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Keep your eye on the health insurance prize

As I noted in my earlier post today, the big news is that people are fretting about the Obama administration abandoning its commitment to the public option — a government-run health insurance company that would compete with private insurance companies. I’m a supporter of the public option, and I really hope that it makes it into the final bill. But it’s not the prize. The prize is the individual mandate. The individual mandate says that everyone must have health insurance. It’s the only non-negotiable piece of health insurance reform.

Why’s it so important? Because of adverse selection. Whenever anyone talks about a plan to reform health insurance (or talks about insurance, period), adverse selection is the issue that must be addressed. Conceptually, it’s simple. Adverse selection describes the condition where insurance is usually purchased by the people most likely to file claims.

Let’s say I want to start an insurance company — the way to make money is to take in more money in premiums than I pay out in claims. That’s the bottom line for car insurance, flood insurance, health insurance, or credit default swaps.

Premiums must go up to account for the amount I’m paying out in claims, plus the overhead of the business. One thing I can do to make my business more profitable or lower my prices is get rid of the people who file too many claims. This is why insurance companies charge people with preexisting conditions more money, refuse to cover sick people, and so on. It’s also why they try to dump expensive customers by any means necessary rather than paying all their claims.

This is where adverse selection comes into play. Only people who think they will need insurance are liable to buy it. People who don’t live in areas that don’t flood rarely buy flood insurance. Young healthy people often choose not to buy health insurance. People who drive old clunkers only buy the auto insurance that’s mandated by law.

If I offer health insurance, this is a problem. Without healthy people who probably aren’t going to need to use their health insurance in my plan, I’m going to have to charge a lot of money to cover the claims from the sick people who I am insuring. Those healthy people do still need health insurance, though. Any of them could get sick — really sick — any time. Sure, they are healthy and probably aren’t going to have a stroke, but there are diseases who strike the young and healthy as well. Hospitals in America cannot turn away patients, so they wind up getting treated anyway, not paying their hospital bills, and either filing for bankruptcy or dying because they can’t afford proper followup care.

This is where the individual mandate comes in. It simply requires everyone to have health insurance. That maximizes the size of the risk pool and eliminates adverse selection as a problem for health insurance companies. As long as everybody is buying in, they can sell insurance to people with preexisting conditions at the same rate as everyone else without worrying about it. (This is how insurance through employers works. If a company has enough employees, then the differing health of the employees doesn’t matter much.)

And once there’s an individual mandate, lots of good things follow from it. First of all, everybody is insured. Secondly, the government has a stronger incentive than ever to control health care costs, because it would be subsidizing the premiums for the poor. Perhaps that would even lead to the creation of a public option that seems so elusive right now. Finally, it is a huge leap for America. Imagine a real commitment, written into the law, that every American will have health insurance. That’s a big deal — the biggest deal. Everything else is an implementation detail. Does anyone really think that five or ten or twenty years from now, anyone will vote to take away their own health insurance? The individual mandate is the ballgame.

13 Comments

  1. Interesting perspective. No one will vote to take away their own insurance, true.

    I’m concerned about the viability of the system as a whole. If it costs so much that it drags down our economy, then it’s essentially bankrupting our country.

    So if we mandate that everyone is covered without a public option in place, then the insurance companies will make a giant profit and be able to further fund the suppression of a public non-profit option. They will bankrupt the country by concentrating power and wealth in the hand of a few CEOs, taking it away from us, the little people.

    I still think that we need a non-profit mandate in the insurance mix to compete with those evil health suppression (insurance) companies. This co-op compromise is my last straw. If they weaken this reform any further, then my liberal vote is gone.

  2. What I feel at this point is that I know the President wants the public option. I know many Democrats in the House want the public option, including the Speaker. I know that a number of Democratic Senators want the public option. If it’s left out, I think we can be sure that it was because a bill that included it was not going to pass. No President gets all the legislation they want, even when their own party is in control of Congress.

