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Health Insurance Is Not Insurance

Is health insurance a plan to help healthy people mitigate against an unexpected illness, or an income subsidy to help the sick pay for medical care?

Conservatives ought to have a clear answer to that question. Congressman Morris Brooks from Alabama did not [1] and found himself on the receiving end of liberal ridicule [2].

By suggesting that those who take better care of themselves should pay lower health insurance premiums, Brooks implied that health insurance is indeed a type of insurance arrangement.  After all, the risk adjustment of premiums is a practice proper to all other kinds of insurance services. A prudent driver pays less for auto insurance than one with a negative driving record.  A homeowner pays more for home insurance if the property is on muddy terrain rather than on sturdy ground.  A smoker pays more for life insurance than a non-smoker, as does anyone whose risk of dying prematurely is high, even if that predisposition is inherited genetically.

Brooks’s conception of health insurance, however, intuitive as it may be, is wrong.  Health insurance is not insurance even if, on the surface, health insurance policies meet the dictionary definition [3] of insurance as contractual arrangements “in which one party agrees to indemnify or reimburse another for loss that occurs under the terms of the contract.”

Health insurance cannot really be insurance because human health is un-insurable: human beings are not machines or buildings whose function or condition can be ascertained objectively.  Yet, an objective assessment of damages and costs is essential for any contractual arrangement to function in a sustainable manner.

Consider, for example, that medical care is based on the legal principle of “medical necessity.”  Medical necessity is invoked when, presumably, there is an impairment in the patient’s health that could be remedied by a medical intervention. But medical necessity is a perniciously elastic concept that cannot possibly satisfy the precise contractual requirements of insurance.

Take Joe, an overweight truck driver, who suffers from back pain and whose MRI shows a slipped disk at the location corresponding to his symptoms.  He and his doctor wish to proceed with surgery. Is surgery medically necessary?

To answer that question, the insurer would need to know several other things. To what degree is Joe incapacitated by his back pain? Did he give physical therapy a fair try? Could he improve his condition by losing weight? If so, how willing is he to try to lose weight? In other words, did he do his very best to avoid expensive medical care? And, similarly, for the doctor. Did he carefully advise Joe on all his options? Is his advice disinterested? How confident is he that the surgery will help?

These are all legitimate questions, the answers to which are completely inaccessible to the insurer, for they reside in Joe’s mind and his doctor’s—and possibly below their level of consciousness.  

No amount of utilization review can overcome this insurmountable “information asymmetry,” yet medical care is replete with situations that are just like Joe’s: doctors and patients who wish to pursue a plan of care, without objective evidence to show—one way or another—that the care is necessary, let alone effective.

This consideration is not meant to cast doubt on the integrity of doctors and patients, but to point out that medicine is an occupation that frequently deals with intangibles. And even for conditions which, on the surface, seem objectively determinable, like heart attacks or cancer, the tentative way in which medical care necessarily proceeds is antagonistic to the aims of insurance.

Take Laura, who has sudden severe chest pain in the middle of the night. Concerned, she calls an ambulance and is taken to an emergency department staffed by competent and cost-conscious doctors. For a variety of reasons (the character of the pain, the fact that Laura has a family history of heart disease, the equivocal finding on the electrocardiogram, etc.), expensive tests and scans must be performed before the doctors can reassure themselves—and Laura—that she is fine, and that her chest pain was simply a bad case of acid reflux, or perhaps a panic attack.

Should the insurance cover the expensive work-up for this false alarm? A “no” answer seems absurd: people cannot be penalized for misjudging the severity of their condition. If the answer is “yes,” on the other hand, the program is no longer insuring against objective health impairments, but against any concern that can cross someone’s mind—be he a stoic or a hypochondriac.  

In short, it’s in the uncertain nature of medical care to conspire against insurance plans that, by nature, must necessarily deal with objectively verifiable claims to remain viable.

So, health insurance is definitely not insurance in the proper sense of the term. Instead, health insurance is—and always was—an income subsidy, ostensibly designed to help the sick pay for medical care.  

Such an understanding of the essence of health insurance should not be controversial if we consider government health insurance programs. After all, the first health insurance program was plainly designed by Bismarck as an income subsidy, if only to gain for the Prussian state the loyalty of the working class.

