Health Insurance is a Questionable Middleman


Since I retired in 2011, I have had experience with health insurance before Obamacare, during Obamacare, and with Medicare. As described below, my experiences with health insurance before and during Obamacare were bad. I avoided going to a doctor during those years because of the problems with health insurance. My experiences with Medicare have been much better.

My Experience with Health Insurance before Obamacare

I did not understand the counterproductive state of health insurance until I retired at age 62 and applied for individual health insurance. This was before Obamacare was implemented. After researching the options, I applied for a plan with Anthem Blue Cross in Colorado. I expected to be accepted with no problem, as had been my experience with individual insurance when I was younger. However, I received a letter that said my application was rejected because I had reported a toenail fungus. This is not an exaggeration. That was the only reason they gave for rejecting my application. Anthem Blue Cross apparently considered a toenail fungus a threat to their profits. Of course my suspicion is that the toenail fungus was used as an excuse to reject a person in his 60s.

I then applied to another insurance company. The company accepted me but required that I sign an agreement that my policy could be canceled if I left out any information about my medical history on the application. When I looked on the internet, I found that the company had class action lawsuits filed against it for canceling policies when payout was needed. It appeared their business practice was to accept people and take their money, but if payout was required, search through their medical records and find excuses to cancel the policy. I stayed with them and paid them each month, but of course I did not trust them.

During this time I avoided seeing a doctor because any minor condition would be in my medical records and could prevent me from obtaining health insurance in the future.

Lessons from my Experiences before Obamacare

Health insurance companies focus on profits and will make extraordinary efforts to exclude people who are not profitable and/or to avoid payouts. Older people and people with medical conditions will be either excluded from health care or have extremely high premiums if insurance companies are left unregulated.

My Experiences with Obamacare

In 2013 I applied for health insurance under the Affordable Care Act or Obamacare. After initially selecting a health insurance plan, I decided to switch to a different plan before coverage began. I was told that switching was no problem and I could hold paying premiums until the switch was completed in two or three weeks. However, the computers for the health insurance exchange apparently did not communicate with the computers for the health insurance company and the change was not actually implemented for about five months. During that time I spent many hours attempting to find out what was happening and whether I had insurance. I also avoided seeing a doctor due to the uncertainty.

Because I was retired and had little income, I received subsidies. The premiums for the health insurance were high and the subsidies were important for me. However, I doubt that such subsidies are a viable long-term solution for the high and increasing costs of healthcare.

Lessons from my Experiences with Obamacare

From my perspective, Obamacare was an experiment that has not worked well. Perhaps if it continued for another 10 years the startup problems could be resolved and it would work better.

However, I think there are two fundamental problems that prevent success. First, Obamacare was based on the assumption that the entire healthcare industry could be managed by regulating health insurance. The rising costs of healthcare are driven by the doctors, drug companies, hospitals, and other providers. Insurance companies do not have the incentive or leverage to force medical providers to keep prices low. Thus, Obamacare did not address the basic cause of the rising healthcare costs. Government subsidies for health insurance in this situation are not a viable long-term solution for the rising costs. Second, Obamacare was based on insurance companies making profits. The profit motive makes it virtually inevitable that groups of people who are not profitable will be abandoned or have very high premiums.

My Experiences with Medicare

In 2014 I became covered by Medicare. For my first visit to a doctor under Medicare, the doctor’s office gave the wrong billing code for the visit and Medicare refused payment. Medicare was very clear about what was wrong and what needed to be done to obtain payment. The doctor was part of a large consortium and the billing department refused to change the billing code. They pressured me for full payment for a service that Medicare clearly covered. I spent many hours on the phone and writing letters for over a year and half on this before it was finally resolved.

My second visit to a doctor under Medicare went much better. The doctor’s office appeared to be familiar with the procedures for Medicare and I received good medical service at the expected cost to me with no problems.

Lessons from my Experiences with Medicare

My impression at this point is that health insurance for older people is not a good source of profits for insurance companies and is better handled by government as a public service.

Current Thoughts on Health Insurance

As this is being written (November, 2016), Donald Trump has just been elected president and the state of healthcare in the U.S. is highly uncertain.

One point that I am certain about is that the way healthcare is provided needs to be fundamentally changed to reduce costs. As discussed in another article on this website, many factors drive healthcare costs higher. Effective healthcare solutions cannot be found until the healthcare services provided by doctors, hospitals, labs, drug companies, and other medical providers are restructured to reduce costs and to align the financial incentives better with the best interest of the patients. The common healthcare proposals by both conservatives and liberals avoid confronting this difficult task, and therefore can be expected to fail.

Another point that I am certain about is that attempting to replace Medicare with health insurance from for-profit companies as proposed by some conservatives would be a disaster. Costs will increase dramatically because (a) older people are not profitable for insurance companies and will get high premiums or be rejected, (b) insurance companies will be less effective at controlling rising healthcare costs than a national program like Medicare, and (c) the profits for investors and high salaries and bonuses for executives will increase the cost of providing the program. In addition, dealing with insurance companies takes much effort that is difficult for older people, and particularly for those most in need of healthcare. The optimal situation for older people is to have a fixed program that does require great effort by the patient.