    My favorite quote about politics is that it’s the art of the possible. It’s worth remembering.

  3. With respect, I think you are wrong about the idea that if we get a bill without it, it’s because one could not pass. If we get a bill without it, it could well be because the gang of six centrist-ha-ha Senators on the Finance Committee enacted their own ad-hoc veto on the idea. A bill with it could likely get 60 votes; as Atrios just posted, that’s the whole reason that Baucus & co. want to keep it from ever getting to the Senate as a whole. I don’t think any Democrat is really going to vote no on a comprehensive package that included a public option. They know it would be primary suicide to be the one or two D votes that meant that healthcare reform did not pass.

    Bob Herbert in the NYT this morning makes my point about the dangers of forcing the compulsory purchase of private insurance better than I have been able to. A non-optional payment with penalties enforced by the federal government is effectively a tax on citizenship. Taxes paid directly to a private party are an extremely dangerous precedent. That is a game any number of private industries would like to get in on.

  4. An insurance mandate doesn’t reduce costs. It only shifts them from the old/sick to the young/healthy.

    However, everyones rates will go up because insurance companies will want as few old/sick people as possible while maximizing the young/healthy people because only the young/healthy people make them money.

    So whichever company at any given time has the lowest risk pool would be able to charge the lowest rates, however they wouldn’t charge lower rates, because if they did they might attract more customers? Why is that bad? Well, why is that good? New customers are more likely to be old/sick if they have the lowest risk pool. But even if getting old/sick people and young/healthy people was evenly possible what is the incentive to lower rates?

    So they will not lower rates, they will put their rates up at the same level of their competitors to deter just anyone from joining while trying to get younger/healthier people into their plan and older/sicker people in the other’s plan via advertising. They might even advertise in favor of old people buying their competitors plans!

    If the public option is included, they’ll all try to recommend older/sicker people to the public option to bring its rates up so they can to.

    However, there is sooooo little competition to bring down rates anyway. Do you really think that the insurance companies would lower rates just because they might have lower costs?

    Lol. Complain about costs and insurance companies and then write a law requiring everyone to buy insurance? Absurd.

    In any case its a stupid idea, but not only that, it is a willful disregard for everyone’s rights to decide what to do with their own money and healthcare, and of course it is a new middle class tax.

    Its also blatantly unconstitutional (against the law) and no amount of “interpretation” can change that.

  5. Reluctantly, I am forced to conclude that the mandate ALONE is not a good outcome. The insurance industry expects to emerge from the current process with reduced accountability and and increased ability to perform all kinds of adverse selection, NOT by refusing to sell policies, but by refusing to deliver services. It would be dicey enough, for all the reasons explained elsewhere, if people were being coerced into honest, accountable business relationships with private entities — subsidized or not–, but the relationships will not be honest or accountable, so it is a total absurdity. The mandate makes no sense except in a single-payer context.

  6. Wei-Shin, I do not agree with your comment that it will bankrupt the country. If every single insurance company is expensive because of huge margins, there’s a niche in the market for a cheap, small-profit high-volume one. It’s essentially open source: if it bothers you, start the company that you want to be a customer of. Companies always take money from customers and redistribute it inside the company. Every citizen’s lifestyle is directly enabled by and requires companies already (e.g. most of them have health insurance). If that’s not a problem now, how does it become a problem?

    Jacob Davies, about your taxes paid directly to a private party: because there’s choice what private party you pay it to, it’s no big deal. I’m not sure: is the choice with the consumer? In my opinion we are already in a situation where some things are almost compulsorily bought by everyone to support their life, so it is precendented by our lifestyles. If the government makes the choice, it’s really very similar to every time the government awards a private contract. That’s common enough for the way the government works, since they rely upon outside companies for the greatest part of their hardware and software, for example.

