Healthcare Needs Insurance Companies Like a Fish Needs a Bicycle

My reveries about toast landing butter side down — the subject of an upcoming blog entry — were pleasantly broken by the discussion on this blog of Ezekiel Emanuel’s analysis of healthcare spending, in which Emanuel goes to town on Left and Right policy ideas for cutting spending. Among his criticisms of Left ideas:

[I]t turns out that the combined profits of the country’s five largest for-profit health insurance companies — United, WellPoint, Aetna, Humana and Cigna — were $11.7 billion, only 0.5 percent of total health-care spending. Even confiscating every penny of those profits would add up to less than half of the cost-saving threshold.

I liked how he quoted the savings as a dimensionless number (the percentage of total healthcare spending). I was also willing to accept his numbers — I’m a sucker for anything dimensionless. However, I was surprised that ridding us of insurance companies saves hardly any money.

To help me think through Emanuel’s argument, I turned unconsciously to a favorite reasoning tool: the method of easy cases. Reasoning tools are so useful because we are flooded with arguments; keeping up with them is a nightmare if one handles each argument using a separate approach. By discussing the method of easy cases, I want to show you a general-purpose tool — one that helps us evaluate this and many other arguments.

The idea behind this tool is a tale of bad news, good news. The bad news is that our minds have severe hardware limitations; for example, our neurons fire slowly and our short-term memory has only a few slots. The worse news is that the world is complicated, and its complicated problems often overwhelm our hardware. The good news is that by simplifying — by thinking about easier versions of a problem — we often recover our reasoning powers.

This tool is widely useful in physics and engineering, which is why I made it the subject of Chapter 2 of Street-Fighting Mathematics. I would also like a general audience to benefit from these reasoning tools. Thus, for the manuscript of my new book Numbersight: A Street-Fighting Mathematician Teaches How to Make Better Decisions, I am on the prowl for examples where the method of easy cases helps interpret numbers around us. Thank you, Dr. Emanuel!

Let’s agree with Emanuel that insurance-company profits are not significant. Does it follow, as he argues, that abolishing insurance companies is not important in reducing healthcare costs?

To test the argument, I reached for an easy case. The easiest cases are often extreme ones. Thus, I summoned my powers of exaggeration (usually not considered a mathematical skill) to simplify the world. Imagine that insurance companies collect money as premiums, turn a fraction of those premiums into dollar bills, and (here comes the exaggeration) use those bills as cat litter, burning them in oil drums in the backyard. They then pay out the remaining premiums as claims. In this world, wouldn’t eliminating insurance companies be a good way to reduce healthcare spending?!

Picturing this world showed me the flaw in Emanuel’s argument: he discussed only the profits of the insurance companies, rather than their total contribution to healthcare spending. Indeed, insurance companies create costs within themselves and throughout the system. As a small example, I recently went to the local emergency room, was double-billed because I was admitted before midnight and discharged after midnight, and was lucky to spend only half an hour on the phone with the hospital and insurance company requesting a corrected bill. And almost everyone I know has a similar or worse experience.

The flaw of ignoring the total contribution to healthcare spending, is not simply theoretical. In the New England Journal of Medicine, one of the world’s leading medical journals, Harvard physicians Steffie Woolhandler and David Himmelstein studied the “Costs of Health Care Administration in the United States and Canada” (N Engl J Med 349:768-75). Their conclusion (on p. 771 of the article): Insurance-company overhead consumes 5.9 percent of U.S. health-care spending — more than 10 times the 0.5-percent figure that Emanuel was discussing just for the profits.

Photo: oskay

Worse, this 5.9 percent underestimates the problem. It doesn’t include the cost of employees in doctors’ offices who fill and file insurance paperwork (this factor is tabulated in the paper) or the value of patients’ time spent talking to insurance companies and their touch-tone computers (“Please listen carefully to all the options as our menus options have recently changed.”).

After thinking it through with the method of easy cases, I stick with my old belief, shared by most industrialized democracies: We need insurance companies in healthcare as much as a fish needs a bicycle.