Today I heard an interesting ad on the radio for dental insurance. It began with a woman saying that she didn’t take her kids to the dentist for routine check-ups, x-rays and cleaning because it would likely end-up costing hundreds of dollars. The pitch then was for an insurance product that would pay for “over 300 different dental procedures” with no deductibles and no co-pays. Plus, according to the ad the entire family could go to any dentist they wanted. They didn’t say anything about the premium for this policy, but the implication was that it would be very affordable.

While this insurance product is marketed to sound like a sweet deal, it raises a basic economic question; how can an insurance company afford to pay the “hundreds of dollars” to the dentist on behalf of this mom and her kids? As a company, they have to make a profit to stay in business, so if mom writes them a check for say $50 a month ($600 per year) the only way they can remain solvent is to pay out less than they take in. Otherwise they’ll take a loss, and trust me, they are not interested in taking losses. In addition to the payments to the dentist the insurance company has other expenses, including their own payroll and employee benefits, office rent and expenses, licensing fees, liability insurance, advertising, etc. Then there is the matter of turning a profit. If they are a publicly traded company, profits are distributed to the stockholders as dividends. If the company is privately held, then the profits go to the owners as a return on their investment. This is how capitalism works.

The problem with this particular example of capitalism rests in the fact that the insurance company doesn’t actually provide any goods or services. Instead they are acting simply as a broker between their policyholders and the dentists. Moreover, they can’t pay for those services as promised without doing one or more of the following:

1. Put a limit on the company’s maximum liability, as defined in the policy, to an amount less than the premium.
2. Limit coverage for expensive services like root canals, porcelain crowns, reconstructions for major injuries, etc.
3. Contract directly with some dentists to pay them less than they typically charge in exchange for directing more business their way.
4. Restrict access to only deeply discounted dentists who offer limited appointment availability or marginal service, or both.
5. Deny payment after services are provided based on one or more technicalities hidden in the fine print of the policy.
6. Delay making payments to take advantage of the use of the premium dollars to finance the company’s other investments.
7. Charge higher premiums than initially advertised using a variety of sales tactics, which basically amount to “bait and switch.”

Just to be clear, I’m not saying that insurance companies are inherently unethical or dishonest. I don’t want to get into that argument. In fact it makes good sense for all individuals to have insurance to protect against the possibility of personal financial devastation in the unlikely event of a catastrophe.  Historically the concept of insurance is to spread the financial risk that might be incurred by any one person, over a large number of policyholders. Insurance companies employ actuaries to assess such risks and determine a premium structure that will allow them to cover the cost of these events and still make a profit. But, over the years we have seen the insurance industry evolve from insuring against unlikely events into what amounts to a system where the policyholder is actually pre-paying for routine and very predictable services. This is what is being offered through the particular dental plan advertised on the radio, and not surprisingly it mirrors most health insurance plans.

Health insurance is generally marketed to consumers as providing “comprehensive care” with little or no out of pocket costs, but this isn’t really insurance. It is actually prepaid healthcare and has led to runaway costs because it removes the element of personal responsibility from the patient for obtaining and paying for healthcare. Unbridled demand for services by patients who are “entitled” based on their insurance card and providers that are paid based on the services they provide, have together caused an unprecedented rise in healthcare costs. As a result insurance companies have raised premiums, reduced payments and limited coverage. (See points 1-7 above).

Attempts to control the rising cost of healthcare have consistently failed to address a fundamental issue – the lack of individual responsibility. This dental insurance plan is a perfect example. The mother is reluctant to spend “hundreds” for routine dental care for her kids, but once she signs up for a dental plan those kids will presumably get the care they need. She is willing to pay a monthly premium to avoid paying the dentist herself. In the end she will pay far more for the policy than she would if she had just paid for these routine services. That is a fact based simply on having a third party interposed between the patient and the provider. Once she recognizes how much the policy is costing her she will naturally be inclined to maximize the benefits and will not hesitate to take the kids to the dentist more frequently than she otherwise might. Likewise, the dentist will be happy to provide any and all services as long as they are covered by her policy. The same thing has been happening on a much bigger scale with healthcare over the last half century.

A variety of ideas for reforming how we finance our healthcare system have been tried, but these attempts to reduce rising cost have failed to have a significant impact. Reform efforts have generally taken the easiest approach – just reduce payments to providers. This has led to a decline in personal service as contracted providers are compelled to increase volume to make up for lower revenue per patient. Only in the past few years has the idea of raising co-payments and deductibles for policyholders begun to actually curb demand. But, since most of the public has been led to believe they have a fundamental right to healthcare, asking them to pay more has been met with understandable anger and frustration.

There are two ways out of this convoluted mess, and both require that we start by eliminating many of the complex contractual arrangements, which serve to deceive and confuse everyone, especially the patients. The first option requires acceptance of the concept that healthcare is a basic human right at which point the government should seize control over the entire process to guarantee that right. This is precisely what is meant by “socialized medicine” and wherever it has been implemented it has been associated with much higher taxes on everyone to pay for it, and a general loss of personal service. The second option is to revert to a system that encourages individuals to pay for their own routine healthcare services and obtain insurance for purposes of avoiding the financial catastrophe of a major illness or injury. This is the concept behind individual Health Savings Accounts (HSAs) where people put their own money aside, tax-free, that can be used to pay for routine healthcare costs. HSAs must be combined with a high deductible, catastrophic insurance policy, which could also be purchased with pre-tax dollars. This would provide coverage for any unexpected, high cost expenses. This sounds simple enough but to make it work requires something that has become increasingly rare throughout our society – personal responsibility.

Excuses for not exercising individual responsibility with regard to healthcare abound, starting with the idea that young healthy people don’t believe they need to spend their money on health insurance. To address this basic issue, everyone should be offered financial incentives such as tax credits or vouchers to participate rather than having the government mandate they do so. The other argument states simply that the poor can’t afford insurance, and in most cases this is true. Obviously government subsidies to assist the poor in obtaining healthcare should continue, but instead of being a “handout,” any and all assistance efforts should be tied to a process that encourages personal responsibility no matter how poor the individual happens to be. Otherwise the system will continue to foster the malignant social disease cycle of “victim status” followed by “entitlement.” The fact is no one gets something for nothing, and under the current system employers and the working class are paying an unnecessarily higher price for healthcare, while the poor are also paying an incredible price; the loss of both their dignity and their freedom.

The opinions expressed herein are my own and do not necessarily reflect or represent the policies or opinions of any medical organization or group.

Check out my web site at www.robertsewellmd.com