Healthcare in the US 101

#1 Introduction to the US Healthcare System

Compared to other similarly developed countries, the US has the greatest amount of healthcare expenditures and the worst healthcare outcomes. This is in part due to its convoluted insurance/payment systems and the degree of variation present in the country—not only is it geographically expansive, but it is also diverse in virtually every other aspect.

More and more research shows that health is impacted by more than just biological factors. In fact, social factors like race, socioeconomic status, gender, and access, among others, can often impact it more than the quality or quantity of medical care. The vast variation in the US furthers the inequality gaps certain demographics face in their access to healthcare, including the complex infrastructure of the country’s insurance system.

Another factor that complicates healthcare is the different schools of thought behind the politics and regulation of healthcare: market justice and social justice. There is this constant tension between market efficiency and fairness.

  • Market justice implies that healthcare is an economic good and that each person is responsible for their own healthcare.
  • Social justice implies that healthcare is a right and that everyone is entitled to the same basic benefits.

America’s trademark “American Dream” also promotes the idea of ‘rugged individualism’ and earning respect and luxury, explaining the innate preference for market justice solutions over social justice ones. However, most countries recognize the importance of both, so they tend to use a mixture of the two, and combining these two ideologies well is where the challenge lies.

#2 How Health Insurance Works in the US and Its Impacts on the US Population

Insurance is typically needed for markets that have a high amount of financial risk and high degree of unpredictability. Most types of insurance, such as for your car or for your house, do not cover routine operations, such as an oil change or everyday maintenance. Health insurance is similar in the amount of risk and unpredictability, but differs in the sense that it covers most routine utilization, like checkups and daily medication. 

 

Healthcare insurance is a tricky business with a lot of nuance involved. The bottom line of how it functions is that insurers need a large number of healthy, low maintenance/cost individuals that subsidize the relatively small number of sick/high cost individuals in their system. For this reason, many insurance providers will try to “game” the system to try to select healthy people for their plans. This is called “cream-skimming” or “cherry-picking” and why some insurance providers used to refuse individuals with pre-existing conditions. The Affordable Care Act (ACA) outlawed this practice in 2010.  

 

Another way around this is through risk pooling, which relies on the law of large numbers: the larger the risk pool, or the number of insured individuals, the more predictable their health experiences and health costs will be. In the eyes of the insurer, having a large risk pool allows for less financial risk. This is why the ACA had placed the Individual Mandate, which states that every individual must be insured. While this part of the ACA was federally repealed in 2017, some states still have this mandate in place. In this way, having health insurance is similar to a “social contract,” in that we all gain and lose from having this agreement. 

 

On the flip side, insured people can also have the tendency to over utilize. Moral Hazard is the concept that a person who has less financial risk (such as through being covered by insurance) behaves differently than someone who is paying completely out of pocket. For this reason, all insurance plans have components that the insured party must pay for:

 

  • The first is a premium, which is typically a monthly amount you pay to have the insurance plan in the first place. If you have employer based insurance (EBI) it just comes out of your paycheck. 
  • The second is through a deductible, which is the amount an insured person must pay out of pocket each year before the plan kicks in. For example, if you have a high deductible plan of $600, that means you must pay $600 worth of costs and afterwards your plan will cover utilization under its plan. If you have a “first dollar coverage” plan, it means that there is no deductible. 
  • A co-pay is the fixed amount you must pay at the time a service is utilized, and a co-insurance is a percentage of the cost of a service that must be paid. These out of pocket costs unfortunately still add up over time, and can be burdensome for many. 

The overall purpose of health insurance is to ensure greater access for everyone. However, studies such as the Oregon Medicaid Experiment show that in reality it only increases utilization, but does not change overall population mortality/morbidity (the exception being it helps control and detect chronic issues, such as diabetes, at a higher rate). 

#3 The Role of State Governments in Healthcare and COVID-19

The concept of federalism, or the sharing of political power between federal and state governments, is important for the American governmental system. Healthcare is no exception to this, and federalism can be seen in how regulation is divided by federal programs, regulatory bodies and state governments.    

 

The US federal government regulates overall health insurance policies, as well as the Medicaid/Medicare programs, pharmaceuticals, and has many supporting regulatory bodies, such as the Center for Disease Control (CDC), Health and Human Services (HHS), and the Food and Drug Administration (FDA).  In terms of regulating the practice of healthcare, the federal government oversees hospitals. State governments have their own regulatory bodies that oversee things such as water quality, and license the physicians that work in their state. While the federal and state governments have many common goals, such as public health and safety, they divide the accomplishment of those goals.      

