Why No One On This Planet Has Health Insurance*

Around the world, policymakers continuously strive to ensure access to affordable health care through provision of health insurance. This insurance only limits the financial impact of health-care related events – and not the actual losses in length or quality of life brought on by injury and illness. If you are diagnosed with an untreatable terminal illness, what is the value in having coverage for access to available, yet unsuitable, treatments? Medical innovation provides the only prospect for true “health insurance,” in the literal sense of the word, by reducing the risks to patient health itself. Unfortunately, traditional policies that expand public coverage for health care services – universal coverage in Europe, for example, or the ACA in the US – often have negative implications for the ability of such real “health insurance” to reduce long-term risk of mortality or morbidity. The unintended consequences of many health care policies through their adverse effects on this real “health insurance” are of central importance but poorly understood by the health policy community.

In life, changes in health are unpredictable. A new diagnosis of cancer, a sudden stroke, or a disabling injury could occur at any time – or never at all. When such health shocks – sudden and unexpected injuries or illnesses – occur, the impact on the individual can be immense, resulting in a loss in quality and quantity of life and potential disability. What’s more, health shocks are generally accompanied by financial shocks due to the cost of health care, loss in income due to the inability to work, and other consequences. Ensuring access to appropriate health care is a critical first step in mitigating the health effects of an illness, as evidenced by the worldwide focus on provision of health insurance to ensure access to health care. In fact, governmental and market responses to health shocks has led to many of the major existing insurance markets, including life insurance, pensions and annuities, workers’ compensation, health care insurance, long-term care insurance, and disability insurance, to name a few. Such insurance protects against financial shocks by pooling financial risks, such that those who are lucky enough to avoid sickness pay for the losses of those who are less fortunate.

However, although traditional insurance deals with financial risks associated with health shocks, it fails to address the risk of losing something even more valuable to a health shock: the quality and quantity of a patient’s remaining life. Though health care insurance, perhaps better named “health care cost insurance”, does ensure more widespread access to health care, no insurance mechanism exists to mitigate the potential losses in health itself due to many health shocks. Risk varies across disease states, of course; for easily treated illnesses, access to basic health care is sufficient. Health care insurance also provides access to preventative care which, along with generally healthy behaviors, may reduce an individual’s overall risk of a health shock. When you are diagnosed with an incurable cancer, however, your health care expenses may be fully insured, but you have no protection against a catastrophic loss in health. Put differently, the costs of care may be covered, but what is the value of care when it does little or nothing to lessen the loss of one’s health – or one’s life?

The problem is that, unlike financial risks, risks to health itself are difficult to insure. The traditional way to avoid risks through insurance is to have everyone put an amount of money (called a premium) in a pot, and then use the total proceeds of the pot to make “whole” those unlucky ones who experience large losses. In the case of health care, this making “whole” occurs through reimbursements to health care providers. This pooling of risks implicit in standard insurance is infeasible for risks to human capital such as health because it cannot be traded or transferred. For example, if a person is hit with Alzheimer’s, he or she cannot be made “whole” or fully healthy by allocating health from someone without Alzheimer’s. Only in rare cases of transplantations do we directly trade health between healthy and sick.

If insuring care is not the solution to insuring health, how do we do it? Health care insurance ensures access to health care; stated another way, this insurance provides access to medical innovations already developed. It is the innovations in treatment over the past century that partly protect us against the loss of actual health when disease hits. Medical innovation, therefore, is the key to true “health insurance.” Whereas health care insurance reduces the risk of financial shocks by pooling financial risk at a single point in time, medical innovation is the primary method by which the future risk of losses in health itself is reduced over time, and can thus be viewed as serving the role of insuring future health.

In essence, medical innovation reduces the true price of health. Innovation in treatments for breast cancer provides a salient example. Before these innovations, the price of living longer for a breast cancer patient was infinite. Regardless of financial means or health care coverage, no one could buy a longer life. Innovations enabled breast cancer patients to buy longer, healthier lives in the presence of the disease, with access to these innovations often the result of health care coverage. Innovations in HIV treatment are another, similar, example. Thus, in the most literal sense of the phrase, cumulative medical innovation provides real “health insurance,” and investment in medical R&D is the premium required for improved risk reduction in health.

