The Fundamental Problem with For Profit Insurance

There is an entire industry of lawyers whose entire job is suing insurance companies for not paying out claims according to the policies they made themselves.

We have health insurance because we recognize that risk is easier to bear when it is distributed. Instead of living in constant uncertainty of having to pay for exorbitant expenses when bad luck strikes, a group of people will opt to regularly contribute a small amount of money into a large pool that will pay for the catastrophic expenses any of its members may encounter. The actual amount each member would need to regularly contribute is determined by a complicated series of risk calculations to ensure the pool of money is substantial enough to (on average) cover the random and infrequent withdrawals. That, and also enough to cover the salaries of the people who need to manage this pool of money: the insurance company.

This is, of course, a simplification. The actual mechanics of health insurance is a byzantine mess. However, we don't need to get into those complexities to illustrate the fundamental problem with for profit health insurance.

How does an insurance company operate? Their main responsibilities is calculating everyone's collective risk and regular payments into the pool (called the premium) to make this entire endeavor work. Obviously, you need to hire staff for this, so that calculation needs to account for this administrative overhead. Of course, you also need staff to make sure there's no exploitation going on. For example, making sure any payments going out are in good faith. It would not be fair to other members in the group if one person was requesting a costly full body scan every 6 months for no medically justified reasons. This part of health insurance will forever be tangled in controversy as determining what is and isn't medically necessary isn't always clear. For the sake of this thought experiments, let us assume they consult doctors and the scientific consensus to make their decision.

Now let us imagine a for-profit health insurance company. The prime directive is making as much money as possible. What sort of behavior can you expect from this company? Well, they can either increase the premiums of its members (income) or reduce the amount of money they need to pay out. Here is what that looks like in practice.

1) Establish monopoly.
Raising the premium runs the risk of driving members to look for another health insurance company or forgo health insurance all together. To prevent this, ensure there are no competitors in the local market so there is no other option for people to turn to. After this, raising premiums will be less detrimental to the bottom line.

2) Refuse to pay claims.
Whenever a claim occurs, the company can opt to not pay the claim in full in hopes that the member will find a legal battle too onerous to pursue. There are, coincidentally, several legal strategies the insurance company can engage in to make this process as long and laborious as possible. While they can't do this for every claim, they certainly can do this for some claims. Combine this with tactic #1, and the model for claim denial is born.

3) Raise the standard for what is medically necessary.
Instead of using doctors and the scientific literature to determine what a patient needs, they simply set their own definition for what is medical necessary and refuse to cover the cost of those "unnecessary" procedures. This work in tandem with tactic #2. That, or engage in a bureaucratic paper war against providers and patients in the hopes they find the conflict too draining to do, and discourage them from billing insurance for those procedures.

4) Refuse to cover sick people.
Since sick people will utilize healthcare more and therefore withdraw from the pool more frequently and substantially, barring them from participating in the coverage will reduce spending. This is especially true for people with preexisting chronic conditions that cannot be ameliorated and require constant care. Ideally, only provide coverage for relatively healthy people, incidentally the people who need health insurance the least.

5) Differential premiums.
Instead of having every member pay a similar rate (the original intention of insurance), have healthy members pay less and sick members (people who would utilize healthcare more) pay more. Ideally, the high cost for these sick members will encourage them to self-exclude from the pool, effectively serving the function tactic #4. Note that this undermines the purpose of risk pooling, which is for a group of people to share the burden instead of each individual responsible for dealing with their own risks.

6) Control a tight pool of in-network providers.
Set differential coverage rates depending on which provider the patient seeks. Work out deals with various providers who will bill the insurance company at a lower rate in exchange for giving them the "in-network" status, partially guaranteeing them exclusive access to your pool of beneficiaries. This way, claims that are out-of-network would not be fully covered, reducing the amount they need to payout. Utilize tactic #1 in conjunction to ensure members do not leave the plan due to poor selection of in-network providers and poor coverage.

Some of the strategies have been reigned in by various health policies like the Affordable Care Act, which prohibits health insurance from barring people with preexisting conditions. But these tactics are still alive and rampant. Remember the assassination of United Healthcare CEO and the bullet casings found on scene? Delay, Deny, Depose. Under for-profit model, insurance companies have almost no incentive to pay the claims, especially when the legal system's burdensome bureaucracy benefits them.

Thus is the fundamental problem with for-profit health insurance. None of these strategies that maximizes revenue are good for public health. Profit is incompatible with health. This does not need to happen. If single payer health insurance is too radical for you, there is a way to dramatically improve our health insurance situation in the US without revamping the entire system. Remove "for-profit" from health insurance. All of these issues stem from these companies attempting to be as profitable as possible as they have shareholders to please. If we can remove this, at the very least these aggressive profit motivated tactics would lose its primary driver. Germany has a (sort of) similar system, where the majority of its residences are covered by one of the many "competing, not-for-profit, nongovernmental health insurance plans". Contrary to what some believe, it is possible to achieve affordable universal high-quality healthcare without single payer health insurance.

The purpose of health insurance is to ensure people can get the healthcare they need when they need it. If there is an incentive (a strong one at that) for insurance companies to not pay the claims, what even is the point?