Private Health Plans Versus Social Insurance
Implications for Health Care Reform
April 28, 2003
Private health plans are responsible for much of the
administrative waste that uniquely characterizes the health
care system of the United States. And for this outrageous cost
and inefficiency, these plans are providing highly flawed and
inequitable methods of pooling funds and allocating health
care resources. We are receiving remarkably little value from
this very costly industry.
Yet the leading incremental proposals for health care
reform call for an expansion of the role of private plans as a
method of expanding health care coverage to more individuals.
Because of the unacceptable inadequacies and high costs of our
current system we will have major reform soon. But before we
invest more resources into the health plan industry, we should
review the policy implications to decide whether this would be
a worthwhile investment.
An evaluation of funding through private health plans would
not be complete without comparing this model with a model of
public funding through social insurance. A program of social
insurance provides health care benefits for an entire
population and spreads the financial risk equitably.
Contrasting the missions of private versus public funding
Private health insurance companies, whether technically
for-profit or not-for-profit, have as their mission the
creation and maintenance of a financially successful business
entity that administers the funds for health care on behalf of
both their purchasers and their beneficiaries. Success is
measured by the growth of the insurance industry’s own
intrinsic entity, the administrative body of their companies,
and by the impact that this has on their profits.
Publicly funded systems of social insurance have a mission
to allocate the health care resources as equitably and as
efficiently as possible
These missions have almost nothing in common. Public
insurance systems are designed to provide access to the best
care possible for the patient, within the limits of the
resources available. Administrative services are limited to
the minimum required to accomplish this task while also
ensuring, through oversight, that public funds are utilized
for their intended purpose.
Private insurance companies concentrate on growth, as
should any other business concern. They expand their
administrative entities to the maximum size that would
continue to enhance their opportunities for profit. They are
engaged in the business of selling their administrative
services to the purchasers of their plans. Offering ever more
administrative services enhances their revenues and their
potential for profit. The insurance companies also attempt to
maximize the funding of the risk pool by increasing premium
revenue as much as is tolerated, and they attempt to reduce
payments out of the risk pool by paying the least they have to
in the form of health care benefits.
Thus the public model supports equity and efficient
utilization of available health care resources, and the
private model maximizes premium income, minimizes benefits,
and expands its administrative business to the maximum size
tolerated, while neglecting the task of equitably distributing
our health care resources.
The administrative excesses and burdens of the private
The administrative excesses of the private health plans
have been well documented repeatedly, and they will not be
detailed here. But suffice it to say that the bureaucratic
goliaths of the private health care plans consume a far
greater percentage of health care dollars than do any public
programs of health care coverage.
This problem is compounded by the fact that our fragmented
system of a multitude of private plans, public programs, and
no programs at all for the uninsured, places a tremendous
administrative burden on the providers of health care.
Although Medicare, as an example of a public program, is
administratively efficient, it does add significantly to the
administrative burden of the providers since it establishes
yet another set of complex rules and administrative procedures
to which the providers must adhere. A single administrative
intermediary would establish one set of rules, which could be
negotiated to ensure optimal efficiency. Numerous studies have
demonstrated that the streamlining of the administrative
process would free up enough resources to cover all of the
voids in health care today.
Insurers are insuring less
The traditional role of insurers was to pool risk. Premiums
were equitably assessed, and payments for health benefits were
based on medical need. Premiums were set based on health care
utilization plus the administrative costs of the plans.
Besides insuring against catastrophic losses, insurers also
functioned as administrators of health funds used for
relatively routine care.
In pooling funds, insurers had been accepting most of the
risk. But health care costs have continued to increase in
excess of inflation. Purchasers of health plans understandably
have become less reluctant to absorb the higher costs in the
form of higher premiums. With pressure to slow premium
escalation, and with the inability to extend further the price
concessions extracted from the providers, the insurers had two
more options. They could reduce the benefits covered, and they
could shift more of the costs directly to the beneficiaries.