 

The benefit of a federal system in healthcare is that a state can tailor their responses and legislature according to the priorities of the people who live there. This can be a benefit for a country as large as the US as it is varied in every single way. Federalism allows the states to have flexibility within the larger federal decisions.

 

An example to illustrate federalism in action is the expansion of Medicaid. Medicaid is a federal program that provides health insurance to those who live below a certain percentage of the Federal Poverty Line (FPL).  However, the states have the ability to expand eligibility as it sees fit. The overall goal for the federal government is to decrease the uninsured population, so they support Medicaid expansion in providing more funds to states with greater low income populations through matching a certain percentage of what the state spends or hospitals that see a large volume of Medicaid patients. 

 

There are many other common examples of this concept at work in the healthcare field, such as abortion laws. The Supreme Court decision of Roe v. Wade gave the right for a woman to get an abortion, but allows the states to create their own regulation about funding, setting/doctors involved, counseling, and waiting periods. Another example is with HPV vaccination policies, and how requirements for school entry vary in many states.  

 

A modern and very relevant example of federalism is the policies surrounding the COVID-19 pandemic. While many countries look towards its federal government for sole authority in times of pandemic, the US gives most responsibility to state governments, and in fact has little control over states’ decisions. While many states use federal guidelines as an example, this system allows states to alter their containment policies based on what their population needs.  However, there are downsides to this system such as uneven response to epidemics, as well as aggravation of interstate inequalities.

 

Overall, giving power and flexibility to state governments allows for specific, population centered medical care and, in theory, is aimed at helping the overall health of a large country such as the US. However in practice there are many downsides as well, as can be seen from the irregular response to the COVID-19 pandemic.

#4 The History and Evolution of Private Health Insurance in the US

The health insurance landscape in the US involves both public and private components.  Typically the majority of individuals over the age of 65 use a type of public insurance called Medicare, while those under 65 use a variety of types, including private options.

Private insurance has deep roots in US history, going back to the Great Depression and WWII.  In 1929, Baylor University Hospital formed a plan in which local teachers were given 21 days of hospital care for $6 a year. This prepayment model grew in popularity and was eventually overseen by the American Hospital Association and formed the Blue Cross Network, which grew to have 20 million people by 1943. Physicians were also hit hard by the Great Depression, as many patients were not able to pay for health fees. Blue Shield was formed in 1939 by the California Medical Association to help cover these expenses. In 1974, these two plans merged to form Blue Cross Blue Shield.

Employer Based Insurance also started around WWII. As there were fewer people available to work, employers competed for workers on the basis of benefits, like health insurance. After the war, unions continued to use negotiations for health insurance as part of their strategies on behalf of workers. Private insurance has deep roots in American values, and this system of employer based insurance specifically is now deeply embedded in the relationship between administrators and unions.

The majority of private insurance today is under Employer Based Insurance/Employer Sponsored Insurance, but some choose to purchase their own independent insurance. For Employer Based Insurance, the monthly premium is taken out of the employee’s monthly salary.   As it is a type of group insurance, the size of the company factors into the format of the plan.  A large group is generally over 200 employees, whereas a small group is less than 200 employees. 

  • Smaller companies typically use state-licensed health insurance through providers such as Blue Cross Blue Shield, Aetna, or United Healthcare. The employer pays a premium for each employee, and the plan itself is regulated by the state government. 
  • Larger companies typically use a self-funded employee health benefit plan, in which the company insures itself rather than actually purchasing insurance, using a third party to do the day-to-day tasks of an insurer, such as paying claims or supervising benefits. 

Since larger companies typically cross state lines, these types of plans are overseen by the federal government under the Employee Retirement Income Security Act of 1974 (ERISA). In either format, any portion of the salary that is taken out as the premium for employer-based insurance does not count as taxable income.

However, due to high current unemployment rates, many people have lost the insurance that comes with their jobs, causing them to look towards the available public options. Unfortunately, despite the name “public” insurance may be misleading, as there is still a large coverage gap for programs like Medicaid, as they only cover people who are below a certain percentage of the Federal Poverty Line. It becomes a major struggle for those who do not fall under that criteria but paying out of pocket would be burdensome. Campaigns such as Medicare For All do work to eliminate these issues, but this would involve a major upheaval of systems that are deeply interwoven into the American healthcare landscape.