In the United States, the Medicare and Medicaid programs were also enacted as income subsidies to help the elderly and the poor pay for medical care. The subsidies seemed justified by the sharp increase in the cost of medical care that followed the widespread adoption of private health insurance after World War II [4].

As it turns out, however, even American private health insurance plans were conceived as income subsidy programs. In the 1930s, the early Blue Cross and Blue Shield experiments were carried out not to actually provide insurance against illness, but to alleviate the surge in hospital bed vacancies that occurred when the Great Depression corrected the hospital construction boom of the 1920s.

A decade or two later, employer-based private health insurance emerged as a means for businesses to circumvent wartime wage controls and recruit employees whose salaries could not be raised. After the war ended, the government made that form of income subsidy permanent by specifically exempting health insurance from payroll and income taxes.

In short, be it a public initiative or privately provided service, health insurance is an income subsidy program and can only be considered as such.

As far as income subsidy programs go, however, health insurance has its own peculiarities.

First, health insurance essentially operates as an unlimited voucher program for medical care, since neither the government nor private insurers can set limits [5] to the amount of allowable coverage. As such, then, health insurance is one of the most generous income subsidy programs conceivable. It is no wonder, then, that the healthcare industry has grown to command nearly one fifth of the gross domestic product.

Second, the income subsidy conveyed by health insurance is not allocated based on a person’s income or wealth. After all, it is the wealthy and securely employed who have historically benefited from “Cadillac plans [6],” while those uninsured tend to come primarily from the lower middle class.

By forcing health insurance on everyone, the Affordable Care Act is admittedly trying to close the gap separating those who do from those who do not currently benefit from health insurance.  The plain result of that policy is to ensure that, in principle, no one is left un-subsidized.

Are income subsidy programs that make unlimited amounts of health care funds available to anyone and everyone sustainable?  Conservatives had better answer that question correctly.
Michel Accad, MD, practices cardiology and internal medicine in San Francisco, offering individualized care in a free-market setting. He is the author of Moving Mountains: A Socratic Challenge to the Theory and Practice of Population Medicine [7].  His blog about health-care and medicine is AlertandOriented.com [8].

17 Comments (Open | Close)

17 Comments To "Health Insurance Is Not Insurance"

#1 Comment By connecticut farmer On May 18, 2017 @ 8:24 am

What impresses is that the argument is being put forth by a medical doctor and not an insurance professional. No, it is not possible to “insure” an individual’s health–for the reasons set forth in the article.

#2 Comment By SteveM On May 18, 2017 @ 9:47 am

The obvious extension to Dr. Accad’s analysis here is a compare and contrast with an existing alternative health care model. Dr. Accad references Bismark, so OK, let’s use the current German model.

If Joe the truck driver were Josef der LKW-Fahrer in Germany with the same condition, how would he be treated? And if Laura were in Germany with the chest pain, how would she be treated? For both, effectively and appropriately or otherwise?

In Germany, everyone is “forced” into the health insurance system yet the per capita cost of German health care is 47% less than the U.S. per capita cost. I.e., German health care is not 1/5 of German GDP even with universal access.

So given that, are German health care outcomes markedly worse than those in the U.S.? How about life expectancy? Quality of life for the aged?

The trivial comparison of the U.S. health care system versus alternative models generally means pointing to the obvious deficiencies of the British NHS model. But the British model is not the only alternative for comparison.

Using a reasonable benefit/cost trade space comparison with the understanding that the Perfect is the enemy of the Good Enough, I’m hoping Dr. Accad would examine the U.S. versus the German or other reasonably successful and much less expensive health care models.

#3 Comment By Arthur Sido On May 18, 2017 @ 10:22 am

Thank you for this. Words matter and when we keep using the word “insurance” we negate a great deal of what matters in this conversation. What we call insurance today is a giant cost-sharing mechanism that serves to mask the real costs. Who cares how much a surgery costs when someone else is paying for it?

