Insurance Company Rules

New ad from Health Care for America Now:

Feisty rhetoric aside, the policy point here is that health insurance companies are a weird beast relative to our social aspiration to provide everyone with adequate health care. Sometimes you might want something widely provided with a government guarantee, but still want to keep private firms in business making the product. Every child needs a desk in school, but the government doesn't need to build the desks. We want private firms in the desk-building business getting as good as they can at building desks. But insurance companies are in the business of screening people based on risk, and of finding reasons to deny people's claims. And we don't want them to do that.

The simplest way would be to just cut them out of the process and put the "insurance" function directly in the hands of the government. Most likely that's not a politically feasible objective, but they could perhaps be put in competition with a public sector entity.

Comments

"but they could perhaps be put in competition with a public sector entity."

How ? Presumably the public sector entity will be devoted to universality, while the private insurance companies (unless heavily regulated and constrained by law) will play their same old game of selecting low-risk clients and refusing the high-risk clients. And then clearly they'll be able to offer attractively low rates to the low-risk people, while the public-sector entity will get stuck with the high-risk people who account for most of the actual health-care costs.
I'm not sure of the actual distribution, but I think it's something like 20% of the population accounting for 80% of healthcare cost ?

What we need is risk-pooling. And risk-pooling works best when applied to the largest pool. Whereas insurance companies, by their very nature, are going to fiddle with rates and policy design and marketing to select a profitable customer base, favoring low-risk customers and definitely excluding those unfortunate people whose health costs are high in relation to their income.

So yeah, you can compete with sharks. But only by growing lots of big sharp teeth and a ravenous appetite. And that doesn't help make swimming safe.

Posted by Richard Cownie | July 22, 2008 3:23 PM

Richard- and that's exactly why I greet the whole topic of health care "reform" with a great big yawn. We'll get the only thing that will work- single-payer- only when the whole current mess collapses of its own weight- which it will- and not before. Any incremental twiddling before then is guaranteed to further enrich the insurance companies- who will game the politics to guarantee that- and may quite possibly have unintended consequences that will make things work.
Or in a nutshell I take kind of a Marxist "contradictions of capitalism" view of the whole thing. This may seem cold-hearted, but I think cruel hoaxes that pretend to "fix" the current system are really a lot moreso.

Posted by Steve LaBonne | July 22, 2008 4:12 PM

The problem with that had is that a group of high school students could have written the script. I don't mind humor but if you aren't telling people something they don't already know what are you accomplishing. It is not enough to criticize the insurance companies. You either need to explain the rules that they should be forced to follow or else make the case that government replace them and do a better job.

Posted by Craig | July 22, 2008 4:21 PM

Read any decent international comparative study of health care systems and see that case for yourself.

What we have now is a lethal combination of by far the highest costs in the world with spotty-to-middling quality (for all but the rich) and terrible access.

Posted by Steve LaBonne | July 22, 2008 4:26 PM

"It is not enough to criticize the insurance companies"

I'm not criticizing insurance companies. I'm not criticizing sharks. Each does what they have to in order to survive. But sharks don't - and never will - keep swimmers safe. And private for-profit insurers don't - and never can - provide universal healthcare. I suppose you could pull out all of a shark's teeth and wire its jaw shut and feed it soup, and then it would just be a waste of money and space, rather than an actual threat. But why bother ? It isn't part of the solution; it's part of the problem.

In the long run I agree with Steve that single-payer is the only sane solution. It's possible that one way to get there might be to provide subsidized Medicare-type coverage as an option to everyone. But then the question is the level of subsidy: if there isn't a subsidy, then the private insurers will cherry-pick the low-risk people; if there's a high enough subsidy to make it attractive for everyone, then the insurance companies go out of business. Either way, private insurance companies are hurting rather than helping. It's in their DNA.

Posted by Richard Cownie | July 22, 2008 4:51 PM

"... and of finding reasons to deny people's claims. And we don't want them to do that."

So you are find with paying doctors for imaginary tests and imaginary patients?

Posted by James B. Shearer | July 22, 2008 5:16 PM

So you are find with paying doctors for imaginary tests and imaginary patients?

