What’s wrong with America’s health insurance system?

The cold-blooded murder of UnitedHealthcare CEO Brian Thompson has led to an avalanche of conversation on what people believe is wrong with the American health insurance system. Many legitimate frustrations exist side by side with many misunderstandings, and men and women of faith are wise to seek clarity and understanding to inform their responses.

Health insurance deals with who is paying for healthcare, whereas healthcare deals with actual medical treatment. That these two things are confused so often is Exhibit A in what is deeply flawed in the current system.

Health insurance is intended to be something people pay for to cover some element of healthcare costs. Policies are priced with all sorts of variables, from copayments and deductibles and varying percentages of coverage to excluded coverages altogether. Like auto and homeowners insurance, there is no way to perfectly price or select our own coverage because we never know if we’re going to need it or not. Ideally, people prefer to pay as little as possible for insurance and never have to use it at all—because it would mean you did not get in a car accident, have your house burn down, or get treated for a disease in the hospital. Insurance is a risk mitigation product, period.

Medical insurance is admittedly more complicated. We would consider it inhumane to not care for a sick person who showed up at an emergency room in dire medical need, but we do not generally coerce individuals to buy products and services they do not want to buy. Nevertheless, there is no system, anywhere, nor could there ever be, where healthcare is “free.” One could coerce insurance companies to pay for more than they do, but that only addresses who pays for the care—not the cost of the care itself.

Healthcare costs can be subsidized (i.e., the government can redistribute tax revenue from one private party to another—a transfer payment). Healthcare costs can be moved from a patient to an insurance company (through a private contract that calls for a cost and specified benefits). And healthcare costs can even be adjusted through “price controls”—the government telling doctors and hospitals what they can and cannot charge for certain treatments and services—but even then, the cost is borne by the provider.

What makes this far more complicated than most market transactions is that people rarely ever know who is paying what for what, and the end user of the product (i.e., the patient) rarely ever sees a bill, let alone pays it. The end result is a confused and murky understanding of prices, competition, supply and demand, and other factors that generally make for efficient market functioning.

It stands to reason that the payer of medical care wants to pay less and keep costs down and that the recipient of medical care wants more care and more coverage. This tension is easily resolved when it comes to sports cars and vacations because the payer of the product is the same person receiving it, so tension is resolved by the individual doing a cost-benefit analysis. Our health insurance system is divorced from that dynamic. This tension is supposed to be resolved by competition, cooperation, and contracts. It probably could never be perfect, but it works reasonably well across nearly all other elements of our economy. Why, then, does it not work with health insurance?

The system is not what people believe it to be. We do not have a system that promotes competition, clarity, transparency, or anything else that economic actors generally like. We have the most excessive level of government intervention of any sector in the economy. We have mind-boggling complexity that inhibits efficiency and fosters frustration and misguided anger. The incentives are wrong, and as is the case when incentives are wrong, what we end up getting is wrong, too.

The need to decline or adjust some claims is not a problem unique to insurance companies. Every government-run healthcare system in the world rations care. The only thing different from our system and a European system is who pays for it. The incentives do not change. If we were serious about a better medical system we would focus on three things:

1. Preventative medical care: Keep costs down in the system, regardless of who is paying, by fostering a healthier society. Incentives in premiums for healthy behavior (like good driver discounts) actually address healthcare costs.
2. Limiting the role of government in the process: Regulation provides the pretext for ambiguity about claims. We have rightly resisted a single-payer system, but we have hardly gone to a market-based system. This ambiguity is creating significant problems.
3. Rigorously pursue transparency and clarity: Recipients of healthcare should know who is paying what, and medical care providers should have no problem offering this information.

We have a system of distrust because too many people erroneously believe that healthcare is free once they pay a premium and because excessive government intervention has prevented our system from working the way other market systems work. Insurance companies owe their insured more clarity on coverage, medical providers owe their payers and patients more clarity on costs, and politicians owe all of the above more freedom and control in the process.