Less is More? Can Health Insurance be Too Much of a Good Thing?

Today’s Wall St. Journal features a provocative op-ed by Jonathan Kellerman called The Health Insurance Mafia. Kellerman argues that a major source of dysfunction in our health care system is the fact that we’re overly reliant on health insurance as a payment mechanism and that health insurance companies extract far more money from the system than they provide in added value.

You don’t need to be an economist to understand that any middleman interposed between seller and buyer raises the price of a given service or product….The health insurance model is closest to the parasitic relationship imposed by the Mafia and the like. Insurance companies provide nothing other than an ambiguous, shifty notion of “protection.” But even the Mafia doesn’t stick its nose into the process; once the monthly skim is set, Don Whoever stays out of the picture, but for occasional “cost of doing business” increases. When insurance companies insinuate themselves into the system, their first step is figuring out how to increase the skim by harming the people they are allegedly protecting through reduced service.

Insurance is all about betting against negative consequences and the insurance business model is unique in that profits depend upon goods and services not being provided….

Health insurers… affix themselves to the host – in this case dual hosts, both doctor and patient – [and] systematically suck the lifeblood out of the supply chain with obstructive strategies. For that reason, the consequences of any insurance-based health-care model, be it privately run, or a government entitlement, are painfully easily to predict. There will be progressively draconian rationing using denial of authorization and steadily rising co-payments on the patient end; massive paperwork and other bureaucratic hurdles, and steadily diminishing fee-recovery on the doctor end.

Kellerman is overstating the case, but his basic reasoning has some basis in reality. I’ve long argued that overinsurance is as big of a problem as underinsurance in our system.

The (admittedly imperfect) analogy is to car insurance. No one expects her car insurance to cover a routine oil change. Miraculously, people nonetheless manage to make sane decisions about when to get an oil change and how much to pay. Unfortunately, we’ve been conditioned by a paternalistic health care system to avoid anything that might incur out-of-pocket expenses, so people without health insurance actually do forgo necessary care. But if we can ever retrain ourselves to take greater responsibility for our own health care, then there’s a lot of potential in the principles of “consumer driven health care”.

Interestingly, Kellerman’s piece inadvertently hints at one of the strongest arguments for a single payer health care system. All of these insurance company shenanigans amount to attempts to manage their risk pools. Since they all pull the same crap (e.g. denying claims, erecting barriers for unhealthy populations, etc.) it’s all a wash in the end. This is essentially a Nash Equilibrium. If all the insurers decided together that they’d cease all these practices, their risk pools would be essentially unchanged, but their overhead costs would drop by 20% or more. This can’t ever happen in reality, though, because as soon as one of the insurance companies steps up to plate, it’ll get hammered by the remaining bad actors. The only reliable way to wipe the slate clean and eliminate risk juggling is to ensure that there is only one risk pool containing the whole population. This is arguably the greatest benefit single payer has to offer.