Why the insurance-based health care system doesn't work

This is not the usual gripe about how difficult it is to get health coverage in this country. This is just analysis why health care is not a good business application for the insurance business model.



Since I've worked at my current job, many of my co-workers got in serious health trouble - one got stroke, another hearth attack, my boss' wife had to have serious hearth surgery, another co-worker ran for the bus and his body got in shock from the sudden vigorous oxygen demand after years of inactivity. Another co-worker - a sweet older lady got a chronic deteriorating condition which caused her to leave work and move in with her sister. Those are just a few examples I came up with without trying to remember everyone at work that needed medical care during my 1 year with this company. The complete list will be at least three times longer and that's a conservative estimate.

Let's look at this 1 year period from the business perspective of the health insurance company. Our employer health plan's premium costs $113 per month. That is the full cost. With about 90 insured (probably way less) this amounts to $122,040 per year. That's the insurance company's income from our company.

Now let's see how much money we needed to pay for health care: A stroke, couple of hearth surgeries, couple of hearth attacks, 2 or 3 ambulance calls and emergency room admittances, a motorcycle accident with surgeries, physical therapy... Let's stop here - I think I made my point - this alone is way over 200,000 conservatively and it does not include smaller things like me going to the doctor the other day with some abdominal pain, which turned out to be nothing, but the services I got have exceeded $400. Furthermore, being a business, the insurance company have to pay taxes, salaries, buy office supplies, etc. etc.

Annual 5 and 6-figure losses on regular basis is not the definition of profitable business, is it? In order to turn profit, the insurance company has to either sell more policies to healthy people, or increase the premium of the currently insured which would make it less competitive. Which means that the best way for a health insurance company to turn profit is to have as many healthy and as little sick people insured as possible. This way the premiums can stay lower, the insured have their health care needs covered, and the company still makes healthy profit. That is exactly what the companies are trying to do and should do, if the primary goal is to sell insurance. Unfortunately, the primary goal is financing health care which is the ultimate loss in the insurance business model.

Beyond my personal observations, if we think in categories, the need for health care is not like the need for property protection. With property, accidents are the only cause of the need for insurance while with humans - our natural construction and the way we function is the primary cause of us getting sick. That's how we are made, and unlike property, our sicknesses are almost never accidental, but either pre-programmed or bound to happen. If cars were insured like people, things like serpentine belts and battery replacement would have been covered by insurance. Instead, as we all know, car insurance only covers damages from accidents, i.e. things you could have not seen coming.

The insurance business model is based on avoiding the risk. With property is relatively easy - younger people and sport cars are a higher risk understandably - teens are inexperienced and impulsive, and nobody buys a roadster to cruise at 55MPH. With human health everyone is a risk and unlike with cars, once someone gets cancer or diabetes they can't just get rid of it to make themselves a better insurance customer.

Health care is just not a feasible venture for the insurance business model, because it is inevitable, not accidental. If we must apply a well-known business model to health care financing, let's use credit unions and mutual funds, although the real question is: Can't we come up with something better?