By John Goodman
John Goodman’s Health Policy Blog
January 26, 2011
I’m one of the very few health policy wonks you know (maybe the only one) who believes everyone should have access to health insurance the same way they currently have access to life, disability and homeowner’s insurance. In fact, I often refer to my blog as about the only health policy blog on the Internet that believes real health insurance is a legitimate business.
Wait a minute, Goodman. How can you say that? What about the Commonwealth Fund and Families USA? Don’t they believe everyone should have health insurance? What about everyone in Congress who supported ObamaCare? What about the president himself? Aren’t they all promoting the business of health insurance?
The short answer to all those questions is “no.” Real insurance involves a pooling of risks. The insurer must make sure each new entrant to the pool pays a premium that reflects the expected costs that entrant brings to the pool. Otherwise, the insurer won’t be able to pay claims. The business of insurance is the business of pricing and managing risk.
The organizations and people noted above don’t believe that “pricing and managing risk” is a legitimate activity. In fact, they went a long way toward completely outlawing the practice in the health reform bill. The only legitimate purpose of insurance, in their view, is to collect money and pay bills. For public insurance, this means collecting taxes and paying expenses. Their view of acceptable private insurance is to copy government insurance — a sort of private sector socialism.
Okay, Goodman, let’s accept that distinction for the moment. Doesn’t pricing risk mean charging me a premium that reflects my health status? The less healthy I am, the more I have to pay. Why should I want to buy insurance from a company that does that?
Because if your insurer doesn’t do that, a lot of bad things will happen.
Remember the phrase, “You’re in good hands with Allstate”? It was the voiceover at the scene of an auto accident where there has been catastrophic damage. The ad speaks volumes about what happens in real insurance markets. Basically, insurance is unimportant to you until things go very wrong. It’s at that point that you want good service.
Contrast Allstate’s ad with the kind of ads federal employees are subjected to during the fall open season for choosing a health insurance plan. What you never see in Washington are ads saying, “You are in good hands with [Aetna, Cigna, UnitedHealth, etc.] if you get [AIDS, cancer, heart disease, etc.].” Instead, the typical open season ad pictures young families with healthy children and no apparent health problems. The not-so-subtle message is: “You’ll be in good hands with us if you look like the people in these photos.”
Why is the health insurance market so different from auto insurance? Answer: health insurers are not allowed to charge federal employees premiums that reflect their health status.
Since the health overhaul legislation plans to make the federal employee health benefit system the model for health insurance exchanges nationwide, it’s instructive to stop and consider the incentives the health plans in these systems have. As explained in a previous analysis, if insurers have to take all applicants for the same premium, they will obviously try to attract the healthy (on whom they will make profits) and avoid the sick (on whom they will incur losses). After enrollment, their incentive is to overprovide to the healthy (to keep the ones they have and attract more of them) and to underprovide to the sick (to encourage them to leave and discourage enrollment by others just like them). If a TV ad could summarize how this health insurance market works, it would say, “You’re in good hands with us, unless you really need us — then we hope you will go somewhere else.”
And the reason this works is because people really can go somewhere else if they get sick — paying no extra premium.
So the incentives of the healthy employees are: Find plans that have lots of services for healthy people — knowing that if they get sick, they can always enroll in some other plan. The incentives for employees with a serious health problem (or more likely, a family member with a health problem) are to seek out plans that are the best at treating costly illness. But, as in a game of musical chairs, no insurer wants to be chosen.
In such a world, comparative effectiveness research, FDA rulings on drugs, end-of-life counseling and so many other controversial issues of late become very relevant. Insurance companies can’t just dump their sickest patients out on the street. They need cover. They need reasons not to pay for the latest cancer drug or the latest expensive test. Given the slightest encouragement, denial is in their self-interest.
Okay, Goodman. This is all very persuasive. But if my premium reflects my health status, what happens to people who are too poor or too sick to be able to afford those premiums? And what happens if a healthy person gets really sick (high medical costs) and wants to switch insurers?
These are good questions. I will answer them in a future Health Alert.
http://healthblog.ncpa.org/the-case-for-health-insurance/
Comments
By Don, McCanne, MD (Originally published here)
In pooling risk, the decision to assign premiums based on an individual’s risk is purely arbitrary, albeit it is convenient for those marketing the traditional business model of insurance – “real” health insurance, as John Goodman calls it.
The ultimate pooling of risk would be one national pool that includes everyone. Yet average medical costs for a worker’s family of four is now over $18,000 (Milliman), when median household income is $50,000. A middle-income family can no longer afford an equally-allocated premium plus out-of-pocket costs for that risk pool, much less a premium that is adjusted upward for higher risk.
Many of of us who do believe that everyone should have access to health care free of significant financial barriers understand that the traditional concept of “real” insurance no longer works. If individuals with health problems are priced out of risk pools, then how can they possibly pay premiums for the pools that concentrate high-risk individuals? And don’t say that you merely have to set up state-run high-risk pools. Not only have they already been proven to be ineffective in seriously addressing this problem, they would still have to be funded by us anyway, through the tax system. If we moved most high-risk individuals into these pools, that would consume a major portion of our national health expenditures (i.e., much of the 20 percent of people who consume 80 percent of health care).
In fact, think of our largest risk pool – the collective pools of employer-sponsored plans. These are largely composed of the healthy workforce and their young healthy families (the 80 percent of people who use only 20 percent of health care). Yet these low-cost pools that benefit from favorable selection (opposite of adverse selection) are already straining the budgets of employers and their employees. Isn’t it kind of silly to pool together these massive numbers of healthy people, while leaving out most of those with greater needs, and pretend that somehow we have provided the nation with “real” insurance? That serves the insurance industry well, but not the people.
Since average-income individuals can no longer afford their equally-allocated portion of our national health expenditures, funding will have to be progressive, based on income. The least adminis
tratively complex and a less expensive method of doing that would be to establish a single risk pool, and fund it through progressive tax policies.
If our goal is seeing that everyone gets the care they need, then we really do need to discard the antiquated business model of “real insurance” and adopt a single payer system – an improved Medicare that covers everyone.