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The Health Insurance Shell Game

The views expressed are those of the author and are not necessarily those of Scientific American.

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The insurance industry had a rocky start a century ago. It was clear that there were untoward events that could befall any of us with catastrophic results, from the incineration of a home to the loss of the ability to maintain gainful employment from injury or death.

Insurance offers a mechanism to share this risk. The stumbling block was the possibility that the insured might burn down their home to collect. Once it was realized that “moral hazard” could be held at bay by investigating for fraud, there was little to hinder the growth of an industry designed to serve our risk adverse proclivities. Almost every adult has some experience valuing the expense of sharing risk for a variety of hazards. After all, automobile insurance is generally compulsory and most of us are familiar with notions of deductibles and riders when it comes to homeowners’ policies. The possibilities are not an abstraction; we can envision the house or its contents damaged, destroyed, or stolen leaving us bereft. What would reducing that prospect be worth to us? As is true for many value-based decisions, the answer brings a mix of reason and intuition1 that can produce surprising outcomes2.

Health insurance is even more complex, and has always been so. The industrial revolution saw the development of “Friendly Societies” in Britain and the Prussian “Krankenkassen”. These were trade-based institutions that allowed advantaged workers to purchase insurance to provide “sick pay” but there was little else. The sea change was the Prussian “welfare monarchy”3, an extensive insurance scheme that encompassed universal health care and a complex approach to disability insurance.4 Modifications of the Prussian scheme spread across the industrial world. It made landfall in the United States in time for the presidential election of 1912. Only one component took root in America: Workers’ Compensation Insurance but not as a national insurance scheme. It fell to the each state to regulate an insurance scheme to compensate injured workers for lost income and medical expenses.

This set the stage for state-based regulation of employer-sponsored private health insurance schemes going forward. But forward momentum appears anything but swift or linear in a country that trusted physicians to charge “commensurate with the services rendered and the patient’s ability to pay” (AMA Code of Medical Ethics, 1957.) Health Insurance as both an industry and a product has become a frustrating web of inefficiency and confusion.

No one needs to be reminded of the escalating costliness of this approach to sharing the risk in healthcare or discordance between the costliness in the United States and elsewhere. No one needs to be reminded of the bizarre machinations already in place and now unfolding to reign in this costliness. What are less discussed are the processes by which these machinations distort peoples’ values, all of us, for whom purchasing health insurance is to provide security against the untoward consequences of clinical misadventures.

The standard approach is to ask employees to decide how much insurance should be purchased and for what coverage. If only it were that simple, but it is not. The average employee has to decide on an insurance plan that hosts a dizzying array of fees and coverage: How much will you pay out-of-pocket before insurance kicks in (deductible)? What’s the maximum coverage (cap) if I get really sick? Is a million dollars enough? Two million? What about co-insurance?  What is co-insurance? Do co-pays count towards the deductible? What about tests?

Answers to these and similar questions dramatically alter the monthly premium, which is not a trivial consideration for the average American employee. In homeowner’s insurance such questions can test one’s mettle when valuing the loss of a family heirloom. How are they even ponderable when valuing health care for one’s self or one’s family? Research suggests they are not, at least not in an optimal way5.

Today’s American employees register their preference for health insurance at the start of employment or during an annual confusing and worrisome time called “open enrollment”. The process is familiar to most employed Americans who must consider and value variations in premiums, deductibles, co-pays, and the like. It is an annual rite because the menu of options often varies year-to-year reflecting employer prerogatives.

The workers’ input to the design of healthplans and their component fees is after the fact; their preferences are constrained by the options offered. They are faced with a complicated choice that pits financial savvy and preconceptions as to the value of health care against their tolerance of risk. This is the model that has been adopted by the Affordable Care Act (“Obamacare”) in the formulation of the Exchanges which are about to make their way deeper into the American landscape.

One might predict that few of us are a match for weighing the array of benefits in light of the costs we might predict we would face. That assumption did not prove true when we put it to the test. We invited members of the North Carolina State Employee Association and faculty/staff of Duke University to volunteer for a web based survey. The survey assessed demographic features of 400 volunteers and presented them with a series of panels, each of which offered up 3 options in health plan design with variations in the description of doctor visit fee, annual deductible, proscription fee, lifetime coverage, choice of doctors, and monthly premium. The Figure (below)  is a display of the features of the plans that influenced the preferences of the State Employees.

