Health Insurance in the United States: Failure of Private and Multi-Payer Financing

Abstract

Since the 1960s, the United States has subscribed to a business model of health care, largely for-profit with most private insurers on a mission to maximize their own revenues. Most insurers use cost sharing through deductibles and copayments based on the principle that enrollees will overuse health care services unless they have enough “skin in the game.” As health care has been corporatized within a medical-industrial complex, even public insurers such as Medicare and Medicaid have been privatized with the same mission. Employer-sponsored health insurance has been the core of insurance in the U.S. since World War II, but has become unaffordable for employers and employees alike. This article brings historical perspective to how health insurance has been transformed from its not-for-profit origins in the 1930s, how it has become unaffordable in recent decades as it costs more and covers less, and how our multi-payer financing system has failed the public interest. Reform alternatives are discussed, but a system of universal coverage through a public, single-payer national plan is still beyond reach politically.

1. Introduction

This is the U.S. story—from the birth of health insurance responding to genuine human need in the depths of the Great Depression in the 1930s—to the opulence of a massive corporatized industry today exploiting that need all the way to the bank. How do we explain that turn-around? This chapter has four goals: (1) to bring some historical perspective to that question; (2) to briefly summarize how health care services are bought and paid for in the U.S.; (3) to describe how private health insurance and multi-payer financing have failed the public interest; and (4) to compare four reform alternatives currently under consideration, only one of which will bring lasting reform through universal coverage.

2. Historical overview

Some in the U.S. considered the possibility of compulsory health insurance early in the 20th century after noting that 10 European countries had adopted one or another form of it by 1913 [1]. But that idea was controversial, and the emergence of voluntary, private health insurance in this country is especially attributed to a Blue Cross plan for school teachers in Dallas, Texas, in 1929. At that time as the Great Depression took hold, the nation’s hospitals were in dire straits with more than one-third of the general hospital beds empty [2].

As the prototype upon which later Blue Cross plans were based, the Baylor plan provided free hospitalization for up to 21 days as well as coverage for operating room, laboratory and anesthesia services. The hospital assumed financial risk for hospital care without any third party and collected pre-payments. Other prepaid health insurance plans were soon to follow. The World War II years saw the start of employer-sponsored health insurance, when employers found it helpful to offer health insurance in order to recruit workers during a wartime economy with a severe labor shortage. By 1950, more than one-half of Americans were covered for the first time [3].

In the last 60-plus years, the private health insurance industry has been transformed from the quasi private-public partnership of its pioneering years to a massive industry on a corporate mission of profit over service. It has followed a conventional theory of insurance based on the concept of “moral hazard,” whereby those with insurance are expected to overuse health care services and lead to uncontrolled increases in health care costs. As a result, community rating and guaranteed coverage during earlier years gave way to experience rating as medical underwriting became the new norm. The Blues were under pressure to compromise their earlier service mission, so that one-half of the nation’s Blue Cross Blue Shield plans had consolidated and converted into for-profit companies by 2005 [4].

With some 1300 private insurers, the risk pool has fragmented into ever smaller parts as insurers work to avoid adverse selection. Medicare and Medicaid were enacted in 1965 as public plans, but recent decades have seen their increasing privatization that often ends up leaving many enrollees uninsured.

These are some of the many ways that insurers have used to extract more income at the expense of reliable and affordable coverage for enrollees:

2.1 Growth of a denial industry

“Denial management” became a growth industry of its own aimed at denying physicians’ and hospitals’ claims for services provided [5]. Many insurers developed ways of avoiding coverage of higher risk people in the first place. One such technique was to hold marketing meetings on the second floor of buildings without elevators to discourage less mobile and older people. Another technique was to make steep increases in premiums after receiving claims from enrollees who were sicker than expected. Denial of claims through burdensome pre-authorization of service became still another way to avoid paying expensive claims, increasingly associated with ever-changing networks. Out-of-network claims for hospital and physicians’ services became unaffordable for many enrollees; even for in-network claims, the average denial rate today is 18% [6].

