The Evolution and Devolution of Health Insurance

An interesting commercial ran on television recently, in which a homeowner’s insurance customer asks why his air conditioner isn’t covered by his insurance, but a zombie apocalypse is. It’s funny, but it also points to the problem of differentiating between being insured in the event of a catastrophic event and what would be considered routine maintenance.

I think that the confusion on this issue arises from what we call “health insurance,” which really isn’t insurance in its pure form anymore—and that change in health insurance has resulted in some very big problems.

Beginnings of U.S. Healthcare

To understand the problem with health insurance we need to go back to how it started in this country. Health Insurance was initially offered in the 1920s and ’30s by groups to help working people deal with the costs of catastrophic health problems. Remember that healthcare technology back then was quite primitive and we had very few medicines to deal with basic problems, so “healthcare” tended to be the treatment of serious injuries or severe diseases—often infections for which there were few effective treatments.

This was actual “insurance” to protect people from unexpected catastrophes, very similar to the way homeowner’s insurance works. In fact, through the early 1980s this was the real model for health “insurance.” Medicare was initially designed under such a model to protect people from the unexpected and very costly health events that required hospitalization, or worse. Like most insurance at the time, Medicare didn’t cover drugs. At first, it didn’t even cover visits to the doctor’s office!

As medical technology—especially pharmaceuticals—improved, healthcare became most costly. Let’s face facts: It is cheaper for somebody to die of cancer than it is to cure it. The same goes for heart disease and any number of disorders.

As healthcare advanced from being event-based to a more ongoing process, the health insurance industry (which was actually insurance companies like Prudential and Mutual of Omaha) began to cover more day-to-day interventions, which moved the entire concept from insurance to something more akin to bulk purchasing of goods and services. The business model went from one of insuring against unanticipated serious events to the financing of day-to-day healthcare, which is not what insurance companies are designed to do. That is the reason we have seen actual insurance companies leave this arena—it isn’t insurance anymore.

The Employer-provided Insurance Model

Another important consideration in understanding “health insurance” today is that health insurance in the U.S. is typically provided through employers. The reason for the employer-based health insurance system in the U.S. is an historical accident that we just stayed with. During World War II, employees were faced with freezes on wages and employers simply couldn’t pay their workers more. Good workers (who were hard to find with so much of the workforce serving in the military), were often recruited by other employers who could offer new employees more pay.

To combat this situation, shipbuilder Henry J. Kaiser began to offer his employees free healthcare in the shipyard—paying for all of their medical costs. Other employers soon copied that model and over time it simply became the norm in this country. At the time this came about it made sense, as the investment by an employer in its workers’ health tended to be sound and most people stayed with a single employer for the bulk for their working lives.

Employers React to Change

Fast forward to today, and you find an environment in which workers change or lose jobs at a rapid pace. It is no longer in an employer’s interest to invest in the long-term health of a person who is likely to be working elsewhere within a few years. Similarly, it isn’t in a health insurance company’s best interest to pay for a treatment that will prevent a costly event years after the individual is no longer insured by them—Aetna, for instance, would rather not pay to prevent the heart attack of a future United Healthcare enrollee—or a Medicare enrollee for that matter.

Pharma’s Catch 22

These structural changes, from actual insurance to bulk purchasing, from a stable employee base to one that is more transient, and a health insurance customer base that is also impermanent, bring us to our current state of inefficiency within healthcare. The pharmaceutical industry invests in and markets drugs that have substantial long term benefits, then tries to sell them to customers who, frankly, can’t afford to waste their money on benefits that take more than a couple of years to realize.

Is Value Relevant?

There is an irony in that as pharmaceutical companies have spent more and more time as well as money to understand and actually measure the value of their products to the healthcare system overall, the structure of that system has moved to the point at which, for all practical purposes, that value is no longer relevant to the diverse decisions makers. This is a critical cause of market access and reimbursement problems in the industry, and there doesn’t appear to be any straightforward solution.


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