I believe that the best option at this point is to revise Medicare such that people who have more money pay more for Medicare. That would be vastly better than turning the older people in the U.S. over to insurance companies that attempt to extract profits from the elders and add substantial complications and stress to their lives.

I am not certain about the role of health insurance in general. Health insurance has a far greater role than the traditional concept of insurance. It is important to understand the role of health insurance in the healthcare industry.

Health Insurance Compared to Traditional Insurance

The traditional idea of insurance was to cover a catastrophic loss that a person could not be expected to handle financially. The loss of a house in a fire or the consequences of a severe automobile accident are typical examples.

Traditionally, insurance would not be obtained for situations that a person could financially handle without insurance. On the average, a person will spend more with insurance than they would spend without insurance. The insurance company operates by estimating the risks and associated costs for the incident covered. Then they add their administrative costs, marketing costs, and profits. They set the premiums based on the costs to cover the incident plus the additional costs. If a person can cover an incident without insurance, the costs are only the costs for the incident without the administrative costs, marketing costs, and profits for the insurance company. Thus, it is less expensive to cover the costs yourself without insurance when possible.

However, health insurance has become a middleman for virtually all healthcare activities. Any visit to a doctor or healthcare service is processed by the insurance company. This means that the costs for all healthcare services and associated premiums for consumers are increased by the administrative costs, marketing costs, and profits for the insurance company. The Affordable Care Act (Obamacare) puts a limit of 20% on the amount of your premium that can be spent for these nonmedical purposes. That means that for typical medical services you pay 25% more than you would pay if the insurance company was not involved (20% / 80%), all else being equal.

At present, this middleman role and associated nonmedical costs occur even when insurance coverage is not applicable. For example, a person with a policy with a very high deductable will pay out of pocket for virtually all medical services. However, the doctors file the claims with the insurance company and the insurance company processes them even though they reimburse nothing. The premiums include the insurance company’s administrative costs and profits for being a nonproductive middleman in this process.

In addition to the nonmedical costs for the insurance company, the premiums may include other costs that do not benefit a person. For example, I live a healthy lifestyle. I expect that my health insurance pools me with people who live a less healthy lifestyle and my insurance premiums pay more of their medical costs than my own.

The Benefits of Health Insurance—In Theory

 In theory, health insurance could be a valuable middleman for all healthcare services because the insurance companies can negotiate better prices and better services with the healthcare providers. Recognizing that the financial incentives for doctors and other medical providers are often not adequately aligned with the best interests of patients and that most people do not have the time and expertise to effectively deal with the healthcare system, a health insurance company could be a valuable ally for a patient.

However, in practice the relationship between insurance companies and patients has often tended to be more adversarial than one of allies. Here too, the financial incentives for the health insurance companies are not adequately aligned with the best interests of the patients. Over the short-term the company profits from avoiding patients who need healthcare and minimizing payout and quality of care for the patients it covers. The primary area of competition is to sign up the younger, healthier people. Over the long-term, an insurance company has little incentive to keep medical costs low as long as the company can keep raising premiums in response to higher medical costs.

The insurance companies have also developed and benefited from complicated health plans that few people can adequately understand. This adds significant complexity to the healthcare industry and makes patients less empowered to manage their own healthcare. Also, doctors and other medical providers cannot be expected to understand all the options and requirements for the different health insurance plans, which greatly reduces the transparency and accountability of healthcare. The result is less effective competition and potentially higher profits for the entire healthcare industry.

The theory that insurance companies will obtain lower medical costs is also questionable. My experience has been that some medical providers have lower rates for people without insurance and some have higher rates. Also, the costs for the middleman role of the insurance companies must be considered when evaluating whether the overall medical costs are lower.

The Experimental Nature of Healthcare

At present, healthcare is basically a work in progress with various experiments to try to find something that works reasonably well. Major changes in strategy from past practices are needed, not minor tweaking of existing systems.

Some people argue that market competition will produce the best results, while others argue that a single payer system will be best. The market competition appears to work well for those who are relatively wealthy, but has been dismal for those with lower incomes. At this point, the single payer strategy appears to me to be optimal in general. However, a mixture options including single payer such as Medicare and for-profit health insurance may be worth exploring. As noted above, I do not believe that for-profit health insurance is viable as the only option for older people.

The politically conservative proposals to reduce government involvement in healthcare are based on the incorrect assumption that the healthcare providers will compete with each other rather than cooperate to raise costs as is current practice. The liberal proposals to require everyone to obtain health insurance without major interventions to reduce costs can also be expected to promote significantly higher costs. The lobbyists for the healthcare industry special interests dominate the political process to the point that the major choice is between different ways of enhancing the profits and control of the special interests.


[Version of 11/14/2016]