The creation of private health insurance stems from the need to address the rising cost of healthcare and provide the population with financial protection against unexpected medical expenses. These intentions are supposed to improve access to healthcare and improve the overall healthcare system. However, because of several prevailing issues, such as the high cost of healthcare in countries like the United States, or the documented instances of unapproved claims and coverages, critics have noted that private health insurance has become a mere rent-seeking middleman and most private health insurers have the goal of lining their confers without adding value.
Explaining the Criticism of Private Health Insurers: Why Private Health Insurance Has Been Considered a Rent-Seeking Middleman?
Profit-Focused Nature of Private Health Insurance
The argument that private health insurance is a mere rent-seeking model comes from its failure to uphold the purpose behind its creation. This has been demonstrated in several instances. For example, following the killing of Brian Thompson on 4 December 2024, the chief executive of UnitedHealthcare, an insurer that is part of the UnitedHealthcare Group, which is considered one of the largest health insurance companies in the world in terms of revenue and market cap, public sentiments were unsympathetic and bordered to celebratory.
Individuals flocked to social media platforms to share their stories of denied claims, bankruptcy, and delayed care. The event also highlighted the greater criticism toward capitalism and the free market as applied in the health care system. Some individuals wrote and shared their think pieces against private health insurers. Others resorted to memes to ridicule these companies. These reactions essentially underscore the disillusionment and anger toward private health insurance and the overall health insurance system in the United States.
A report from Amy Fieldman and Alex Knapp that was published in 2024 on Forbes noted that UnitedHealthcare denied an estimated one-third of claims submitted. The same article also cited a Senate report that slammed the insurer for using artificial intelligence algorithms to automate claims denial. Other insurers have also used claims-denial tactics to retain higher profit margins. Process automation company Hyperscience estimates that the automated processing of claims saves insurers in the U.S. more than USD 11 billion each year.
Criticisms From Economists and Observations From Studies
Several economists have taken aim at rent-seeking actors across the broader healthcare industry. For example, Angus Deaton, a British-American economist who received the 2015 Nobel Memorial Prize in Economic Sciences, said that he favors a single-payer health system because the current part-private and part-public system is designed to give opportunities for rent-seeking. Austrian political economist Joseph Schumpeter specifically identified private health insurers as the biggest rent-seeking middleman in the U.S. healthcare system.
The term “rent-seeking” refers to activities performed by an economic actor or group of economic actors that aim to increase its wealth without creating new wealth or value. Nevertheless, in the case of private health insurers, these economic actors have been considered rent seekers because they earn profits by acting as financial intermediaries without directly contributing to lowering the cost of health care, improving access to health care or medical services, and providing individuals with financial protection and suitable levels of care or services.
Researchers I. A. O. Odeyemi and J. Nixon concluded that the impact of private health insurers on health equity can be either positive if they can reduce access barriers or fill existing gaps or negative if they create disparities due to cost or access issues. A systematic review by R. Wu, N. Li, and A. Ercia also suggested that the role of private health insurance in extending universal health coverage alongside social health insurance can be limited due to its uneven distribution, limited financial protection, and underwhelming impact on access.
Notable Examples of Specific Rent-Seeking Activities
Schumpeter noted that the share of rent-seeking of pharmaceutical companies is relatively trivial compared to other companies within the healthcare industry. The biggest rent seekers in the industry are the private health insurers. This is based on their sizeable profits that account for more than 40 percent of the total industry profits. These companies generate disproportionately high profits relative to the capital they invest and the risks they assume. Deaton described their activities as geared toward stealing things and not producing real value.
Critics have argued that private health insurance is unnecessary in an ideal system because it does not add meaningful value. Moreover, regarding its purpose of making healthcare more accessible, critics also argue that it does not control healthcare costs. The presence of insurance often leads to increased administrative costs and marketing expenses that are passed on to the patients in the form of higher premiums, deductibles, and claim denials. Adding to this is the idea that private health insurance makes the health care system more complex and inefficient.
Private health insurance can also leave gaps in healthcare coverage. Insurers often fail to provide comprehensive or equitable access for all individuals. This occurs due to limitations in coverage design, financial barriers, limited networks of care providers, and instances of policy cancellations and claims denials. Availing health insurance also does not necessarily lead to faster care. Some cases can slow down involved processes due to the need for pre-authorizations, denials of coverage, disputes over what is covered, and delays in approvals.
Solving Rent-Seeking in the Health Insurance System and Health Care Industry and Suggested Alternatives to Private Health Insurance
Addressing the rent-seeking problems in the health insurance system and the entire healthcare industry requires systemic reforms that reduce inefficiencies, prioritize patient care, and limit the extraction of profits. These include increasing government regulations pertaining to transparency and accountability in pricing, coverage, and practices, as well as promoting market competition by reducing monopolistic practices and strengthening access to social health insurance. Others have forwarded the idea of decoupling insurance from employment to eliminate gaps in coverage and allowing consumers to purchase insurance across territorial lines.
There are also alternatives to private health insurance. The most notable one is the single-payer healthcare model which involves a government-run system where a single public entity funds and manages services for all citizens. Examples include Medicare in Canada and the National Health Services in the United Kingdom. A cooperative or non-profit insurance model is also a possible alternative. It centers on community-driven operations focused on member benefits rather than profits. There is also a bolder proposal to eliminate insurance intermediaries through a direct primary care membership model. Concierge medicine is a prime example.
FURTHER READINGS AND REFERENCES
- Fieldman, A. and Knapp, A. 2024. “UnitedHealthcare Denies More Claims Than Other Insurers.” Forbes. Available online
- 2020. “Benefits of Automation in Healthcare and Insurance.” Hyperscience. Available online
- Odeyemi, I. and Nixon. 2013. “The Role and Uptake of Private Health Insurance in Different Health Care Systems: Are There Lessons for Developing Countries? Clinico Economics and Outcomes Research. Informa UK Limited. DOI: 2147/ceor.s40386
- Robb, G. 2017. “Nobel Economist Takes Aim at Rent-Seeking Banking and Healthcare Industries.” MarketWatch. Available online
- Schumpeter, J. 2018. “Which Firms Profit Most From America’s Health-Care System: It Is Not Pharmaceutical Companies.” The Economist. Available online
- Wu, R., Li, N., and Ercia, A. 2020. “The Effects of Private Health Insurance on Universal Health Coverage Objectives in China: A Systematic Literature Review.” International Journal of Environmental Research and Public Health. 17(6): 2049. MDPI AG. DOI: 3390/ijerph17062049