Kevin Schulman, M.D., professor of medicine at Duke University and visiting scholar at Harvard Business School, provides us with a brief and, thank you very much, understandable explanation (Raleigh News & Observer, March 23, 2017, “Why the health care market doesn’t work.”)
First, the concept of any insurance system: we all pay into a pool of money that is used to reimburse us when whatever is insured is damaged and requires some of the pooled money to be fixed. Or, in the case of health care, healed – we hope.
In short, all of us who put money in the pool are sharing the risk. Few of us will avoid the misfortune, the need to have a car restored, a home repaired, a business to prop up after a fire or other disaster, a serious health problem treated, and so on. Those of us who never suffer such misfortune help finance the relief for those who do. (Somewhere along the line I recall reading that Ben Franklin either invented the concept of insurance or transplanted it in the Colonies.)
Health insurers are stuck trying to predict the ratio of healthy to sick people who will sign up for their policies. It’s not much of a stretch to grasp that the larger the number of sick policyholders the higher the cost of the insurance. That’s why the Affordable Care Act (or Obamacare – I never could figure out which was which; a smidgen of humor there…..) had a provision requiring people with no health care to pay what amounted to a tax.
For the pool to work, everybody has to jump in.
Next, here is the arithmetic to demonstrate the importance of the healthy/sick ratio. Dr. Schulman provides a conceptual model. “The key question is what proportion of the population who sign up for insurance will be healthy.” Suppose 80% of the population is healthy and each of those healthy people will require $1,000 a year for their health care services. The other 20%, sick people, will require $10,000.
80 healthy people x $1,000: $ 80,000
20 sick people x $10,000: $200,000
Cost per person ($280,000/100) $ 2,800
Decrease the number of healthy people to 70% and you get:
70 healthy people x $1,000: $ 70,000
30 sick peopole x $10,000: $300,000
Cost per person ($370,000/100) $ 3,700
Note the difference between $2,800 and $3,700 is $900. As a percentage, the difference is 32%.
Does 32% ring a bell, sound like a number that closely resembles the increases in health insurance premiums we’ve been hearing about?
What happened is that health insurance industry estimated (guessed) wrong. They used the 80% healthy percentage and wound up with the 70%.
And then there is the assumption that doctors and hospitals will work together to bring down the cost of health care? Why on earth would they do that? We have a profit based, market driven health care system, the object of which is to make money. Where is the incentive to lower prices?
If we start over with our health care system, shouldn’t the foundation principle be that we, the people, have an inalienable right to health care? If we don’t start and stick with that principle, the health care system will always be great for some, barely adequate for many, and attainable only in emergency rooms and the rare clinic for many more.