Medicare And Commercial Health Insurance: The Fundamental Difference
As the debate over Medicare continues in connection to America’s fiscal problems, it is critical to understand how Medicare differs from commercial health insurance for working people. There is a fundamental difference between these two types of health insurance plans, one social and one commercial. The basic difference between Medicare and commercial insurance is that Medicare is designed to absorb risk, serving individuals who have or may have costly and complex medical needs as well as the relatively healthy, whereas commercial insurance is required to protect its business interests by avoiding those most likely to use medical care. That’s why Medicare was first enacted. People over 65 were unable to buy commercial insurance because they use three times more medical services than working people; it was unaffordable or insurers simply refused to provide it. And now it’s simply unrealistic to imagine that commercial insurance companies will change their fundamental business model and work to protect the health and financial security of most Americans. Medicare’s mandate: Medicare is a federally administered insurance program that Americans pay into throughout our working lives and enroll in after they retire or in case of a serious disability. It pools the resources of the entire nation to protect older and disabled Americans from the risk of an unforeseeable financial disaster in the event of an acute illness, an injury, or an expensive chronic condition. All American workers finance the program and all are covered by it once eligible: no one is excluded because of their age, health status, or their income. Meanwhile the program is obligated to pay for all necessary care for the eligible population, wherever they live in the country and whatever else may be true about their history, prospects, and preferences. Medicare only denies claims for medically unnecessary care. Commercial insurance’s mandate: Commercial medical insurance, even with regulations, has an entirely different mandate. Its fundamental purpose is commercial. Insurance corporations receive premiums that must fund the costs of their enrollees’ health care and administrative costs, as well as profit margins sufficient to allow borrowing in the capital markets. To make that work, insurance firms avoid risk. They are rewarded for avoiding, within the rules of the day, those who are already sick, those likely to become sick, and those whose incomes are relatively low .
Medicare is more cost-effective than commercial insurance: Commercial insurance is less effective than Medicare on any number of metrics. Because Medicare has such an enormous coverage pool, the program has bargaining power that no commercial insurance c ompany can match. On average, Medicare manages to pay 22 percent less than what commercial plans pay for physician services, so the only way those plans could compete would be by offering 22 percent fewer services. Only Medicare is designed to insulate Americans from risk: This essay has laid out the differences between two different ideal types of insurance. The realities of how plans actually work can be substantially more complicated. Medicare hospital insurance (Part A) most fully conforms to the social insurance model, since it is financed by proportional contributions from all citizens, whereas Part B uses general revenue and a yearly premium. Meanwhile regulations can moderate the difference between commercial and social insurance. But nothing can change the underlying reality that programs like Medicare are designed to absorb and broadly distribute risk, protecting everyone, while commercial insurers are designed to select and protect individuals with the fewest needs. [Source: http://healthaffairs.org/blog/2012/02/15/medicare-and-commercial-health-insurance-thefundamental-difference/]