I'm not fine with insurance companies issuing blanket denials of claims without regard to their merit and then forcing sick and dying patients to fight through a tortuous bureaucratic nightmare to receive the coverage which they paid for in good faith. Are you?

Posted by ben | July 22, 2008 5:29 PM

Re: And we don't want them to do that.

Actually, we do want fraudulent claims denied, and excessive claims to be whittled down to Reasonable and Customary. Government health programs do that to.

Re: What we need is risk-pooling.

We already have it, even with private insurance. Most people get their insurance at work, which means they are in a risk pool and can't (usually) be denied coverage under the group plan. Problem is a large minority of people are not under these sorts of plans. What we need are alternative plans that can risk-pool people who aren't under an employer plan.

Re: We'll get the only thing that will work- single-payer- only when the whole current mess collapses of its own weight- which it will- and not before.

Single payor plans are not common. Most countries with universal healthcare have a mix of private and public coverage, with the private plans very strictly regulated. And letting anything vital "collapse under its own weight" is profoundly immoral. You're talking real lives here, the equivalent of letting the rif-raf in New Orleans drown in Katrina's flood waters in hopes that a better class of people
might replace them.

Posted by JonF | July 22, 2008 6:23 PM

"The simplest way would be to just cut them out of the process and put the "insurance" function directly in the hands of the government"

It works in Canada - why shouldn't it work in the US?

When the administration costs and the requirement to show a profit are taken into account, the mind boggles as to how such a system is supposed to work.

To borrow Michael Moore's argument - if police and fire dep'ts are "socialized" (administered by the state) why shouldn't health care be similarly administered?

Posted by chet | July 22, 2008 6:58 PM

The anti-Canada anti-European trolls who once had to wait really long to get their infected bum-boil lanced under single-payer are sure taking their time about showing up tonight...

Posted by vivisfugue | July 22, 2008 7:25 PM

Most countries with universal healthcare have a mix of private and public coverage, with the private plans very strictly regulated.

Indeed, and this can work extremely well- in those countries.. The question is, can it ever work in OUR pay-to-play political system in which private companies have found it so easy via to subvert regulation? I'm very, very sceptical about that.

Posted by Steve LaBonne | July 22, 2008 7:32 PM

Sorry about the extraneous "via"- editing foulup.

Posted by Steve LaBonne | July 22, 2008 7:35 PM

"We already have it, even with private insurance. Most people get their insurance at work, which means they are in a risk pool and can't (usually) be denied coverage under the group plan"

And of course the people who are *really* sick aren't working, which skews the system straight off. And besides that, the insurance companies don't really accept any significant degree of risk: if they pay out more than they expected on a company insurance plan one year, then they put the premiums up the next year. It's a crappy system all round, rigged for profit rather than health.

Posted by Richard Cownie | July 22, 2008 7:55 PM

"And letting anything vital "collapse under its own weight" is profoundly immoral."

Think it through a bit more. A deterioration in the
health insurance system isn't going to instantly kill all the doctors and nurses, nor bankrupt all the hospitals and drug companies. With all those doctors and nurses and hospitals around, and the same number of people getting sick, the market will adjust to ensure that people still get treated.
It might mean that doctors and hospitals have to charge less (or maybe just give individuals the same discount that insurers get now). It very probably means that a bunch of paper-pushers in the insurance industry have to find other jobs. But it won't cause a lot of deaths. The mortgage crisis isn't making house fall down.

Posted by Richard Cownie | July 22, 2008 8:26 PM

And besides that, the insurance companies don't really accept any significant degree of risk: if they pay out more than they expected on a company insurance plan one year, then they put the premiums up the next year.

And governments don't so essentially the same thing? When they go over budget, they don't increase the premiums (taxes) that people pay (or print the money)?

Posted by Glaivester | July 22, 2008 8:56 PM

"And governments don't so essentially the same thing? When they go over budget, they don't increase the premiums (taxes) that people pay (or print the money)?"

Well, when the insurance company raises premiums on an unprofitable company plan, they either get rid of that customer, or else they probably make money off them next year. So it's another way of avoiding risk. Whereas in a single-payer system, the government can't pass the buck in that way: they can only reduce risk by adopting policies to make people healthier, and that's good.

