Customized health insurance benefits do not pool risk

Late G.O.P. Proposal Could Mean Plans That Cover Aromatherapy but Not Chemotherapy

By Margot Sanger-Katz
The New York Times, March 23, 2017

Most Republicans in Congress prefer the type of health insurance market in which everyone could “choose the plan that’s right for them.”

Why should a 60-year-old man have to buy a plan that includes maternity benefits he’ll never use? (This is an example that comes up a lot.) In contrast, the Affordable Care Act includes a list of benefits that have to be in every plan, a reality that makes insurance comprehensive, but often costly.

Now, a group of conservative House members is trying to cut a deal to get those benefit requirements eliminated as part of the bill to repeal and replace the Affordable Care Act moving through Congress. (The vote in the House is expected later today.)

At first glance, this may sound like a wonderful policy. Why should that 60-year-old man have to pay for maternity benefits he will never use? If 60-year-old men don’t need to pay for benefits they won’t use, the price of insurance will come down, and more people will be able to afford that coverage, the thinking goes. And people who want fancy coverage with extra benefits can just pay a little more for the plan that’s right for them.

But there are two main problems with stripping away minimum benefit rules. One is that the meaning of “health insurance” can start to become a little murky. The second is that, in a world in which no one has to offer maternity coverage, no insurance company wants to be the only one that offers it.

David Cutler, a professor at Harvard who helped advise the Obama administration on the Affordable Care Act, said he thinks the kind of insurance products that would be offered under the proposed mix of policies could become much more bare-bones than plans before Obamacare. He envisioned an environment in which a typical plan might cover only emergency care and basic preventive services, with everything else as an add-on product, costing almost exactly as much as it would cost to pay for a service out-of-pocket.

There is most likely a middle way. Republican lawmakers might be comfortable with a system that shifts more of the costs of care onto people who are sick, if it makes the average insurance plan less costly for the healthy. But making those choices would mean engaging in very real trade-offs, less simple than their talking point.


NYT Reader Comment:

By Don McCanne, M.D.
San Juan Capistrano, CA

“There is most likely a middle way.”

Not really. Most of the 20 percent of people who use 80 percent of our health care cannot pay for it out of pocket. That is why we need to pool risk and fund it by all of us, certainly including the 80 percent who remain relatively healthy.

Our dysfunctional multi-payer system wastes a tremendous amount of resources in insurer administrative excesses that play games such as distributing the costs between a multitude of public and private programs, the variability and complexity in claims processing for the health care providers, and the allocation of out of pocket costs by individuals.

Over $500 billion of this waste is actually recoverable (Annals of Internal Medicine, Feb. 21, 2017) if we switched to a single payer national health program - an improved Medicare that covered everyone. The “middle way” would simply perpetuate this waste.



By Don McCanne, M.D.

A very common theme is that we can design insurance products to provide only the coverage that we need. By not covering everything, the premiums would be much lower and thus affordable to everyone. Problem solved. (Not so quick.)

The most obvious problem is that nobody knows when they may suffer a catastrophic medical event or experience the onset of a serious chronic disorder. The health care financing system should automatically cover such occurrences, but, in doing so, since much of our health care spending falls into these categories, the savings in the insurance premiums would not be enough to make them affordable for too many of us. The coverage that a person might decline, such as management of breast cancer for men or prostate cancer for women, would still have to be paid for either out-of-pocket or through additional riders on the insurance. As soon as you allow riders, the costs would go up because of adverse selection - the people selecting the riders would be the people who would need them.

So the system would have to cover that 80 percent of health care that is used by the 20 percent of people with greater health problems. What about the other 20 percent that is used by individuals in better health? That is where much of the administrative waste occurs in our health care system. The insurers create and market a variety of insurance products with varying provider networks and variable cost sharing which place an administrative burden on the providers of health care. That negatively impacts the 80 percent of us who are healthy. For the 20 percent who use 80 percent of our health care, once the cost sharing requirement is reached, the additional administrative burden is not that great. So the half trillion dollars of recoverable administrative waste is providing essentially no value since it is wasted on superfluous up front interactions with the health care system and its patients.

Other nations have shown us that we do not need to have cost sharing and fragmented risk pools in order to control spending. They deliver comprehensive services to everyone at a lower cost. Fragmenting risk pools would only increase the administrative waste while subjecting elective risk pools to adverse selection, making them unaffordable. Who would sign up for a rider covering HIV and AIDS? What would the cost be when that rider is added to the basic insurance that everyone needs? Fragmenting the risk pools would result in modest reductions in the basic premium but those adding the riders would have premiums that would be unaffordable except for the wealthy. Customizing insurance by fragmenting risk pools defeats the goal of removing financial barriers to care. If we pool all risks together the special needs that might occur in the future would balance out.