Insurance is what makes US health-care prices so high

Consider this: Health insurance is a product so terrible that few Americans voluntarily buy it without receiving a sizable subsidy.

"No one would design a system like the one we have. And no one did," UnitedHealth Group CEO Andrew Witty wrote this month. "It's a patchwork built over decades."

Today, insurers are accused of pushing up prices for medical care and then denying legitimate claims. Their leaders are said to be greedy or incompetent. In reality, we have a more fundamental problem: Health insurance can no longer pay for or manage modern health care, and the patchwork that Witty described is not fixable. It makes no sense to try.

Instead, Americans need to begin to create a working health-care marketplace that better aligns the incentives of health-care providers with the rapidly changing needs of patients.

Health insurance was meant to work like other kinds of insurance: When policyholders got sick, they would use the collective financial resources of the healthy to cover their costs. But this model was designed to pay for emergencies such as hospitalizations — not to "share the risk" of erectile dysfunction, weight loss, lifelong management of chronic conditions, or the mental health treatment needed by 1 in 5 Americans. The Centers for Disease Control and Prevention estimates that 90% of America's health-care expenditure goes toward chronic and mental health conditions.

It's as if homeowners' policies expanded from insuring against fires and floods to also covering utility bills and property taxes, or even replacing worn-out furniture.

Yes, some people become extraordinarily ill during their lives. But all of us, even the relatively healthy, now use a lot of health care. It's no longer an unexpected need — an insurable risk. It has turned into one of our largest expected needs. Expected needs aren't insurable.

Trying to force the square peg of insurance into the round hole of health-care needs has created a terribly inefficient business. The United States spends five times more per capita on health-care administration — paperwork — than any other developed country. Yet rather than drive cost control, this system codifies high prices while making insurers, not patients, the primary customers of health-care providers. No medical provider can generate additional profits from insurers by cutting prices or controlling costs. Therefore, no provider does.

When insurers are the primary payers, the marketplace is distorted. So much of what Americans hate about the system — limited networks, paperwork, billing mistakes, terrible customer service, opacity — arises from the way clinicians serve insurers' business priorities rather than patients' needs.

Policymakers cement the centrality of this model. Medicare, Medicaid and Veterans Affairs health care all have been dressed up as pretend insurance. Americans individually pour hundreds of thousands of dollars into the system through premiums and deductibles, yet they somehow keep believing that someone else is paying for their care.

The disconnect between actual health care and the insurance model is widening, as care grows more complicated, more pervasive, more personal and more effective. As lifestyle drugs, remote monitoring and treatment, genetic medicine, rare-disease cures, and AI-driven care expand the uses and effectiveness of medicine, insurance processes are increasingly unable to keep up.

To replace its obsolete insurance structure, America has two choices.

One is to emulate other nations and make health care a social utility, with government controlling supply and prices to ensure equal access to care. But this model utterly fails to drive the innovation that's essential to improving health outcomes. Had the United States copied Britain's National Health Service when it was established in 1948, Americans might today enjoy the glories of equal access — to roughly 1948-level care.

Instead, America should get the entire industry to compete vigorously for customers — for patients, that is, not insurance companies. Spending power needs to shift from insurers and government subsidies back to individuals, through mechanisms that patients control. Competition among providers for dollars spent directly by prudent consumers would not only bring prices down but also encourage more innovative approaches to packaging care. And this care would be better aligned with patients' diverse needs.

In such a system, insurance and government would play their traditional functions but no longer act as the industry's primary customers. Insurance would spread the financial risk of rare and major episodic medical needs. Governments would subsidize vulnerable populations so they could fully participate in the marketplace for ordinary health care.

Only when patients themselves make choices about how to spend health-care dollars — even if some of those dollars come from government subsidies — can providers' incentives align with patient needs. Only then will there be real pressure to improve health-care quality and lower costs, and continue to do so in the face of constant demographic, technological and cultural change.

The U.S. health-care system cannot be changed quickly. But there are immediate opportunities to unleash market forces into large corners of it. Consider that Americans today spend between $200 billion and $300 billion a year directly on health care, via deductibles and the cost of uninsured care. This, on its own, would be a sizable consumer industry.

For example, insurers could be banned from requiring patients to spend their annual deductibles only within their closed provider networks. Medicare could remove its rules that effectively bar providers from offering discounts below Medicare rates. Insurers could also be required to be transparent about how they reimburse providers for specific services. And state rules that make insurers accept providers who charge less than their network price could be extended nationally. Government programs that pay hospitals more than competing providers for identical services could be scrapped.

Countless other effective changes could be made once competition for consumer dollars becomes the guiding principle. Insurance could gradually become less comprehensive, and the developing consumer market would better manage costs.

After nearly 60 years of reform failure following the passage of the Medicare and Medicaid Act, we first need to give up on the idea that the insurance-based system can be fixed. As we shift some of the nearly $5 trillion in annual health-care spending ($14,570 per American) from insurers back to individuals, we will discover that, in a competitive marketplace, high-tech health care can offer better quality at lower prices. We'll develop the confidence to shift more of our health care spending away from the pure weirdness of the insurance-reimbursement model and toward better management of our most important consumer industry.

David Goldhill, the CEO of Sesame, a health-care marketplace, is the author of "Catastrophic Care: Why Everything We Think We Know About Health Care Is Wrong."