But you've accidentally pointed out one of the two key reasons why government can do risk-pooling cheaper than any private entity: firstly, they have the biggest possible risk-pool, and thus the lowest year-to-year variance of costs; and secondly, they can set premiums without having to allow any margin to avoid the possibility of bankruptcy. If they underestimate one year, they can raise taxes, or borrow at minimal rates, to make it up in subsequent years. Whereas a private insurance company has a real risk of insolvency.

Which is also why indexed Social Security pensions are a fabulous deal compared to buying a comparable indexed annuity from a private company.

Posted by Richard Cownie | July 22, 2008 9:31 PM

Matthew writes,

But insurance companies are in the business of screening people based on risk, and of finding reasons to deny people's claims. And we don't want them to do that.

No, insurance companies are in the business of providing insurance. That means, among other things, paying out on valid claims. An insurer who routinely refused to pay valid claims wouldn't last long in the marketplace.

The simplest way would be to just cut them out of the process and put the "insurance" function directly in the hands of the government.

That might be the simplest way of doing serious harm to our health care system, yes.

Posted by Mixner | July 22, 2008 9:53 PM

Another problem to worry about with private insurers is systemic risk. Do you really think your private insurance is going to help much if there's an epidemic of avian flu and 10% of the population requires hospitalization ? Either you won't get the treatment, because there just aren't enough hospital beds; or you'll get it, but your insurer will go bankrupt. So it's really yet another class of risk that isn't accepted by private insurers in any meaningful way: taxpayers will end up footing the bill.

Posted by Richard Cownie | July 22, 2008 9:53 PM

Richard Cownie,

Whereas in a single-payer system, the government can't pass the buck in that way: they can only reduce risk by adopting policies to make people healthier, and that's good.

Nonsense. Single-payer health care systems can and do reduce financial risk by limiting services. That's why people in Britain and Canada face such long waits for things like surgeries and tests and consultations with specialists that Americans get right away. In many cases, single-payer health care systems will simply refuse to cover services altogether. If you want the service, you have to pay the full cost yourself out of pocket or through private insurance.

Posted by Mixner | July 22, 2008 10:00 PM

"That might be the simplest way of doing serious harm to our health care system, yes."

What harm ? We'd have the same number of doctors and nurses and hospitals, and thus presumably the same total quantity of healthcare services - you might plausibly argue that a single-payer system would reduce future growth in healthcare - but given the trends of the last decade, that's really a feature, not a bug.

Posted by Richard Cownie | July 22, 2008 10:05 PM

No Mixner, I'm pretty sure that's incorrect. In single-payer systems you get whatever care you want and a pony.

Posted by AB | July 22, 2008 10:06 PM

Re: And of course the people who are *really* sick aren't working

But quite often their spouse, parent or domestic partner is, so they still get healthcare through the private system, and can't be cherry-picked out of it. My own domestic partner has a chronic illness, but on my insurance plan (my employer is very progressive about these things) we pay no more for his coverage than for mine.

Re: if they pay out more than they expected on a company insurance plan one year, then they put the premiums up the next year.

Well, actually they seem to raise their premiums no matter what. But there are limitations. Raise the prmeiums too high and they will lose business. With small businesses they may not care, but losing an account the size of my employer's workforce (well into the five digits of employees) would be a disaster for our insurance carriers. Strange to say, but I think the Clintons had it right (in the large details): the solution may well be to create large purchasing copperatives for people who are not part of large groups already, giving them all the same clout in the marketplace that companies the size of the one I work for have.

Re: A deterioration in the health insurance system isn't going to instantly kill all the doctors and nurses, nor bankrupt all the hospitals and drug companies

You said "collapse", not "deterioration".

Re: It very probably means that a bunch of paper-pushers in the insurance industry have to find other jobs.

Most of the insurance workers (except the marketing people and the excess layers of management) would easily find jobs in a public plan since the sort of work they do is work that has to be done no matter what: claims do not pay themselves, customer service lines cannot be staffed by ghosts or robots, etc. The people who stand to lose their jobs (apart from the aforementioned insurance marketers and executives) are the legions who work at clinics, hospitals etc., dedicated to billing and insurance issues.

re: Whereas in a single-payer system, the government can't pass the buck in that way: they can only reduce risk by adopting policies to make people healthier, and that's good.

