Health Insurance Is Not The Same As Healthcare

“Half the harm that is done in this world is due to people who want to feel important. They don't mean to do harm; but the harm does not interest them. Or they do not see it, or they justify it because they are absorbed in the endless struggle to think well of themselves.”  ― T.S. Eliot

For more years than I have been writing this, politicians have been ranting about the cost of healthcare and how to fix it. Unfortunately, the conversation does not center on healthcare, instead they keep talking about insurance. The reason is simple: Insurance is much easier to fix; just throw money at it. Healthcare itself is a complex mechanism with many moving parts. But fixing insurance does not change the underlying issues. In some cases it makes them worse.

 

People often talk about how healthcare was good, but not great, back in the 1960s; and it was affordable. Some doctors still made house calls. They yearn for the good old days. Along these lines, an interesting comparison occurred to me.

 

Back in 1960 a typical television looked like this.

Just over half the population owned a black & white tube television, and you were lucky if you could get five channels.  The TV had no remote, and there was no cable, so you needed an outside antenna or an inside antenna known as "Rabbit Ears".  In 1960 an RCA black & white 21 inch console TV cost $268, most people financed this for about $10 a month.

Today the equivalent of $268, adjusted for inflation is about $2400, and here is what you can buy for a little more than half that!

But the costs of medicine and the education moved in the opposite direction. Today we live longer and healthier due to medical advances, but the price has increased faster than inflation. The cost of becoming a medical professional has likewise soared.

One reason for both, ironically, is government interference: low cost insurance on one hand and student loans on the other. This greatly reduced competition. Make it easier for citizens to pay for something, and the people who sell it have no incentive to control costs.

 

The only way to control cost, any cost, is to focus on the reasons behind the high cost. Politicians are silent about these underlying reasons for soaring healthcare costs, and have made no plans to deal with them. The primary reasons for the high cost of healthcare are summarized below. (A thorough explanation was given back in the spring of 2012.) 

• Insurance Design:  Insurance companies separate the provider from the patient. 
• Innovation: New medical technology and treatments save lives but add cost. 
• Lack of open competition.
• Over-testing.
• Billing and coordination issues.
• Regulations and Restrictions: Rules vary from state to state. 
• Liability: The high cost of malpractice insurance affects all patients' bills.
• Lax eligibility rules and outright fraud.

Unless someone comes up with a plan and makes a serious effort to address these issues, all the insurance or Medicare-for-all schemes will not succeed. The alternative would be for the government to fix a price on everything and see how many drug companies continue to innovate, how many doctors stay in business and how many students chose to get a medical degree.

But politicians will continue to promise the easy non-solution to give the appearance that they care about fixing the problem.

Flashback – (Mis)understanding Insurance

If they learn economics in journalism school, they must quickly forget everything upon graduation. Furthermore, when the facts don't make a compelling story, they resort to the usual tactic of trying to make stories fit their worldview or make things look scarier than they are. Here is a prime example I gave in December 2016.

[As I was reading the transcript of Scott Pelley’s "60 Minutes" interview with House Speaker Paul Ryan, I noticed that he seemed uninterested in hard news or in-depth information so much as he was interested in tripping up the Speaker, trying to put him in a position of disagreeing with his new boss, making one or the other of them look bad, or uncovering something potentially embarrassing.

He asked how often the two speak on the phone and who initiates the conversation. The answers were almost daily and both. No news there. How does he answer the phone? “He doesn’t say, ‘This is the president-elect?’” No. “Have you told him being president is not being CEO of the United States, that the Congress is going to have a say?” 

Instead of asking how the two got together after a contentious election, he asked, “Who apologized to whom?” It’s clear by now that Pelley has no liking or respect for Donald Trump, thinks he is a bully and a racist, and is searching for evidence to back up his views. Better yet, he would like to get Ryan to agree on any point that might make it seem he is of the same opinion.

The silliness and self-serving finally comes to a close, and Pelley asks a number of questions about policy issues. Soon he gets to the details about possible changes to Obamacare and the sniping continues. At one point Pelley says “And women will pay the same as men? That didn’t used to be the case.” This is a question designed to get an answer that will incite outrage. He is trying to get some admission of Republican bias against women, but showing in the process that he does not understand how insurance works and counting on the fact that many Americans don’t either.