With further analysis we could demonstrate that the State and Duke employees would be willing to spend several out-of-pocket dollars on co-pays rather than a dollar more in premium. Furthermore, this sensitivity to premium is greatest for younger employees insuring only themselves; non-white families are more sensitive to annual deductibles.6 Clearly these volunteers were weighing the value to them of greater expense assuming that the health policy had intrinsic value worthy of as much as they could afford. The more their resources were limited, the more they were willing to run the risk of incurring expense modulated by their assessment of their risk for sickness.

aRange, $100, $300, $500. Results show a preference for the lowest deduction amount. bRange, $1 000 000, $2 000 000, unlimited. Results show a preference for unlimited coverage. cRange, $0, $1 000, $2 000. Results show a preference for the lowest deductible amount. dRange, $0, $20, $40. Results show a preference for the lowest prescription copay amount. eRange, 100, 200, 400 doctor network. Results show a preference for more choices. fRange,  $0, $25, $50. Results show a preference for the lowest copay.

Utility for Plan Attributes in the State Employee Sample (click to enlarge). aRange, $100, $300, $500. Results show a preference for the lowest deduction amount. bRange, $1 000 000, $2 000 000, unlimited. Results show a preference for unlimited coverage. cRange, $0, $1 000, $2 000. Results show a preference for the lowest deductible amount. dRange, $0, $20, $40. Results show a preference for the lowest prescription copay amount. eRange, 100, 200, 400 doctor network. Results show a preference for more choices. fRange, $0, $25, $50. Results show a preference for the lowest copay.

Generations of Americans have now been lulled into thinking all of this is sensible. “Gaming” the system is the way it is and the way it will be. Health insurance may seem like a logical variation on homeowners’ insurance. But there is nothing sensible about it. Choosing health coverage is a totally different exercise from choosing to insure a family home or heirloom. For one, the home or heirloom can be appraised. Health can’t be appraised; in fact, it is difficult to define. How valuable is the care, which elements of care are less valuable and which might one rationally do without? No one offers a policy designed to such particulars, and no person can be reasonably expected to fully know what they will want or need as a sick, scared, patient during the savvy consumer-minded extravaganza of open-enrollment. For health insurance, the “moral hazard” does not pertain to the insured; it pertains to the other stakeholders participating in the system.

Medicine in the 21st century should be an exercise in informed medical decision making. For each option in diagnosis and intervention, the patient must be encouraged to ask, “Based on the available science, what is the best I can expect?”  And then actively and with comprehension, listen to the answer. For some options, there is no informative science. For many, the science may be robust but demonstrations of efficacy have proved elusive, inconsistent or marginal. Examples include interventions for occlusive atherosclerotic disease, elective procedures on backs, shoulders and knees, pharmaceutical management of cognitive impairment, situational affective disorders, type 2 diabetes and essential hypertension, along with various screening protocols that afford minimal if any demonstrable benefit. The therapeutic decision hinges on how the patient values the remote possibility of benefit and the probability of harm.

Shouldn’t health insurance in the 21st century live by the same razor? How valuable is the care, which elements of care are less valuable and which can one rationally do without? Rather than tolerate increases in co-pay and deductible, shouldn’t we be able to pay less because we do not value particular options. Better yet, shouldn’t the options relate to the likelihood of benefit? Those of us who consider interventions with unlikely or small benefits of little value should not be asked to burden the cost of providing such for those who value such. We should be offered a “high efficacy option” at lower cost than an “any efficacy option” and no one should be offered an option that indemnifies for interventions that have been studied and cannot be shown to offer a clinically meaningful benefit. In fact, if the “any efficacy option” was transparent in terms of limitations in efficacy and risk of toxicity, would anyone want to share in the expense of indemnification or balk at a policy that did not cover interventions that lacked substantive evidence for meaningful effectiveness7?

Focusing primarily on cost, costliness, and administrative priorities takes the health of the “health care system” as the primary goal. It is a focus that provides no measurable advantage in caring for people. Persisting in this approach, and even expanding it, provides a temporary diversion, but not a solution. Neither the practice of medicine nor its infrastructure is the reason for medicine to exist. Furthermore, becoming a savvy consumer of “health care” is not what is meant by informed medical decision making. Medicine’s primary calling is to the personal, unique, idiosyncratic needs and values of each person who chooses to be (or must become) a patient. And in that calling is the solution to the crisis of costliness.7


1. Kahneman D. Thinking Fast and Slow. New York, NY: Farrar, Straus and Giroux; 2011.

2. Ariely D. Predictably Irrational. The hidden forces that shape our decisions. New York, NY: Harper Collins; 2009.

3. Beck H. The Origins of the Authoritarian Welfare State in Prussia. Ann Arbor, MI: University of Michigan Press; 1995.

4. Hadler NM. Stabbed in the Back. Confronting back pain in an overtreated society. Chapel Hill, NC: University of North Carolina Press; 2009, 93-138.

