Free Market Health Insurance is a Broken Model

Would you buy fire insurance for your house if you knew your house was made of solid steel? Would an insurance company sell you homeowner's insurance if they knew your house was made of straw? The concept of insurance requires ignorance. The statement is not meant to be derogatory. It is just that potential purchasers of insurance will only buy insurance if they think they might have an incident that will cause them to collect on the policy. Sellers, on the other hand, prefer to sell insurance to those who they think might never need to submit a claim. In the past, people were more likely to purchase health insurance to protect them if they had an unlikely illness that required an expensive hospitalization. Neither the buyer nor the seller knew if any individual would get sick. Today, health outcomes are much easier to predict, and nearly 75 percent of health expenditures are for chronic illness. This makes prior illness an excellent predictor of future health needs. To a large extent, simply knowing the prior year's expenses for a patient is a good predictor of next year's expenses. With advances in technology (in particular, genetic sequencing data), the ability of both buyers and sellers of health insurance to predict outcomes will only increase. As this ability increases, insurance companies will naturally try to avoid selling insurance to people whom they know will require care.

In addition, it used to be that expensive events covered by insurance were usually acute illnesses that created claims during a single year (the period for which insurance is generally purchased). Now, if someone is newly diagnosed with an expensive disease, the illness is more likely to be chronic, and the cost for the illness may occur after the period in which the patient has contractually committed health insurance coverage. For example, if someone is diagnosed with a new cancer, she may undergo repeated chemotherapy and surgeries for years after the coverage year in which she first got sick. If this patient loses coverage after she gets sick (for example, by losing her job or otherwise by not being able to work), she will likely not be able to get new coverage, and she will be marked as having a pre-existing condition. Unfortunately for the patient, if the insurance company is able to terminate coverage for this patient, it is in their financial best interest to do so.

As technology progresses, our ability to predict disease and live with more illness will increase. Given this trend, health insurance as it exists today is going to become less and less viable. Some aspects of reform being considered in Washington address these issues by forbidding insurance companies from dropping sick members or from considering pre-existing conditions in new members. In the absence of these reforms, the market approach that now exists is guaranteed to fail eventually. Many of the problems we are seeing in today's healthcare system are the beginning of this market failure. As a country, we have a choice between two options: 1) attempt regulatory reform that controls for this market failure, or 2) migrate to a single payer model that pools risk for all individuals. The status quo is no longer viable.