How Health Care Became a Financialized Hellhole

Instead of insuring families, we treat them like junk bonds.

The song about the hole in the bucket runs through my head each time I see a headline about the health care debate in Washington. You know, there’s a hole in the bucket, to be filled with straw, which must be cut, but the knife blade is too dull and the sharpening stone too dry, with no way to wet the stone, owing to a hole in the bucket.

The actual goal, after all, is health. Health care is mostly something we use if there is a problem with our health, and health care insurance is really something we should only need in the very rare case where a catastrophic event requires health care far in excess of a typical year’s consumption. The Affordable Care Act’s health care insurance subsidies, then, should be something of an oxymoron. What kind of insurance product has a baseline premium, meaning the amount you pay when you don’t have a catastrophic event, that itself represents a catastrophic cost necessitating government assistance?

A subsidy might make sense as an element of the safety net for low-income households, but the current debate is over expanded health care insurance subsidies for the middle class and beyond. The basic insurance product has reached a price where politicians feel they must help even households with incomes more than four times the poverty line in order to deliver the holy grail of universal coverage. Meantime, access to actual health care is generally in decline and Americans are generally in lousy health. There is a hole in the bucket.

The transformation of a concern for health into an obsession with insurance is just one expression, but an especially salient and painful one, of the nation’s downward slide into financialization. Rather than pursue progress and reform in the real world, of a kind that might improve real lives, we layer financial products atop our quotidian corporeal existence so that we need speak only in terms of dollars and cents, perform mathematical manipulations that create the appearance of value and wealth even as they worsen outcomes, and then declare success. In this respect, proposals for a 50-year mortgage, student debt forgiveness, and expansion of ACA subsidies are all cut from the same cloth.

The patient-as-insurance customer is a peculiar figure, drifting haplessly through a Kafka-esque non-market. He probably did not choose his insurer, that decision coming from an employer. He did not choose the services covered, that decision coming from a regulator. He may not have chosen his doctor, that decision constrained by his insurer’s network. He has little sense of the price he will be charged, or how much of it he will have to pay, and likely anticipates with dread having some long fight with a bureaucracy about his bill after the fact.

He is held this way because he is, in the eyes of the system, not so much a patient as a junk bond. His stream of future cash flows is unpredictable, as a standalone asset he is uninvestable. But securitize him in a sufficiently deep pool of assets with uncorrelated risk and voila, he is sound as the pound. This was how the Blue Cross system began, using large employers to create insurable risk pools. Exempted from World War II wage controls and income taxation, corporations poured resources into health insurance coverage not because it was anyone’s preferred compensation, but as a form of financial engineering. As health care costs exploded, each insurer negotiated rates with select providers and covered access only to them. Patients did not need to know those prices; they had no choice anyway. Going outside the network, trying simply to consume a basic health care service, was a good way to get billed $1,700 for a blood test, which somehow remains a legal way to conduct business.

But as the modern wave of advanced treatments crashed over the system, the cost of the most expensive patients became prohibitive. In 2019, the costliest 5% of patients accounted for half of all health expenditures. The costliest 20% of patients accounted for more than 80%. Put another way, the cost to provide care to each member of the bottom 95% of the population is half the cost of providing care to everyone. If insurance coverage for the entire population costs $10,000 per person per year, insurance coverage for a pool that included only the least expensive 80% of the population would cost just $2,000 per person per year.

The incentive to identify and exclude those most expensive patients, or to at least identify those at risk of being most expensive and charge them a much higher rate, became overwhelming. For a young, healthy customer, finding coverage tailored to young, healthy customers could save a substantial share of income. But while identifying and pricing such risk is desirable in the bond market, and refusing credit to unreliable borrowers is just the market “working,” that outcome is unacceptable when the securitized cash flows are actually human beings—a distinction voters understand intuitively, even if insurance companies do not.

Common sense would suggest that, in such circumstances, funding the care for those uninsurable risks would become the responsibility of a public program. But the nation’s center-left and center-right were both determined to prove that they were pro-market, and that markets could solve the problem, so they advanced instead the idea of an “individual mandate,” a brainchild of the Heritage Foundation, that would force everyone to buy the same insurance, priced at similar rates. Asking healthy Americans to pay higher taxes to provide care to unhealthy Americans was outrageous, big-government overreach. Telling healthy Americans they had to pay the same amount of extra cash to an insurance company to cover the cost of providing the same care to the same unhealthy Americans was a “market-based solution.”