Benefit reductions have been somewhat subtle. Plans not
required to provide certain mandated services such as
obstetrical care or mental health services will frequently
exclude those options from coverage. Tiering has been a
mechanism through which graduated levels of cost sharing have
created price disincentives that have made more expensive
pharmaceuticals or higher cost care in academic institutions
less affordable. The level of services should be based on the
best interests of the patient’s health rather than on the
differences in pricing structure. Although many plans promote
their preventive services, the actual services authorized are
often quite Spartan. Pediatric immunization costs are
sometimes shifted to the provider, placing in question the
sincerity of the insurer in promoting prevention. Cost sharing
when using non-contracted providers is frequently so high
that, for practical purposes, such point-of-service options
are so limited that they are not much better than no benefit
Cost sharing has been a more important mechanism for
insurers to reduce their expenditures. Many plans now have
very high deductibles, but often with a restricted number of
routine visits with modest co-payments, which creates the
impression that most services are covered, when, in fact, the
patient bears most of the deductible costs. Larger co-payments
(a given dollar amount) and co-insurance (a percentage of the
allowed charges) are now quite routine. Frequently the insurer
bears little cost until a defined catastrophic level is
reached. At that point, most plans now use managed care
contracts requiring the provider to accept some of the risk in
the form of fee reductions.
Thus innovative benefit packages, increases in beneficiary
cost sharing, and fee concessions from providers have all
reduced the risk exposure for the insurers as that risk is
passed on to patients and providers.
Perhaps the leading reason that private health plans should
no longer serve as the administrators of health funds is their
role in promoting risk segmentation. They have become masters
of the art, and we are all paying for it.
The group market is composed largely of plans sold to
employers to cover their employees. Group plans tend to be
more comprehensive with less cost sharing, partly because of
more stringent regulatory requirements in the group market,
and partly because of concessions gained by organized labor.
But the insurance industry has prospered in this environment
because most members of the work force are younger and
relatively healthy, as are their family members. This is a
relatively low-cost sector for the insurance industry.
The individual insurance market is subject to underwriting
which allows the insurers to charge unaffordable premiums or
even exclude from coverage those who are anticipated to have
greater health care needs. Also, in the individual market,
administrative costs are much higher and benefit packages are
not nearly as generous. Costs are about 30% higher than in the
group market, giving the insurers a larger cushion to accept
less certainly in their risk exposure, even though they
actively avoid risk through the measures mentioned.
It is instructive to see how the industry has been spared
the requirement of covering some of the higher risk sectors.
People over 65 who are expected to have a high incidence of
chronic disorders and more expensive end-of-life care are
placed in the Medicare program. Although the insurance
industry attempted to skim off the healthier subset of this
sector by selective marketing of their Medicare + Choice
options, this has proven to expose the industry to a higher
risk than intended, and they are backing out of this market.
Many individuals with long-term disabilities become
eligible for the Medicare program, again relieving the
insurance industry of this burden.
Low-income individuals frequently do not have access to
affordable insurance, either because their employers do not
offer it, or simply because they cannot afford their portion
of the premium. Low-income individuals who do have greater
health care needs may be eligible for Medicaid and would tend
to enroll in this program through necessity. This concentrates
higher-cost individuals into the Medicaid program, and, thus,
this is yet another higher-cost sector that the insurance
industry has been able to avoid.
Individuals with major preexisting disorders are also
excluded from the individual market and have to resort to
state-sponsored high-risk pools under HIPAA.
The premiums for these plans are often unaffordable,
and the benefits are as minimal as state laws will permit.
These programs have not functioned well, leaving many
individuals uninsured. But the insurers are able to shift this
responsibility from their own industry, and then blame the
state for failing to provide an adequate program.
We are paying the insurance industry a disproportionately
high share of the health care dollar, especially when
considering that the insurers have been successful in
cornering the market for healthy individuals, and in shifting
high-cost individuals into taxpayer-funded programs, or worse,
into the ranks of the uninsured. Funding the plans richly for
taking care of the healthy while placing the burden of funding
care for the sick on the taxpayer is not rational policy.
The impact of the insurance underwriting cycle
The health care insurance underwriting cycle is the
variation in premiums that are not explained by the changes in
health care costs, but are due to unrelated factors such as
the impact of corporate behavior in a competitive market. At
peaks in the cycle, premiums are priced higher as insurers
attempt to maximize profits. During these peaks, consumers are
wasting even more health care dollars that are not being use
to purchase health care benefits.
