Until recently, I thought that the healthcare expenses taken out of my paycheck were combined with my employers contribution to buy insurance from a third-party insurance company.That is not the case.
Like many companies, my employer self-insures. This means that the company actually pays the cost of my care but they enlist a third-party to manage the process.
Using round numbers: I pay $100/month for health care. My company contributes $300/month for my health care. That's roughly $10,000/year combined. If there are 20,000 people in my company, that means that the company and its employees allot $200MM for the medical care of its employees. Over the years, the company has been able to estimate that it needs about $200MM per year to cover its employees care and pay to administer the plan and payments.
A portion of that money also goes to buy actual insurance, but not 'health insurance' per se. Instead, my company buys a policy that protects them from the risk that any given year's ACTUAL spend exceeds $200MM. Think for example of a company building fire, where suddenly a large percentage of employees require unusually expensive care at the same time.
Now, I work in a relatively safe company compared to other industries like coal mining or deep sea drilling. Firms like that can be virtually guaranteed to have higher medical costs per person than our company. Given that, why would my company want to buy insurance from a company that covers these other companies as well? Such coverage is almost certain to be more expensive than my company's current approach because of the risk sharing involved.
In later blogs I'll extend this analogy to ask why I, as a relatively healthy and health aware person, would want to be a part of a pool of people who are less healthy or at a greater risk of needing medical care.
Friday, January 29, 2010
Thursday, January 28, 2010
What Do We Have A Right To?
I agree with the statement that people have a 'right' to quality, affordable health care. But once you get past the good feeling that statement engenders, you have to consider the question: What does it mean? What exactly do we have a right to? Quality compared to what? Affordable to whom?
Most reasonable people would agree that there have to be logical limits to this statement. But where?
Starting with an absurd example: There is a medical procedure that will keep someone alive for one more day and it costs $1MM dollars. They don't have $1MM. Do they have the right to expect that someone else (i.e. the rest of the USA via the US Government) will pay for that? Even in this extreme example, I would not want to be the person who says 'no' to that person. Would that everyone could have everything. But of course we can't.
What about $100,000 for an extra month of life? $10,000 for a year?
I'd be willing to pay $10,000 of my own money for an extra year of life. But, again, if I couldn't afford it, do I have the right to expect someone else to pay for my extra year of life?
Whichever entity (insurance companies, government) that we expect to subsidize care that we cannot otherwise afford on our own will have to establish limits to what they will and will not cover and at what price. As heartless as that may sound, there is no alternative since insuring everyone for everything is clearly not a realistic option.
In conclusion, one could say that we have an absolute right to any healthcare that we can pay for ourselves. But if some third party is going to paying for our healthcare, there will inevitably be some limit to what care we will receive. So, make sure that whichever third party you choose to assist you with your healthcare expenses mission is in line with your own values and care objectives.
Watch for future posts about rich vs. poor and 'fairness'.
Most reasonable people would agree that there have to be logical limits to this statement. But where?
Starting with an absurd example: There is a medical procedure that will keep someone alive for one more day and it costs $1MM dollars. They don't have $1MM. Do they have the right to expect that someone else (i.e. the rest of the USA via the US Government) will pay for that? Even in this extreme example, I would not want to be the person who says 'no' to that person. Would that everyone could have everything. But of course we can't.
What about $100,000 for an extra month of life? $10,000 for a year?
I'd be willing to pay $10,000 of my own money for an extra year of life. But, again, if I couldn't afford it, do I have the right to expect someone else to pay for my extra year of life?
Whichever entity (insurance companies, government) that we expect to subsidize care that we cannot otherwise afford on our own will have to establish limits to what they will and will not cover and at what price. As heartless as that may sound, there is no alternative since insuring everyone for everything is clearly not a realistic option.
In conclusion, one could say that we have an absolute right to any healthcare that we can pay for ourselves. But if some third party is going to paying for our healthcare, there will inevitably be some limit to what care we will receive. So, make sure that whichever third party you choose to assist you with your healthcare expenses mission is in line with your own values and care objectives.
Watch for future posts about rich vs. poor and 'fairness'.
Insurance Does Not Equal Health Care
First, we need to separate the question of how much we pay for healthcare from the question of who pays for health care.
In its most basic form, insurance allows individuals to pay a little to protect themselves from something that will cost them alot but has a low probability of occuring.
For example: In my hypothetical, greatly simplifed world, I pay about $1,000 per year to insure my car. If something catastrophic happened to my car, I would expect that to cost $20,000 that would be covered by my insurance. If I had to pay $20,000 out of pocket, that would be a hardship for me. So, I am willing to pay the $1,000 each year to avoid that potential hardship. Insurance 'saves' me money if I have to make a major claim.
