Arithmetic and Health Care

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

Total: $280,000

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

Total: $370,000

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.


5 thoughts on “Arithmetic and Health Care

  1. Your article suggests that all people should have an inalienable right to health care. That is certainly a lovely concept but probably impractical unless we define the level of health care to which all people will be entitled. For example, at my current age of 73, would it be reasonable for me to expect the other insurance pool members to spend $100,000 to buy me a new heart? I don’t know the answer but I do know that such questions need to be answered in order to set premiums at a level that will make the plan economically viable on a long-term basis.


    1. *Hey John,* *I have no clue how to answer that new heart at 73 question other than to suggest we already finance heart transplants for people who are able to get on the list, get on top of the list, and obtain a donor heart. * *Come to think of it, we already pay for a lot people who have no insurance to get their care at a local emergency room.* *On second thought, maybe an age limit, or Sara Palin’s “Death Panels” would work…..😂 Seriously, what about all the other transplants?* *I went to the North Raleigh Wake Med Emergency Room back in January – chest pain. I was there for four hours, an ekg, and at CT scan. The bill: just south of $7,600, of which the hospital accepted my $75 copay and a Coventry Medicare Advantage payment of about $500.* *What in the world is that all about? When I asked them that question I got drivel for an answer. I told them next time I’d cut the bill by bringing my own sheets, blanket, and pillow.* *If you mean an artificial heart, my answer is why not? We’re on the verge of driverless cars and trucks, why not artificial hearts and other organs?* *Don’t worry about my spouting all this. I type about 100 words/minute.* *All the best……Einar*

      On Mon, Mar 27, 2017 at 1:15 PM, EinarJoeBohlin's Blog wrote:



  2. I love that explanation, but it’s a bit too simplistic. It leaves out the profit that insurance companies make from investments. It also leaves out the insurance companies’ administrative expenses. Maybe that’s just a wash, I really have no idea. But where I also think some of this analysis misses the mark is in the WHY. Why did the insurance company analysts “guess” wrong? Could it be because the premiums were still too high to encourage healthy people to enroll? The penalty (tax) for not enrolling is significantly lower than the lowest premiums for the crappiest plans. Realizing that even if they are able to scrape together the money for the premiums, they’d still be responsible for more than they could possibly afford before the insurance paid for anything, healthy people decided that it’s a much better deal to negotiate with a doctor or clinic on a cash pay basis when/if the need arises. Of course the insurance companies are making money on the people who have bought “bronze” policies, but still can’t afford to go to the doctor. The statistics for health “coverage” may be improving, but health “care” is still not affordable for many.


  3. Hi Einar, First I am for health care for all, we should figure out as a society how to provide that for all citizens. The article has at the end the statement that hospitals, insurance companies are profit driven. I take exception to that, most hospitals and a lot of insurers have a tax exempt status as non profit. Therefore if the Doctor is correct than take away their exempt status. Just my thoughts. John

    Sent from my iPad



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