Do We Really Need Insurance Companies?

Insurance companies, which first became a major player in the American healthcare system in the 1930s, have long been associated with many market inefficiencies such as high costs, fragmented care and red tape.

Why this matters
In an effort to reduce costs and increase access, activists on both the right and the left have shown an interest in health-care delivery systems that do away with insurance companies.

The Takeaway
Given the power and influence of insurance companies, no major changes are expected anytime soon. But a few experimental programs have been put in place, and their results should be studied closely.

In Depth

The Insurance Company Model
Last month, House Republicans passed the American Health Care Act, which aims to reduce the soaring cost of health insurance premiums by removing many of the regulations contained in Obamacare—the plan passed by a Democratic-controlled Congress in 2010. While Congressional Republicans and Democrats hold vastly different ideas about health care—with Republicans insisting for example that insurers should no longer be prevented from offering the same policy in multiple states—most leaders in both parties agree on one fundamental principle: that insurance coverage is still the best way to provide care. “But the insurance company model—whereby consumers pay money to a third-party to obtain services from doctors and hospitals—is just an accident of history,” says Christy Ford Chapin, a historian at the University of Maryland Baltimore County and a fellow of the Snider Center. “And under this system, which first took off in the 1930s, providers are not incentivized to do the right thing, and there is a vast oversupply of care. That’s why activists on both the left and the right are eager to find a way to replace it,” she adds.

In her 2015 book, Ensuring America’s Health: The Public Creation of the Corporate Health Care System (Cambridge University Press), Chapin traces the history of how insurance companies ended up financing and overseeing health care. She also explains how this development led to a host of problems that have been widely chronicled by health policy analysts such as high costs, fragmented care, poor distribution and bureaucratic processes.

The Rise of Insurance Companies in the 1930s
In the 1930s, insurance companies were just one of several major players in the American health care landscape. Other popular prepayment options included health plans sponsored by unions, businesses, mutual aid societies and physician groups. But the leaders of the American Medical Association (AMA) decided that the insurance company model offered its physician members the best chance of a secure income and began doing everything in its power to oppose all the other options. For example, the AMA began threatening to take away the medical licenses and admitting privileges of physicians who offered their services to patients in their own prepaid plans. “The irony is that in the 1930s, the AMA feared the growth of corporate power, which it associated with these physician groups. But as it turned out, the AMA helped create today’s large insurance companies, which would eventually take away much of the decision-making power from physicians,” says Chapin.
After World War II, the federal government jumped on the insurance company bandwagon, as both Republicans and Democrats began trying to expand coverage to more and more segments of the population. And when Medicaid and Medicare came on the scene in the mid-1960s, these government-run programs were both built on the edifice of the AMA-crafted insurance model. Unfortunately, as policy makers had warned back as far back as the 1930s, the expansion of insurance coverage resulted in higher and higher costs for medical services.

A Cure?
Some liberal Democrats have long argued that the best way to reduce health-care costs in the long run is to remove insurance companies from the equation altogether. This was the thinking behind the proposal to create a public option in Obamacare. In the 2016 campaign, Bernie Sanders proposed a single-payer approach; and in the last few months, Democratic legislators in both New York State and California have proposed statewide single-payer plans. “But single-payer plans, though they are not out to make a profit, are still reliant on the insurance company model and may not be as effective as their advocates claim,” says Chapin. And some conservative Republicans have also come around to the same conclusion—that the insurance company model is not working—but have offered a different set of proposals. One popular solution favored by those on the right is to bring back the prepaid physician groups of the 1930s. One such group is AtlasMD, based in Wichita, Kansas, which calls itself a direct-primary care provider. For a monthly fee—typically about $50—patients have steady access to physicians, and they can obtain their medications and other medical services such as x-rays through the group at greatly discounted rates. To cover major medical expenses such as hospitalization, patients rely on a low-cost catastrophic plan. “Prominent conservatives such as the Fox News commentator Sean Hannity argue that this is the best way to bring back capitalism—that is, a market-based approach—to health care,” says Chapin. “These conservatives, like their liberal counterparts, concede that the insurance company model is full of inefficiencies. And some on the left have also shown an interest in such physician cooperatives.”

Dig Deeper

How Did Health Care Get to Be Such a Mess? NY Times, June 19, 2017

America’s Healthcare Model is Even More Broken than you Think, Dissent, June 14, 2017

EconTalk (podcast) June 3, 2017

Bipartisan Health Care Reform That Would Energize Both Left And Right, Forbes.com, April 19, 2017.

Joshua Kendall has written on business and healthcare for numerous publications including BusinessWeek, Fortune.com, The New York Times, The Boston Globe and The Washington Post. For more about his work visit JoshuaCKendall.com.