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Current Affairs

A Magazine of Politics and Culture

Why Private Health Insurance Makes No Sense

It’s important for everyone to understand exactly why it needs to be gotten rid of.

There is a lot of nonsense and confusion on the subject of healthcare in the United States. During the Democratic primary, Bernie Sanders was criticized by fellow Democrats for wanting to raise middle-class taxes and abolish the private insurance industry. Many Democrats have defended the system of private, for-profit health insurance, suggesting that a “Medicare For All” plan would be a radical proposal that would upend healthcare. The last Democratic president, Barack Obama, explicitly rejected a “single-payer” healthcare system and said it is not right for America. 

I think it is very important for every single adult in this country to understand the left critique of the current system and why the defenses of this system make no sense. Everyone has health, everyone needs healthcare. It is in all of our interest to have as good of healthcare as possible, delivered as inexpensively as feasible. We should all want it to be easy to get the care we need, and for nobody to fret about money when they go to the doctor. 

I want to explain as clearly and simply as possible, then, why having for-profit private health insurance companies is fundamentally irrational and harmful. 

Let’s start with: what is it that a health insurance company actually does? Its job is to move money. You pay them, so that when you need to visit the doctor, they will pay the doctor. If you need something exorbitantly expensive, and all of us risk having some medical problem that needs very expensive treatment, the insurance company will pay, and you won’t go broke. From your perspective, it’s necessary to have someone who will cover the cost if this happens, so there’s reason for you to pay your insurance premiums. The insurance company also gets better rates from healthcare providers than you would if you were approaching them alone, and even though there are deductibles and co-pays in addition to your premiums (and your premiums and deductibles both might be very high) on the whole, from your perspective, health insurance is supposed to be worth it. 

I have made a diagram to illustrate what is going on in this process. 

Fig 1: Basic Flow of Money and Services in Privatized Part of Healthcare System

So: on the left is society. Those magenta dots are human beings. Human beings need healthcare from healthcare providers. If they have insurance, they pay monthly premiums to their insurance company, and co-pays to the provider. In return they are given healthcare.

The green arrows are green because they represent the flow of money. You give money to the middleman who gives it to the provider.

But this is not the entire flow of money. The insurance company operates for profit, which means that (taking the blue line out for now), the flow of money actually looks like this:

Fig 2: Mostly Same As Fig. 1 But Shows How Insurance Industry Is Parasitic

So some of the money you pay to the insurance company gets paid to the healthcare provider. But some gets paid out to shareholders in the form of dividends, to executives in the form of salaries and bonuses, and to “tusslers.” By “tusslers” I mean those whose job it is to tussle with you about your claims, and to try to minimize the amount they pay out to pay for your healthcare.

This is a for-profit insurance company. This means, at least on the common theory that a corporation’s job is to maximize shareholder value, that the company’s mandate is to try to maximize the thickness of that green line on the bottom left (shareholders) and minimize the thickness of that line coming out on the right. It wants to give as much as possible to its shareholders and as little as possible for your care. That is its job.

Now, it’s disputed whether “maximize shareholder value” does in fact have to be the mandate of a for-profit corporation. Milton Friedman said it did, famously arguing that the social responsibility of business is to increase its profits (and nothing else), meaning that any other value that the corporation pursued, if it came at the expense of profit-maximization, was a violation of the corporation’s mandate. I recently interviewed former Cigna executive Wendell Potter, who explained that in the for-profit health insurance industry, there is indeed an intensive push to maximize return for the shareholders even if it comes at the expense of sick people and involves denying them care they desperately need. (His disgust with this caused Potter to leave the industry and become a whistle-blower.) 

A corporation is an artificially constructed entity. What is a corporation, exactly? Well, it’s a legal arrangement, an agreement among different parties to cooperate in accordance with a certain set of rules to pursue some goal. But because it is a legal construct, there is no reason a corporation has to be set up as a shareholder-value-maximizing entity. (Current Affairs, for instance, is incorporated but does not have shareholders or create profit for owners, because we made a choice.) We make our legal institutions, and if we make institutions that are devoted to maximizing shareholder value, we presume it’s because there’s some ultimate purpose for doing so. 

