The High Costs of Cost Sharing Insurance

Incentives drive all economic activity. Unfortunately, far too many of the incentives that underlie the U.S. health care sector discourage quality and encourage excessive costs.

Our current health insurance system exemplifies this problem. The disincentives created by the way the U.S. health insurance industry operates arise because insurers do not play their proper role. Instead of providing effective risk-sharing services, health insurers provide inadequate cost-sharing services. The consequences from serving this improper role are dire.

We all face the risk that we will be diagnosed with a disease whose treatment will be costly. Instead of having to fund these costs ourselves, or be denied treatment due to these costs, we purchase insurance. As I have argued previously, the proper role of health insurers is to bear these types of risks on behalf of the people they cover.

With proper insurance, insured people benefit regardless of whether they file claims or not. Should the unfortunate happen, then an insured person benefits because her financial costs will be capped at an affordable level, with insurers covering the costs above this threshold. If an insured person is fortunate enough to not require any expensive treatments, then she still benefits because she had the security that the insurance provided.

With such an arrangement, the insurance company makes money because it provides people with a valuable service – the company bears the financial risks on behalf of patients. The company earns a profit because not all the people it offers insurance to will file a claim in a given year.

This is the essence of insurance. People are willing to spend a set amount of money every year regardless of whether the insured risk occurs to avoid the high costs that they would experience if the risk did happen.

This is a foreign concept to the current health insurance system, which pays the costs of many health care expenditures that are not risks. As a direct result, and to the detriment of patients, insurance companies will fail patients at the exact moment when they need insurance the most. It’s as if after paying your home owners insurance for years, your insurer was unwilling to cover the costs from a fire that destroyed your home.

Unfortunately, this is not a theoretical possibility for far too many patients.

In one example, a patient’s husband, Jack Weber, spoke at a 2017 press conference at Hampton University Proton Therapy Institute to highlight how the insurance industry was failing his wife as a direct result of the systemic problems that distort the entire concept of insurance.

In this case, Anthem insurance denied his wife access to the proton radiation therapy her physician recommended to save her life because she could no longer receive additional standard radiation for her recurrent cancer. Perhaps making this denial even worse, the insurer erroneously claimed that proton therapy was not the standard of care for Weber, citing outdated and inaccurate guidelines as proof. Luckily, due to Mr. Weber’s tenacity, the proton therapy that was credited with saving his wife’s life was ultimately approved.

The Weber’s example is not unique. A new report out by the Alliance for Proton Therapy Access last week chronicles the experiences of Jack’s wife and many other patients faced with similar barriers to care due to insurance denials. In fact, according to the data in the report, more than 60 percent of patients seeking doctor-recommended proton therapy are initially denied by insurers.

In another recent example of patients being denied physician-recommended treatments, CNN reported last month that health insurer Aetna was apparently automatically denying many claims without any review from a medical director of the patient medical records.

These examples are the expected outcomes from an insurance system based on cost-sharing not risk-sharing. When insurers share the costs of health expenditures, regardless of whether these expenditures are an actual risk or not, insurers will simply not have enough resources to pay the full costs of the health risks patients need covered.

Addressing these problems requires a rethink of the role that health insurance plays in our health care system. Instead of being an ineffective cost-sharing service, core health insurance should be based on high deductible catastrophic risk plans. Innovations in routine health care services should then be empowered, along with much more generous health care savings accounts.

Such reforms will improve overall access and quality of health care and ensure that health insurance covers patients when they need it the most.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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