Insurance usually works by assessing the risk and charging premiums accordingly. If you have homeowner’s insurance you expect a discount for having a working alarm system. Teen drivers are generally less safe than more experienced drivers, but boys have more accidents than girls. Auto insurance for a young man 16-25 is higher. There is no outrage there. It’s not unusual for companies to charge smokers more for their health insurance benefits. Owners of cars with higher repair costs pay higher premiums. Older cars are cheaper to insure due to the lower replacement cost. Those who don’t drive as many miles sometimes pay lower premiums. Costs of auto and homeowners insurance vary by what part of the country and by the size of the town or city you live in. And since women outlive men and take fewer chances, they pay less for life insurance. Older people pay more, as do those who participate in dangerous hobbies like skydiving or juggling chainsaws.

This all happens without a stir. Everyone seems to understand that certain classes of people are at a higher risk for either the frequency or the size of insurance claims. Hence they should pay more. The ones in the classes with higher premiums don’t like it, but they pay. So why would people be upset that some women, especially those of childbearing age, might have to pay more? That “used to be the case” and it didn’t have anything to do with prejudice or victimization.

Apparently the government and some group of citizens have now decided that charging women more for health insurance can be explained only by prejudice. Everyone must purchase the same insurance for the same cost or there will be an uproar. And Scott Pelley and others in his profession are more than happy to incite and later fan the flames of that uproar, because it makes their job of reporting the news so much easier. Their job is not to inform or to educate; their job is to attract views and clicks. Nothing does that better than a good demonstration or protest, even those grounded in fundamental misunderstanding.]

P.S. I have often said that problems with healthcare costs must be solved on the basis of costs, not by tinkering with health insurance, but that’s for another discussion.

Speaking of Insurance

Unfortunately, I must name a particular brand to make the point. It's not meant as criticism, only as another example of how people often don’t ask the right questions about money and economics.

The example is the Allstate commercial about their accident forgiveness program. Whenever I see it I ask, “Where do people think the money is coming from – surely not some magic money tree?” But that is the impression the ad leaves. Have an accident and your rates don’t go up, even though you expect the insurance company to pay for the repairs.

If the company has some sort of accident forgiveness fund set aside in a secret vault, where does that money come from?

As always, the company’s money comes from their customers. They use it to pay their employees, pay their rent and utilities, pay the claims that come in, reward the shareholders by making a profit and pay for the production and airing of those television commercials. To make this work, they must collect more money in premiums than they pay in claims! On average every one of their customers pays them a little more than they get back; that’s true for all insurance companies – even the non-profits.

Generally, insurance companies reward good drivers by raising premiums only minimally to account for inflation and industry-wide claims experience. Drivers who have accidents are considered a higher risk and must pay more, so on the surface accident forgiveness sounds like a good deal. But beware the details. 

The program has been around for a long time. Here from Fox Business back in 2011 is one explanation of some of those details. It’s not free. “At Allstate, for example, you get accident forgiveness by upgrading to a Gold or Platinum coverage plan. Gold costs 8 percent more, and Platinum 15 percent higher than a standard policy.” To qualify for Gold coverage, “you need to go three years without a collision,” but with Platinum coverage it kicks in immediately.

So there apparently is an accident forgiveness fund, but the people who signed up for the program are the ones funding it. It’s almost like buying auto insurance and then buying more insurance against a first accident. 

It’s similar to life insurance where the company is betting, based on life expectancy tables, that you are not going to die until you have given them enough money to invest and come out ahead. For auto insurance they set rates betting you are not going to have an accident, based on your driving record so money is left over to pay for the exceptions. The added premium is a bet you make against the company to protect you against an unforeseen incident. 

The rest of the article says that this added protection might be good for some but not for others, and it’s best to talk it over very carefully with an agent. 

Several other companies also offer some form of accident forgiveness and the Allstate program may have changed since this 2011 review, but the main point remains the same: There is no magic money tree! Companies don’t reward us out of the goodness of their hearts or by lowering the CEO’s salary. They collect it from their customers; and in every transaction it’s our choice whether a purchase meets our needs and is fairly priced compared to the competition.