5. McGraw AP, Schwartz JA, Tetlock P. From the Commercial to the Communal: Reframing Taboo Trade-offs in Religious and Pharmaceutical Marketing. Journal of Consumer Research 2012; 39: 157-73.

6. Schwartz J, Hadler NM, Ariely D, Huber JC, Emerick T. Choosing among employer-sponsored health plans. What drives employee choices? J Occupational and Environmental Medicine 2013; 55: 305-9.

7. Hadler NM. The Citizen Patient. Reforming health care for the sake of the patient, not the system. Chapel Hill, NC: University of North Carolina Press; 2013.

Nortin M. Hadler and Janet Schwartz About the Author: Dr. Hadler joined the faculty of the University of North Carolina in 1973 and was promoted to Professor of Medicine and Microbiology/Immunology in 1985. Much of his scholarship has focused on issues in employee health and safety. The third edition of Occupational Musculoskeletal Disorders (LW&W 2005) provides a ready resource as to his thinking in this regard. In the past decade, he has broadened the scope of this work beyond the workplace. His assaults on medicalization and overtreatment appear in many editorials and commentaries and 5 recent monographs: The Last Well Person (MQUP 2004) and UNC Press’ Worried Sick (2008), Stabbed in the Back (2009), Rethinking Aging (2011), and Citizen Patient. (2013).

Dr. Schwartz is Assistant Professor of Marketing in the A.B. Freeman School of Business, Tulane University, New Orleans, Louisiana. She is a well published cognitive psychologist whose post-doctoral career path included appointments at the Woodrow Wilson School of International and Public Affairs at Princeton University and the Fuqua School of Business at Duke University. Her current research is at the intersection of marketing and public policy where she uses insights from psychology and behavioral economics to investigate how consumers navigate the healthcare marketplace.

The views expressed are those of the author and are not necessarily those of Scientific American.

Comments 15 Comments

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  1. 1. candide 10:31 am 06/17/2013

    One simple piece of logic is: If companies are pulling large amounts of profit out of Health Care they are increasing costs.

    Link to this
  2. 2. Scienceisnotagenda 11:03 am 06/17/2013

    Nice if SA kept the politics out of its site.

    Link to this
  3. 3. Bora Zivkovic 11:21 am 06/17/2013

    Nice if commenters did not see politics in everything they don’t like out of their own political reasons…

    Link to this
  4. 4. rationalrevolution 12:36 pm 06/17/2013

    This sounds like a bunch of nonsense to me. I don’t think there should be ANY choice at all involved with health INSURANCE. Everyone should have universal coverage.

    We don’t need endlessly customized options or different efficacy options, etc., we all simply need an healthcare system that covers everything.

    The decision about what to actually DO and what to cover should be made at the time of diagnosis and treatment.

    What I’ve put forward here in the section on “Real Health Care Reform” (, would be a system with three main sources of funding: a flat annual premium charged to everyone (subsidized for the poor), a sales tax applied to all goods and services sold, which varies based on the item’s relative association to health risk, and employer fees based on worker’s compensation coverage, i.e. it would piggy back on the work comp system but cover long term health risks, not short term accident risks.

    So that’s where the funding would come from. Coverage would be universal, meaning that everyone would be fully covered by the exact same plan.

    From that, I agree that the size of the co-pay should be based on efficacy. I don’t think we should build efficacy into the insurance plan, we should charge based on efficacy at the time of treatment.

    Everything with a certain level of efficacy should be fully covered, with no co-pay at all. Then diminishing levels of efficacy beyond a certain threshold should be accompanied by co-pay percentages.

    Using the type of plan I’ve laid out would have the following result:

    1) Every individual has the same cost of base coverage, which means that there is no discrimination based on genetic factors outside an individual’s control.
    2) Behavioral risks are highly accounted for via the sales taxes, which does charge different people differently based on the choices they make.
    3) Behaviorally pricing is accomplished without privacy violation, because it happens via sales taxes, not personal profiling.
    4) Health risk pricing is tied directly to decision making, and occurs at the time of action, which has reinforcing effect. The cost of eating a cheese burger vs a salad is felt at the time the choice is made, so it can be better internalized and accounted for, possibly leading to reinforcement of positive health choices, which can better actually reduce health care expenditures.
    5) Employer’s contributions are limited to the actual risks that they put onto individuals.
    6) Again, pricing for efficacy occurs at the time of decision making, thereby reinforcing value decision.

