Monday, December 3, 2012

The trinity of health and why use health insurance?

Let's begin with the basics!

The holy health trinity (three P's!)
Patient
Provider
Payer

Patients are YOU and other consumers of health.  Unless you are one of the other two.. 
Providers are the ones that 'provide' medical care (e.g. hospitals, physicians)
Payers are the insurance companies or just anyone that takes your money and then pays the providers (e.g. the government in medicaid/medicare using your tax money, blue cross blue shield, kaiser permanente)

Patients pay Payer
Payer pays Provider
Provider treat Patients!

So you may be wondering, why do we need payers (health insurance) to be our middle men?  Couldn't we just directly pay the providers?
Our new relationship would be:
Patients <--> Providers

Well, let's answer this by examining it in parts by splitting insurance into two different components: primary care and catastrophe care.

1. Primary Care: This includes all of the basic check ups and related preventative care components (e.g. pediatrician, general physician).  Having health insurance for primary care is actually more expensive than directly paying the providers.

Imagine 10 people wanting the service of a yearly check-up with a general physician.  They each pay $100 a year to the health insurance company/payer.  The health insurance company takes that money and then pays the provider.  However, they don't pay $1000 to the providers, since the health insurance company needs to take a chunk of that money to pay themselves for handling your money.  They may end up only paying $90 to the physician for each person that gets the annual check-up.  Ideally everyone will go get their check up, so only $900 total.

Couldn't we have just paid $90 directly to the physician instead of $100 through the insurance company?  It would be cheaper for us to cut out the middle man.

Why get insurance for primary care?
The reason is because as a society, we believe that getting your yearly check-up is a good thing, so we want more people to purchase it.  It's like wanting children to eat their broccoli.  Some kids may like it but other kids may not, but we do want them to eat it.  With insurance and the way US insurance is provided (employer insurance), it seems much cheaper to the patients when in reality it is more expensive.  Pretty much we are tricking patients into thinking their broccoli is an airplane.

Imagine that the 10 people pay $8.33 per month to the insurance company.  In a year, they are paying ~$100 for only $90 of service, but it seems a lot cheaper to them since they are paying only $8.33 at a time. And when they go to the physician, they don't pay anything upfront so it looks like they are paying nothing (or very little if there is copayment).  If they had to pay $90 up front instead of receiving it through insurance, less people would purchase it.   So its pretty much disguising their broccoli like an airplane.

2. Catastrophe Care: This is the care you hope you will never have to get, but sure are glad its there when it happens.  It could be covering a bone fracture, going to the ER, coming down with a terrible strain of tuberculosis, and etc.  Anything that cost a lot of money and if it happened to you, many of your friends would be telling you "I am so sorry that happened."

Usually these treatments are very expensive, but fortunately do not happen that often.  If 10 people are interested in protecting themselves from a terrible unspeakable disease that costs $2000.  If each person pays $200 and the disease only has a 10% chance of happening, then this form of catastrophe insurance would totally be worth it.  With the insurance, it will prevent you from going bankrupt when it happens.  We need an insurance company as a middle man to collect and handle the money to distribute out, unless you trust all of your friends to pitch in for you when you're sick.

Wrap-up
Health insurance is usually made up both components.  The first part, primary care, has the goal of trying to convince you to improve your health.  The second part, catastrophe care, has the goal of preventing you from going bankrupt.  This question become much more complicated, when we as a society try to decides
1) Who should receive it?
2) How much should they pay for it?
3) How can we pay for it?
4) How effective are the health insurance in improving health?
5) How do we convince someone to get it?

As a result, this becomes a very politicized issue that is still being resolved.  There are some really interesting research regarding these questions.  So until next time!

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