Pricing Health Services and Risks

There I sat, in one of the largest cities in the world, atop one of the tallest buildings in the city, across the table from the top executives of one of the largest health insurance companies in the world. It was quite a view, let me tell you.

"So, this is where my health premium dollars go; this is expensive real-estate," I quipped to myself.

I sat staring at a slide--a very important PowerPoint slide--that detailed the prices of the different health insurance packages that this insurer offers. From top to bottom, the prices decreased, as the list moved from the gold-plated prepaid healthcare plans (HMO's and the like; these are not 'insurance' products, by any means) at the top, down to the high-deductible, catastrophic and HSA (Health Savings Account)-compatible plans at the bottom. A previous slide had graphed the rapid rise in premiums that this health insurer charged over the past ten years, so I thought to myself, "Clearly, we simply cannot price health risk very well if this health insurer has raised its premiums each year at such an exponential rate. I wonder if this pricing challenge applies to all the products this insurer offers?"

I raised my hand: "Have you had differential success in pricing your insurance products? Do you find it is more difficult to price your 'rich', comprehensive packages than it is to price your catastrophic, high-deductible options?"

A pause proceeded.

The motivation behind my question was simple: most of what we call 'health insurance' in today's marketplace is nothing more than (overly priced) prepaid healthcare--it's the only type of 'insurance' where the incentive is to consume it (file a claim). 'Use it or lose it' is the name of the game when it comes to health insurance, especially if your employer purchases your health benefits (defined benefits) for you instead of compensating you with higher wages (or defined contributions). Under the model, many non-insurable health services and events get included in and priced into health 'insurance' products. But, there exists a spectrum of health services marked by non-insurable, often chronic care events on one end, and insurable, primarily acute care events on the other. In this light, I suspect it is much more difficult to price the primary care services for an obese, diabetic patient who will move into and out of the healthcare system in a number of ways throughout the year. This is the 'car maintenance' (tires, oil changes) world of healthcare. In stark contrast, the price of an ankle surgery in the emergency room is much more concrete and acute (and perhaps involves less pricing variability; more predictability?); the 'car accident' health domain. Surely, we underwrite some health events more effectively than we do others.

That was my basic thought process that preceded my question.

The sly answer: "We prefer that people purchase comprehensive packages."

"Of course you do," I thought to myself, "You want as much of my money as you can get your hands on, and up front, no less."

I left this enlightening meeting with the Chief Medical Officer, Chief Legal Counsel, and a few other C____ folks without a direct answer to my question, but pretty sure I received the answer indirectly.

The real answer: Health insurers are operating on a 'free-option' right now. They have simply raised their prices every year as healthcare costs have escalated--they must do so in order to cover their overhead obligations and return profits. Meanwhile, through consolidation and growth, the distribution of health insurance companies in America looks disastrously power-law (and fragile), with a small number of insurers (WellPoint, Aetna, United, etc.) dominating the financial landscape (analogous to JP Morgan, et al. in the banking realm), reaching overwhelming sizes that make these organizations far 'too big to fail'. The problem is, they are going to fail, and, when they do, their 'too big to fail' statuses will result in socialized costs through government bailouts. It's the free-option that privatizes profits and socializes costs.

The real answer, I suspect, is that we cannot price all health services and risks well. Our current 'health insurance' system incentivizes people to consume health services, lacks incentives for healthy lifestyle choices, and fails to hold people accountable (where appropriate and financially reasonable) for their poor health decisions. We lack individual accountability where it makes sense, and we bankrupt people for healthcare events where catastrophic protection makes sense. The opposite should be the case. Health insurance should insure against bankruptcy (you should not have to worry about losing your house because a brain tumor strikes randomly/unfortunately despite your lifelong conscientiousness), but it should not pay for your visit to see a physician when you have the flu (if your brain tumor were truly caused by really poor health choices, you would have paid the individual costs individually over the years through all the health problems that preceded this unfortunate event). We can't pay for everything in healthcare, so what we do elect to pay for lies at the core of our current health reform debates. If, inevitably, we are going to socialize the costs of medical care, it seems apt that we discuss which costs these are going to be, cutting back 'health insurance' to actual insurance by increasing defined contributions (scaled according to income) and reducing the size of our defined benefits in order to remove the abundance of third-party parasites in the system while reconnecting patients and providers directly as much as possible (a la, Hello Health ).

Remember: 'Health insurance' does not ensure access to health care. Health care does not ensure health. Ergo, take all steps possible, for your own sake (if you are lucky enough to be healthy), to enhance, maintain, and preserve your health so that you access health care as little as possible and avoid health insurance claims as much as possible. Our current state of affairs pays for and provides far too much care to people who act irresponsibly, reducing our ability to serve those who truly need and deserve medical services. I wouldn't want a physician spending time and energy caring for my sinus infection if it were caused by my lack of sleep, my carb or beer binges, and my failure to exercise (personally, I elect for Ancestral Fitness, instead). I don't want to clog up our limited resources that could better be used to care for more valuable care, such as life-saving surgery for a baby with a birth defect. Call it social responsibility; call it individual responsibility; call it whatever you like; but, we must figure out how to build a health reform bridge to get us out of this mess and move toward a healthcare system that performs a defined role in society and holds individuals appropriately accountable for their health choices while protecting those deserving of health services from fearing bankruptcy should fate strike their health states in unfortunate and devastating ways.

I don't know what this 'bridge' looks like, although I have implied one above and in previous posts, so I invite you to chime in here or join the following discussions and serve as a healthcare reform bridge-building architect / engineer:

To good health.