Flashback - Health Insurance

[My argument back in July 2011 was that people needed to better understand how health insurance works to keep from getting fooled by advertisers and politicians. Here is the entry in full.]

A flyer in the newspaper today reminded me how naïve consumers are about understanding the economic process, business and insurance, or at least how naïve advertisers think we are.

An ad from AARP promoting their Medicare supplemental insurance plan states that Medicare pays only about 80% of Part B (non-hospital) expenses and the other 20% is up to you.  (True.)  Right below is the statement that a supplemental insurance plan could save you up to thousands of dollars in out of pocket costs. That looks like a great deal, but where do those thousands of dollars come from, the AARP magic money tree? Perhaps the insurance company, out of the goodness of its heart, is going to make up the difference? – of course not.

The insurance company is going to collect premiums from everyone.  (Since premiums are not out-of-pocket costs in insurance language, maybe they are ignored when counting up the thousands in savings.)  The first thing the insurance company must do if it intends to stay in business is to pay its expenses (including the costs of the “free” brochure and of paying for all the people who work there and of other operating costs).  They also want to make a profit.  So already the total amount paid by everyone must be more than the total amount paid back to everyone (or to their doctor).

There will be winners and losers. The (financial) winners will be the people with high medical expenses for doctor visits, tests, etc. The losers will be the healthy ones. This may fluctuate, so in some years you come out ahead and in other years you may be part of the healthy bunch subsidizing the sickies – paying more in premiums than you receive in return.  Except for people who are chronically ill, this amounts to little more than a smooth-monthly-payment program similar to the installment plans offered by some electric and gas utilities. It is often a good budgeting tool to trade unknown payments for smooth, predictable ones, but you are hardly getting thousands of dollars for nothing as the flyer suggests.

This is a common tactic. It implies that the money is coming from somewhere else - but there is no money except our money. Companies and governments handle it, allocate it, and sometimes waste it, but their only source is to get it from us. Americans must listen to advertisers, news media and politicians with this always in mind to avoid getting tricked by this common something-for-nothing sales pitch that is really a smokescreen to disguise redistribution.

[Note that two and a half years after this posted, Jonathan Gruber, a professor at MIT and an architect of Obamacare said publicly: "And basically, call it the stupidity of the American voter or whatever, but basically [an intentional lack of transparency] was really really critical to get for the thing to pass." According to Snopes, the video footage of his remarks was deleted from the Internet in an attempt to hide it.]

Critical Thinking and The Mail

Yesterday was my birthday, but I wasn’t born yesterday. Nor am I naïve enough to fall for all the advertising tricks that come my way. This must come as a disappointment to many companies. I got many examples in a single day last week when I picked up the snail mail.

First, let me repeat the assumption that a large percentage of the ads we see must be working to some extent. If consumers didn’t respond to the ads and buy the product, the company would either change their approach to advertising or go out of business. So let’s go to the mail.

The first envelope contains a typical auto insurance ad. It tells me I can save 15% or more on my insurance simply by switching to their company. (The number of discounts they can offer will make my head spin!) But didn’t I just receive a mailing the week before from another company telling me how much I would save with them? Theoretically, someone could keep switching back and forth between companies, saving with each switch, eventually paying almost nothing. That is certainly too good to be true. So this one gets recycled.

The next one is supposedly from my bank offering me a credit card with a 5.99% APR rate fixed for life. I don’t get too excited, because the fine print gives away some additional information. It’s not really from my bank; all my bank did was sell a mailing list with my name on it. The rate shown boldly at the top of the letter applies only to balance transfers during the first 3 months. After that it’s 15% to 24%. They are no doubt counting on the fact that people who already have a balance to transfer will also carry a balance with them and end up pay the higher rate (for life) – along with the possibility of some $37 late payment fees. This great deal follows the insurance offer into the recycling bin.

