Health Insurance 101: Its Beginnings and What It is Now.

 What is insurance?

Insurance serves as a safeguard against financial losses from unexpected events like car

accidents, fires, theft, or illness. You pay a premium, and in exchange, the insurance company agrees to foot the bill if certain events occur. An early example of this practice dates back to medieval times when maritime insurance was invented to manage the risky business of shipping. Merchants would contribute to a fund that would reimburse them if their ships and payload were lost. Modern insurance companies similarly assess risk levels and charge premiums accordingly to mitigate financial exposure.

Insurance companies, including health insurers, assess the risk involved by considering factors like age and demographics, then they set a cost for covering that risk

In the United States, health insurance is commonly provided through employers. In fact, companies of a certain size are mandated by law to offer this as an employee "benefit." This system took root in the 1940s during WW2. A period when wage and price controls were implemented to manage the economy and support the war effort. Since employers couldn't increase wages to attract employees, they created non-wage “benefits” like health insurance, sick leave, and pensions, to outmaneuver the era’s new regulations. This strategy not only helped attract but also retain employees. This idea is not universally lauded. This forced allocation of a portion of their salary to health insurance, limiting personal choice. With this change, you are not at liberty to use that part of your earnings for buying a home, covering the grocery bill, stashing your savings, or towards another’s healthcare. Your choice is limited and the ability to allocate your earned resources is diminished.

In 1954 the Revenue Act made these regulations law, and allowed employers to count the cost of providing health insurance to their employees as a business expense. This act also exempted employees from having to pay taxes on the value health insurance as a form of income. The government wanted this change and was willing to pay for it by forgoing some collected taxes. This made health insurance a feature of American life. By 1958, estimates say 75% of Americans had some form of employed based health coverage. Those lobbying for a nationalized healthcare plan considered it a less desirable but more achievable goal.

Seniors, the poor, and the unemployed still had no coverage. Plans for seniors were expensive, their likelihood of getting sick and have medical bills is much higher than their younger counterparts. To assist seniors who couldn’t afford the high cost of their plans, and the poor, the Medicaid and Medicare act was signed into law in 1965. Demonstrating its costliness these programs accounted for 24% of the federal budget in 2023. Arguments against the law existed at the time. The American Medical Association warned that this is a step towards socialized medicine and would result in more bureaucracy and lower quality medical care. They figured it would result in more forms, red tape and time in waiting rooms and on waiting lists in place of getting care. Others cited cost-irresponsibility and the heavy burden it would be on future generations leading to more taxes and inflation. Less goods for the same amount of dollars. And still others argued that is healthcare should be an individual or family responsibility rather than a governmental one. They questioned so much governmental involvement in everyday personal life.  

Later another group was identified that had too much risk for health insurance companies to cover. Those with certain “pre-existing conditions”. Insurers would complete a process of medical underwriting, or evaluating a person’s health to determine whether to offer coverage and at what cost. You see these pre-existing conditions, like diabetes, HIV or epilepsy, meant you were much more likely to require care and rack up bills. It was too big of risk for insurers. To account for  this extra risk, insurers would charge a higher price for coverage or decline to offer coverage all together. It just wasn’t a bet that private insurers could make. In 2010, the Affordable Care Act (ACA)or Obamacare made it illegal for insurers to decline coverage or to charge a higher price to those with “pre-existing conditions”. Medical underwriting or trying to determine an individual’s health risk was nixed.

So, what happened?

After the Affordable care act, essentially everyone’s insurance premiums went up. These high-risk individuals were added to the risk pool. This means more appointments, ER visits and hospitalizations needing insurance payouts, premiums had to go up. The Affordable Care Act also required insurance companies to cover certain services like preventative care, prescription drugs, mental health services, which some may want, but more services increase cost. Today the average health insurance premium is 635/month for an insurance plan for one person and for a family the average is $1,698. That is a lot of money heading to insurance companies. This act will assist low-income earners to cover part of their monthly insurance bills. The amount of assistance received depends on how much money they make. The ACA bills detractors again cited its cost. It requires 6% of the federal budget to fund this bill. Again, the fear of more government overreach and further socialization of medicine. Restriction of private business and on individuals was seen as an attack on personal liberty.

Health Insurance Isn’t Insurance.

Here's how health insurance differs from what we typically think of as insurance. Remember, insurance is meant to safeguard you from financial loss due to unforeseen events. Take home or auto insurance, for example; they kick in to cover you against things like a car crash or a hurricane. You pay a premium to shield yourself from the financial hit of these rare but catastrophic events, hoping you'll never actually have to use it. However, health insurance is different. It has extended into routine, scheduled events. A visit to the family doctor, a trip to urgent care for the sniffles, or even childbirth - these are anticipated events that can be planned for. It acts more like a health subscription rather than insurance. In contrast, insurance was originally designed for less likely scenarios like cancer, accident-related trauma, or other catastrophic health events.

