I recently had an occasion to climb into the attic above my garage, where I encountered a technological relic. Bolted to the rafters was our old television antenna, its slender arms folded back against itself like an aluminum lobster. Analog television signals have not been broadcast over the air since 2009, and most households converted to digital transmission long before that. Seeing the antenna made me remember a summer day in the 1960s when my dad was up on the roof of our house, twisting his TV antenna in an effort to aim it at the city, shouting to ask me whether the picture had improved enough to discern images from the blizzard of signal interference that people used to call “snow.” We don’t use television antennae anymore. We have far better alternatives.
After climbing down from the attic, I noticed an envelope on the kitchen counter. It was an explanation of benefits from our health insurance company – a printed accounting of the financial transactions related to a recent medical episode. As I held the insurance form, I thought again of the old television antenna in the attic. Does health insurance – the way it has been structured with annual policies linked to your employer – make sense anymore?
The traditional concept of health insurance was protection against catastrophic financial loss in the event of a serious illness. Early insurance policies focused on acute hospitalizations, the costs of which could swamp a family financially. With the advent of health maintenance organizations (HMOs) in the second half of the 1970s, ambulatory care benefits were expanded significantly, funded through savings arising from reduced inpatient utilization. Until that time, ambulatory services had largely been paid for out of pocket. Richer benefits fundamentally changed the market; as outpatient demand and the associated costs escalated, the pendulum swung back to higher deductibles and increased coinsurance in an effort to slow the rate of increase in premiums.
The underlying structure of health insurance, with an annual deductible and coverage spanning 12-month intervals, has existed for over 50 years. The link between insurance and employment has its roots in the administration of Franklin D. Roosevelt. With wage and price controls in place to battle inflation, employers and trade unions turned to health benefits as a way to circumvent restrictions on higher compensation. The tradeoff between wages and health benefits has been part of employment arrangements ever since. The time may be upon us to question the wisdom of that insurance model moving forward.
The 12-month commercial insurance cycle, with its annual resetting of the deductible, works well for unpredictable single events that have a discrete beginning and an end, but is not particularly well-suited for chronic or complex episodes of care that span more than a single calendar year. Consider a patient diagnosed with cancer in October of a given year. They might incur a $3,000 deductible or even $5,000 in out-of-pocket expenses by year-end, then another $5,000 in January as their deductible and policy limits reset. Or take a patient with congestive heart failure whose illness will extend far beyond the current one-year insurance cycle.
What incentive does the insurer have to invest in services which may avoid multiple hospitalizations several years from now when there is no guarantee that the patient will still be covered by the same insurer? Or consider an employee whose child has hemophilia and for whom gene therapy could eliminate the long-term need for monthly infusions but at enormous upfront cost; what is the economic model that incents the employer to provide a lifetime of benefits to the dependent of an employee who may only work for the company for a year or two?
To protect themselves from the financial impact of selection bias, where beneficiaries gained coverage, incurred significant claims costs, then left the risk pool (either to be covered elsewhere or dropping coverage entirely), insurers historically excluded coverage for preexisting conditions, or they instituted lengthy waiting periods during which patients went uncovered for those conditions. It was much easier for insurers to avoid the risk than to manage it.
To increase the portability of insurance as employees move from one employer to another, regulations limited the insurers’ ability to impose restrictions on coverage for preexisting conditions. As part of the recent tax reform legislation, Congress eliminated the individual mandate, a move that will undermine the stability of already shaky insurance exchanges. Recent proposals under consideration in Washington to allow short-term policies, with durations of less than one year, would be even more destabilizing. Any movement of beneficiaries from one insurance risk pool to another, and particularly the option of discretionary participation in coverage, opens the door to selection bias.
The private sector insurance market has evolved into a patchwork quilt of annually renewing policies tied to transient employment relationships. The very nature of cyclical insurance coverage matches up poorly with the most expensive subset of the population – individuals with chronic and complex illnesses. Incentives are badly misaligned; short-term plan sponsors (employers and insurers) have no economic interest in treatment modalities that deliver years or even a lifetime of benefits at costs that can reach hundreds of thousands of dollars. Universal longitudinal coverage would better align incentives and more efficiently spread the financial risk of chronic and complex illness across the broader population. Additionally, it would eliminate the selection bias that arises from the transitory nature of annual employer-based insurance policies.
With the analog television antenna lying dormant in the attic, I found myself watching an old episode of Andy Griffith on the high-definition flat screen TV. Picking up the telephone, which had no mechanism to dial, Andy spoke into the receiver and said, “Sarah, can you connect me with the mayor?” In the years since that show was filmed, we have gone from shouting into a telephone at an operator to rotary dial phones to touch tone phones and now back to shouting at the telephone and asking to be connected with a friend or relative. Telephones have come full circle; it may be time for insurance plans to evolve.
About the author and the Vizient Research Institute™. As executive director of the Vizient Research Institute, Tom Robertson and his team have conducted strategic research on clinical enterprise challenges for 20 years. The groundbreaking work at the Vizient Research Institute drives exceptional member value using a systematic, integrated approach. The investigations quickly uncover practical, tested results that lead to measurable improvement in clinical and economic performance.