Healthcare Basics
Healthcare does have some complexities, but there are some basic fundamentals that the industry is founded upon, which unfortunately get clouded up in the news media, and sadly by politicians.
Insurance Pool
The most important concept to healthcare insurance is the Insurance Pool. It’s so obvious that people miss it—but this is vital if we’re serious about keeping costs low.
It’s a simple concept: vast numbers of healthy people pay into a system for the few who become sick and the handful who become catastrophically sick. We all hope that we won’t need it, but it’s there if we do.
If there are high numbers of sick people with high medical costs, then the average cost per member, per month (PMPM) will be high, which forces high premium costs; and if the PMPM costs are low then we can have low premiums. The only way to accomplish low PMPM is to have large numbers of healthy people and to lower costs for those who become sick.
Multiple Pools
There is a misconception where people, especially politicians and editorial columnists, want to break out different insurances pools for various “good ideas” that they dream up—it’s not a good idea. Here are a couple examples that sound good, but are not:
- Let’s offer a 3-tier pricing system based on how healthy you are; discounted rates for really healthy people, average rates for most people, and a higher rate for those who have high medical costs.
- Let’s offer big discounts to large groups of insurance; e.g. large unions, companies, coops, state employee, etc.
If you do this, it’s called Diluting the Pool, which rapidly drives up the costs for those who are sick or don’t belong to a large union or group.
Let’s take the first example. The healthy people will enjoy cheaper premiums, but the sick people would not be able to afford the premiums that it would require to support their huge PMPM costs.
Anyone who wants to break up separate tier structures just doesn’t understand the simple premise for insurance: we all pay a small premium to pay for the few people who are sick—it’s something that we pay and hope that we don’t need, but we’re happy that it’s there if we need it.
The healthy pay for sick, and there’s no way around that, other than kick sick people to the curb to die because you want cheaper health premiums, or magically for someone else to pay the bill.
What about the person who says, “I represent XYZ union, with 20,000 members, we want a deep discount.” The insurance company has a pool of a million people or more! Competition drives each insurance company to charge the cheapest rate that they can for everyone or they will go out of business. If they give too many discounts to large groups then they will have to offset those revenue losses by charging more for the unfortunate individuals who don’t belong to a large group—in essence the individuals will be subsidizing the large union’s premiums. That doesn’t sound fair.
What Does This Mean
The best, fairest way, is for each insurance company to keep their PMPM costs down for one large insurance pool. It also means that we need to lower our PMPM costs, and that’s accomplished through the following:
- Increase competition by allowing insurance companies to easily do business nationally
- Work with the states to create more uniformed laws in the healthcare industry, especially with tort reform
- Streamline electronic medical records into a single format
- And SUCCESSFULLY come up with prevention concepts that work—we save money and people live better live when we prevent sickness in the first place