2.2 Managed care

Managed care grew rapidly during and after the 1990s, as a way to contain health care costs by changing from fee-for-service payment to prospective payment based upon capitation—the number of individuals enrolled in a health maintenance organization (HMO) plan. That gave insurers yet another way to profit from providing less care, and soon became known as managed reimbursement rather than managed care. As insurers found new profits, however, the quality and outcomes of care suffered. By 2000, 65 million Americans were enrolled in HMOs [7].

2.3 Privatization of public programs

Insurers have increasingly privatized Medicare and Medicaid in recent years as ways to exploit federal funding sources. Their claims that privatization would be more efficient have been proven false by experience. Instead, they have been more restrictive in choice and coverage, increased their administrative overhead to five or six times higher than traditional Medicare, and left markets that were insufficiently profitable. They have also increased their revenues by up-coding diagnoses—claiming payment for conditions for which care was not provided [8]. Table 1 shows marked differences between privatized Medicare and traditional public Medicare by the early 2000s [9].

Privatized medicare	Original medicare
Experience-rated eligibility	Universal coverage
Managed competition	Social insurance as earned right
Defined contribution	Defined benefits
Segmented risk pool	Broad risk pool
Market pricing to risk	Administered prices
More volatile access & benefits	More reliable access & benefits
Increased cost sharing	Less cost sharing
Less accountability	Potential for more accountability
Less choice of provider & hospital	Full choice of provider & hospital
Less well distributed	Well distributed
Less efficiency, higher overhead	More efficiency, lower overhead

Table 1.

Comparative features of privatized and public medicare (CAF Table 1.2, p. 14).

Source: Geyman [9].

2.4 Consolidation and growing market power

Increasing consolidation through mergers within the private health insurance industry has taken place since the 1990s. The largest insurers today—in numeric order United Health Group, Anthem, Aetna and Cigna—collectively have a market share of 49% [10]. As a result, that level of consolidation has led to less competition, more cost sharing with higher deductibles, and less options for enrollees. United Health Group, as the largest insurer in the country, has also gained clout beyond insurance by selling technology to hospitals, managing clinical trials, distributing prescription drugs, and offering continuing medical education to physicians [11].

3. How health care is paid for in the U.S.

Before looking at the role of private health insurance in U.S. health care, it is helpful (though still confusing!) to ask who really pays for health care. The late Dr. Uwe Reinhardt, Professor of Political Economy at Princeton University and author of Priced Out: The Economic and Ethical Costs of American Health Care, has summarized the complex transactions between enrollees in private households and providers of care in Figure 1. He makes the case that all health care spending originates from private households by paying premiums into public or private insurance pools as well as through taxes. The government accounts for about two-thirds of health care spending through taxpayer funding [12].

Figure 1.

Who pays for health care, and how is it paid (Figure 9.6, CAF 128).

Today’s system of paying for health care works against most of the working population through what economists call “labor income”—what people earn in their everyday jobs— that is taxed higher than “capital income” (accumulated wealth). As a result, billionaires today pay lower tax rates than their secretaries, steel workers, school teachers, and retirees [13].

4. How private health insurance and multi-payer financing have failed the public interest

These are some of the ways in which private health insurance and multi-payer financing have failed the common good in this country.

4.1 Unaffordable costs and increased cost sharing

Our market-driven system, now consolidated to a small number of corporate giants, can charge what the market will bear. Predictably, the cost of medical care has doubled compared to the consumer-price index over the last 25 years [14]. Figure 2 shows the cumulative growth of the cost of premiums for employer-sponsored health insurance compared to annual average earnings of the bottom 90% over the last 20 years [15]. As a result, four in ten people with that insurance do not have enough savings to cover the deductibles and one in six have to cut back on food, take an extra job, or move in with friends or family [16]. Even when insured, many enrollees defer or avoid needed care, while many others receive high surprise medical bills that drag them into poverty, often ending them up in medical bankruptcy [17].

Figure 2.

(Figure 7.2 MIC 104).

Predictably, increased cost sharing cuts access to care ranging from ER visits and office visits to hospital care and mental health [18]. As Dr. Veena Shankaran of the Hutchinson Cancer Research Center observes:

High-deductible plans are really the epitome of the access to care problem. People do not have the liquid cash to meet the deductible, so you see delays in care or even avoiding treatment altogether [19].

