In John Goodman’s latest book, Priceless: Curing the Healthcare Crisis, he describes “ideal health insurance.” One of the characteristics of such insurance is that it is owned by the individual, not his employer. This is something which the current tax code effectively prohibits. As a result, employers contract on an annual basis with health plans to buy group insurance for their employees.
We usually discuss this government failure in the context of its harm to beneficiaries — that we are trapped in health plans of our employers’ choice, and laws designed to prevent us from falling through the cracks if we lose their jobs or choose self-employment are inadequate. In a market unburdened by this government failure, people would choose to buy guaranteed-renewable health insurance, like we buy life insurance today. Nobody would buy a 20-year term life-insurance policy if the insurer was able to re-price the premiums according to future annual changes in the policy-holder’s health status.
There is also a more dynamic harm caused by the government’s flawed design of health insurance: It impedes medical innovation. Here is a video of an interview with David Pyott, CEO of Allergan, discussing his company’s decision to sell its lap-band technology, after having failed to secure its adoption by third-party payers.
Pyott makes the case that lap-band surgery has a huge payback in reducing the costs of morbid obesity, especially dramatically reducing the risk of Type II diabetes. And yet, insurers declined to pay for the technology. At an average cost of $21,000, lap-band surgery’s costs are paid back within 2.3 years, according to Pyott’s analysis. However, the average beneficiary in a commercial health plan is enrolled for less than three years. Assuming the average patient who would benefit from lap-band surgery is indicated for it halfway through his tenure at a job, the lap-band surgery does not pass insurers’ hurdles.
If individually owned, guaranteed-renewable health insurance were the norm, health plans would take a life-cycle approach to the costs and benefits of innovative new technology, increasing the likelihood of their adoption.
Unfortunately, even when medical-technology executives identify this flaw, they accept it as the natural state. I’ve never heard a CEO of an innovative medical-technology company call for reforming health insurance along the lines advocated by this blog. Their failure to do so ensures that their innovations will continue to fail to meet their market potential.