At other phases of the cycle, the insurers deliberately
price their products low in order to gain a greater share of
the market. This results in pressure to reduce payments to the
providers, which then can impact their solvency, especially
for providers who also tried to increase their volume by
agreeing to excessive rate reductions. The low pricing will
often negatively impact the insurers, frequently causing them
to withdraw from markets that are no longer profitable. This
instability can disrupt the continuity of care for patients,
and affect the richness of the benefit packages as the
insurers readjust their strategies to improve their balance
sheets and profit and loss statements.
As long as we rely on the market to control private health
plans, we will be subject to intermittent periods of excessive
pricing, interspersed with periods of health plan and provider
instability. A universal public program would be designed with
price stability and would include all providers, eliminating
intervals of instability of the delivery system.
Consumer-directed health care
Advocates for reform that reduces the role of government in
health care have been promoting consumer-directed health care.
The theory behind this approach is that when patients are
insulated from health care costs by comprehensive coverage,
they waste resources by over-utilizing health care. It is
contended that, by increasing cost sharing, especially by
requiring payment for all up-front costs, patients will reduce
health care spending by eliminating unnecessary services.
This theory is flawed. Numerous studies have demonstrated
that such approaches create financial barriers to beneficial
health care services. Controlling costs by preventing access
to beneficial services is not good policy. There are other
methods of controlling health care costs and reducing
over-utilization that do not erect financial barriers to care.
Several versions of consumer-directed products establish a
fund for use by the individual and his or her family. Health
spending arrangements, medical savings accounts, flexible
spending accounts or other forms of personal health accounts
are a few of the options. The details vary with each of these
accounts, but they all establish an individual account that is
used for initial expenses. Then once the requirements of a
deductible are met, a high-deductible catastrophic plan covers
Recognizing the potential popularity of these plans, the
insurance industry is now beginning to offer its own versions.
Insurers wish to retain the lucrative business of
administering these accounts, and they can do so without
accepting any risk, since the funds belong to someone else
(either the employer or the individual, depending on the
version). The insurers also escape any risk until the
deductible is met with the patient’s own personal funds.
Even then, the catastrophic insurance product will not be an
unlimited, traditional indemnity-type plan. Costs will be
controlled through managed-care contracted provider lists,
Spartan coverage, and perhaps with even more cost sharing
required by the catastrophic coverage plan. Under these
proposals, health plans will be reducing their risk exposure
even more than they do so now, while retaining their
administrative business. Although their premiums will be
competitive with other insurance products, it can be
anticipated that they will include an even more generous
cushion for health plan profits.
The consumerists are also using the deceptive rhetoric that
patients want choice, but they extrapolate that to mean choice
in their health plans. Patients do want the freedom to choose
their personal physicians, the hospitals they will use, and
other providers of care, including the option of choosing an
integrated health care delivery system such as Kaiser
Permanente. Preserving this choice is very important for the
individual patient. But patients are not really interested in
choosing from a menu of restrictions in their coverage, when
they realize that this is what a “choice of health plans”
really means. A single payer system covers all beneficial
services. When patients have a need for those services, they
do not want to be told that the plan they have chosen does not
Threat to individual financial security
Employers are beginning to shift health care costs to their
employees by increasing the employee share of premiums, by
reduction of benefit packages, and by increasing employee
cost-sharing when utilizing health care services. For
individuals or families with significant health care needs,
these costs frequently exceed disposable income, even for
moderate-income individuals. Thus financial security is no
longer assured for those with needs, defeating the purpose of
insurance. Personal bankruptcy is increasing because of unpaid
medical bills, even for those with health insurance. The
innovative products being offered today do not provide the
level of security that we should expect from this industry.
It is very unlikely that more comprehensive products will
become available in the individual market, and even the group
market is experiencing pressure to reduce benefits and
increase cost sharing. Plans compete primarily on the price of
their premiums. Low premium plans will be popular with those
who are in relatively good health and wish to gamble that they
will not develop major disorders. Those who do develop
significant problems will have lost the bet and then
understand why everyone needs comprehensive coverage. Those
with greater health care needs because of preexisting
disorders will be reluctant to purchase plans that leave them
exposed financially. They will tend to select the more
comprehensive plans. But these plans will concentrate
high-risk individuals, driving the premiums up to unaffordable
levels, causing the plans to withdraw because of loss of
The insurance industry will be left with precisely what it
wants: a well-funded, large, private administrative
bureaucracy, with minimal exposure to risk. Employers will
have shifted their risk to their employees. Unions that are
successful in negotiating generous health benefit packages
will pay for them by accepting lower wages for their members.
