One of the more puzzling arguments against universal coverage is that advanced by the worthies at the Cato Institute. They argue that if insurance companies could just charge people based on their risk profile, the market would solve the problem of coverage.
I don’t follow the logic.
Here’s Cato’s Michael Cannon’s thinking on one of the problems with universal coverage (he’s actually referring to a related, but very different topic – community rating, but we’ll just go with his flow):
“Another common concern is that the young and healthy will go without insurance, leaving a risk pool of older and sicker people. This results in higher insurance premiums for those who are insured. But that’s only true if the law forbids insurers from charging their customers according to the cost of covering them. If companies can charge more to cover people who are likely to need more care — smokers, the elderly, etc. — then it won’t make any difference who does or doesn’t buy insurance.”
There are a couple of gigantic problems with Cannon’s argument. The first is he is really calling for ‘self-insurance’; that is, by enabling insurers to price based on the projected costs of an individual, insurers will instantly set prices for folks with expensive, chronic conditions (think asthma, diabetes, Parkinson’s disease, ALS, cardiovascular disease) or a history of cancer or hypertension or depression at the expected cost of treatment, plus a safety margin.
Take Alzheimer’s. The annual cost of treatment for Alzheimer’s is $19,000, which is in addition to the care provided by family members (valued at $60,000). If Cannon were king, here’s what insurance companies would do to price coverage for individuals with Alzheimer’s.
First, calculate the expected cost of treatment. Next, add in the cost for family care (if the family member dies or moves or just can’t handle it anymore or the patient’s condition deteriorates, the patient will need to be put in a facility). Or, exclude facility care for the insured, as well as in-home care. Add in the projected costs for other medical conditions; 60% of Alzeimer’s patients also have hypertension, 30% have coronary artery disease, 28% suffer from congestive heart failure, 21% have diabetes…
Plug in a risk premium for unforeseen medical conditions. Then, add on administrative expenses.
At the low end, premiums would range from $37,500 (with exclusions for facility and in-home care for Alzheimer’s) to $86,000 for a policy covering institutional care in a residential facility (one-bedroom unit). And yes, the insurance company would price the latter policy at expected costs, figuring that anyone who wanted to buy the policy is highly likely to need the coverage (this is called “adverse selection).
Which leads to another huge flaw in Cannon’s logic – what insurance company would want to insure someone with Alzheimer’s, given the potential financial liability? Insurance companies can’t predict the future, so they have to charge a ‘risk premium’ to guard themselves against the unforeseen. What if a new drug comes out that costs $5000 per month?
I’ve been in the health insurance business for 25 years, and have yet to meet an actuary or underwriter who would be remotely interested in writing a policy for a person with a diagnosis of Alzheimer’s – if they weren’t forced to, they wouldn’t.
There will be 5.5 million Americans with this disease by 2010. How many individuals with Alzhemier’s can afford monthly premiums of $3125 to $7167?
And how many insurance companies would offer coverage to Alzheimer’s victims at any price?
Cannon either does not understand what “insurance” is (the spreading of risk among large pools) (which I doubt because he writes like a pretty bright guy) or he wants everyone to pay their own way.
The free-market true believers should be honest and call it what it is – not insurance but self-coverage for medical care.
I appreciate the arguments of both Joe and Aubrey, but I believe you both are missing the point. Health insurance is not insurance in the purest sense (i.e. pooled protection against an unknown future risk). It is a combination of insurance and social welfare, regardless of whether it is government run or privately run. The moment that one determines that the risk characteristics of the individual cannot be used to alter price and/or that coverage cannot be excluded for known losses one is departing from pure insurance. While pre-existing condition waivers apply to individual policies in some jurisdictions, they do not apply everywhere and are not typically used in group insurance. Government, through its legal, licensing and regulatory powers has chosen to alter the insurance mechanism to ensure that the treatment of some people is subsidized by other insureds or by government. Movement to required coverage or a single payor system will only serve to spread the cost of this subsidy to a greater pool of individuals. Please note that I do not find this decision by government to be without merit. It helps to ensure that those who have congenital or acquired medical needs have access to expensive, but usually needed care. I do however object to us thinking that the insurance mechanism is the source of the problem. Instead, the problems are rooted in several policy decisions that alter the insurance mechanism to meet other social goals; that do not require universal insurance; that require access to care for those who have no insurance or funds to pay; that establishes a standard of care that is expensive; that sets up a tort liability system that leads to practice of defensive medicine; and that fails to come to grips with end of life issues. These are the root cause questions that typically are avoided in these discussions.
Aubrey – define what you mean by “successfully implemented government health care”.
