The problem–the insurance model does not really apply to health care

When we think of insurance, we typically think of property/casualty insurance (auto, homeowner’s, personal articles, fire, flood, windstorm, business, etc.), life insurance, and disability insurance. Each of these insures against perils which are relatively rare and unexpected, such as fires, hurricanes, theft, accidents, disability, and death, and against these insurance policies we hope to live our whole lives without ever having to file a claim. Most of us will pay far more in premiums for these kinds of insurance than the dollar amount of the benefits we will obtain. However, when these events occur, the financial cost can be catastrophic, so we gladly pay a premium to spread the risk.

On the other hand, medical insurance covers losses which we fully expect to incur. People typically do not expect to live their entire lives without ever becoming ill. Medical insurance also covers some expenses which have nothing to do with illness, such as pregnancy, birth control, screening procedures, and preventive care. When we have medical insurance, we try to get more benefit from it than the cost of our premiums. In other words, we believe someone else should pay for our medical care.

Indemnity insurance was generous in paying claims and permitted costs to escalate. PPOs (preferred provider organizations) offered discounted fee for service and temporarily slowed the inflation of health care costs. HMOs (health maintenance organizations) tried to cut costs by limiting the demand for services by requiring referrals before patients could see specialists, requiring prior authorizations before obtaining diagnostic and therapeutic procedures, and using financial incentives to encourage the use of cheaper medications. Some used capitation (paying the primary care physicians a set fee per member per month) to discourage overutilization. However, too much of the premium dollars for these plans went toward administrative costs and profits for owners of these plans, and both patients and physicians were unhappy with the hassle factor. Accordingly, there has been a backlash, and open access plans and PPOs have become more popular, but costs continue rising.