But wait – there’s more! This one according to the return address comes from “Your Local Office” in a city I am not familiar with. A gentleman working there is saving my free copy of the Medicare Guide. All I have to do is tear off the stub and mail it back telling my age, phone and email – so he can haunt me for the next year? No, thank you! (The actual name of the company is in the fine print at the bottom of the letter where I am informed that it is not affiliated with or endorsed by any government agency.) Out it goes.

Finally, the letter offering me wonderful, affordable health insurance joins the rest.

This is not the first time I have seen these or similar letters. So what could be the reason that these mailings continue? Someone must be responding. Perhaps it is the people who relieve stress by cow cuddling.

That’s right, for only $300 for a 90-minute session, the latest health trend, according to this source, is “snuggling up with a 1,000 lb farm animal to help with your mental health.” One farm in New York “has a program offering the ‘Horse & Cow Experience’ where individuals can spend time connecting with the large barnyard animals.” When it comes to mental health, paying $300 to spend time snuggling with a cow seems more diagnostic than therapeutic!

I wasn’t born yesterday, but based on the mail I receive and the latest health trend, yesterday must have seen a figurative baby boom. If we get drawn in by these, how will we ever start using critical thinking to solve real problems?

Economic Connections

Last time I checked into a hotel or motel, it was quite simple. I parked temporarily in front, walked in and told the desk clerk my name and handed over my credit card. In short order I got my credit card back along with my room key and was politely given directions to the room along with other information, such as breakfast or pool hours. I parked my car or drove it to the most convenient doorway. It was easy and pleasant.

The last time I boarded an airplane was a different story. If someone dropped me off, parking was limited and patrolled – and don’t leave the car unattended. I had to show an ID to get my boarding pass and check luggage, which was presumably inspected after the airline took control. I then took my carry-on bag to the security area where everyone lined up, showed an ID again, showed a boarding pass, took off shoes, emptied pockets, separated electronic devices, walked through a scanner, and sometimes had to be rescanned or even searched. I then picked up my belongings, refilled my pockets, put on my belt and shoes and walked to the gate.

It used to be much simpler. Relatives could even meet you at the gate when you arrived, but not any more. Now there is security everywhere, and for good reason. We don’t want terrorists or crazy people to be able to use the airports or airplanes for murder.

This came to mind when I read about  MGM "suing" the victims and survivors of the shooting massacre in Las Vegas where a lone gunman used the MGM-owned Mandalay Bay Resort and Casino as his base of operations to slaughter 58 concertgoers and wound many others. 

Suing these innocent people sounds heartless, but the word is not being used in the familiar sense. There will be no trial, no testimony, no demand for payment. MGM filed for a declaratory judgment, where a judge decides whether they can be held liable for damages. “Here, MGM is asking a federal court to pre-emptively determine whether a particular federal law prohibits a lawsuit by the victims against MGM, instead forcing them to sue only the vendor that provided security.” As people line up to sue someone, MGM wants a judge to move them out of the line of fire.

Of course there are lawyers already jumping into the fray looking for victims to represent and for deep pockets to exploit. In addition, because people either don’t understand the intent of the lawsuit and jump to the conclusion of heartless behavior or believe that the victims deserve as much compensation as possible regardless of real fault, boycotts are being encouraged.

Now I have no interest at all in MGM, but I can predict the ramifications of such a battle. Lawyers will argue that the hotel, and by extension MGM, did not do everything possible to avoid the situation – that’s the usual argument, “everything possible.” Everyone else in the hospitality industry will be put on notice. Their insurance will increase, and they will begin to take steps to do everything possible – which, by the way, is impossible when you can’t predict what threat(s) to anticipate.

As a result, all travelers will be affected in at least a couple of ways. First, things will cost more. Economic understanding tells us that when costs like insurance and precautions go up across an entire industry, there is no competitive incentive to absorb the costs. They are easily passed on to all customers.

Second, could checking into a motel become more like taking the plane, with some combination of heavily monitored parking, baggage inspections, metal detectors, photo IDs, take off your shoes and empty your pockets – with the same for all visitors and meeting attendees? 

The second outcome is not guaranteed, but it is possible. This lawsuit by the owner of a Vegas hotel may seem unfair and distant, but our world is connected in many unexpected ways.

