A Grave Mismatch

A McKinsey analysis released this month calculated that 43.2% of health care costs in 2006 were related to “catastrophic expenses,” but insurance payments accounted for 57.7% of the funding for all expenses. This mismatch supports our assertion in The Innovator’s Prescription that today’s health insurance products are no longer “true insurance” meant to protect assets against unpredictable and catastrophic loss. Instead, over a period of 60 years, health plans have increasingly paid for discretionary services, many of them expenses that could easily be paid out-of-pocket.

This gradual expansion in health coverage is perhaps not surprising if you understand the motivation of successful companies to continually improve their products which they can sell for higher profits to their best customers. Sustaining competition drove employer-based insurance products up-market to a point where anything that did not offer “first dollar coverage” was considered inferior. But as these plans became more bloated, they also became more expensive. More and more people (and employers) were priced out of the market, leaving a growing faction of uninsured that remains a less attractive target population for health plans today. At the same time, these expansive health plans also over-serve the needs of many people who can afford them but who don’t use or need the widespread coverage that is offered.

Health insurance needs to be disaggregated into products that target the jobs customers actually want to get done. Many consumers may still want full coverage with a broad choice of providers, but others simply want to protect their assets against catastrophic events and are willing to pay for routine and discretionary medical expenses. Others may want the more limited, but decision-free environment of an HMO; but the lesson of the failed managed care push of the 1990s is that the critical factor in the health insurance marketplace is choice. By encouraging disruptive, slimmed-down products that more effectively target the different jobs of consumers, we can make health insurance more affordable. It’s not the only answer to health care’s problems – among other things, we must also make health care delivery more affordable, and generate useful and transparent information so consumers can make well-informed decisions – but it’s a necessary step to disrupting the existing value network and stimulating further innovation. It’s also a critical step to re-engaging the 47 million people who are already non-consumers of health insurance.