Time for 'Buy Local' Programs in Health Care?

 Could We Be All Wrong About Health Insurance and Risk Pools?

"The very idea of health insurance is in some ways the original sin that catalyzed the evolution of today’s medical-industrial complex."

Elisabeth Rosenthal made this statement in her excellent book, An American Sickness (see excerpt here). As I wrote about in the Health Rosetta Institute's theory of change, we believe the fundamental constructs of our dysfunctional healthcare industry should be replaced. In that piece, I pointed out that we may draw more useful lessons from outside of healthcare than the under-performing healthcare status quo. For example, a new approach to system change has proven itself in diverse areas including microfinance. The most profound work I've heard in the system change arena has come from Chris Brookfield.

I shared the above excerpt from An American Sickness with Brookfield. His response, once again, was thought-provoking. As the Health Rosetta Institute thinks about transpartisan approaches to reinventing healthcare, one area of opportunity is how social missions can be nested within free markets and local control as a path to broad, positive change. Let's face it, forward-looking people agree it's a national embarrassment that the U.S. can spend so much and have such mediocre health outcomes while simultaneously abusing the clinicians that care for us. The key question is what's a plausible path from where we are today to a more optimal system that is pragmatic about forces aligned against positive change. Read Brookfield's thoughts on insurance below and tell us whether you think this is a plausible path forward.

All group risk pools - health insurance, life insurance, credit insurance, disaster/property insurance - have a long social history.

They all evolved out of village/community mutual aid groupings. So for instance, along with microcredit (which has analogs that go back thousands of years) there were all kinds of group risk insurance. The community would pay if one member had an unanticipated tragedy.

These systems work very well at the community level. They are efficient and well supervised (by their own participants). They all go completely haywire when "scaled up". Because the 'governance' is local and ad hoc, it breaks down beyond the personal level.

Aside. I got to see how life insurance really began while in India. Modern life insurance was 'invented' by banks. It is inconvenient and expensive to collect money from someone who has died. So quickly banks offer life insurance as part of their loans. I saw this happen. 

Taken as a whole, I think it is a mistake to think of any kind of insurance as being made for the beneficiary. In nearly all cases - even the village case - the system of insurance benefits the relatives and neighbors or more distance relations of the beneficiary. In the primary case - where there is no systemic insurance - people still get help to survive their catastrophic risks. The only question is how are those risks born and by how many people carry the burden.

Persuading individuals to buy insurance is kind of backwards. I saw this in India all the time. Individuals do not value their own risks - their relatives and neighbors do. We could not ever get individuals to buy insurance. We made buying life insurance compulsory to receiving a much bigger benefit - personal loans. Then we quickly sold 10 million policies.

It would be good for American policy makers to be reminded that a) insurance is not an attractive sale to an individual b) the beneficiaries of insurance, fundamentally, are the family and community members, not the recipients.

Most modern insurance vastly scales up the number of people who bear the burden. And in the process add enormous cost and lose effective oversight. 

What is the smallest actuarially valid risk pool? Several actuaries and an economist have shown me that pools over 1,000 people are redundant and may actually reduce resilience as the ballooning overheads are more costly than the marginal benefit from wider risk sharing. So why do pools end up huge, in the 100's of thousands or more? More power/money to the administrator's plus hugely expanded cost of end of life intervention that adds a big nut for a smaller pool. Insurance administration drives to scale and cost which drives additional costs from providers...and on we turn.

For nearly all people nearly all of the time, we would be better off with community risk pools, self-governed, for nearly all of our risks.

When I think of the large insurance companies, Brookfield’s comments ring true. Further, as I think about what I called “Healthcare’s Katrina” in an earlier piece, it makes me wonder whether some of the big insurance companies have become too big to fail. There appears to be little benefit in their size relative to the value they deliver in the marketplace.

'Buy Local' Programs in Healthcare Reinvigorate Communities

Increasingly communities realize the value of “buy local” programs that enable community resilience. Today, the vast majority of communities send a large amount of money outside of their community (to out-of-town insurance bureaucracies) to pay for services that are mostly delivered locally. It's quite odd if you pause and think about it. In contrast, the Rosen example is a microcosm of how a community can be transformed (crime down, high school graduations up, etc.) by harvesting money that would have otherwise been squandered to giant out-of-town bureaucracies. Likewise, Pittsburgh has shown how a local insurance pool can ensure education budgets no longer get devastated by a wasteful healthcare system. Even in countries perceived to have centralized healthcare, administration is pushed down to a more local level. Communities like Jonkoping have been internationally recognized due to how they innovate and reallocate monies as warranted by members of their community.

Administrative costs sent to out-of-town insurance bureaucracies

In many ways, we already have this today with a variety of communities from employers (self-insured and captives) to unions to health sharing. All but the largest pair the risk they can manage with Stop Loss policies. My partner, Sean Schantzen, tells me all the time about ways organizations hedge against risks of all kinds, many of which are highly complex and unpredictable. For example, the wide range of reinsurance products, commodities options, currency hedging, etc. are all forms of insurance that enable organizations to tailor their protection to their comfort level with risk.

As the graphic above illustrates, it’s self-evident that our current approach to health insurance isn’t working. As mentioned in the theory of change piece (click on article below), the beauty of the approach Brookfield articulates is the blend of local control and accountability with the scale advantage of appropriate use of technology and modern business practices. Brookfield has seen this work in a wide array of fields.

Poke holes in this approach. Why won’t this work in healthcare?

Update: I was forwarded this link after posting the article -- Why health care pools haven't worked (published in 2009). It shares some experience from the past. Interestingly, the pools that mostly failed a)Brought orgs together that had no connection or local accountability and were government vs. community driven b)They are predicated on buying from middlemen insurance companies (vs. provider orgs) which assumes PPOs are value add negotiators rather than the value-extractors they are in their current instantiation (our case studies show small employers are proving more effective than insurance companies at slashing health costs) c)They used time-proven healthcare purchasing methods very "effective" at driving healthcare costs upwards.

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Dave Chase is the Managing Director of the Quad Aim Fund, Executive Producer of The Big Heist (the first fiercely non-partisan satirical film to address healthcare), co-founder of the Health Rosetta Institute (a LEED-like organization for healthcare) and author of the forthcoming book, “CEO's Guide to Restoring the American Dream - How to deliver world class healthcare to your employees at half the cost.” His recent TED talk was entitled "Healthcare stole the American Dream -- here's how we take it back." The Health Rosetta Institute is transitioning from two years of self-funding/bootstrapping and recently achieved 501-c3 status. See the Health Rosetta Institute website for how to get involved, resources and how to join others to support its mission.

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