But in many contexts, a clear incentive problem is created by a set of rules that encourage the pathological pursuit of profit, and a for-profit institution is just a disastrous way of solving a problem, because it doesn’t have the incentive to do socially beneficial things. Fossil fuel companies and cigarette companies, for example, had an incentive to lie to the public and manufacture fake science obscuring the harm that their products did, because it was their literal duty to their shareholders to ensure that the public didn’t understand the truth about the causes of climate change and lung cancer, respectively. Potter explains that the same is true in the insurance context: the for-profit health insurance industry literally tries to mislead the public about how well other systems work, because it has an obligation to mislead in order to satisfy its institutional mandate.

That’s crazy, of course. If you’ve designed an institution that operates according to an algorithm that requires it to lie and cover up the harm it does, you’ve designed a poor institution, and “for profit” institutions often simply prioritize things nobody should want (except a very narrow group, the shareholders of the corporation). 

Why would we conduct healthcare financing in this way? Why would we route our money through an artificial institution that skims off a giant portion of it to give to the rich, and is constantly trying to find ways to skim off more? You don’t even have to be a leftist to recognize that from a purely rational perspective, this is bad institutional design. It doesn’t make sense.

I’ve previously given the example of fire departments to show how, when “for profit” institutions would inherently have bad incentives and create needless private bureaucracy and unfairness, we use socialized institutions to solve social problems. As with healthcare, protection from being burned alive is something everyone needs. They need it to be as good as possible, and we need to make sure that every single person has it. A for-profit firefighting system existed once and was a disaster. Not only did firefighters only fight fires for the houses that had particular insurance policies, but the competition between firefighting companies was so intense that they became like gangs in some places and fought each other physically. Not an efficient system.

A socialized fire department that covers everyone and is free at point of use made much more sense. Instead of paying money to a private insurance company to pay a private fire company, money for fire services was just taken out of local taxes. Nowadays fire departments are ubiquitous, and while there are still instances of privatized services giving superior firefighting to the rich, the socialized system of financing and providing services is just a simpler and more effective model for delivering something we all need. 

In this next chart, we see the basic flow of funds and services in a “single payer” system, like the kind pushed for by “Medicare for All” advocates.

Fig 3: “Single Payer” System

In this system, as we can see, we have eliminated the parasitic flows of money. We have stopped the “leakage” by which a portion of your healthcare money goes to the executives and shareholders of insurance companies. Plus, private insurers must spend money on “sales, underwriting, enrollment and policy service, claim adjudication, utilization review, actuarial functions, legal support services, investment functions, corporate overhead, and risk charges.” (And the advertising budget of insurance companies, so that they can convince you to use theirs instead of others, which I didn’t even include in the flows.) 

We have made sure in this model that the pool of money collected from the people who need healthcare is the same as the pool used to buy healthcare, by routing these funds through a different kind of artificial legal construct called a government, which operates by different rules and has a mandate of securing the common good of all the little dot-people on the left rather than a particular subset of wealthy people. Even better, because there is only one government, instead of many insurance companies, the monopoly on health financing gives greater power to bargain with the providers for better rates. The government is essentially a “corporation” comprised of everybody that can exercise the collective will of the people on the left as determined through a democratic process. 

It is, I am sure you will agree, a much more logical system. And you can see very clearly why it was so bizarre that at the Democratic debates during the last primary, there were so many discussions about whether “single payer” as advocated by Bernie Sanders (and sort of Elizabeth Warren) would “raise your taxes.” In a sense this is true, but it gives a totally false impression of what is going on. What is actually happening is we are just routing your healthcare dollars (which you already spend, through premiums and copays) through a different kind of artificial legal institution, one that does not have a built-in incentive to pocket your money and let you die. From your perspective as one of the magenta dots, what you care about is not whether the flow of funds is called a “tax” or a “premium,” but what the size of the green arrow going from you to the healthcare financing institution is (i.e. how much you pay) and what the size of the arrow coming back from the providers is (i.e. what you get in return). If you get a better deal under the single-payer system, it doesn’t matter how much it raises your taxes, because that amount is more than canceled out by the savings you get through not paying premiums and copays anymore. We are putting more money in your pocket by routing health spending through a legal entity that isn’t set up to fleece you. 

