If you have health insurance, is it always good to use it? Maybe, maybe not.

In years of seeing patients in a walk-in clinic setting in the United States, one thing consistently stood out to me regarding those with commercial health insurance plans:

People are disgusted at the cost of their health insurance premiums and at what their plans don’t pay for.

I gradually realized there is a disconnect between what people believe about health insurance and its true function. For example, people who pay for health insurance often believe they are making an individual or family investment. But, are they?

Without proper understanding of the true function of insurance, those who pay for it do so without informed consent. Looking at the facts can help people understand the function of health insurance and make better choices.

How does insurance work?

To better understand health insurance, it may help to compare it to a less complex insurance type. For the purpose of our discussion, we’ll look at the common function and perception of homeowners insurance.

The basic function of homeowners insurance is often easy for people to understand. Premiums (the annual cost of insurance policies) paid by homeowners serve as protection from risk of financial loss. Such a loss event may include damage from a catastrophe like a tornado, a fire, a flood, or the like.

Homeowners therefore pay the premiums, almost expecting or hoping to never see that money again. (Because, obviously, ‘seeing the money again’ when a payout occurs means something terrible has happened.)

The compensation amount when a home loss event occurs often totals in the hundreds of thousands of dollars. This amount usually greatly exceeds the sum paid by the individual for premiums. The system works best when not many people require payouts. In other words, the pooled resource of the many covers the needs of the unfortunate few.

Those who purchase home insurance policies therefore understand the purchase is not an investment as much as it is a protection from risk. Risk of homelessness, financial ruin, lawsuits, and the like. Homeowners therefore consider insurance a necessary, if not unpleasant, fact of life. *

The way people look at health insurance is different

Though the function of each is similar, people don’t usually look at health insurance the same way as homeowners insurance. Rather, to many, the purpose of health insurance isn’t to cover risk. Instead, people often view health insurance as a product that should pay off in terms of financial investment.

Moreover, people don’t expect their home insurance to cover the cost of routine home maintenance or repairs. Yet, people do tend to hope and expect their health insurance will cover the cost of medical visits.

What is the reason for these differences in expectation?

Health insurance history revealed: A ‘benefit’?

To begin to understand why people view health insurance differently than other forms of insurance, consider how commercial health insurance is sold to people. It is often presented as a ‘benefit‘ of employment.

In the U.S., health insurance’s link with employment has historical roots. When it first started, in the late 1800s and early 1900s, health insurance was closely tied to financial protection from loss of work in the event of illness or injury. In other words, it wasn’t primarily intended to cover the cost of medical bills. (For reference, see works like Origins of American Health Insurance: A History of Industrial Sickness Funds by John E. Murray.) 

During this time period, medical care in the U.S. was rapidly changing. The purpose of hospitals shifted from care of the chronically ill and indigent (a sort of mixture of almshouses and asylums) to care of the acutely ill and injured.

At the same time, an “intellectual monopoly” on health knowledge by the American Medical Association (AMA) gained hold, allowing for soaring medical costs. Due to the “professional sovereignty” it held, the AMA successfully fought regulation of pricing. (For reference, please see works such as The Committee on the Costs of Medical Care and the History of Health Insurance in the United States by Joseph S. Ross.)

Meanwhile, health care started becoming highly technical, with associated but disproportionately inflated price increases. Eventually, medical cost became prohibitive, not just for America’s poor, but also for those of the middle class. As the government attempted but failed to intervene among the stakeholders, insurance companies like those of our modern day were born.

What is the real purpose of health insurance companies?

The primary purpose of those early (and also modern-day) insurance companies was not to provide benefit to the common people. As independent companies supported by the medical establishment, their function was largely two-fold:

1) To ensure payment to providers of prohibitively expensive medical services; and

2) To prevent the regulation of health care by the government.

(For reference, see works such as One Nation, Uninsured: Why the U.S. Has No National Health Insurance by Jill Quadagno.)

The reality is that health insurance isn’t meant to be a great ‘benefit‘ for most members of the group. If it was a good investment for all its members, health insurance companies would not be profitable businesses. Truly, much of the ‘benefit’ goes to the insurance industry itself, as the historical record shows, and as we go on to consider in more detail below.

Then, what is the tangible benefit people receive when they buy commercial health insurance? Regardless of how it is spun to purchasers, the function of health insurance is actually very similar to homeowner’s insurance. The average insured person’s benefit primarily consists of protection from risk of financial ruin from an unforeseen and expensive health care event.

Who really pays for health insurance companies?

It’s like the saying goes: Some of the biggest buildings in any city belong to insurance companies. One shouldn’t underestimate the increase in cost the health insurance industry adds to one’s medical expense.

In the U.S. in 2019, the cost of running health insurance companies amounted to over 7.5% (a sum of 1.195 trillion dollars) of the nation’s health care expenditure. For comparison, this percentage has more than doubled since 1970. Just over 30% of that amount, over 358 billion dollars, comes from households like yours and mine. The rest comes from employer and government sources.

In other words, people, just like you and me, fund health insurance companies, either directly, through taxes, or through employer ‘benefits’ that likely decrease our wages. (Please see the source for these statistics and more provided by the National Health Expenditure Accounts.)

