Deadly Sins Of Private Health Insurance

One of the hallmarks of the American economic system is our commitment to the idea of competition. We believe in it so sincerely that we even have anti-trust laws with criminal penalties for violators who try to monopolize an industry.

So why is health care different? Why would anyone think monopoly would work better in the provision of medical care or health insurance? The likely reason is that in health care we are not getting the benefits from competition that we receive in markets for other goods and services.

The reason for that is unwise government regulation.

In the market for health insurance there is quite a lot of superficial competition. More than one third of seniors choose among competing Medicare Advantage plans in an annual open enrollment. The same thing happens in the (Obamacare) exchanges that were explicitly designed to be competitive markets. Federal employees, along with the employees of most state and local governments and many colleges and universities, have dozens of health insurance choices. So do employees of many large companies.

So what’s going wrong? Here are five problems.

1. Patients enroll in the wrong health plans. In his book Sick to DebtPeter Ubel finds that “around 40 percent of people with chronic illness choose plans that end up predictably costing them more than alternative plans.” Why is that?

Under the current system, we don’t allow health plans to specialize in something they are really good at. Say a plan is very good at diabetic care. If we would allow it to restrict its enrollment to diabetics and focus exclusively on their care, it would probably improve even further.

Or take organizations that have already specialized, like Cancer Treatment Centers of America. If CTCA were to become a plan in Medicare Advantage or in the individual market exchange, the government would insist that it offer all types of care to all patients, including care that CTCA may not be very good at.

Our regulatory system doesn’t allow plans to become focused factories, a concept promoted by Harvard Business School professor Regina Herzlinger. It also doesn’t allow enrollees to tell plans in advance what their health care needs are. We literally make it as difficult as possible to pair the right patient with the right plan

[Note: an exception to this generalization started last year as an experiment in the Medicare Advantage program. Chronic Special Needs Plans (CSNPs) can specialize in such diseases as diabetes, heart, lung, etc. These plans can exclude people who do not have the disease. They can ask health questions and request medical records before admission—something that is illegal almost everywhere else in the health care system.]

2. Health plans cannot correct enrollment mistakes. In a normal market, low-cost producers tend to win out in competition with high-cost producers. For the same price, better quality products outsell lower quality. Unfortunately, these normal market forces have been suppressed almost everywhere in health insurance.

Even if an enrollee with a particular health problem starts out in the wrong plan, this mistake could be corrected if health plans could engage in mutually beneficial exchanges with each other and with the patients themselves.

To expand on the previous example, suppose CTCA has lower costs and better quality outcomes than a run-of-the-mill insurer. Then there is a potential opportunity to transfer the cancer patients to CTCA (with the patients’ approval), leaving both plans financially better off and the patients with better care.

3. Health plans cannot subcontract for 24/7 primary care. The ability to talk with a doctor by phone or email or Skype—day or night and on weekends—used to be a privilege only the rich could afford. We called it “concierge care.” The benefits are obvious. The coronavirus and other medical problems don’t just crop up during working hours. And a trip to the emergency room is not only expensive, these days it has health risks as well.

Today, Atlas MD in Wichita says it can provide all primary care—around the clock and by means of phone, email, Skype, Zoom and Facebook if needed—for $50 a month for a mother and $10 for her child.

Until recently, this option was rarely offered by employers and not at all by Medicare Advantage or the Obamacare exchange. A Trump administration executive order now allows employers to put money in a Health Savings Account and lets employees chose the direct primary care doctor of their choice. Emergency deregulation (because of COVID-19) is allowing the use of Skype, Zoom and Facebook for doctor-patient communications.

These changes need to be codified and made permanent.

4. Patients cannot manage their own health care budgets. In his review of Sick to Debt, Jeff Goldsmith says Ubel finds fresh evidence of a finding from a four-decade-old RAND Health Insurance Experiment: when free care is replaced with out-of-pocket prices, patients cut back on high-valued care as well as low-valued care. This leads some to conclude that patients can’t tell the difference.

But the result shouldn’t be surprising. The same thing would happen if you replaced an all-you-can-eat buffet with á la carte pricing. When things are free we tend to take everything—even food we leave on our plate. When things become costly, we cut back on everything.

Here is what we know. Chronic patients, with a minimal amount of training, can often manage their own care as well or better than traditional primary care. In Medicaid’s highly successful Cash and Counseling program, the home-bound disabled control their money and manage their own budget. Similar programs of self-directed care exist in other countries – even in Britain’s National Health Service.

Why can’t other chronic patients do the same? When these patients save money by making prudent choices, why can’t they put the savings in their own pockets? Outside of Medicaid, federal law makes it almost impossible to do that anywhere in the system.

5. Plans are getting the wrong price for the wrong patient. No health insurance system will work well unless insurers receive a premium that equals the expected medical cost of each enrollee. If enrollees all initially pay the same premium, there must be a risk adjustment mechanism that adds to the premiums of people with higher expected costs. If that doesn’t happen, or if the system is poorly designed, insurers will try to attract the healthy and avoid the sick.

That appears to be happening with employer health insurance and perhaps with some Medicare Advantage plans. By far the worse outcomes are in the Obamacare exchanges, where a race to the bottom has produced plans with narrow networks that exclude the best doctors and the best hospitals. In fact the typical individual market health plan today looks very much like Medicaid with a high deductible.

If we ever do get Medicare for all, I suspect it will look like Medicaid for all.

And there will be no exit.

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John C. Goodman is President of the Goodman Institute and Senior Fellow at The Independent Institute. His books include the soon-to-be-published updated edition of Priceless: Curing the Healthcare Crisis, the widely acclaimed A Better Choice: Healthcare Solutions for America, and New Way to Care: Social Protections that Put Families First. The Wall Street Journal and National Journal, among other media, have called him the “Father of Health Savings Accounts.”