Why Insurance?: Part 3 - Cost of Care

Health insurance is not the same as health care which is not the same as health. When we talk about “health care reform,” the changes we are addressing relate to how health care is paid for – who does the paying, and how do providers receive those payments. As I discussed in my first post, Obamacare is based on the idea that every individual should have health insurance. This ideal begs the question: what are the benefits of being insured? Over a series of three articles, I will examine the relationships between health insurance and the three key issues of health, access to care, and financial protection.

If healthcare is about protection from illness, health insurance is about protection from the cost of care.

Since the dawn of modern medicine, a person’s chances of surviving an episode of major illness or injury have improved dramatically—but so has the price of survival. In the United States, individuals can mitigate the risk of needing expensive care by purchasing health insurance, while those who cannot afford to purchase insurance are left unprotected from the financial consequences of seeking care.

The result of this dichotomy is both simple and disturbing: The price of having your life saved is contingent on whether you have insurance. The question of what, if anything, should be done about this divide stands at the heart of the current debate over healthcare reform.

Why does insurance make such a difference in the price of medical care? There are two major contributing factors.

First, insurance is designed to protect against financial risk. When you have coverage, you (and a lot of other people) pay the insurance company a set amount every month. What you are buying is protection from the risk that you get injured or become ill. When you need medical services, be it birth control or back surgery, the insurer pays for most of the price of that care, and you pay a small portion of it (called a “co-pay”). If you require extensive care, being insured puts a limit on the total amount you might have to pay. Meanwhile, the uninsured are left unprotected.

To be sure, there is great variation in the amount of protection offered by different insurance plans. Plans with lower monthly premiums often have higher co-pays and deductibles, leaving users vulnerable to high out-of-pocket costs if they need care. However, even low-coverage plans can shelter enrollees against the most extreme expenses, and the status of being “covered” in itself can change the price of medical care.

The second reason having insurance makes a difference in medical expenses is that hospitals, doctors, and pharmacists do not charge everybody the same amount for the same treatment. Instead, each insurance company negotiates the price it will pay for each service with each provider. Because insurers pay for the care of a large number of patients, providers are willing to offer lower fees in exchange for a higher volume of guaranteed payments.

Uninsured individuals, who don’t have the bargaining power of a large company, have to pay the price on the “chargemaster,” the list of prices kept by each provider. For insurance companies, the chargemaster serves as a starting point for negotiations. For the uninsured, it is the end.

This fragmented system of payment and pricing raises the financial stakes for the uninsured. A procedure as simple as stitching up a small cut can result in thousands of dollars of bills for the uninsured, while a person with insurance might only pay a few hundred dollars in co-pays.

The impact of this divide in pricing is exacerbated by the fact that people often lack insurance because they cannot afford it, meaning those with the least protection are also the least able to cope with large medical bills. For those with low income and bad health, constantly paying full price for daily medicines and regular visits to the doctor can be impossible, resulting in erratic treatment that is both inefficient and ineffective. An accident requiring a trip to the emergency room or hospitalization can be financially devastating.

In comparing the state of uninsured Americans against those who have insurance, what we see is a split in how much it costs to survive and be healthy. It is a division that raises some deeply uncomfortable questions, drilling into our core understanding of human rights and the role of government. Can we truly claim an equal right to life when the price of survival differs so dramatically across two classes of people? And if we’re not satisfied with the current system, how can we build one that does better?

The answers to these questions are debated at the highest level of healthcare policy.

Avik Roy, who served as Mitt Romney’s healthcare adviser in 2012, argues that each individual should bear responsibility for the costs of maintaining his own life, with exceptions made only for those disabled from birth. Purchasing insurance is a choice, not a right. Systems that require everyone to obtain insurance, or provide everyone with government-subsidized coverage, infringe on the right of the individual to freely purchase the care and insurance they choose.

Barack Obama disagrees. In his 2013 State of the Union address, the President stated that “America is not a place where chance of birth or circumstance should decide our destiny.” The goals of Obamacare echo this same ideal—that chance of accident or illness should not dictate a person’s financial future. In expanding Medicaid and providing health insurance subsidies for those with lower income, the law assumes government responsibility for providing Americans with affordable coverage.

Both ideologies have their tradeoffs. The lofty aims of universal coverage face serious logistical challenges that some believe render it unattainable. On the other hand, the laissez-faire approach of placing the responsibility of obtaining insurance on the individual leaves the very ill and the very poor unprotected from catastrophe.

As the debate over healthcare reform rages on, the implications of that debate play out on the individual level. While Obamacare will increase the number of people with health insurance, the disparity in the price of care between those who have coverage and those who do not will remain the same. Those who are left uninsured will still be without protection from the financial threat of medical care. Medicine may save your life, but having health insurance will determine how much it will cost you.

This article is the final installment of a three-part series by Anna Stapleton called “Why Insurance?”

Article Series: Why Insurance?

Part 1 - Health

Part 2 – Access

Part 3 – Cost of Care