4.2 Inadequate benefits

Private insurers have many ways to game the system at the expense of patients and taxpayers. Even after passage of the Affordable Care Act (ACA) in 2010, they discriminate against the sick by such benefit designs that limit access, high cost-sharing, restrictive drug formularies, inadequate and ever-changing networks of physicians and hospitals, and deceptive marketing practices. Meanwhile, they market new kinds of inadequate gap insurance, immune from the ACA’s requirements, that include, for example, copays for treatment and lump sum payments upon diagnosis of such conditions as cancer, heart disease and stroke [20]. Short-term plans are another way to evade the ACA’s requirements, providing very limited coverage for up to 1 year at exorbitant costs. Correctly labeled as “junk insurance,” the aptly named Golden Rule Insurance has brought big profits to its owner, the giant United Health Group [21].

4.3 Profiteering

Private insurers consume 15–20% of the health care dollar in bureaucracy, administrative overhead, and profits. Figure 3 shows how much higher that overhead is compared to other countries [22]. At the same time, they have received large subsidies from the federal government for many years, now about $685 billion a year [23] and projected by the Congressional Budget Office to double in another 10 years [24].

Figure 3.

Insurance overhead in 6 countries (CAF Figure 11.2, 151).

Overpayments for privatized Medicare and Medicaid have been a bonanza for private insurers, accounting for more than one-half of their net revenue. Their fraudulent practice of up-coding, mentioned above, accounts for much of that revenue, as shown in Figure 4 [25].

Figure 4.

(CAF Figure 4.2, 45)

Wall Street investors have much to say about what private insurers do in their unending quest for more profits. As one example, CVS Health, the parent company of Aetna, made far more money in 2021 than most other publicly traded corporations, in part because of Aetna’s jacking up premiums and cost sharing, which it will do again in 2022. When the company issued a guidance for 2022 profits of just $12 billion to $13 billion (down just slightly from that for 2021 of $12.5 to $13 billion), its share price dropped by 6%, unnerving investors, and the company proceeded to buy back its own shares to boost earnings per share. Aetna’s health insurance market has going down due to the decline of employer-sponsored health insurance, with less than one-third of businesses with 50 or fewer employees now offering health benefits [26].

Stepping back to consider all of this, Gerald Friedman, PhD, Professor of Economics at the University of Massachusetts Amherst and author of The Case for Medicare for All, brings us this important insight:

In many commodity markets, profits are a reward for making good products at low cost. Profits reward the company that makes the laptop, for example, giving it an incentive to produce a computer at low price; the more they sell, the more they profit. The incentives in health care are different, however. Rather than increasing sales, health insurers profit by screening customers, segmenting the market so as to exclude those likely to use health care (“lemon dropping”) while attracting the healthy and lucky who use less health care (cherry picking”). While profitable, such activities add to the cost of America’s bloated health care administration, raising a question that we should ask of all health care insurers: how many patients did your company help today? [27]

4.4 Unreliability: exiting less profitable markets

Despite receiving long-term subsidies from the federal government, private health insurers leave their market, often with little advance notice, whenever their profits fall below expectations of their CEOs and shareholders. As just one example, at least 1.4 million people in 32 states lost their ACA coverage at the end of 2016, leaving them fewer choices than before [28].

4.5 Segmented risk pools

To be effective nationally, health insurance must be compulsory in order to eliminate segmentation of risk pools, as Dr. Henry Sigerist, then Director of the History of Medicine at the Johns Hopkins University, recognized as far back as 1944:

Illness is an unpredictable risk for the individual family, but we know fairly accurately how much illness a large group of people will have, how much medical care they will require, and how many days they will have to spend in hospitals. In other words, we cannot budget the cost of illness for the individual family but we can budget it for the nation. The principle must be to spread the risk among as many people as possible … The experience of the last 15 years in the United States [since 1931] has, in my opinion, demonstrated that voluntary health insurance does not solve the problem of the nation. It reaches only certain groups and is always at the mercy of economic fluctuations … Hence, if we decide to finance medical services through insurance, the insurance system must be compulsory [29].

