Free Market Health Insurance is a Broken Model

Would you buy fire insurance for your house if you knew your house was made of solid steel? Would an insurance company sell you homeowner's insurance if they knew your house was made of straw? The concept of insurance requires ignorance. The statement is not meant to be derogatory. It is just that potential purchasers of insurance will only buy insurance if they think they might have an incident that will cause them to collect on the policy. Sellers, on the other hand, prefer to sell insurance to those who they think might never need to submit a claim. In the past, people were more likely to purchase health insurance to protect them if they had an unlikely illness that required an expensive hospitalization. Neither the buyer nor the seller knew if any individual would get sick. Today, health outcomes are much easier to predict, and nearly 75 percent of health expenditures are for chronic illness. This makes prior illness an excellent predictor of future health needs. To a large extent, simply knowing the prior year's expenses for a patient is a good predictor of next year's expenses. With advances in technology (in particular, genetic sequencing data), the ability of both buyers and sellers of health insurance to predict outcomes will only increase. As this ability increases, insurance companies will naturally try to avoid selling insurance to people whom they know will require care.

In addition, it used to be that expensive events covered by insurance were usually acute illnesses that created claims during a single year (the period for which insurance is generally purchased). Now, if someone is newly diagnosed with an expensive disease, the illness is more likely to be chronic, and the cost for the illness may occur after the period in which the patient has contractually committed health insurance coverage. For example, if someone is diagnosed with a new cancer, she may undergo repeated chemotherapy and surgeries for years after the coverage year in which she first got sick. If this patient loses coverage after she gets sick (for example, by losing her job or otherwise by not being able to work), she will likely not be able to get new coverage, and she will be marked as having a pre-existing condition. Unfortunately for the patient, if the insurance company is able to terminate coverage for this patient, it is in their financial best interest to do so.

As technology progresses, our ability to predict disease and live with more illness will increase. Given this trend, health insurance as it exists today is going to become less and less viable. Some aspects of reform being considered in Washington address these issues by forbidding insurance companies from dropping sick members or from considering pre-existing conditions in new members. In the absence of these reforms, the market approach that now exists is guaranteed to fail eventually. Many of the problems we are seeing in today's healthcare system are the beginning of this market failure. As a country, we have a choice between two options: 1) attempt regulatory reform that controls for this market failure, or 2) migrate to a single payer model that pools risk for all individuals. The status quo is no longer viable.

Houdini Coverage

Are you happy with you health care insurance plan? How do you know? Have you tested it? Will it really be there when you need it? Nikki White (referenced by Nicholas Kristof's Op-Ed Sunday Sept 13, 2009) thought she had good coverage when she was diagnosed with a disease called system lupus erythematosus at age 21. By 27, she could no longer work, and she therefore lost her employee sponsored coverage. From their, her health deteriorated, and she died at age 32 of what should not have been lethal condition.

Unfortunately, too many people find that their health insurance disappears when they need it most. A recent article in The American Journal of Medicine shows that 57 percent of bankruptcies in the US are related to medical bills, and even more surprisingly, 78 percent of the people who went bankrupt for medical reasons had insurance at the time they first got sick. Perhaps, you are happy with your current health insurance, but if it not there when you need it, what good is it?

The solution to this problem is clear, insurance companies should not be allowed to discontinue anyone once they have provided them insurance. Also, when signing up for insurance, insurance companies should not be allowed to consider pre-existing conditions. Both of these ideas are part of the new health reform being proposed, and if they were in place when Nikki White needed care, she would likely be alive today.

For a while, I have been thinking of writing about the issue of
hospitals and clinicians having different rates for same exact
procedures depending on who they are paying.  When I read about Senator
Conrad's efforts to start health insurance co-ops, I thought he might be
interested in the idea.  I therefore submitted the below message to him.
I do not know if he or anyone in his office will pay much attention to
what I wrote, but I thought it would be worth a try.


Senator Conrad,

I commend you on your efforts in healthcare reform.  Your work is vital
for the best interests of this country.

I am writing regarding your proposal for creating healthcare co-ops. I
believe the co-ops are going to fail if an additional change is not also
including in the healthcare legislation.  Any new Co-op will be at a
significant competitive disadvantage when competing with established
insurance companies since 1) they will need to hire an army of contract
negotiators and 2) work in an environment where they pay significantly
more (perhaps 30% to 50%) than their competitors for the same exact
services (until the co-op has significant market share). 

This does not have to be the case.   Currently insurance companies
compete on the basis of their negotiating power.  This provides no
benefit to the patient, and it just rewards monopolistic situations.
The system needs regulation analogous to antitrust legislation that
control monopolies.  The regulation would state that providers should
not charge healthcare co-ops more than what they charge other commercial
insurance company.  This regulation should eliminate the need of the
co-op negotiating rates with all providers in a region (a large portion
of the administrative waste) while getting the co-op a fair price for
the services they pay for.

Going further than needed for the Co-ops, the ability of each provider
to charge different rates to different insurance companies is a major
source of waste in healthcare, and it is a major reason competition in
health insurance is so regional.  I also believe that providers should
not be allowed to charge different commercial health plans different
rates.  This would promote competition by making it easier for plans to
enter areas of the country where that they currently do not serve.
Ideally, providers would post their rates for all consumers to see (as
one might find in an open, transparent market) so that consumers would
have the information they need to make informed choices about their
care.

I specifically propose that the rates providers set for commercial plans
should be set by providers and should not vary by the payer.  The
government should not set the rates since government control of rates
would negate the beneficial aspects of the free market. Therefore, the
rates should not be tied to what providers pay to government plans since
these rates are set by the government.  Tying the rate to these plans
would effectively be governmental price control.  This would do more
harm than good.

I hope you find this suggestion helpful.  If there is anything I can do
to help your reform efforts please let me know.  If you do not like what
I have just presented, I am still a supporter of the healthcare report
reform efforts. I believe you and your committee are doing incredibly
significant work.

Who not to trust: government or business

      I went to a John Kerry discussion forum on healthcare last week.  At the  forum, it was interesting to speak to people who were strongly in favor and strongly against the public option.  The people with the strongest opinions on both sides of the question appeared to lack experience and knowledge in the field and were generally speaking from emotions.  The strong opinions went as follows.

 

Against the public plan:

    I do not trust government.  Any additional power given to government is just power to be abused.  History has ample evidence to prove this.  Those people in favor of the public plan are naive to think government bureaucrats will act in our best interest.  I want none of that.

 

 In favor of the public plan:   

     We need a public plan to control the commercial insurance companies.  These companies (even the non-profit) are just watching their bottom line and seeing what they can get away with.  The business people in charge do not care about the patients, and we already have plenty of examples of abuse.  The last thing I want is some executive watching his bottom line to be deciding if I need care.

 

For the people I spoke to, it was interesting to see how their strong emotions were driven by a strong distrust, but for different entities.  Hopefully, both sized sides will learn to imagine ways of adding checks and balances so that the viability of whatever system we get is not dependent only on the integrity of specific powerful individuals.