Furthermore, the expense estimates just mentioned don’t include the amount spent by medical practices to deal with the administration of insurance plans.

For example, every health care business that works with insurance companies employs staff that perform a number of administrative tasks. These duties include signing up doctors and other providers to be able to accept insurance (a process called ‘credentialing’), negotiating contracts, making sure billing and rejections are handled properly so fees will be paid, and so on. Personnel salaries, and also expense for software and so forth required to complete such work, indirectly increases medical fees, because it adds to the total cost of doing business.

More complicating factors, and other increased fees

These costs aside, health insurance workings often greatly inflate direct fees for medical care (visits, labs, hospital stays, etc.). This is because insurance companies work with providers, clinics, and hospitals on a contract basis. This means that each insurance company negotiates a discount of the “reasonable and customary fees” set by the provider’s fee schedule.

The practice of contract discounts sets into motion an ugly ‘chicken-and-egg’ scenario. A provider’s established fee becomes, not what the service is actually worth or what the practice expects to receive, but an inflated multiple of the amount insurance companies agree to pay. A quick internet search with a phrase like ‘how to establish a medical fee schedule‘ reveals that health care practices commonly inflate set medical fees anywhere from 15% to 300% of what insurance companies and Medicare are likely to pay for the service.

Some providers try to offset this inflation with an offer of cash discounts to those without insurance. But powerful insurance companies try their best to make sure the rates they pay are the lowest. If a provider offers a discount to individuals, the insurance companies can accuse providers of violating complicated “anti-kickback” laws and engaging in unfair competition practices. Such attempts at discounts can be a legal minefield that put at risk the providers who offer them.

Yet, because of insurance discounts, any health care business accepting insurance that does not offer cash discounts generally charges patients who pay out of pocket much more for those services than it charges those with insurance. This result is obviously unfair and unethical.

A different way of looking at health insurance and health care

After pondering all of this information, let’s focus on a new question: Is health care really a good service to insure in the first place?

The answer to this question may not be a simple one. But we can gain insight by considering that the nature of health care is different than other insurable items, such as homes. This is because, though adequate housing is a basic human need, home ownership is not. But, like adequate housing, health care is a basic human need. Moreover, health care is likely a human right.

Debate exists among scholars and thought leaders regarding whether health and health care are truly human rights. Yet, the United Nations Declaration of Human Rights lists health care among aspects of essential standards of living, which include food, clothing, and housing. 

Putting it into perspective

The essential nature of health care accounts for the need to look at it differently than other things that may be insured. To illustrate this point, we can imagine that any of the essential rights listed in the U.N. Declaration is handled the same way health care is handled. We’ll use food as an example.

Imagine that a “food insurance” program exists. Rather than paying a reasonable cost for one’s food needs, one is asked to pay many times that amount, in advance, “just in case” something catastrophic happens somewhere along the food supply or demand chain.

Additionally, imagine that the cost of one’s daily food needs are not included in this pre-paid amount, but must still be paid out of one’s own pocket.

Also, in our imaginary example, the pre-paid food funds (i.e. “food insurance” premiums) aren’t kept and managed by agencies that make sure to look out for the best interests of the population. The funds are instead managed by giant corporations, whose executives make hundreds of times the annual salaries of their average workers, are often publicly-traded companies (Aetna, UnitedHealth, Humana, etc.), and whose function greatly drives up the cost of food for all.

The model proposed by our “food insurance” example is absurd; it is unreasonable to think such a scenario would ever be tolerated by the common people. Yet, in the U.S., a similar situation exists in health care, due to industry dominance wielded by health insurance companies.

Average people not only have to worry about the cost of routine health care (occasional sick visits, chronic disease management, etc.). Most people also pay an expensive premium for their health insurance policy. It’s therefore not surprising that a sense of resentment often develops among those compelled to purchase health insurance.

What can you do to minimize costs?

So, what does this all mean for the individual trying to minimize health care expense in a responsible manner? 

The health care crisis in the U.S. is hopefully reaching a climax, in part due to effects of the COVID pandemic. Never before has it been so well-understood that the health of individuals is not just a personal but also an important national concern, and also a basic human right.

Thankfully, consumer groups and sympathetic legislators have begun to demand more transparency and fairness in health care pricing. One goal is to enable comparison-shopping for health care services. Because of these efforts, even a person with insurance may find it is less expensive to pay out of pocket at a provider that does not contract with his or her insurance company than at one that does.

Health care reform is under way. Eventually, pressure exerted by people who are wise to the workings of health insurance companies and their negative effects on the provision of health care services will be a huge influence for change. Informed people can contribute greatly to ensuring that reform yields better health and more equity for all.

At IllumiMed, we support fairness and transparency in health care pricing. We also support inexpensive and responsible delivery of health care services. To see more about our purpose, browse our website or view the article Toward Better Help from Health Care.

* (To be fair, note that purchase of homeowners or auto insurance policies by some may not be truly voluntary. Many people chafe at the cost of such insurance, or simply have a hard time paying for it. Their participation may be only to satisfy a contingency of financing agencies or state law.)