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JAMA Forum Archive, 2012-2019: Health policy commentary from leaders in the field
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The 6 Functions of Health Insurance

In 2017, the average insurance premium for US families with employer-sponsored health insurance cost $18 764, an increase of 3% over the previous year. What this mean value hides, however, is the enormous variance in the amount of health care received by different people in the United States.

Image: vinnstock/Getty Images

That variance is reflected in huge disparities in health care spending. In 2016, the top 5% of US health spenders accounted for 50% of total spending, or about $50 000 per person. The bottom half of the population, based on health expenditures, accounted for only 3% of total health spending, or $276 per person in 2016. People in both groups buy health insurance, but the benefits they gain from doing so are different.

In addition to helping people stay healthy and improving their health when they get sick, our system of health insurance serves at least 6 functions, to enable everyone to benefit from being insured. These functions, however, are not always compatible.

  1. Financial protection to individuals with catastrophic health events. Health insurance, like car insurance, protects individuals from unpredictable and financially catastrophic events. Like car crashes, catastrophic health events are both rare and difficult to predict, and their costs are far beyond most people’s means. Drugs to treat cancer or multiple sclerosis can run more than $10 000 per month, a crushing amount for all but the few. Organ failure requiring a transplant can lead to hundreds of thousands of dollars in costs. Policies aimed at improving this function of health insurance include capping annual out-of-pocket expenses, ending lifetime benefit limits, and ensuring coverage for people with preexisting conditions.

  2. Broad access for a small usage fees. Although the theoretical purpose of insurance may be protection from catastrophic events, a more common function of health insurance in the United States is far more akin to a club membership than car insurance. In exchange for an annual fee, beneficiaries receive access to free or low out-of-pocket cost services, such as routine doctor visits. These services are largely predictable—such as well-child visits for people with children or medication refills for people on lipid-lowering medications. Policies aimed at the club membership function generally aim to customize policies to people’s needs. Medicare beneficiaries enrolling in Part D prescription drug coverage, for instance, enter the medications they are currently taking to find the plan that best subsidizes those items.

  3. Negotiating health services. Health insurers leverage their market power to obtain price concessions from clinicians or hospitals and health care systems or, alternatively, to screen out high-cost providers from their networks. Covered patients benefit from these discounts even when paying out of pocket for services (with the exception of prescription drugs, for patients often pay list prices even when they have insurance). Policies that focus on this function of health insurance affect the negotiating leverage of clinicians and hospitals relative to insurers. Medicare, for example, sets payment rates via fee schedules, rather than allowing health care systems to use their market leverage to drive up the prices they charge. The Affordable Care Act (ACA) encouraged insurers to construct “narrow” networks of clinicians and hospitals to help commercial plans obtain lower rates through increased negotiating leverage. Insurance company consolidation strengthens the insurer’s negotiating position as well.

  4. Enhancing and ensuring the quality of clinicians and hospitals. Both commercial and government insurers have developed measurement efforts that aim to monitor and improve the quality of hospitals. Examples include both quality ratings that help patients and plans select which hospitals to engage, and exclusion of certain hospitals from providing types of services based on quality. Medicare Advantage plans have quality ratings. Medicare limits which hospitals can perform the transcatheter aortic valve replacement procedure to those with adequate volume and expertise. Policies focused on this function of health insurance focus on more comprehensive measures and quality measurement.

  5. Nudging individuals toward staying healthy. Health insurers for the past decade have experimented with benefit designs that encourage healthy behavior. This includes premium reductions for individuals who join health clubs or stop smoking. Value-based insurance design (VBID) is another example. Under VBID-type policies, individuals pay little or nothing out of pocket for health services deemed beneficial, such as preventive services and certain medications that prevent complications of diseases like diabetes.

  6. Wealth transfer. Health insurance is the vehicle of sizable wealth transfers. The wealthy pay more than the nonwealthy through taxes to fund Medicare and Medicaid. But the wealthy disproportionately benefit from tax-subsidized health insurance premiums paid by employers. Policies often target these transfers, such as the ongoing debate over the “Cadillac tax” that would reduce the tax subsidy for especially generous insurance plans. As another example, the ratio of premium differentials between young and old was limited to 1 to 3 in the ACA, but one of the bills intended to repeal the ACA contemplated widening the ratio to 1 to 5 (lessening the wealth transfer from younger to more elderly individuals). Subsidies for rural hospitals transfer wealth out of cities and suburbs. And of course, health insurance works via risk pooling, which is to say, transferring wealth from the healthy to the sick.

That health insurance has disparate functions may explain why policy makers can arrive at vastly different reform proposals. The objective of providing better catastrophic financial protection, which depends on pooling the risk of many who will not experience those events, runs counter to the objective of selling insurance that is highly customized to a patient’s anticipated needs. Encouraging narrow networks could obtain lower prices, but at the cost of excluding high-quality providers (if prices are concordant with quality).

While the above list is an effort to enumerate the functions of health insurance in the United States, it would be far shorter if we described only what health insurance succeeds in doing well. Insurers may negotiate for lower unit prices, but unit prices for US health care are still higher than they are in other wealthy nations. Although prescription drug insurance may be good enough for many, US residents are 6 times more likely than residents of other countries to not take medications because of out-of-pocket costs. Similarly, insurance may aim to nudge people toward healthier behavior, but US rates of diabetes, obesity, and maternal mortality exceed those in Europe. Even with quality measurement in place, the US maternal mortality rate is more than 3 times that of Canada, France, or Australia.

Of course, considering the functions of health insurance is a conversation that excludes a very large number of people in the United States: the 29.3 million who lack health insurance altogether.

Peter B. Bach, MD, MAPP, director of Memorial Sloan Kettering’s Center for Health Policy and Outcomes, is a physician, epidemiologist, researcher, and health care policy expert. His work focuses on the cost and value of anticancer drugs, leading efforts to increase understanding of the US drug development process and to develop new models for drug pricing that include value to patients. His work in lung cancer screening has led to the development of screening guidelines and one of the first-ever risk-prediction models for this disease. Dr Bach has been inducted into the National Academy of Medicine, the American Society of Clinical Investigators, and the Johns Hopkins University Society of Scholars. Image: Rob Kunzig/Morning Consult
Pranammya Dey, BS, is a research data assistant at Memorial Sloan Kettering’s Center for Health Policy and Outcomes. He previously worked as a research assistant at Yale-New Haven Hospital’s Center for Outcomes Research and Evaluation. He is a graduate of Yale University and is pursuing a medical degree at Yale School of Medicine. Image: Memorial Sloan Kettering Cancer Center
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