Or they do not (perhaps cannot) reduce risk at all. So they simply up the taxes to supopirt the system. I'm not opposed to that if necessity forces us there, but let's be honest about it. There are administrative savings to be had under a universal, public system. I don't see that there are vast health savings though.
We are what we are: human, mortal, fallible, liable in the end to age, get sick and run up huge, huge bills.

Re: Either you won't get the treatment, because there just aren't enough hospital beds; or you'll get it, but your insurer will go bankrupt.

Insurers buy insurance themselves to guard against catastrophic losses. Of course it's possible that the reinsurers could go belly up, but I think it would take lot more than a flu epidemic to effect that. Probably it would require a nuclear attack on several population centers at once. As for hospital beds, it's hard to see how hat situation would be any better under single payor or whatever: the limitations of healthcare are what they are. A widespread epidemic or massive disaster will tax the system no matter what.

Posted by JonF | July 22, 2008 10:15 PM

"But quite often their spouse, parent or domestic partner is, so they still get"

True. And "quite often" the spouse or parent is in a crappy McJob at Walmart with no health benefits.
"Quite often" doesn't do the job - the current system is failing, with a high and rising proportion of the population uninsured.

"Raise the prmeiums too high and they will lose business. With small businesses they may not care, but losing an account the size of my employer's workforce (well into the five digits of employees) would be a disaster for our"

So what ? The point is that the insurer is free to set the premium, and can pick and choose which customers they want. If you're in a big risk pool, then yes, you won't get dumped or - equivalently - hit with an exorbitant rate hike.
But that's the point: big risk pools are good, the bigger the risk pool the better, and the whole damn country is the biggest and best risk pool.

"You said "collapse", not "deterioration"."

Whatever. A "collapse" of the health insurance
system does not entail a collapse in the provision of healthcare. There will still be demand (sick people); there will still be supply (doctors, nurses, hospitals, drug factories); therefore there will be some kind of market to mediate and price the exchange.

"Or they do not (perhaps cannot) reduce risk at all. So they simply up the taxes to supopirt the system. I'm not opposed to that if necessity forces us there, but let's be honest about it"

Indeed, they may not succeed in reducing risk.
But at least the government has an incentive to try. Private insurers can just refuse coverage to high-risk individuals and groups, and/or quote prohibitively high premiums.

"Insurers buy insurance themselves to guard against catastrophic losses. Of course it's possible that the reinsurers could go belly up, but I think it would take lot more than a flu epidemic to effect that"

The "flu epidemic" of 1919 killed more people than the Great War. And that's in living memory. Go back to the Black Death or the plague of the 17th century; or AIDS in much of Africa today. Epidemic diseases can be really really bad.

Posted by Richard Cownie | July 22, 2008 10:46 PM

"Feisty rhetoric aside, the policy point here is that health insurance companies are a weird beast relative to our social aspiration to provide everyone with adequate health care."

Well, no. That is a point, perhaps even a good point. But it's certainly not the point of this video. Indeed, is we removed the feisty rhetoric, I don't think we'd have any video left in which to discover a point.

Posted by NC Saint | July 22, 2008 10:48 PM

Nonsense. Single-payer health care systems can and do reduce financial risk by limiting services. That's why people in Britain and Canada face such long waits for things like surgeries and tests and consultations with specialists that Americans get right away. In many cases, single-payer health care systems will simply refuse to cover services altogether. If you want the service, you have to pay the full cost yourself out of pocket or through private insurance.

But allowing people to do that creates inequality, which states with single-payer hate, so the state may just ban you altogether from getting the treatment altogether and tell you "screw you, we won't let you buy it privately either. Please go and die."

Posted by Glaivester | July 22, 2008 11:16 PM

Re: The "flu epidemic" of 1919 killed more people than the Great War.

True. But what were its financial consequences? As for the Black Death, should things come to the point where a new pandemic of that (on the 14th century scale, not a localized outbreak) is a possibility I suspect we'll have a lot more serious problems than just how to finnace healthcare.

Re: But allowing people to do that creates inequality, which states with single-payer hate, so the state may just ban you altogether from getting the treatment altogether and tell you "screw you, we won't let you buy it privately either. Please go and die."

This is hyperbole. No democratic nation could get away with that. And there are few nations with single payor: most have a public-private mix of coverage.