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  5. 5. JPGumby 1:04 pm 06/17/2013

    Disappointing that this article talked about problems, but not solutions.

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  6. 6. larkalt 1:45 pm 06/17/2013

    I’m using an expensive drug for an off-label use, which the doctor and I have observed to be effective.
    I don’t have health insurance, I pay for it myself.
    If I were forced to buy health insurance, likely the health insurance wouldn’t pay for the offlabel use. It’s the best drug I’ve found so far – so the result of compulsory health insurance would be that I pay for other people’s health expenses AND my own.
    Wanting scientific proof of efficacy sounds good until you get problems that science doesn’t know much about.

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  7. 7. marclevesque 2:26 pm 06/17/2013

    The authors- Informative, I had no idea, lots to consider

    Bora- : )

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  8. 8. DuFarle 3:07 pm 06/17/2013

    Please to remember and never forget; the life insurance company is betting you are going to live and YOU are betting you are going to die. Using the Gompertz curve when you reach 99 years old there you can’t buy any life insurance. So it is only now the health insurance companies realize they can make more in the long run either off the public or the government. As a classic example of the Cobra Effect; hospitals make much more when the foul up by keeping you hospitalized. All a matter of economics and mathematics. Politics only enter if there is ignorance.

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  9. 9. monk tavern 10:01 pm 06/17/2013

    First: Insurance inevitably distorts any market it is in, creating an upward price spiral.

    Further: Government regulations allow insurance companies to participate in price fixing, via “risk pools.” If another industry did this, it’d be called “racketeering.”

    Further still: It’s interesting that the term “moral hazard” is always applied to insurance *buyers*. It’s high time we recognized that there’s plenty of “moral hazard” on the side of insurance *sellers*, in that they consistently misstate and/or evade the terms of their contracts.

    Next: Everything is political, economics particularly so. Pretending otherwise is idiotic.

    Finally: I cannot believe that Scientific American editors cannot tell the difference between “adverse” (wrong) and “averse” (correct) in the article. It’s sad to see how far this magazine has fallen.

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  10. 10. Jerzy v. 3.0. 8:54 pm 06/19/2013

    @4 “I don’t think there should be ANY choice at all involved with health INSURANCE. Everyone should have universal coverage. ”

    This is the case in eg. Switzerland. Except dental insurance, every medical insurance company must cover everything.

    Which sounds right, because every human can get (practically) every disease, and average man cannot estimate his/her risk of particular disease categories.

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  11. 11. rationalrevolution 1:16 pm 06/20/2013

    @10 Exactly. “Choice” is just a term of American propaganda. “Choice” in terms of health insurance just means, “We are going to present you list an array of sub-optimal options, of which you will need to try and choose the least bad one.”

    When you talk about “universal coverage” people say “it eliminates choice”! Well, duh, of course it eliminates choice, now you don’t have to choose among different plans that all lack certain things, you now get EVERYTHING.

    The insurance industry is great at how they distort this discussion. We don’t need choice in terms of insurance, we need choice in terms treatment.

    Ironically, the fact that you have to chose among various limited plans means that you by definition have reduced treatment choices.

    Our current medical insurance system is completely absurd. employer provided insurance itself is completely absurd.

    The first objective of real reform should be the total elimination of employer provided health insurance.

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  12. 12. bucketofsquid 2:30 pm 06/26/2013

    @Scienceisnotagenda – Every post of yours I’ve read has been very political so I’m really at a loss as to what your complaint is.

    @RationalRevolution – I don’t know the details of your plan but government funded health care was good enough for Kaiser Friedrich Wilhelm IV so it is good enough for me. Every point you made is painfully obvious to me. The only downside is you can’t have the government setting prices for healthcare treatment because as we have seen repeatedly, lack of reward for excellence leads to a lack of excellence over all. Doctors and such need to set their own prices but should have a public list of all of the outcomes for the past 10 years or so. It should be entirely based on patient opinion and malpractice convictions.

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  13. 13. CPO_Ryback 5:31 pm 07/8/2013


    Neither of the authors have any real-world experience with insurance, finance, accounting, economics, operations, management, executive leadership.

    This is terrible. Awful. Ridiculously simple, one-sided, and 99.99999% useless.

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  14. 14. CPO_Ryback 5:35 pm 07/8/2013


    About the authors’ lack of real-world experience –

    Hey, Obama doesn’t have any, either. In case SA forgot.

    You are welcome.

    Link to this
  15. 15. buboy 1:37 am 08/15/2013

    Informative article, But gained a lot of criticisms.

    If insurance is involved, i only trust “PPLIC

    Link to this

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