As for the comments on waiting for coverage, your quotes are all from Cannon’s article, and he is not an objective source. And your comments on other countries’ waiting lists do not have citations. I suggest you look for research that is more carefully done, and include citations if you have them. Here is one highly regarded source – http://www.statcan.ca/english/freepub/82-575-XIE/2003001/report.htm
Here is another that directly references Sweden. http://www.cprn.org/doc.cfm?doc=1665&l=en
Again, your arguments are not persuasive because you fail to incorporate documented research to support your positions. If you want to argue that I’m wrong just because you think I am, that’s fine, but if you want to be persuasive, do your homework.
Bill – thanks for the thoughtful comment. My point in the article was to note that the arguments advanced by cannon et al are misleading as they characterize unregulated health insurance as a solution to the problem of coverage.
And that is just not true.
Joe
Aubrey – no, i never studied “Lineal Reductionist Thinking”.
I did study Linear Reductionist Thinking in a course on Plato’s Republic.
Saying “free markets in health insurance just don’t work” is like saying “gravity just doesn’t work in North Carolina.” It’s nonsense. The market always works. Your problem is not with a dysfunctional market. It is with the inevitable effects of an unfettered market.
What to do about the relatively small percentage of people (like those Alzheimer’s patients) who drive health care costs through the roof is not really a market or even an insurance issue.
In the end, it is a social policy issue because society has to decide whether to shift cost from the “expensive” patients to the rest of us. So far, society has answered “Yes,” but don’t send me the bill.”
Catron,
Define “works” in the statement “The market always works.”
If you mean that everyone will get meaningful insurance, you are wrong. There is no free market in the world where anything as big and expensive as health insurance can be afforded by everyone. Can everyone afford a car? Can everyone afford a house? Can everyone afford anything that costs even a fraction of what healthcare costs today?
When you say markets work, you miss the problem critics raise. They are not talking about the failure of a supply curve and a demand curve to meet. They are talking about a social or moral failure in not helping the people who are left out when the supply and demand curves meet to set a price.
So Joe is absolutely right to say, “The free-market true believers should be honest and call it what it is – not insurance but self-coverage for medical care.”
Conversely, the universal coverage true believers should be honest and call it what it is: a redistribution of wealth designed for social justice and to reduce social disruption (bankruptcies, foregone educations, etc.).
Since Alzheimers was chosen in Joe’s example above, I would be interested to know whether any individuals here would consider getting a genetic test for predisposition to Alzheimers.
Assume for the moment that the test is highly accurate and that you actually want to know your risk (even if, in reality, you might not care to know).
I’m really interested in learning about how people who are participate in the health insurance arena professionally and intellectually, as well as personally, would make this decision and how concerns over health insurance hikes, loss of coverage, etc. play into that.
I would also be curious to know whether there is support here for GINA, the Genetic Information Nondiscrimination Act.
Any takers?
we are running after our own tails. we do not have anyone or agency that seriously seeks to correct the delivery system. no positive results can occur till people take an interest and the system responds to correct the system.
our prices and the delivery services are messed up and no one cares. there is no effort to correct this and it grows every year.
Mr. Paduda, Alzheimer’s is about as insurable event as one can imagine! Mike Cannon understands insurance perfectly well: it is a way to spread the risk of anticipated future events, not spread current costs. A reformed health insurance market would provide guaranteed renewable policies (like Mark Pauly has studied) and insurers would compete to create pools of young, healthy members in their twenties. Actuarial science tells us how many Alzheimer’s diagnoses to expect as the pool ages.
Expecting health insurance to work by enrolling people who already have Alzheimer’s is like expecting car insurance to work by enrolling people who have already crashed their wheels!
But that’s the trouble John, it’s not like car insurance. Nobody can say, with certainty, that they will be involved in a car accident every month for the rest of their life. If such people existed, no car insurance company would ever insure them.
In health care, hoever, there are many, many people that have very expensive existing conditions like Alzheimers and Diabetes that require treatment that is beyond their ability to pay unassisted. In a free market, there is absolutely no reason for any insurer to insure any such person, yet we tend to think that these people should, in fact, receive care.
“there are many, many people that have very expensive existing conditions like Alzheimers and Diabetes that require treatment that is beyond their ability to pay unassisted. In a free market, there is absolutely no reason for any insurer to insure any such person, yet we tend to think that these people should, in fact, receive care.”
Don, I think you and John are talking past each other.
Arguing about “insuring” people who already have a serious condition mixes up insurance with charity care. It’s inappropriate to characterize charity care as “insurance” just as it’s inappropriate to require insurance to provide charity care.
Medicaid spends a large share of its budget on long-term, custodial care. This is excluded from private insurance policies (except for specific long-term care riders or policies). The public, thru Medicaid, thus pays the last-resort, charity care for anyone who cannot get insurance. I don’t object on principle to Medicaid’s paying these costs, because I know the cost of custodial care continues to be excluded from my health insurance premiums. (Medicaid could be run much more efficiently, and I do object to the waste, fraud, and abuse that is rampant in Medicaid; but that’s a discussion for another day).