Why is Health Insurance so Costly

Patients consume health care but they don’t pay the bills. Health insurance is so expensive in America because third parties, the real customers (insurance companies, employers and the government) pay the bills and make decisions in the name of the patient.

Patients are disconnected and insulated from the financial and medical decisions associated with their own health care. “When the direct linkage between the use of medical facilities and payment is broken, medical consumers lose their incentive to economize on their use of medical resources.”[1]

People will shop around and spend the time looking for the best prices when they have to spend their own money. It’s human nature. But because most health care consumers are out of the cost decision making loop, they neither know how much their treatments will cost ahead of time, nor do they feel responsibility to control costs for their own health care.

In a survey of 2,000 people with employer sponsored health coverage commissioned by Great-West Healthcare,[2] the people who responded spent twice as much time researching the purchase of a new car as they did researching their health coverage.

* When consumers were asked to “guess” prices, they were within 1% on the price of a new Honda Accord, 8% on the price of a round trip airline ticket, but were off by 56% on the cost of a 4-day hospital stay.

* 63% discovered the cost of medical treatment only after they received the bill and 10% never knew.

* When asked if individuals should be extremely responsible for controlling medical costs, only 20% thought so.

State minimum coverage mandates drive health insurance costs even higher and are “One of the major causes of high-priced health insurance in the U.S.”[3]

States increase upward pressure on health insurance costs when their “Guaranteed issue” regulation forces insurers to provide health coverage to all applicants regardless of health status.[4] As of 1999, 45 states restrict the ability of insurers to set rates based on an applicant’s state of health [5]

* 21 states restricted rate variation based on health status to no more than 2:1

* Community rating (pure or modified) doesn’t allow any consideration of health status for rate setting and is required in 13 states.

The health care model is broken when health care consumers are disconnected from the true costs of health care and governments at all levels force insurers to ignore sound actuarial practice. Spiraling health care costs and expensive health insurance are inevitable.

1 Liebowitz, Stan. “Why Health Care Costs Too Much.” Policy Analysis: Why Health Care Costs Too Much 23 Jun 1994. 18 Feb 2009 <http://www.cato.org/pubs/pas/pa211es.html>.

2 “Consumer Attitudes Toward Health Care.” Great-West Healthcare. Harris Interactive Survey. Jan. 11 to Feb. 8, 2005. www.greatwesthealthcare.com/C5/StudiesSurveys/Document%20Library/Great-WestHealthcareConsumerAttitudesSurvey_2005.pdf

3 Emanuel, Jeff. “Health Insurance Mandates. Research & Commentary.” The Heartland Institute 13 Jun 2008. 18 Feb 2009 <http://www.heartland.org/article/23381/Health_Insurance_Mandates.html>.

4 Goodman, John C. “Health Insurance: The Concise Encyclopedia of Economics | Library of Economics and Liberty.” Dec 2008. 18 Feb 2009 <http://www.econlib.org/library/Enc/HealthInsurance.html>.

5 “The Impact of Access Regulation on Health Insurance Market Structure.” 20 Oct 2000. 18 Feb 2009 <http://aspe.hhs.gov/health/Reports/impact/sect01.html>.