5. Reform alternatives

The above account of the expensive missteps in U.S. health insurance over these many years shows how important universal coverage is to meet the needs of our population, as has been shown in many advanced countries around the world. Remarkably, a proposal was made for national health insurance by Teddy Roosevelt as a presidential candidate on the progressive ticket more than a century ago in 1912. It was rejected then and thereafter as the political debate became controlled by corporate stakeholders in the present lucrative financing “system.” With health care now accounting for more than one-sixth of the nation’s GDP, corporate power and lobbying for its continuance have continued to block reform efforts for cost containment, health care equity, and universal coverage. It has become increasingly clear that employer-sponsored health insurance has itself been a big part of the problem, as Drs. Anne Case and Angus Deaton, Professors Emeritus of Economics and Public Affairs at Princeton University recently observed:

The historical accident of employer-based coverage is a huge barrier to reform. So is the way that the health care industry is protected in Washington by its lobbyists— five for every member of Congress [30].

Health care has become a front-burner issue in recent political campaigns and as we head into the 2022 and 2024 election cycles. These four reform alternatives are up for debate:

1. Building on the Affordable Care Act (ACA) of 2010;

2. Medicare for Some: increasing the numbers of insured by Medicare by lowering the eligibility age to 60, together with a public option for sale alongside private plans on the ACA’s exchanges;

3. Privatized Medicare Advantage for All; and

4. Single-payer Medicare for All.

The first three of these alternatives would leave a for-profit, multi-payer financing system in place with all of the problems described previously. The fourth alternative is the only one that can bring a not-for-profit public financing system with universal coverage for all Americans, cost containment, improved access and quality of care. There is a bill in the House of Representatives (H. R. 1976) for Medicare for All with more than 120 co-sponsors. However, the Congress is sharply divided along partisan lines, and this bill may have to wait for the forthcoming elections for the Congress to clarify its priorities.

Although much of organized medicine in the U.S. has opposed national health insurance over the years, that stance is beginning to change as so many physicians find our present multi-payer financing system such an impediment to daily medical practice. Medicare for All already has strong support among the general public, physicians and nurses. Experience and evidence over the years confirms its advantages as shown by Table 2 [31]. Had Medicare for All been in place during 2019, it is estimated that we would have saved more than $1 trillion. Figure 5 shows how those savings would have been taken place [32].

	ACA	Public option	Medicare advantage for all	Medicare for all
Access	Restricted	Restricted	Restricted	Unrestricted
Choice	Restricted	Restricted	Restricted	Unrestricted
Cost containment	Never	Never	Never	Yes
Quality of care	Unacceptable	Unacceptable	Unacceptable	Improved
Bureaucracy	Large, wasteful	Large, wasteful	Large, wasteful	Much reduced
Universal coverage	Never	Never	Never	Yes
Accountability	No	No	No	Yes
Sustainability	No	No	No	Yes

Table 2.

Comparison of four reform alternatives based on evidence (Table 13.1, 60 years, 160).

Figure 5.

Medicare for all savings compared to current system, 2019 (Figure 14.2, MIC 269).

If and when Medicare for All can be enacted, it will bring a new system of national health insurance for all Americans with comprehensive benefits based on medical need, not ability to pay, together with full choice of hospitals, physicians and other health professionals anywhere in the country. Administrative simplification will drop its single-payer overhead to about 3%, one-sixth of today’s multi-payer overhead. Cost savings will be achieved through large-scale cost controls, including (a) negotiated fee schedules for physicians and other health professionals, who will remain in private practice; (b) global annual budgeting of hospitals and other facilities; and (c) bulk purchasing of drugs and medical devices. Cost sharing through deductibles and copayments will be eliminated at the point of service, and pre-authorization of services will no longer be needed. Higher priority will be given to primary care and public health, while the risk for costs of illness and accidents will be shared across our entire population of 330 million Americans.

6. Conclusion

The corporate transformation of health care in this country from a traditional service ethic to a commodity for sale in an unfettered marketplace is indeed unfortunate. Financing reform through a not-for-profit public mechanism—Medicare for All—can go a long way to restoring the traditional service ethic of health care as a moral enterprise. We shall see what the future will bring. Meanwhile, Winston Churchill gives us hope:

Americans will always do the right thing—after they exhaust all the alternatives.