Homeowner's Insurance - a Different Perspective

About the middle of April there was an isolated hailstorm in the neighborhood.  A few miles away was nothing, but on my block and in the immediate surrounding area houses and cars suffered some damage.  The hail tore window screens, chipped and cracked vinyl siding and (supposedly) damaged roofs.

I looked at the damage to my house and decided I could repair six screens myself, and with the help of a friend I repaired the siding damage with leftover siding from the matching shed that the previous owner built in the backyard.  The roof looked OK.  Total cost was about $30.

Over the next three months, however, driving through the neighborhood was like walking down the aisles of a home improvement show.  On well over half the lawns were signs from a dozen or more siding and roofing companies.  The hammering went on constantly, even on weekends.  The siding color on at least half of the houses in my subdivision has changed since Easter.  (Many of them are less than 10 years old.)

Everyone understands the typical thought process: “I paid all that money every year to the insurance company and now it’s time to get some back.”

A couple of things occurred to me.  First I assume the actions of my neighbors will raise my insurance premiums regardless of whether I filed a claim and regardless of whether they have the same insurance company.  Insurance companies are driven by risk of future claims as much as by today’s claims.

Second, this seems very much out of sync with the history of property insurance as I understand it.

Back in colonial times, and even more recently in the rural areas, when someone had a loss the community would often work together to fix it.  If a barn burned down, neighbors would have a barn-raising event where everyone would pitch in.  Wikipedia explains these events were particularly common in 18^th- and 19^th-century America.  If a family was in distress, finding a job too big to manage alone, the problem was solved by “enlisting members of the community, unpaid, to assist in the building of their neighbors' barns. Because each member was entitled to recruit others for help, the favor would eventually return to each participant.”  That was the custom.

Soon in the cities this practice faded away, but people still needed protection from destructive acts of nature.  Insurance took the place of community action.  Companies administered the insurance by collecting from everyone and distributing the money to those in need.  That change replaced the act of contributing tools and labor toward the erection of a new barn with an insurance payment.

No one in those 18^th century communities would imagine thinking, “Great, my barn is burning.  Now I can get paid back for all the times I had to raise someone else’s barn.”  This would be a very silly reaction.  Weird as it may sound, seen from this perspective, paying premiums to an insurance company is not a cost of owning a house, but an act of helping your neighbors and contributing to the community.

Sure the insurance companies haven’t done much to instill this kind of attitude.  They always act like the reluctant neighbor that doesn’t want to pitch in.  But this attitude may be healthier than resenting the annual premium payment and rejoicing when some major or minor disaster brings the opportunity for monetary revenge.

Chiropractic - Handle With Care

Several months ago I noticed a couple of friends going to the chiropractor on a regular basis and tried to talk them into trying a yoga class instead.  They said they were too old and stiff for yoga, a typical response, and besides, Medicare paid for the chiropractor.  I wasn’t sure this was correct, but let it go.

Recently though, I ran across a fact sheet from the government and learned the following: “Spinal manipulation is a covered service under Medicare. However, maintenance care is not considered by Medicare to be medically reasonable and necessary, and is not reimbursable by Medicare. Only acute and chronic spinal manipulation services are considered active care and may, therefore, be reimbursable.”  It went on to define maintenance therapy, which sounded exactly like what my friends were getting.  Of course, I don’t have all the information and may be wrong, or the chiropractor may be violating the law.

From what I have read most chiropractors are honest and sincere.  They and their patients believe that treatment of subluxations in the spine provides relief from pain and other back problems.  Likewise Medicare recognizes subluxation as a problem that calls for medical attention.  But this in itself may be a problem.

One of many skeptical sources shares a different view.  “According to classical chiropractic, a ‘subluxation’ is a misalignment of the spine that allegedly interferes with nerve signals from the brain. However, there is no scientific evidence for spinal subluxations and none have ever been observed by medical practitioners such as orthopedic surgeons, neurosurgeons, or radiologists. On May 25, 2010, The General Chiropractic Council (GCC), a UK-wide statutory body with regulatory powers, issued the following statement:  The chiropractic vertebral subluxation complex is an historical concept but it remains a theoretical model. It is not supported by any clinical research evidence that would allow claims to be made that it is the cause of disease or health concerns.”  It’s like a metaphor that American professionals and  their patients take seriously.

