Why Insurance Reform Is Desperately Needed

John Hammond, Ph.D.

In the first half of the 20th century, most health insurance was provided to those who could afford it by state-based, non-profit Blue Cross / Blue Shield plans (BCBS), which based their premiums on a community rating system; to calculate their premiums, they took the costs of their enrollees, added a reasonable overhead contribution, and divided that by the number of enrollees. Under this system, the young healthy enrollees paid more to subsidize the insurance cost of the older, more chronically ill ones. Some libertarians would consider this unfair, but if the young lived long enough they would become old. Such an arrangement is fundamental to the definition of health insurance.

At first, the for-profit insurance companies considered health insurance too risky because of uncontrolled costs or adverse risk that health insurance caries. But by 1955, these companies figured out how to manage the risks and entered the health insurance market. To deal with adverse risk, they developed the concept of pre-existing conditions to exclude the sick from insurance coverage and applied liability-style risk rating to health insurance premiums which reduced the premiums for the young while making insurance unaffordable for the older population and thus removing the associated risk of the older population. Thus, risk rating of premiums effectively ended the subsidy of young for the cost of the care of the older.

The risk-based premium approach is appropriate for the auto liability insurance, where people are responsible for their driving record. But risk rating is totally inappropriate for human beings who cannot control their genetic inheritance, which plays a large role in their overall health. However, risk rating and pre-existing condition exclusions did protect the for-profit health insurance companies from the adverse risk of health insurance by denying access to insurance to those who need it most.

The introduction of risk-based premiums immediately caused major problems for the nonprofit BCBS plans became if they continued the community rating system they would end up with all the sick (adverse selected population), and all the young healthy enrollees would flock to the cheaper rates of the for-profit risk-based premium system. This forced the non-profit BCBS’s to go to risk-based premiums and act like the for-profits. Today, for example, there is little difference between BCBS of NC and CIGNA.

How for-profit health insurance corporations work is lucidly explained in the recent testimony of former insurance company executive Wendell Potter before the U.S. Senate Committee on Commerce, Science and Transportation. In a blistering attack reminiscent of the attack that laid bare tobacco company deception, Potter described how for-profit companies work to maximize their income.

Another major problem is the total number of health insurance plans that are offered by the health insurance industry and the lack of any real regulation that would ensure that they are adequate to cover the needs of the enrollees. The huge numbers of plans challenge doctors and hospitals to figure out what services are covered by what plans. Such choice drives the administrative costs for both the insurers and the providers higher than any other health insurance system in the world. However, it is profitable for the manufacturers of large mainframe computers and billing software vendors, but adds billions to the administrative cost of the healthcare system, and still hospitals cannot get our bills straight.

Further, the US healthcare system has the greatest number of administrative personnel of any country in the world. It is no wonder that our per-capita costs are 1.6 times those of other countries, even though millions have no health insurance. If these administrative costs could be reduced to the European or Canadian level, substantial funds would become available to cover a part of the insurance cost of the 52-55 million uninsured Americans for whom health care is difficult or impossible to get.

Although the insurance industry is trying to portray itself as interested in health care reform, it really is not. In an interview with Bill Moyers, Potter described how the companies plan to sabotage health care reform and use the political system to protect their interests. If you really want to understand the role of health insurance companies in our society, invest the 30 minutes needed to watch this broadcast.

It is time to face that fact that there are absolutely no market solutions for the chronically and mentally ill in a for-profit health insurance system. The fiduciary responsibility of boards of directors and executives of for-profit health insurance corporations is to maximize the income of the corporations for investors. Any approach that keeps present for-profit and not-for-profit insurance companies with their plethora of insurance plans alive makes it impossible to control cost and free the billions of dollars that today go to administrative cost and make these funds available for patient care. All the existing health insurance companies must be eliminated. We need a single-payer insurance system that covers every person in the country for medical, mental and dental healthcare. The cost of the system should be funded by income taxes paid by each adult/family in the country. It should provide universal access to care no matter where you are in the country, with equal quality and quantity and without regard to your wealth. It is time to face the reality that affordability and cost control are only possible with a single-payer system.

The present insurance system is both morally and financially bankrupt and cannot be sustained. It is time to face reality and move in an orderly fashion to a single-payer health insurance system and join the civilized world. It may not be possible to achieve all of the necessary reforms quickly, but the direction we need to take is clear.


Dr. Hammond is Professor Emeritus of Pathology & Lab Medicine and Biomedical Engineering at the University of North Carolina, Chapel Hill School of Medicine.

This article was revised on September 8, 2009..

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