#4 Comment By Gerald Arcuri On May 18, 2017 @ 11:16 am

Having worked in healthcare for forty years, and being very familiar with concepts of utilization review, I found the premise of this article intriguing. However, after a few moments reflection on the nature of other types of insurance, and the unpredictability of the hazards against which policies are written, it became clear to me that under the author’s definitions, no insurance is insurance. All insurance underwriting is based on some sort of staristical, actuarial data, plus an understanding that the nature of hazards in somewhat unpredictable. Rates for policies tend to reflect this reality.
While it may be true that health and illness are more unpredictable than other forms of life hazards, and that personal lifestyle choices and genetics and medical practice complicate the actuarial equation, that does not invalidate the concept that health insurance is – like other forms of insurance – a way for most individuals to protect themselves against the vicissitudes of serious illness. To argue otherwise is to throw ones hands up and capitulate to socialized medicine.

#5 Comment By Paolo On May 18, 2017 @ 11:38 am

This is all interesting and supported by well-known facts, such as the special history of post-war employer plans. By renaming health care insurance as income subsidy, the argument is almost guaranteed to appeal to TAC readers. I found the renaming clever, but a bit disingenuous, however. Just about every government enterprise–think road-building, education, even war-making–could be construed as an income subsidy. The real question, I think, is how Canadians and Danes manage to enjoy half the per capita income subsidy–let’s use the author’s term–for the same kind of health care offered in the U.S.

#6 Comment By Potato On May 18, 2017 @ 11:50 am

Who cares how much a surgery costs when someone else is paying for it?

Who cares about it when the alternative is death? Come on, no one has surgery for the fun of it. Like because they enjoy spending money. Surgery itself is a very substantial deterrent.

Health care is just not like other markets. I’m perfectly OK with the idea that rich people drive $250,000 automobiles and poor people walk or take the bus, or that rich people eat steaks and poor people eat peanut butter. I’m not ok with the idea that if a poor person has a threatened heart attack we will just let him die, whereas a rich person will get a bypass operation and live another 20 years. If you are perfectly Ok with that all I can say is, you and I diverge very sharply on our values.

Please everyone consider the situation of the German system, or, to go to something I am more familiar with, the Dutch system (which is very much the same). We’re talking about (slightly) better outcomes at half the price.

I don’t really expect a cardiologist like Dr. Accad to be honest about this because his equivalents in Germany or the Netherlands, while they do very well economically, get paid a lot less than cardiologists do here.

#7 Comment By Peter On May 18, 2017 @ 1:21 pm

As Gerald Arcuri says, all insurance is a form of “income subsidy.” We might just as well ask, who cares how much it really costs to fix my car, when I’m not paying for it? This is the very concept of insurance–creating common pools of money to help those who have a misfortune of some kind.

The German system is a good case study, both because it works well, and because it is not single-payer, the panacea always offered by liberals as the “only solution” to improve or replace the ACA. In Germany, employers do not choose insurance policies, employees do, and premiums are paid as a simple fixed percentage of their salaries. Health insurance companies are still private corporations, but highly regulated, as are costs for every visit or procedure (with very minimal copays or deductibles).

#8 Comment By Jerome B Bigge On May 18, 2017 @ 1:55 pm

No one ever seems to wish to discuss possible means to reduce the cost of health care. The only discussion is over how to pay for it. However if we start looking at the problem of “cost”, then it rapidly become apparent that the price level for medical services is not set by the free market, but by a government enforced legal monopoly where possible “competition” from “outsiders” is prohibited by law. This is why we have prescription laws that give doctors a legal government enforced monopoly over access to medical drugs. Something that is now standard in all developed countries.

The idea of reducing health care costs by deregulation of the health care system as far as is possible never seems to be ever considered.

#9 Comment By Kevin On May 18, 2017 @ 2:04 pm

“The German system is a good case study, both because it works well, and because it is not single-payer, the panacea always offered by liberals as the “only solution” to improve or replace the ACA. In Germany, employers do not choose insurance policies, employees do, and premiums are paid as a simple fixed percentage of their salaries.”

Let’s just point out that for most people, “single payer” is just a short-hand for “European style system.” And the German system is a bit more complicated than you describe: insurance companies (sickness funds) are non-profits, the government negotiates prices, and people who are unemployed get their tabs picked up by the government. Only about 12% of population are covered by private health insurance, and they tend to be younger, and migrate to the public system as they age.