But those who have a greater necessity to access the health
care system will be left with neither health security nor
Is regulation the answer?
Costs continue to escalate. The numbers of uninsured
continue to increase. Under-insurance is becoming epidemic.
Since our current system of public and private plans has
failed to provide satisfactory solutions, some have suggested
that we need to increase the regulatory environment of the
Suppose that we did specify the precise benefits that a
standard plan must cover. Suppose that we required plans to
accept all applicants regardless of health status. Suppose
that we did require regulatory approval of premiums charged,
and that those premiums did not have enough cushion to include
wasteful administrative excesses. Suppose that we did require
the plans to adopt uniform administrative procedures to reduce
the administrative burden of the providers. If these measures
were effectively instituted, the role of the insurers might
well be limited to being a contractor for administrative
services in what would amount to a single payer system. If we
really want to adopt the policies that characterize a single
payer system then we should seriously consider the obvious
solution of enacting single payer reform, thereby enabling us
to benefit from all of the advantages of a single, equitable,
publicly administered system.
Public funding of health care
60% of our health care system is currently publicly funded,
which is more than the combined public and private funding of
most other nations that provide universal health care
coverage. Relying on the fragmented public and private system
of allocating funds has resulted in the deficiencies,
inequities and waste of our current system. Numerous studies,
including the California Health Care Options Project, have
demonstrated that we can have much more without any increase
in total health care spending, merely by adopting a single,
publicly administered health care program.
A single payer system of social insurance would be
universal, covering everyone. It would be comprehensive,
covering all beneficial services. It would improve
accessibility by eliminating financial barriers to care. It
would provide permanent, life-long coverage. It would be
portable, covering individuals regardless of employment,
location, or any other arbitrary determinant. It would improve
quality by improving access, and by detecting and preventing
both under-utilization and over-utilization of the system. It
would ensure free choice of providers of health care. Through
administrative simplification it would reduce the expenses and
burden of our current public and private bureaucratic
excesses. And by establishing cost containing mechanisms, such
as global budgeting, it would ensure that health care would
remain affordable while, at the same time, ensuring that the
system would be adequately funded to meet the health care
needs of everyone.
Does the blame lie with the private insurers?
The private insurance companies are businesses. They have
an ethical obligation to behave as businesses. They must
maximize revenues, minimize expenditures and nurture their own
industry. To do less would be to fail their corporate
responsibilities, whether or not a for-profit corporation.
They are doing precisely what they should be doing in a health
care system relying on the discredited theory that health plan
competition in the marketplace would bring us a higher quality
system at a lower cost.
So who is to blame? The policymakers who insist that
solutions to our problems in health care must include private
health plans should carry most of the burden of guilt.
Employment-based private insurance funds only 19% of our
health care system. Yet, in protecting this industry,
policymakers are supporting the perpetuation of the severely
flawed policies that are essential for private health plans to
thrive. Our policymakers have access to the health policy
science that has established the superiority of a single
public model of funding health care. They understand precisely
the models that would greatly improve allocation of our health
care resources. They know that further entrenchment of private
plans into our health care system significantly decreases the
likelihood that we will ever adopt an equitable and efficient
model of reform. Continuing to support models that waste
resources by catering to this superfluous industry represents
a failure of the responsibility for policymakers to promote
systemic changes that maximally benefit patients. But
policymakers can redeem themselves by renouncing the flawed
policies of private plans and by supporting the policies of an
equitable system of social insurance.
Our current fragmented system of private plans and public
programs continues to waste an inordinate amount of health
care resources, which is tragic considering the unmet needs in
health care. The current system has been incapable of
containing costs, now threatening affordability even for those
with health care coverage. Policies supporting the private
health care plans have perpetuated the inadequacies,
inefficiencies and inequities that plague our system today. It
is time that we demand value for our health care investment by
replacing this antiquated, ineffective and wasteful system
with a single, efficient, equitable, and affordable program of
this insanity of economics of health care, the patient always
loses." - Peter Van Etten, President, Stanford Health