“People Don’t Know What Insurance Is!”

Deal W. Hudson

Published August 24, 2009

“It’s a myth to say our health care system is broken – it is the best in the world.” That politically incorrect assertion comes from a man with more than 25 years of experience working for one of the nation’s largest health insurance companies. “When the wealthy and powerful from all over the world choose to come to the U.S. for medical procedures and treatment, the message is clear.”

Jack Whelan, a well-known Catholic philanthropist from Indianapolis, is an active Legatus member and has been chairman of the board of the Culture of Life Foundation for 10 years. But for 25 years, Whelan worked for Golden Rule Insurance, eventually becoming COO, president, and CEO. Golden Rule, now a United Healthcare Company, has been offering health insurance for more than 60 years.

Golden Rule, and Whelan himself, was deeply involved in the lobbying that led to legislation creating health savings accounts (HSA).

“The biggest problem with the present health-care debate is that people don’t know what insurance is,” Whelan told me in a recent phone interview. “Insurance,” he explained, “is not pre-payment of service, it is the transfer of risk of the financial impact of a potential event from yourself to a company.”

Whelan used the example of homeowners’ insurance. Your homeowners’ insurance does not cover replacing your roof after years of normal wear and tear. But it does cover damage to your house caused by an unlikely event, such as high wind or a tree falling on it. “When you buy homeowners’ insurance you are transferring the potential expense of events like these,” he explained. You are not pre-paying to replace the roof; you are paying for the company to take the risk of a catastrophic event.

“Health insurance,” Whelan went on, “has evolved into something different. In addition to being the transfer of an economic risk, health insurance now includes some pre-payment for medical services.”

Since the majority of health insurance is provided by employers and the government through Medicare, Medicaid, and Veterans Affairs, and consumers pay only a modest portion of the insurance premium, there is no consumer motivation to control consumption. Going to the doctor has, as Whelan put it, become “like going to the grocery store without having to pay.”

Whelan asked me to imagine two scenarios:

In the first, you are given permission to go shopping at your favorite grocery store without having to pay for the items filling your basket. What would you pick off the shelves? Premium steaks and the finest wine? Of course! Compare that with the second scenario: the way you normally shop for groceries. The steaks and the wine go back on the shelves, because you are paying. As Whelan pointed out, “Assuming the cost directly impacts the kind of decisions we make about consumption and how we behave when we spend our money.”

The key to a “workable alternative to government-run health care” is lowering the cost of health care by bringing consumer choice back into the health-care equation. Giving control of health care to the government is exactly the opposite of what will bring costs down, one of the four goals sought by the Catholic bishops.

Only a portion of health care – but an expensive part – remains a transfer of risk. Treatment of cancer, for example, is not a financial event that everyone will face one day. The health insurance company assumes that risk.

But – and this is crucial – insurance companies have to set their pricing for medical coverage to cover the behavior of consumers who are not controlling their personal consumption of day-to-day medical services for things like colds, flu, cuts, bruises, sprains, skin rashes, and various physiological and psychological services now offered under insurance plans. For example, how many massages and visits to the psychologist would you pay for if they were coming out of your own pocket?

Whelan’s point is simple:

When we spend our own money, we control our consumption – that is the factor missing in our health-care coverage which, for the most part, is paid for by employers or the government.
Consideration of price needs to be put back into the health insurance equation. This will immediately change the dynamics of consumption and the cost. If everyone purchased his or her own high-deductible health insurance and combined it with a health savings account (HSA), health insurance would once again become what it should be: the transfer of risk, not prepayment for predictable medical needs.

Under such a plan, everyone would pay out-of-pocket from their HSA for normal medical needs, and the insurance company would assume the risk for high-dollar medical costs. Once the consumer starts considering the costs of medical care, consumption will go down, and so will the cost of health insurance, without diminishing the quality of this nation’s medical services.

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