Last Thursday, a major French bank, Societe General, reported that it was victim to one of the largest trading frauds in history: $7.2 billion was lost in a series of unauthorized trades made by a single employee, Jerome Kerviel. On the same day, the American Diabetes Association reported a scandal of even greater magnitude: $116 billion (most of which came from taxpayers) was spent last year on medical expenses and complications caused by a single preventable disease, diabetes.
These two cases are not directly analogous, of course, but they do share a similar feature: system failures that could have been avoided with proper oversight. In France, despite having some of the most advanced derivative-trading technology in the world, Societe General failed to detect the rogue actions of its employee. In the United States, despite having the most advanced medical treatments in the world, our private health-insurance system continually fails to provide basic preventive care to patients suffering from diabetes and other chronic conditions.
The private health-insurance system fails to address today’s challenges of chronic disease because it was designed for something completely different. Rather than preventing disease and promoting health, private insurance schemes were primarily designed to manage financial risk.
Risk-based schemes made sense in the early 20th century, when infectious diseases were the major killers and most Americans needed relatively simple, acute care. Since it was hard to predict who would get sick, it made sense for people to pool together and form mutual insurance schemes to help spread out the unexpected cost of care.
Today, however, with chronic diseases now accounting for 75 percent of all U.S. health care costs, the old model no longer applies. Patients with incurable chronic diseases, like diabetes, will always require much more medical care than the average patient. These “medical losses” are thus excluded from most private health-insurance plans because they are not a “good risk” to insure, based on their preexisting conditions.
Even for those who do get health insurance, perverse incentives exist in the private insurance market to prevent people from getting the care they need. In an effort to reduce the “medical loss ratio,” most insurance companies instinctively deny care, even if it would prevent future complications. In our dynamic economy where people rapidly change jobs and about two million Americans lose health insurance each month, it often doesn’t pay for companies to invest in prevention upfront. Years later, when the benefits are finally realized, the patient will most likely have a different insurance company.
As a result, insurance coverage and preventive care for patients with chronic conditions is dumped off on to the government after it’s too late to do much good. About half of all patients with diabetes in the United States have public insurance. We all end up paying for their costly complications.
More spending on health care isn’t inherently bad, but we should be concerned if all this money isn’t making us any healthier. The irony about the French bank case was that the trader didn’t even profit from his fraud in the end. The irony about diabetes is that we spend about twice as much per person as a country like France and yet, we aren’t any healthier. In a study released earlier this month, the United States ranked worst in an 18-country comparative study of deaths that could have been prevented (France, on the other hand, ranked the best). We can — and should — do better.
Defenders of the private health-insurance market argue that the “invisible hand” is somehow supposed to fix poor health care quality in a similar way that stocks of Societe General plummeted after the discovery of the fraud. If anything, however, the markets for health seem to be pushing in the other direction: By excluding sick patients and denying expensive medical care, health insurance companies are improving their bottom line. It is not a free market, but a private one, in which a select few profit at the expense of the public good.
In these situations of market failure, chapter two of classical economics tells us that the government has an important role in setting the rules for fair play. After the fraud at Société Général was announced, the government intervened swiftly to stabilize the situation. With health care, our federal government also needs to take bold action.
The rules of fair play in health care start by eliminating exclusions based on preexisting conditions and offer fair prices for health insurance through a process known as community rating. Moreover, we need to explore options such as reinsurance and health insurance mandates to encourage health insurance companies to switch from risk-management to disease management.
It’s time to put “health” back into health insurance.
Robert Nelb is a senior in Timothy Dwight College. His column runs on alternate Tuesdays.