Today Health Insurance is a combination of two things:
- Insurance to protect us when catastrophic, unexpected stuff happens.
- A way to pay for routine and small(ish) expenses.
This combination creates some perverse incentives that are hard for insurers to manage, reduce innovative competition from non-insurers, create complexity and restrict choice for consumers.
In this post, I suggest a different model of healthcare insurance that can actually put consumers in control.
Why is Healthcare Insurance different from other insurance in our life?
We all buy home insurance and car insurance. These are designed to protect us when our house burns down or our car is in a major crash.
If our oven breaks down we don’t call our home insurance company. If we have bought a home warranty plan then we call them otherwise we call a repair person.
If our car needs service, we don’t call our car insurance company. If we bought a service plan we take it to the dealer. Otherwise we take it to our favorite repair shop and pay out of pocket.
We only call the home insurance and car insurance if something catastrophic happens. This is why both of these are relatively cheap compared to health insurance cost.
On the other hand, our health insurance covers both catastrophic events AND every day healthcare like getting a flu vaccine or a regular checkup by your primary care doctor.
How does this make health insurance very complicated?
Catastrophic insurance is simply an underwriting business. Insurance companies calculate the probability of each adverse event occurring and the cost incurred when that adverse event occurs. This combination determines how much premium is charged to each person. (This is, of course, a highly simplified view of underwriting.)
Warranty plans or service plans are different. Companies figure out what services they can cover, how they can provide those services at the lowest cost and what they should charge to cover those costs and still make a profit.
Each is a very different business.
Combining the two things into one complicates the business and restricts competition where a new entrant may want to focus on just one business and not the other.
For comparison, in home insurance and car insurance, catastrophic insurance and warranty/service plans are often offered by completely different companies that can focus themselves on one or the other.
How do we put consumers in control of health costs?
1- Separate catastrophic insurance from health service plans
Healthcare is one of the few areas where these two are combined. Let’s have insurance be insurance. Companies should sell insurance for catastrophic, unexpected events.
For regular healthcare costs, we should have separate health service plans (i.e., health subscriptions). For a given price per month, we get a set of services free or at discounted rates.
We can pay more to get a health subscription that offers more services, or we could choose to keep a cheaper health subscription and pay for remaining services out of pocket.
We’re used to buying service plans for appliances why not for our health?
2- Have Health Systems and other providers (Walgreens, CVS, One Medical) offer health subscriptions
Today it is hard for care providers to offer health subscriptions because regular healthcare costs are bundled in with insurance. Amazon One Medical offers health subscriptions but consumers would then have to pay double; they are already paying their insurance company for regular health expenses.
If we separate the insurance from the health service plan, we now enable all care providers to offer health service plans without getting into underwriting and managing risk. Walgreens could offer a health subscription, so could my health system, so could other health systems, so could the County Health department, so could One Medical, so could tele-health first care providers etc.
Just like other subscriptions we buy, we would see what we get with that subscription and choose the right one for us. Also, by separating catastrophic insurance which consumers do not understand we can make the health subscriptions easy to understand. For example, we are able to understand other subscriptions in our life like Amazon Prime, Netflix but we struggle to understand insurance.
3- Health subscriptions should have a personalized price based on the person/family
Today healthcare premiums are based on very limited factors such as age, gender and smoker/non-smoker. As a result, there is little incentive for a consumer to save money if they take care of their health better.
By enabling consumers to have skin in the game we can empower them. If they follow healthy habits they would be able to save on health subscriptions. Think of the “safe driver” discount that car insurance companies offer.
4- Require standardized “Truth in Lending” summary document for health insurance
When you get a loan, you get a single page standardized summary of the characteristics of your loan (https://www.debt.org/credit/your-consumer-rights/truth-lending-act/). This enables the consumer to understand the loan without having to read tens of pages of legal language and they can put disclosures from two loan companies side by side and compare easily.
Health insurance companies should provide you a simple and standard way of understanding your insurance and comparing with other insurance plans. Today comparing insurance plans requires reading tens of pages of documents with legal language which are all different from each insurance company.
Defining and requiring a standard disclosure format (“Truth in Health Insurance”) for all insurance plans will help consumers understand the value they get from this catastrophic insurance. No one should have to read more than a page to understand their insurance.
5- Employers should stop choosing health insurance plans and instead offer vouchers
Employers should stop making health insurance decisions for employees. Most employers have large benefit teams that are managing healthcare options for the employees but the reality is many employees do not understand their health care choices and the ones that do, cannot choose outside the limited choices offered by the employer.
Instead, employers should offer health vouchers that their employees can use to buy both catastrophic insurance and health subscription. These vouchers can be in the same amount as the employer portion of the premiums so there is no increase in cost for employers (in fact employers can save money by eliminating their benefit departments). These health vouchers can only be used for healthcare purposes (similar to an HSA) so this ensures that employees have health insurance and cannot spend the voucher on non-healthcare expenses.
Employers can make this even easier by having a default choice that employees can use if they don’t want to make their own choices.
This would also allow consumers to keep their insurance when they change jobs as they would just start using the voucher from their new company to pay for the same insurance and the same health subscriptions.
Once employees have the freedom to choose health service plans, we would expect all kinds of new business models will emerge in the market. The business models that consumers like will gain revenue and succeed.
What are the benefits for consumers?
These five steps can:
- Allow insurance companies to focus on insurance.
- Allow healthcare providers to directly sell their subscriptions to consumers without an insurance middleman.
- Simplify healthcare for consumers.
- Give consumers choice to choose and keep their insurance and health subscriptions for life without being dependent on their employer.