#10 Comment By bacon On May 18, 2017 @ 2:46 pm

Health – insurable or not? A simpler definition, and just as correct, of insurance is that it is a bet. The insurance company bets a large amount of money that something won’t happen and charges a much smaller amount to the insured for taking that risk. By that definition anything is insurable.

#11 Comment By Hyperion On May 18, 2017 @ 5:59 pm

Potato says: I don’t really expect a cardiologist like Dr. Accad to be honest about this because his equivalents in Germany or the Netherlands, while they do very well economically, get paid a lot less than cardiologists do here.

THIS! My brother-in-law cardiologist got rich treating a ton of Medicare patients via the very lucrative fee-for-service model. He hates the federal government except when it’s making him wealthy. I begrudge no one a well-paid job, but $400K/year for treadmill work is ridiculous.

#12 Comment By SteveM On May 18, 2017 @ 6:01 pm

Re: Kevin, Let’s just point out that for most people, “single payer” is just a short-hand for “European style system.”

Agree. A side point is that the American physicians that call for “single payer” want it on their terms. I.e., single payer with the existing unsustainable fee structures. That’s what they expected with Obamacare – more patients and no fee haircuts.

Ain’t gonna happen. What can’t go on forever – won’t…

#13 Comment By Andrew Smethers On May 18, 2017 @ 8:31 pm

A Danish Lady, when asked by an American interviewer, what she thought about the swinging (his word) 40% tax rate she paid. She looked at him as though he were an imbecile and said, “I am happy to pay it because I consider it an investment in my society”. There is the quintessential difference between American and European societies. We’re in this together or every man for himself. For a supposedly Christian country you have some very odd values

#14 Comment By Gerald Arcuri On May 18, 2017 @ 10:38 pm

Connecticut farmer: no one insures the normal state of anything. You don’t insure a person’s health anymore than you insure that individual homes will remain intact. You insure against risks, i.e., against the risk of contracting a disease, against the risk of a flood or fire.

When people get the idea that something should be guaranteed, then that thing becomes an entitlement, and eventually a right. No one has an inherent right to good health or the right to owning a home which is not subject to accidents or acts of God. Hence, insurance. Shared risk. Life is not risk free.

And, Andrew Smethers: there is no such thing as a Christian country ( “My kingdom is not of this earth.” – Jesus ) and there never was. The difference between Denmark and the U.S. is a matter of freely made democratic choices. The Danes have chosen a communal approach to many things and are willing to pay high taxes to have government provide them, with the attendant consequences. Fine. The population of the United States has, up to now, mostly chosen to allow individuals more freedom of choice on what to do with their hard-earned income, with less government involvement and with the attendant consequences. Fine. It has nothing whatever to do with Christianity, properly understood.

#15 Comment By Deggjr On May 19, 2017 @ 3:53 pm

Is health insurance a plan to help healthy people mitigate against an unexpected illness (thus becoming sick people), or an income subsidy to help the sick (previously healthy) pay for medical care?

Can a person [9] ever be considered to be healthy?

Is free market health care only paid for by individual patients out of personal funds, excluding Medicare, Medicaid, and employer sponsored healthcare?

If this article has a point I sure missed it.

#16 Comment By Ken T On May 19, 2017 @ 4:47 pm

Many of the author’s points are true, but what he has unwittingly (I think) done is make the case for why the only effective way to provide health care is to make it some version of Universal Health Care. Because it is absolutely true that it is impossible to predict what any individual’s healthcare needs are going to be. But it is entirely possible to predict those needs for the population as a whole. And therefore the cost of that care can be calculated and divided by the population, so that a per-person cost can be determined. And that is in fact the very definition of what insurance is. Everyone pays into the pool, so that those who end up needing those funds have them available. And it is precisely the reason why any system that allows some people to pay less than that per-person cost simply can not work. Because no one can accurately predict who will eventually need that care.

#17 Comment By Nelson On May 19, 2017 @ 10:23 pm

This is a great argument for universal healthcare. As far as costs go, yeah of course we can lower costs. One thing we could do is pay for medical school so doctors don’t start off in debt, while at the same time increasing the supply of medical professionals.