  7. Frank Wilhoit: if the contractual obligations are not being met, the wronged party should take it to court. There is a system for fixing broken business relationships already. I don’t think the belief that the system is broken should stop us from moving forward into a more healthy system overall (especially when there are tools to force the system to work). If you don’t believe in the justice system, propose fixes to your representative in government.

  8. For what it’s worth, I agree that getting only the individual mandate plus some tighter regulations on the insurance business is not a good outcome. Well, I actually I don’t know if I agree with that. It’s not the optimal outcome, but it’s a lot better than what we have today.

    As far as the legislative process goes, it’s the one we’re stuck with. I suppose Max Baucus could be doing something different, but in the end his committee has to mark up a bill and that bill has to make it out of his committee. There are a number of steps to go after that — there are four other bills that have to be reconciled with that one. And I am sure that he knows exactly how most Democrats feel about his process.

    I guess the bottom line for me is that if we end this crazy process with a bill that makes things a lot better, even if it’s not the one I would hope for, I’m not going to count it as a loss but as a win.

  9. This is the status quo: every time any treatment or test is delayed into the next earnings-reporting quarter, someone at an insurance company gets a bigger bonus. Anyone who can accept that has no moral compass.

    I take as given that some kind of legislation will pass this year. The only prediction that can confidently be made is that it will structurally eliminate any accountability for the insurance industry. In its aftermath, what is quickly going to be come almost universal is what I will call sub-rosa rescission, whereby the insurance companies issue as many policies as they can, but essentially stop paying any claims, except to entities with which they have interlocking ownership. That already includes most hospitals and drug manufacturers. Group medical practices will quickly sell themselves to the insurance companies when they stop getting paid.

    The idea that the courts can provide effective remedies for this is utterly fatuous. Think of the number of injured parties, the size of each disputed amount, and which side has the burden of proof. (Any legislation that makes it onto the books will contain a clause forbidding class-action litigation.)

    In this time and place, the justice and political systems are totally dysfunctional and have lost all institutional legitimacy. There is no incremental way forward. Our challenge is to prevent as much backsliding as we can while waiting for the inevitable discontinuous transition (whose form cannot be foreseen).

  10. Competition in the health care industry will come if I am allowed to be a health care consumer, who can reasonably easily purchase an equivalent policy with a different company. Currently, we do not have this option, and there is no true competition, so companies can get away with much of the things they do today. If my insurance company is too expensive, delays treatment, or is otherwise an obstruction to me receiving health care, I don’t have many options. But if I can easily take my business elsewhere, the insurance companies will treat their customers better or they will go out of business because they no longer have any customers. True competition will eliminate many of the problems we have today.

    And as far as out political system is concerned, for good or bad it is as dysfunctional as it always has been. This is a blessing and a curse, and to believe that our system or our people or our legislators are worse off today ignores our history as a nation.

  11. The current cost of health insurance keeps going up. More people are being left without insurance every day. The system is costing more because healthcare costs keep going up. (The Congressional Budget Office projects that, without changes in law, total spending on healthcare will rise from 16% GDP in 2007 to 25% in 2025 and 49% in 2082.) I call that bankrupting America. There are many reasons for this, which I describe here. http://healthbyaphysician.blogspot.com/2009/08/why-health-care-costs-so-much-and-some.html

    Unless people get healthier again or we provide more rational and preventive care, this country’s health problems will eventually cause a recession or worse.

  12. all i’ve got to say is that if there’s an individual mandate with no public option, watch out for the backlash.

    i don’t have any insurance right now and if they’re going to make me a criminal for not paying those crooks and liars in the insurance industry, then the dems are going to have some big problems.

  13. The US Government is once again sticking its nose in an area it has no business. A one size fits all solution won’t work i.e. FORCED Health Insuarance. Isn’t anyone the least bit concerned about the loss of liberty and the freedom to make ones own decision and find ones own way.

    THE USA IS NO LONGER THE LAND OF THE FREE….IT IS A LIE

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