Insurance companies can do this because they have lots of people paying them $1,000 a year. They pool our risk. If 20 people buy insurance each year and one person in that group has a $20,000 accident each year, then the insurance company breaks even.
Of course, basic auto insurance doesn't cover every automotive expense. Oil changes, new tires, car washes, etc. I pay those expenses myself. But becuase an oil change is only about $30, that's not a hardship for most people the way a $20,000 accident would be.
What if insurance covered oil changes - one $30 oil change per person per year? The insurance company would expect to have to pay out $600 per year ($30 x 20 people). How much would they charge their customers for this oil change insurance? At least $30, of course.
And because the insurance company has pay an employee to handle the paperwork, and buy them a computer to track the paperwork, and heat/cool the office in which they work, the company would have to charge their customers more like $32.
Why would you pay an insurance company $32 to insure yourself against an expected $30 oil change? That doesn't make any sense.
Putting this conversation back in the health care realm - Why would you pay an insurance company to cover your routine doctor visits? If you have a annual physical exam that cost $200, and so does everyone else, then you can expect your insurance for that exam to cost you MORE THAN $200 for the reasons we discussed above.
Therefore, I conclude that health insurance should be used to cover high cost, low probability medical events not every single medical expenditure an individual may incur.
Obviously, this first post ignore many issues about how insurance companies work (profit motives, ability to bargain for prices) and the fact that costs of medical services are very difficult to determine in advance. We will cover these topics further in future posts.
In its most basic form, insurance allows individuals to pay a little to protect themselves from something that will cost them alot but has a low probability of occuring.
For example: In my hypothetical, greatly simplifed world, I pay about $1,000 per year to insure my car. If something catastrophic happened to my car, I would expect that to cost $20,000 that would be covered by my insurance. If I had to pay $20,000 out of pocket, that would be a hardship for me. So, I am willing to pay the $1,000 each year to avoid that potential hardship. Insurance 'saves' me money if I have to make a major claim.
Insurance companies can do this because they have lots of people paying them $1,000 a year. They pool our risk. If 20 people buy insurance each year and one person in that group has a $20,000 accident each year, then the insurance company breaks even.
Of course, basic auto insurance doesn't cover every automotive expense. Oil changes, new tires, car washes, etc. I pay those expenses myself. But becuase an oil change is only about $30, that's not a hardship for most people the way a $20,000 accident would be.
What if insurance covered oil changes - one $30 oil change per person per year? The insurance company would expect to have to pay out $600 per year ($30 x 20 people). How much would they charge their customers for this oil change insurance? At least $30, of course.
And because the insurance company has pay an employee to handle the paperwork, and buy them a computer to track the paperwork, and heat/cool the office in which they work, the company would have to charge their customers more like $32.
Why would you pay an insurance company $32 to insure yourself against an expected $30 oil change? That doesn't make any sense.
Putting this conversation back in the health care realm - Why would you pay an insurance company to cover your routine doctor visits? If you have a annual physical exam that cost $200, and so does everyone else, then you can expect your insurance for that exam to cost you MORE THAN $200 for the reasons we discussed above.
Therefore, I conclude that health insurance should be used to cover high cost, low probability medical events not every single medical expenditure an individual may incur.
Obviously, this first post ignore many issues about how insurance companies work (profit motives, ability to bargain for prices) and the fact that costs of medical services are very difficult to determine in advance. We will cover these topics further in future posts.
Wednesday, January 27, 2010
Introduction
I've been thinking a great deal about the current health care debate. In as much as we are searching for the right answer, I wonder sometimes if we are asking the right questions. I believe there is a great deal of consensus around the goals of reforming health care, namely:
But I do have some opinions about how we define these problems, what the underlying drivers are and where possible solutions might lie. This blog is my effort to document my thinking on the matter to ensure that my own thinking is internally consistent, a place to aggregate data and statistics to prove or disprove my hypotheses, and generally a place to vent my spleen over the shoddy nature of the debate currently underway.
If anyone chooses to listen in on my musings, I encourage comments and guidance.
- Ensure that as many people as possible have access to quality health care (ACCESS).
- Reduce the overall amount of money we spend on health care (COST).
- Maximize the quality of the health care we receive (QUALITY).
But I do have some opinions about how we define these problems, what the underlying drivers are and where possible solutions might lie. This blog is my effort to document my thinking on the matter to ensure that my own thinking is internally consistent, a place to aggregate data and statistics to prove or disprove my hypotheses, and generally a place to vent my spleen over the shoddy nature of the debate currently underway.
If anyone chooses to listen in on my musings, I encourage comments and guidance.
Subscribe to:
Posts (Atom)