Health Insurance Shouldn’t Pay For Routine Care | Stock News & Stock Market Analysis

Imagine you run a trucking company and are looking to buy commercial auto insurance. After shopping around, you find a great package that covers catastrophic claims, like physical damage, medical expenses, and liabilities from truck crashes.

You fill out the form and click to see the free quote — a whopping $10,000 per vehicle per year, more than twice what you expected.

X Your jaw drops. This must be a mistake. But it’s not. The agent explains that the package also includes car washes, oil changes, and tire replacements.

You just want a policy that protects you from catastrophes. Not possible, the agent says. The government mandates that policies cover virtually every routine service.

Of course, commercial auto insurance doesn’t work like this. It’d be wasteful for trucking firms to file insurance claims every time they needed an oil change or new tires. Commercial auto insurance simply protects against unforeseen large events.

But health insurance does work this way. The policies that employers purchase cover everything — from routine medical expenses, like doctor’s visits and generic antibiotics, to catastrophic unforeseen events, like broken limbs and cancer diagnoses. Today’s health insurance companies don’t really sell insurance; they sell prepaid medical care.

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This system is predictably — and disastrously — inefficient. Employers that buy policies spend much more than they need to on health care.

Some of these inefficiencies are easy to see. The more services insurers must cover, the more they must charge.

Other inefficiencies are harder to spot. Doctors’ offices and insurers spend billions processing routine claims. Those administrative expenses drive up costs — and thus, premiums. Such expenses could be avoided if more employers paid for routine care out of pocket.

Since comprehensive insurance plans typically charge a fixed co-pay for routine care, they also deter employers from encouraging their workers to make economical choices.

Consider allergy tests, which range from $60 to $300.  If a patient only faces a $25 copay,  she has no reason to choose the $60 provider over the more expensive one. The same is true for MRIs, X-rays, CT scans, and more. Identical tests and procedures can have dramatically different price tags.

And because consumers often have no incentive to comparison shop, employers end up overpaying. High-deductible plans somewhat align the employee’s incentives with his employer’s — but fall apart when the employee exceeds his deductible or faces an extremely expensive procedure.

It’s no wonder insurance has become so expensive. From 2006 to 2016, premiums for small and mid-sized businesses increased 58%.

Employers can begin to drive their health costs down by “self-insuring,” or covering their employees’ medical expenses directly instead of paying premiums to a traditional insurer.

Here’s why self-insurance works. Individual employees’ health costs vary wildly. But divide those costs into two buckets — small, predictable claims and large, unpredictable ones.

Employers have a good idea what those small claims will add up to each year — just like a trucking firm can predict how many oil changes it’ll need to pay for, or how many tire replacements it’ll need to make in a given year.

Why pay an insurer to cover those small, predictable expenses? If employers take on that responsibility themselves, they can opt out of many of the constraints that dictate traditional insurance policies — and tailor their health benefits to their employees’ specific needs.

For example, a firm with mostly older, male employees might offer cheap access to cholesterol drugs to promote heart health. An employer with a largely remote workforce might invest heavily in telemedicine. Companies can pay comparatively small fees to insurers to set up and administer these tailored benefits packages.

The large, unpredictable claims in that second bucket are where employers really need insurance. “Stop-loss” policies, which reimburse employers for claims above a certain dollar amount, can protect them against the cost of catastrophic events, such as an employee getting cancer or requiring an organ transplant.

The savings that self-insurance can deliver are substantial. Mid-sized firms with 50 to 250 employees  save about 12%, on average, by self-insuring.  It’s no wonder that three in ten mid-sized businesses self-insure, a share that’s 19% higher today than it was in 2013.

It’d be wasteful if commercial auto insurance paid for ordinary expenses like car washes. Similarly, it’s wasteful when an employer-sponsored health insurance policy covers routine doctor visits. By self-insuring, employers can escape ever-increasing premiums and use insurance as it was meant to be used.

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Originally posted 2018-01-01 15:17:04.


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