This “health insurance” view of medical innovation has wide-ranging implications for how we evaluate government policies in health care. First, it affects how we assess the regulation of medical products by bodies such as the Food and Drug Administration in the US or European Medicines Agency in Europe. Regulators like the FDA have a responsibility to protect today’s patients from exposure to risk of negative health impacts, such as dangerous side effects from new treatments, yet overly-cautious regulation creates a disincentive for innovators. This has the potential to slow medical innovation, thereby reducing coverage of true “health insurance” and leading to larger risks imposed by future health shocks. The FDA lowers one set of risks, due to the side effects of innovations, but raises another risk by lowering “health insurance” by making medical innovation less attractive to investors. These risks must be carefully balanced in medical regulation, but this is completely excluded from assessment of FDA policies.

Second, the health insurance view of medical innovation affects how we assess public expansions of health care coveragebecause public insurance reforms affect the returns from medical innovation, thereby affecting “health insurance.” A large share of global health care is publicly financed, so reforms to public health coverage policies have large effects on the returns on medical innovation. Public coverage expansions typically lower the price paid on the demand side (in terms of patients’ premiums and copays), leading to increases in the volume of health care utilization. On the supply side, expanding coverage commonly lowers markups as governments become increasingly dominant purchasers of health care, allowing them to demand deep discounts on reimbursements to providers and innovators. This reduces the potential returns on innovative new treatments. These opposing effects – a rise in volume with a cut in markups – point to uncertain effects on the incentives to innovate and thus real “health insurance.” In cases where government coverage expansions primarily benefit lower-income populations, the effect of volume increases on rates of innovation may exceed the effects of lower payment per patient. For example, recent Medicaid expansions under the Affordable Care Act raise innovative returns in this manner. However, innovative returns fall when public insurance expansions include wealthier segments of the population if reimbursements decrease more than utilization increases. In Europe, single-payer payment systems tend to lower innovative returns in this manner. In the latter case, there is a tradeoff between public health care coverage and real “health insurance” – the more financial risks are insured, the larger the health risks facing the population will be.

Lastly, the “health insurance” view of medical innovation affects how we evaluate rare disease policy.Many countries disproportionally subsidize medical innovation for rare or orphan diseases. For example, the Orphan Drug Act (ODA) in the US provides R&D subsidies for diseases affecting less than 200,000 patients. Previously, a lack of market incentives for pharmaceutical companies to develop and manufacture drugs for such rare diseases had left those afflicted by these diseases without viable treatments. The ODA was passed in 1982 in response to a groundswell of public concern for the plight of these patients, and it has led to significant advances in the treatment of many rare diseases. However, while providing the possibility of treatment for the few who suffer from rare diseases is valuable to society, many economists would argue that it is preferable to cure a disease that is both serious and common than a relatively rare disease because, for a given level of R&D spending, the overall returns (in terms of increased aggregate health) are greater when more people benefit. In other words, subsidies for R&D in rare diseases are inefficient. From a “health insurance” perspective, however, small disease R&D may actually be efficient when seen as an insurance mechanism to protect against a health shock with a low probability but severe impact. For the same reasons that life insurance is valuable to the vast majority of people with coverage who do not die, small disease R&D is valuable for the vast majority of people who never get the rare disease. This insurance, or “peace of mind,” value of new medical innovations for patients who never need them has traditionally been absent from policy debate.

To sum up, the current preoccupation with expanding health care coverage may have unrecognized impacts on our ability to provide real health insurance through medical innovation. The expansion of health care coverage has unquestionable benefits, but they must be weighed in the context of long-term impacts on our ability to insure health losses themselves. The health policy community must better recognize our inability to insure health itself, and the consequences of policies on that ability.

*This op-ed reports on existing research that is more fully described in a chapter by myself and George Zanjani in the 2013 Handbook of Risk and Uncertainty edited by Mark Machina and Kip Viscusi.