Can We Have Health Care without Health Insurance Companies?

In the aftermath of the senseless murder of the CEO of UnitedHealthcare, responsible commentators were quick to condemn the act.

“Murder is bad, and so are murderers,” wrote the liberal economist Paul Krugman. “Neither should be celebrated.”

But then Krugman went on to offer an admittedly “somewhat … caricatured” view of U.S. health care: “It’s a system in which taxpayers bear the cost of major medical care, but this taxpayer money flows through private companies that take a cut, spend a lot on administration, and do their best to deny care to people who need it.”

What service do private insurers provide in return for the fees they collect? Americans, Krugman wrote, “may not realize the extent to which they are exposing themselves to the delay-and-deny strategy private insurers often use to avoid paying for care.”

For many years, Krugman has been an advocate of single-payer health insurance—often pointing to Canada as a model to be emulated. In Canada, there are no health insurance companies. When Canadians get health care, the cost is paid by the government—often with few questions asked.

If Canadians can get by without health insurance companies, could something like that work in the United States? Not in a way people would find desirable.

All Developed Countries Face Some Health Care Problems

There are three problems with the doctor-patient relationship in all developed countries—regardless of the way the payment system is organized.

First, when a third party is paying the bill, neither the doctor nor the patient has any incentive to apply the kind of cost/benefit analysis that is normal in the purchase of any other good or service. In considering whether to obtain an expensive test (an MRI scan, e.g.), the incentive is to consider only the benefit. Since cost is irrelevant to the patient, a tiny benefit—no matter what the cost—is viewed as desirable.

Second, in a fee-for-service arrangement (such as exists in both the U.S. and Canada), the more services doctors perform, the higher their incomes. So, just as patients have an incentive to over-consume, doctors have an incentive to over-provide.

Third, there is malpractice liability, which is especially a problem in the U.S. A doctor who orders an unnecessary MRI scan faces no real penalty. But no matter how improbable, there is always a chance that a scan not ordered will fail to detect a problem that grows worse through time. Our legal system, therefore, provides incentives for too many tests and too many procedures, compared to a system in which costs would have to be justified by comparable benefits.

What we are describing are three perverse incentives. If they are not checked in some way, medical care becomes unreasonably expensive. That means higher premiums or higher taxes or both.

Canada Rations Care

Canada checks these incentives by limiting resources. The typical Canadian general practitioner, for example, does not have radiology equipment and must send patients to a hospital for simple x-rays. The hospitals, in turn, operate under global budgets tht limit spending, no matter what the level of demand.

Canada ranks 25th of 29 countries on the number of MRI scanners per person. As a result, the wait for a scan is almost three months, and the wait until final treatment is more than six months. The government has decided to prevent overuse of MRI scanners by severely restricting the number of scanners that are available.

Canada’s system of limiting heath care resources and forcing doctors to ration care has many undesirable characteristics. The system favors high-income over low-income patients. It favors white patients over racial minorities. It favors city dwellers over rural residents. It favors the politically connected over those without connections.

Arguably, there is more inequality in access to health care in Canada than there is in the United States.

How Aggressive Are Private Insurers?

Although there are complaints about preauthorization requirements and denials, one could argue that the private insurers are not being aggressive enough. One oft-quoted estimate is that one-third of U.S. health care spending is wasted. If we could magically eliminate all that waste, we could give every American almost $5,000 each year.

You might suppose that in countries that impose rationing, such as Canada and the U.K., doctors are forced to be more efficient—prioritizing resources so that the most promising procedures are done first. But studies by the RAND Corporation found that this isn’t so. In Canada and Britain, for example, scholars found just as much unnecessary care (as a percent of the total) as they found in the United Staes.

Then there is fraud, which is a special problem in government-administered programs. In Medicare and Medicaid, for example, fraud is estimated to consume at least $100 billion a year.

Hospital upcoding (claiming a higher level of patient severity in order to obtain a higher insurance payment) is another problem. One study estimates that increased upcoding (relative to a decade earlier) was associated with $14.6 billion in hospital payments.

Although doctors are the biggest critics of claim denials, hospitals are by far a bigger problem.

Suppose a patient’s condition is stabilized in an ER. Then the medically correct procedure is usually to send the patient home and let further care be outpatient. Yet some hospitals will keep the patient for a night or two and try to bill an insurer for that cost.

Suppose a patient’s condition warrants keeping the patient in an “observation bed” for a night or two. Some hospitals will treat the patient as a full admission instead and try to bill the insurer at a much higher rate.

These are just two of hundreds of ways some hospitals try to add unnecessary costs to our health care system. When insurers deny these claims and refuse to pay the bills they are performing a socially useful function.

And the price of that function is not unreasonable. Despite claims that insurers put “profits before people,” profit margins for health insurers are well below those of the average company in the S&P 500.

The Role of Preauthorization

An important tool private insurers use to avoid unnecessary spending and inappropriate care is to require preauthorization for a particular drug, therapy, or procedure. Doctors tend to regard these procedures as burdensome and irksome. Yet only 7.4% of requests by patients in Medicare Advantage and Medicaid managed care plans are denied. Moreover, in the vast majority of appeals (83.2%), the initial denials are overturned.

If you follow the health policy literature, you might be led to believe that the denial rate is a special problem in Medicare Advantage. In fact, the denial rate in Medicaid is twice that of the Medicare Advantage rate.

Some policymakers have decided to take aim at the use of AI in generating denials. At the same time, some doctors are using AI to file their appeals—greatly reducing the time to file and increasing the success rate. Yet both trends should be applauded if the desire is to make the entire process more efficient.

Overall, our health insurance system can be improved, and scholars associated with the Goodman Institute have proposed many ways to do that. But we cannot have a system that works well without companies that perform the functions health insurers are performing today.

The public seems to understand this. Despite occasional complaints, more than two-thirds of Americans rate their health insurance as “good’ or “excellent.” And that holds for all kinds of insurance: employer plans, (Obamacare) marketplace plans, Medicare and even Medicaid.

Even among people who say they are not in good health (and who, presumably, need medical care), a substantial majority give positive ratings to their health plans. Only a tiny percent rate their insurance as “poor.”

And that is good news.