Posted by JonF | July 23, 2008 6:29 AM

Again, we have, and will continue to have unless we can find a way to clean up our system of legalized bribery, special problems with public-private hybrids of all kinds; the private component can too easily co-opt the regulatory apparatus. Enabling this process all over the economy has been one of the main themes of the Bush Administration.

My first choice actually might well be a German-style public-private system- except that I doubt that Americans are capable of running one. Hence, my belief that we need single-payer, and will get it when and only when the public revolts to such a degree that politicians have to ignore the campaign cash and give the voters what they want. Which in turn can only happen in the wake of a major crisis visible to all.

Posted by Steve LaBonne | July 23, 2008 8:24 AM

P.S. For an example of the kind of corruption and distortion I'm talking about, we need look no further than the notorious provision of the Medicare prescription coverage law which explicitly forbade the government to use its market power to negotiate lower prices.

Posted by Steve LaBonne | July 23, 2008 8:30 AM

"Re: The "flu epidemic" of 1919 killed more people than the Great War.

True. But what were its financial consequences? As for the Black Death, should"

Its financial consequences were enormous - it killed
something 2.5-5% of world population, and the mortality was actually highest among young adults, because many of the deaths were caused by triggering a "cytokine storm" immune reaction which was most lethal in those with strong immune systems.

AIDS of course has a similar demographic profile, and by destroying the health and lives of people at what should be their most economically productive years, it has crippling economic and social effects.

And recent research demonstrates that the 1918-20 flu pandemic was *precisely* a form of avian flu.

Now, did the 1918-20 flu pandemic destroy the US's health insurance industry ? No, but perhaps only because there wasn't much of a health insurance industry back then: the current system of largely employer-funded mass health insurance was a
post-WW2 innovation.

Anyhow, to summarize what the health insurance
industry does:

1) it doesn't deal with systemic risk of pandemics
or war: government has to plan for and fund that.

2) if you're a high-risk individual, it doesn't want you

3) if you're in a small group with high healthcare costs, it doesn't want you

4) if you're healthy, or if you're in a big group, it'll take you and make a profit off you.

In all, this reminds me of the old definition of a banker: someone who'll lend you an umbrella but wants it back if it starts raining.

Posted by Richard Cownie | July 23, 2008 10:16 AM

But insurance companies are in the business of screening people based on risk, and of finding reasons to deny people's claims.

If you removed price controls, this unusual quality of insurance companies would go away.

Price-controlled insurance markets are indeed weird, as are price-controlled housing markets.

Premiums might go up alot without price controls, so you'd have to add some extra income redistribution into the mix. But I think such a scheme would be preferable to price controls.

Posted by mk | July 23, 2008 11:26 AM

"If you removed price controls, this unusual quality of insurance companies would go away.

Price-controlled insurance markets are indeed weird, as are price-controlled housing markets."

As far as I know, there aren't any health insurance price controls in the USA right now. So what are you talking about ?

Posted by Richard Cownie | July 23, 2008 12:17 PM

Richard:

Community rating would count as an example here.

In community rating, the insurance company is forbidden from charging an individually-targeted risk-based price to the consumer.

Instead they must charge a community-aggregated risk-based price. This means that some consumers (those with pre-existing or chronic conditions, for example) become an "expected loss" for the company. Companies respond to this incentive by trying to drop people who are an expected loss.

Now, you can try to fix this by forcing insurance companies to accept all applicants, but it is possible that this will have weird effects (like, the insurance company tries hard to piss off the consumer so they leave). In my view it would be preferable to allow insurance companies to charge risk-based (better to say "expected-cost-based") premiums. That means someone with cancer who applies for insurance will get ludicrously high premiums. That's bad, but we can fix it through something like income redistribution.

Does that clarify what I was getting at?

Posted by mk | July 23, 2008 1:19 PM

"Community rating would count as an example here."

Well, yeah. And that's something that has been discussed in the plans for *future* healthcare legislation by Edwards, Clinton, Obama. But it isn't in force *now*. So it can't be imposing any "weirdness" on the market *now*.

The "unusual quality" of the insurance companies cherry-picking customers and/or trying hard to deny claims is all stuff that happens right now, in the absence of premium price controls.

