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Riskology

Health ‘insurance’ — or discount buying club?

About the author

Ari has written about financial products and investing for The Wall Street Journal, Forbes, and Pensions & Investments. Find him on Twitter.  

Why universal health insurance matters (Chris Schneider/Getty Images)

Why universal health insurance matters (Chris Schneider/Getty Images)

Your car is damaged; your house is robbed; you die on a business trip.

All very unfortunate events, but also things for which you can insure. As financial products go, basic insurance offerings are generally standardized by sellers, that is, insurance companies. And such products are usually viewed more or less as a risk management tool by buyers — individuals and corporations who want to protect against the financial losses of worst case scenarios.

At its core, holding an insurance contract acts a financial hedge against an unlikely or untimely event actually happening. Insurance is available for everything from jewellery to piracy. The intention of both the insurance companies and people who buy the policies is roughly the same — that a claim never has to be made.

Although buying insurance is most prevalent in North America and Western Europe, the rest of the world — as tallied by the International Association of Insurance Supervisors — has seen double-digit premium growth in both life and non-life insurance as premiums in Western economies contracted.

And then there’s health insurance.

Perhaps a misnomer, health insurance, where it is offered around the world, is less a policy one hopes to never collect on and more often the gateway to actual health care services — seeing a doctor, getting prescription medication, having a surgical procedure. “Coverage” is either administered wholesale as a public good by governments or mandated by laws and incentives to be distributed through employers.

Health insurance is more akin to a buying club, with governments and insurers (on behalf of their individual and corporate customers) haggling with providers on fees and availability. Claims are paid out at pre-set levels or at negotiated values. But health insurance is far more difficult to price and encounters far more complicated intermediaries than assessing appraising art or fixing a fender-bender. Doctors, hospitals, clinics, pharmaceutical companies, medical device makers and more are large, independent businesses.

As the United States grapples with implementing a fo market-based model universal coverage— a benefit handled more heavy-handedly by other governments in Canada or the UK, BBC Capital checked in with Leemore Dafny, the Herman Smith Research Professor in Hospital and Health Services at Northwestern University’s Kellogg School of Management in Evanston, Illinois. Capital asked for her thoughts on how governments, markets and insurance interconnect and what it means to the end-user — that is, you and me, Mr and Mrs Insured.

Dafny is an authority on health insurance markets. Her research into competition in the US coloured the initial debate around the introduction of the Affordable Care Act, also known as Obamacare. For example, her research revealed that insurers have sufficient market power to charge different prices to different employers based on how profitable they (the employers) are.  In a truly competitive marketplace, such pricing practices would be difficult to maintain. 

BBC Capital:  Most insurance products are a risk management tool for personal items or business operations. Why has health insurance — private or government sponsored — developed as more of an intermediary to necessary or elective health services?

Dafny: Health insurance is certainly a risk management tool as well — at least when it doesn’t have features like annual or lifetime payout maxima [thereby capping the risk payout.] In the US, insurance also plays two other key roles.  First, it’s part of a worker’s compensation package. Employers purchase plans with pre-tax dollars. This skews compensation toward health insurance (versus salary).  Second, insurers are active intermediaries who help to manage the medical care consumed by plan enrollees.  They assemble networks of providers (and verify credentials), negotiate discounted rates with these providers, perform utilization review, offer “wellness programmes” and chronic disease management services, etc.

BBC Capital: What is the most significant difference between government-sponsored health insurance or health care and employer or individual market insurance?

Dafny: Government insurance programmes dictate prices, whereas private plans negotiate prices.  Private prices exceed government prices by quite a bit — over 35% in the case of hospital prices set by the Medicare programme for the elderly in the US, to take but one example. Prices set by Medicaid (for the indigent) are lower still, which has resulted in access problems (ie fewer providers accepting Medicaid patients).

BBC Capital: It seems clear how coverage for general wellness, public health and even chronic disease can help keep employers (or governments) running smoothly, but where do elective or cosmetic procedures come out?

Dafny:  Your question implicitly asks why there are “gold-plated” insurance plans that cover elective services and/or require low out-of-pocket costs in general. Employer-sponsored insurance can help explain this, as well, and it’s not just about the tax treatment of premiums. When employers choose health plans for their employees, they lean towards plan designs that do not generate lots of angry calls to their Human Resources departments. 

Large provider networks (which imply lower provider discounts) and generous benefit designs stave off those calls.  As the US shifts toward a system where individuals, not employers, select plans, I expect we’ll see broader enrolment in “bronze-plated” plans.  Indeed, the new health insurance exchanges offered in the US under the Affordable Care Act offer 4 tiers, and the lowest rung (bronze) is substantially less generous than private-sector employer-sponsored plans.  In the Commonwealth of Massachusetts (the pilot for the national exchange), the bronze plan is by far the most popular.

BBC Capital: So, what’s your view on the movement to shift more responsibility to providers?

Dafny: “Accountable Care Organisations,” as they are known in the US, and clinical commissioning groups in the UK will essentially bear some of the risk of medical spending by patients. If this model takes off, provider organisations (hospital systems, physician groups) will have to take on various functions currently performed by health insurers.  Providers don’t generally have such expertise in-house (eg risk-management skills, capabilities to interact with patients whose care is being actively managed by the provider organisation), and it seems unlikely that many could achieve minimum efficient scale for several of these functions. We could end up with fragmented mini-insurance companies within provider organisations, or with these provider organisations outsourcing many activities to larger, re-invented insurers.

It’s not at all clear to me how this reorganisation will reduce costs.

BBC Capital: Thank you for your time. We’re eagerly watching the implementation of the exchanges across the US to see if competition on rates and services can actually bring about a healthier, health “insurance” market.