Lower Health Insurance Rates: The Physician's Move

To test abstraction abilities in a mental state exam, the physician asks the patient to interpret a cliché, "He’s just trying to make a buck. What does that mean to you?"

Say Joe Six-Pack was an insurance company, looking to make a buck, should we blame him? What if he was pushing health insurance?

It certainly matters to many people who would like more affordable insurance. Various figures are quoted of the for-profit insurance industry, usually around 30%, to quantify overhead, 15% to describe profit margin. These numbers are Exhibit A and Exhibit B; they support an argument: non-profit healthcare is the key to fixing our healthcare system.

Taking a gander at history, we discover that non-profit is not without precedent. The concept of health insurance was originated as non-profit assistance to teachers who represented a significant portion of uncollected bills at a Dallas hospital.

The concept was termed Blue Cross. What started as a tax exempt organization would years later become a licensee, selling its good name to private companies looking to enter the health insurance market branded with a recognizable name. In fact, up until 1994, Blue Cross required its franchisees be non-profit.

1994: the year consumers wised up. We had seen enough of these non-profits. Rightly, we started demanding for-profit health insurance. Similarly, unsatisfied with 90% profit margins on Coca-Cola, we clamored for bottled water, and challenged beverage makers to conjure up a product that was pure, 100% profit.

We expect firms to maximize profit. However, unlike birds or Koi fish, we don’t like to feed them.

You’re not alone when you desire any product be more affordable. Oreos are in my pantry, in place of “Newman-O’s,” not because of any disdain for Paul Newman’s charities; Kraft simply has a cheaper cookie which I also enjoy.

Lack of demand doesn’t explain the scarcity of non-profit health insurance. In a country of 300 million people, certainly we can scrounge up a few dozen business leaders who’d take a shot at running a non-profit health insurer. A non-profit health insurer could enjoy benefits such as raising capital by issuing tax-exempt bonds. Given investor concern for rising tax rates, these issues would be popular and provide a large source of capital. Wall Street could even join the party, and profit from underwriting the lot. Without a shortage of human talent or capital, the absence of affordable, non-profit health insurance isn't a supply side problem either.

So then, why haven’t we seen a non-profit health insurer? Clearly, the demand and the supply are present. Insurance is a financial derivative. To understand why it's become so expensive, consider the underlying product, medical care. The future costs and likelihood of medical care drive the current price of a health insurance policy.

Over time, the health insurer must collect premiums which exceed the present value of future obligations to its policy holders. These obligations are estimated, by actuaries—math-magicians of sorts. Actuaries are employed by all types of insurers. However, the considerations taken into account for health insurance are very different from other insurance products. These differences are important as they explain why health insurance has become so unaffordable.

Wherever doctors lead the practice of medicine this derivative product, health insurance, follows. Physicans must consider where we lead medicine. By heading in the right direction, we can call on those would be non-profit health insurance executives and ask them why they don’t get up off their lazy butts to make us some affordable insurance.

-Mark Cooper