How to Get Rid of the Health Insurance Industry

by Fred Siegmund

Will health care reform really keep costs down? In order to find out, we need to know exactly where costs keep on increasing.

Shortly before the passage of the new health care bill, a spokesman for Anthem Blue Cross of California said this: “All health plans are in the same situation in trying to deal with the steadily increasing costs in the delivery system, which are not sustainable.”

In other words, the health insurance industry is only responding to cost increases beyond its control.

Cutting Out the Middle Man

The premiums that individuals and families pay for insurance cover the costs of the delivery system and the burden of supporting separate industry bureaucracies with a separate set of transactions.

In other sectors of the economy, bills tend to be a two-party transaction between a customer and a vender, but seldom so in health care.

One illness or injury starts a billing shuffle through separate bureaucracies at hospitals, laboratories, clinics, imaging centers, Preferred Provider Organizations (PPOs), Independent Panel Associations, private insurance companies, independent billing agencies and bureaucracies at Medicare, Medicaid, Social Security, and workmen’s compensation or the Veterans Administration.

Medicare, Medicaid and workmen’s compensation are federal programs with federal bureaucracy, but also administered by the states through 50 separate bureaucracies.

Private insurance companies accept premiums paid into a risk pool that generates a reserve fund to pay losses. Insurance companies analyze actuarial data on accidents, sickness, disability and other risks to construct probability tables that will determine the premiums that will generate reserves to pay future losses.

Otherwise, insurance companies do not provide health care; that is left to doctors, hospitals and medical venders.

All those separate entities in medicine have an incentive to bill higher amounts; all the insurance companies have an incentive to pay lower amounts. The two sides maintain bureaucracies with staff to argue and negotiate over the bills from millions of transactions nationwide.

But what does the insurance industry do that the health care industry cannot do for itself?

Can the Medical Industry Cut Out Insurers?

The actuarial data for health insurance policies comes from the medical industry, so they could employ their own actuaries and do the necessary risk assessment without insurance companies.

If the medical vendors were organized together as regional or metropolitan entities setting their own premiums to provide their own health care, then millions of transactions would be eliminated, along with the perverse incentives to overcharge and underpay.

If the health care industry was organized with its separate components brought together into comprehensive health care providers, the insurance industry would be unnecessary. It would become a redundant component.

You may recognize the combination I mentioned above as an HMO, or a health maintenance organization, but that is the rub.

Many Americans have the idea, aided by the health insurance industry, that health maintenance organizations restrict choice or might deny treatment, even though they have the facility and staff to provide it.

The private insurance industry exists because enough people believe private insurance gives them more choices and better choices. It is a very expensive choice, which is why President Obama is going easy on the health insurance industry when he attacks their increase in premiums.

If he was going to get tough, he would tell us how we can rid ourselves of the health insurance industry.

About the author: Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at

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