Besides proper coding and billing, chiropractors must also be careful about the results they promise.  Some have advertised that spinal manipulation can improve general health, cure many different diseases, cure children of earaches, autism, and asthma, and prevent spinal degeneration.  None of these claims have any scientific backing.

Then there are the cases of unethical behavior like this one in Utah where the doctor was disciplined for financially abusing two patients and failing to cooperate with board investigations among other offenses.  But ethical failings happen in every profession.

In short, it is smart to be skeptical about the benefits of a visit to the chiropractor.  Maybe yoga, physical therapy or some other stretching routine will yield the same benefits.  Maybe most of the effect is placebo, based on a belief it will work.  All I know is that when I do a weekly review of medical articles, information about an investigation of problems with one chiropractor or another – ethics, false claims, and other problems – appears quite often.

(For a comprehensive scientific critique of the practice, see this YouTube video.  But I know many will read this or even view the video and still ignore facts that don't agree with a worldview they don't want to change.)

Food as a Human Right

When I saw the headline on LinkedIn that food is not a commodity, but a human right, I wondered why we weren’t trying to solve the food insecurity problem in the US the same way we are trying to solve the healthcare problem.  Now that both food and healthcare have become human rights, wouldn’t it make sense to treat them the same?

In that case, Congress should immediately start debating a bill to provide food insurance for everyone.  It’s not fair that some people with good jobs at big companies should be able to provide sustenance for themselves and their families while people without a job or with a minimum wage job struggle to do so and must rely on food stamps (SNAP) and a number of other government programs.  (Many of these programs are so obscure or complex that local food banks have strategies to educate the poor about what programs they may be eligible for and how to apply for them.)

If talking about insurance will solve the healthcare problem, surely it can do the same for food.  Just set up a system where citizens have to sort through a list of insurance providers (depending on the state they live in) and then sign up with the one that best matches their eating needs.  Of course everyone must be forced to participate and pay the same premiums regardless of the size of their family, how much they eat or how often they shop.  Each insurance company would negotiate prices of every food item with some of the grocery stores.  You would just go in, pick up your items and hand over a small co-payment at checkout.  Months later you would receive an Explanation of Benefits (EOB) from your insurance company telling you what amount was covered and what you owed.  Some time later you would receive a bill from the grocery store telling you what the insurance was paying for and what they think you owed.  If there were any discrepancy, you would spend hours on the phone trying to work it out (and no one could help you without written permission because of food privacy laws).

If you had one brand of insurance, you would be covered at Kroger and Target; but when you were on vacation you might have to shop “out of network” and pay higher prices.  (One insurance company has a policy that would cover you at home and on vacation, but it’s not offered in your state.)

The grocery stores could stop advertising prices, because only people with certain insurance would be covered at their store and not at the store down the street.  And you could only buy the brands of food available in your store.  As farmers and food companies increased prices to them, the stores could use that as leverage with insurers to increase prices.  This would force the insurance companies to increase premiums and force the government to increase the subsidies to those who couldn’t afford it.  Various groups would demand that the government require everyone, even vegetarians, to be covered for the purchase of steaks, and that those who chose to shop at more expensive or exclusive grocery stores offering all-natural, organic or health food items must have the right to do so (regardless of their personal financial situation).

Would that be a wonderful system to ensure that prices for food be kept under control and that everyone was treated fairly?  Of course not!  There is no incentive for anyone to worry about costs, prices or service.  Grocery stores would be competing with each other based on the size of the selection regardless of the cost of adding extra shelf space.  Lobbyists would be out in force to make sure every special interest (except the customer) got their piece of the action.  The paperwork would be a nightmare.  Customer service and responsiveness would drop like a rock, because those who used to be their customers and made choices (voting with their feet and their dollars) would be helpless participants.

This may not be the perfect analogy, but anyone who believes tinkering with insurance will solve the problems of affordability or quality with food, healthcare or anything else is missing the point.  Think about it.