Modern-day Health Insurance Acts More Like a Subscription to Health Services and Usually Not a Very Good One.

Why not very good? Well, it’s like signing up for service with big promises but delivers only portions of that promise. Normally, it only covers care in certain states. More specifically, it's limited to certain clinics in those states. Even within those clinics, you're often restricted to certain providers. Furthermore, certain illnesses conditions or injuries may not be covered. Treatments too, certain treatments might be deemed coverable while others are rejected.  

Think of your health insurance card as a preloaded Visa card designed only for health services. Sounds okay, right? But there's a catch: by using this card, You don't get to see the cost of services before you agree to pay them. And when the bill comes, they only pay for certain portions of it. Imagine you've used your card, thinking you're covered, only to find out you're still on the hook for a significant portion of the costs. It's like your card magically shrinks in value right when you need it most. And occasionally this card won’t cover any of the charges.

Why should we care?

Health care is insanely expensive, health insurance is insanely expensive. It doesn’t seem like the former helps with the latter. A reason why health care is so expensive is that there is a way to pay for it- insurance. When there is an alternative mode of payment, and upfront prices are not disclosed price inflation occurs. Like the way college education has gotten so expensive- there is a way to finance it through student loans. The price can spiral upwards cause the price doesn’t matter- at least not up front. When these different modes of financing exist we act as if price doesn’t matter and the price increases. But they do! This phenomenon coupled with administrative cost and regulations push healthcare prices up.  You are paying for those costs before the appointment with the copay, weeks after the post-appointment bill arrives, every month with your monthly premium- whether you use your insurance or not, in the yearly deductible, with inflation of the dollar and your taxes.

Evidence of the Increasing of Health Care Costs: The Deductible and Copay.

As health care costs increased, high deductible plans became popular in the 1980s-1990s as a way to control costs. A deductible is the amount of money required to pay out of your own pocket before your health insurance begins to pay for services, this amount must be hit every year.  The deductible is a way to share costs with policyholders, encouraging more judicious use of healthcare services. How generous of them to share, right? A copay is a fixed amount that you pay for a covered health care service at the time you receive it. Similar to a deductible, it is an effort on health insurance companies to share costs with the policy holder aiming to reduce unnecessary medical use.

Suggestions For Curbing Health Insurance Cost.

This is a tough question. Scaling back from its subscription like roll to one that only steps in for catastrophic events excluding routine, or scheduled events would result in lower costs. This returns insurance to its original intention. Could you imagine if your health insurance only cost 100/month? It would be a lot less burden on monthly budgets and within reach for a lot more people.  For routine care direct payment care models can provide upfront pricing.

Using health insurance at all leaves the door open for growing costs, and the tendency is for these programs to grow. This phenomenon is called scope creep. Under political, regulatory and public pressure or in pursuit of self-interests insurance pushes itself into new territory expanding its relevance into new markets. Prior to the adaptation of health insurance reliance, in catastrophic health events costs would be covered by personal savings, charities, neighbors, family networks and private care agreements would help share the burden of care. Likely not a perfect system either, but one could certainly see how this would engender a sense of community. No better motivation to take seriously your rehabilitation and health when it is funded by grandma, Uncle Lewis, mom, the local church members and yourself. All people you know and have invested interest in, rather than the unknown people who also pay into your shared health fund. It is very different.

Suggestions for Curbing Healthcare Cost

Using an endless fund of money (health insurance) as your primary method of payment is a problem. Sellers will provide will price their services to the highest amount of money they can get out of you. Think, when you ask, “How much does it cost” and the seller responds, “How much money do you have?” if you say, “an infinite amount” …. he’s gonna quote you a crazy high price. This is price inflation.  Ask for up front pricing, or transparent costs introduces price sensitivity, or how much the price of an item or service bothers you. If the service is extremely valuable, who cares about the price. On the other hand, if it is not so valuable, it better be cheap. Without patients having to consider the cost (because of insurance based payment), there's less price sensitivity. This can lead to overuse of services, which in turn drives up costs. Providers might also offer more expensive treatments or tests because they know the payer will cover it, even if cheaper alternatives exist.

Know that Options Do Exist

Watch out for your financial wellbeing while getting healthcare. Ask about price, even if it can feel tacky or unorthodox, it’s a fair question. Think, your about to agree to pay for something, asking the price is pretty intuitive. My clinic and several others focus on providing prices upfront. And services are priced to be affordable. Come check us out or consult with us on what affordable options exist for your care. We’ve helped a lot of people and would love to help you.