Now, you might look at the above chart and wonder why we still have a “middleman.” We’ve changed the institution through which the money is being routed, but I am still paying someone to pay someone else. Why don’t we just have the entity providing the services be the same entity as collects the big pool of money? 

Such systems do exist. In them, it is not just insurance that is socialized (i.e. the payment process) but healthcare itself. Britain has a hugely popular system called the National Health Service, in which the government just provides healthcare to people through clinics and hospitals, and also collects taxes. It is extremely cost-effective and Britons have never seriously considered returning to any other system, because why would you introduce bad incentives into your health provision by allowing institutions with parasitic motives? (My colleague Aisling McCrea, who lives in Britain, has written an excellent article on how this kind of system makes ordinary people’s lives more free and easy.)

Here is how things work in a fully socialized system:

Fig. 4: Socialized Medicine Like Britain’s National Health Service

Now, this is a little misleading, because you might be thinking: but if there’s only one provider, how do I get a choice? Well, there is only one legal entity doing the provisions, and the pool of money is all going to a central place, but since all doctors and hospitals are within the circle, you still get to choose your doctor and hospital. Because it’s all in the same legal entity, you don’t have to get someone “in network” and there’s far less bureaucracy. Having a single entity makes healthcare cheaper to administer. 

Conservatives may reply to all this by saying “Well, that’s all good as an ideal, but in reality, socialism is a failure.” It’s true that so far I have only pointed out that capitalist healthcare funding does not work in theory. But if we look at how it works in practice, its performance is even more dismal. One reason that right-wing opponents of government healthcare are constantly citing anecdotes about the Canadian or UK healthcare systems (“I knew someone who had to wait 6 months for a…”) is that the moment you actually look at data, the case for for-profit insurance collapses utterly. The United States is one of the absolute least efficient systems in the world. Its hospital administrative costs are more than twice as high as those in Canada, gobbling up 25% of overall hospital costs, according to a Health Affairs study. Interestingly, that same study suggests that the more a country relies on market mechanisms, the more it may end up spending on administration, based on what happened with the NHS’s market reforms:

Among the UK nations, Scotland’s administrative costs were lowest, England’s were highest, and Wales’s were in between ( Exhibit 3 ). This ranking correlates roughly with the role of market mechanisms in those nations’ health care systems. The NHS internal market reforms introduced throughout the United Kingdom during the 1990s separated the commissioning and provision of care, with price-based competition among hospitals. Scotland reversed these market-based reforms soon after devolution in 1999; Wales did so somewhat later, in 2009. 

This shouldn’t be surprising. Markets are costly and complicated, in addition to their built-in “money siphon” to the well-off. (We don’t even measure the “opportunity cost” of the things you could be doing other than dealing with your insurance company and trying to comparison shop for an insurance policy.) As we’ve seen, the underlying theory of for-profit insurance is faulty (usually the word “competition” is simply invoked to magic away the inherent conflicts of interest). A thing that works badly in theory usually works badly in practice, and so no wonder right-wing (and liberal) opponents of universal healthcare do not talk much about the data comparing system performance across countries. When you actually do look at studies, such as this one by the Commonwealth Fund, the verdicts are damning:

The U.S. ranked last on performance overall, and ranked last or near last on the Access, Administrative Efficiency, Equity, and Health Care Outcomes domains. The top-ranked countries overall were the U.K., Australia, and the Netherlands. Based on a broad range of indicators, the U.S. health system is an outlier, spending far more but falling short of the performance achieved by other high-income countries. The results suggest the U.S. health care system should look at other countries’ approaches if it wants to achieve an affordable high-performing health care system that serves all Americans.

The system simply does not make sense. Not in theory, not in practice. 