And I don't think it's at all surprising or "unusual", any more than it would be surprising for a shark to eat a smaller fish. Private insurance companies are motivated by profit - in fact even have a fiduciary duty to their shareholders to seek profit - and this is just one way to do that.

"That means someone with cancer who applies for insurance will get ludicrously high premiums. That's bad, but we can fix it through something like income redistribution."

No, you can't fix it. Suppose someone earns median income ($40K ?), but they have an expensive medical condition (AIDS, cancer) requiring $80K/year in treatment (which you can get to pretty quickly with expensive drugs and/or a couple of weeks in hospital). Private insurers aren't going to touch them; "income redistribution" isn't going to do a damn thing, because you can't magically double median income.

And that's the heart of the problem: the distribution of medical costs is very highly skewed, with relatively few people accounting for a large fraction of total cost. How much care do those people get, and who pays for it ? Any plan has to answer those questions. Otherwise what you'll have is a plan for insuring the healthy,
or a water-soluble umbrella.

Posted by Richard Cownie | July 23, 2008 1:39 PM

Well, yeah. And that's something that has been discussed in the plans for *future* healthcare legislation by Edwards, Clinton, Obama. But it isn't in force *now*. So it can't be imposing any "weirdness" on the market *now*.

My understanding is that many states have implemented some form of community rating.

Another widespread form of price controls is (certain forms of) guaranteed renewability. Often guaranteed renewability provisions include some type of community rating.

And I don't think it's at all surprising or "unusual", any more than it would be surprising for a shark to eat a smaller fish. Private insurance companies are motivated by profit - in fact even have a fiduciary duty to their shareholders to seek profit - and this is just one way to do that.

Rejecting individual claims, I'll grant you, there's an incentive for that. But I don't see the incentive for cherry-picking consumers. Every consumer has an expected cost to the insurer. What makes the insurer more likely to drop the consumer rather than just jack up the premium?

No, you can't fix it. Suppose someone earns median income ($40K ?), but they have an expensive medical condition (AIDS, cancer) requiring $80K/year in treatment (which you can get to pretty quickly with expensive drugs and/or a couple of weeks in hospital). Private insurers aren't going to touch them; "income redistribution" isn't going to do a damn thing, because you can't magically double median income.

That is indeed the problem; health care costs as you say are very skewed.

So, for example, you could begin to fix this by calling health care costs a negative part of your "pre-tax income". So the worker in your example will have an income of $-40K. Next, a negative income tax swoops them up to 20K or what have you.

If this is not good enough (and maybe it's not), then you could make the negative income tax a function of the two variables (health care costs and regular income) rather than of the sum. So maybe the person gets bounced up to 40K or 35K.

Posted by mk | July 23, 2008 2:11 PM

"Every consumer has an expected cost to the insurer. What makes the insurer more likely to drop the consumer rather than just jack up the premium?"

Some consumers have an expected cost that is a large fraction of (or much more than) their income. For such people, the insurer can't make a profit - because if the insurer sets a profitable premium, they can't pay it. QED.

"If this is not good enough (and maybe it's not), then you could make the negative income tax a function of the two variables (health care costs and regular income) rather than of the sum. So maybe the person gets bounced up to 40K or 35K."

Yeah. But trying to call this "income redistribution" is like calling an elephant a duck. Someone has big healthcare costs; a big chunk of money is going to come out of government revenue to pay for their healthcare. It walks like a duck, it quacks like a duck; it's government-paid healthcare for the otherwise uninsurable. And if the insurance companies are involved as intermediaries, it's only to take a cut and otherwise gum up the system.

And then once everyone knows that government is going to pay for chronic/prohibitively expensive healthcare, then there's less incentive to sign up for private insurance (or to provide it for your employees). So no-one does, unless you mandate and regulate the whole system up the wazoo. You get a whole bunch of complicated and hard-to-enforce laws and regulations, *and* the insurance companies still taking a cut, *and* government is paying a big slice of healthcare costs. Ugly all round.

Better to go the UK route, where government funds and runs an adequate healthcare system for everyone, and then you can pay for private insurance if you want something better/faster.
Or the French route, where government funds a
really good system. Or just about anything else,
really.

Posted by Richard Cownie | July 23, 2008 3:06 PM