To prove its market bona fides in the ACA debate, the Democratic Party ultimately rejected even the idea of a “public option” insurer run by the government. The taxes disguised as premiums could go only to private companies. The Republican Party, determined to be more pro-market, proposed simply relaxing the various regulations and reducing the funding, as if this would somehow allow the artificially constructed market to work better rather than just falling apart. Everyone supported various permutations on tax-advantaged accounts, in hopes that yet another financial product could further buttress a sense of agency while addressing no element of any underlying challenge.

Meanwhile, the Medicare and Medicaid programs that are run by the government introduce additional sets of cash flows attached to bodies that challenge the business models of providers. Medicaid patients, especially, are “worth” less because the government offers a payment rate far below the cost of care. As a result, they often struggle to find providers who will treat them. Medicare pays more, but hospitals often struggle to break even caring for Medicare patients too. Lest one think this is good governance and saves money, providers must make up the difference by charging more to private insurers, raising the premiums paid by individuals through their employers and, yes, the subsidies that must be offered in the individual market. In rural areas especially, providers are simply closing up shop, leaving patients nowhere to receive needed care. But at least they have coverage.

The insurance model works for insurers, obviously. It works for providers, and device makers, and drug companies too, all of whom can demand and rely upon payment for whatever they develop, with the cost landing on a group of people who are not consuming the services and cannot opt out. For a while it seemed to work for politicians, who could claim to be keeping government small and taxes low while imposing distortions that are remarkably similar in practice to a nationalized system and imposing premiums that are remarkably similar in costs for households. But as with any part of a financialized economy, number games can only obscure reality for so long.

The insurance model does not work for the American people. Hidden behind all of the financial machinations, they are spending nearly twice what citizens of comparable countries spend for health care, and nearly 40% more than the next closest country, and getting worse outcomes. Yes, the United States excels at providing those highest-cost treatments in those rarest cases, but the cost of that tradeoff in everyday struggles, lower quality of life, and worse public services is a poor one, even if the opacity of the financing model obscures its existence.

A system in which the median American consumes $1,300 of health care but the median family insurance plan costs more than $25,000 cannot claim to improve the typical family’s welfare, nor long survive. Steadily rising deductibles have done little to slow the growth in topline premiums, but much to eliminate the upside that the typical family could expect to receive. Yes, any family could be the one that needs the rare treatment, consumes hundreds of thousands of dollars of care, and thus benefits far in excess of what it has paid. And every family benefits, in some ethereal way, from the possibility of being that family—this is how insurance works. But at some point the certain cost exceeds the hypothetical benefit, and that point is long past; even measured solely in the typical family’s expected health; especially when the forced cross-subsidy from younger and healthier to older and sicker is designed specifically to benefit the latter at the expense of the former.

A parallel problem exists on the public side, where Medicaid’s structure encourages states to channel their spending toward health care in pursuit of greater federal subsidies, fueling higher health care costs and squeezing down funding for other public priorities. Here, studies have found that the value to low-income recipients is a fraction of the cost. The best randomized controlled trial found no significant improvements to health.

In the short run, the political system may need to help families cope with the absurd costs it has placed upon them. If it makes Republicans feel better, they can think of ACA subsidies as tax cuts, which in one sense is what they are, and which should be paid for with an offsetting tax increase on those best able to afford it. But really, ACA subsidies are a bailout for a financial product groaning under the weight of its own poor design. Bailouts are sometimes necessary, but they are justified only if accompanied by a pathway to true reform.

How might that reform look? We’ll be writing a lot on that topic in the coming year. And we will do so from the perspective that so often characterizes American Compass’s work, asking first and foremost: What are markets for? When do they work, and what do we do when they don’t? In some cases, the traditional conservative perspective has clearly been right. Where a market can work in health care, for ordinary expenses and decipherable services, it should be allowed to. In others, unleashing market forces will clearly fail, which explains why 15 years of attempting to conjure an “Obamacare replacement” has led nowhere. Fresh thinking will help, if only because it could not possibly do worse.

In all cases, we will resist the financial abstraction of the subsidy fights and the insurance fights and the tax fights, arguing instead for health care policy that helps families build decent and healthy lives, that supports care when it is needed, and that relies upon insurance for the rare situations to which such financial products are suited.