I want to address a point on how we think about the relationship between tax/premiums and healthcare. I have so far been talking in the usual way about “paying taxes” to the government and getting “services” in return. But there is a school of economic thought called Modern Monetary Theory (MMT) that discourages us from thinking like this. They argue that while we have been conditioned to think of the two arrows above, green and blue, as related, this can lead us into error. So, in the usual way of talking in American politics, if we want to provide a service, we need to “pay for it.” To expand the blue line, we have to expand the green one, so that the government is “solvent.” If the government spends more than it brings in, it is going into the red and becoming insolvent.

This, MMTers say, is a mistake. It makes sense when we’re talking about local fire departments, which do have to bring in money in order to spend it. But the U.S. federal government can print its own money. To talk of it going “into the red” is as irrational as saying that the banker in Monopoly is going into the red. The banker in Monopoly has infinite money. They can take money if they want to, and pay for things if they want to, but there is no necessary one-to-one relationship between the two. 

That doesn’t mean that the government can do whatever it wants, that there’s no restriction on how thick that blue line can be, or that no taxation is necessary. It means that we should not think about this as a flow of dollars from your pocket to the government to the service provider. (For more, see the Current Affairs interview with MMT economist Stephanie Kelton.) MMTers would be critical of the way I have treated what is going on as the movement of money from one place to the other, because it is important that the two arrows (money into the government and money out of it) do not need to be strictly related to one another. This means that the government does not necessarily need to levy a specific tax in order to create a pool of money to pay for healthcare. 

There is a significant debate about the usefulness of MMT thinking in the field of economics and this is not the place for me to try to resolve it. What we should note here is that regardless of whether you think of government as “taking in a big pool of money through taxes that it then uses to spend on healthcare” or “creating money to spend on healthcare, and separately raising taxes for reasons independent of its desire to spend on healthcare,” the conclusion that socialism in healthcare is good remains the same. (And if you do want to match revenue to spending, it’s easy to do so, as Matt Bruenig of the People’s Policy Project demonstrates.) Under no sensible theory do we want private, for-profit institutions diverting money that should be spent keeping you well. (I should note, too, that government spending already constitutes a huge part of American healthcare. We are simply talking about eliminating the part of national healthcare spending that is not conducted in the public interest, by switching it from being routed through a badly-designed institution to being routed through a well-designed one.) 

I have presented my explanation here in a very simple way, and you may think this is all a thunderingly obvious point that does not need little graphics with dots in order to grasp. But there are plenty of people in the country who either do not understand it or are lying about it. Consider Pete Buttigieg, one of the main Democratic candidates for president this year. Pete Buttigieg criticized a single-payer health plan on the grounds that it would raise taxes and cost trillions of dollars. As you can see, while Buttigieg’s criticisms sound real, they are actually irrelevant. We are talking about which type of institution our healthcare dollars should flow through. Should they be called “premiums” and skimmed by insurance companies with no institutional mandate to care about everyone, or should they be called “taxes” and routed through a democratic, collectively-owned institution that has a mandate to serve universal needs? Either way, people are going to pay money, and there will be trillions of dollars paid for healthcare services. The relevant questions are: is the money individuals pay more than they pay now and are the services sustainably funded? Buttigieg is trying to scare you into thinking you’ll have less under a single-payer system when it is designed specifically in order to give you more by eliminating parasitism. Buttigieg is known as a pretty smart cookie, so I have to think that he understands the basics of the diagrams I have presented you with and was deliberately trying to leave people with a misunderstanding of what the proposal is and why it is being made. 

Try to think less about words like “taxes” and “trillions of dollars” and more about what is actually going on and what it means for you. If it helps to think about a “flow” of money either through an amoral and socially destructive institution or a public one, then think about it that way. If you are an MMTer and find this misleading as well, that’s fine. But I hope either way healthcare debates in this country can become a little more sensible, with the Buttigiegs of the world being laughed out of the conversation for completely misunderstanding the basics of how it all works. Let’s have some clarity and ask the questions that matter, the most important of which is: how does a for-profit health insurance industry make any rational sense at all? The answer to which is clear from thinking about the basics of how it works. It doesn’t make sense. It doesn’t. 

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