Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

30 September 2009

Health-Insurance Reform on Its Deathbed

The Senate Finance Committee’s rejection of the public option yesterday put health-insurance “reform” in intensive care. It’s not entirely dead yet, but its life hangs by a thread. Here’s why.

The first thing to know is that the current (Baucus) “reform” bill has virtually nothing to do with health care. It’s all about health insurance. Health insurance is an entirely different market from health care, just as the health-insurance premiums that you pay are different from your insurer’s payments to doctors and hospitals for your care and your own co-payments to make up the rest of the bills.

There are only two ways to hold down the price of anything, including insurance: regulation and competition. Price regulation is anathema in America, so it was never on the table.

Congress could have created competition by eliminating state-by-state regulation and forcing the fifty states’ insurance monopolies and oligopolies to compete in a national market. It didn’t.

Congress could have created competition by specifying uniform, mandatory minimum policy terms, which all insurance companies would have to offer. That way, consumers wouldn’t have to read or understand fine print and could compare prices (premiums) for the same thing. Congress didn’t.

Congress could have created competition through the “public option,” the latest version of which was a nonprofit, independent corporation, initially funded by the government but operationally and financially independent and self-sustaining. But because of the Senate Finance Committee’s votes yesterday, Congress probably won’t.

So any competition—and therefore any restraint over health-insurance premiums for consumers—depends on the feeble substitute for the public option that is in the current Baucus bill. That’s so-called “co-ops.”

The Baucus bill would allow independent, nonprofit cooperative insurers to be set up, which would insure their members without making a profit and without any government support. The government might provide some start-up capital but would thereafter give the co-ops no further support, and they would have no governmental power or imprimatur.

The competition with private insurers that these co-ops might offer is the only thing in the Senate’s current plan that might place any restraint whatsoever on health-insurance premiums.

So here’s the Baucus deal. Private insurers will get some 37 million new customers, who will be forced to buy insurance or pay a fine. The poorer of those new customers will get subsidies to help them pay the premiums.

Let’s say the average annual premium is $1,500. (That’s a very low premium indeed. My own insurance costs over $5,000 per year just for me; my wife has her own insurance.) Multiply 37 million by $1,500 and you get $55.5 billion in new insurance-company revenue. If the average profit is only 7%, that’s $ 3.885 billion dollars in clear profit every year. Not a bad return for a few months of lobbying!

What do America’s consumers get as a quid pro quo? Not much. They get a prohibition on clauses that deny insurance for pre-existing conditions and that make your insurance disappear when you get sick.

But nothing in the bill would prevent insurance companies from charging more for these “better” policies. For example, suppose a basic insurance policy costs $2,500 per year. If you’ve ever been diagnosed with diabetes, it might cost $6,000. If you’ve had a heart attack or a skin cancer removed (like John McCain), if might cost you $8,000 per year.

These number are just guesses, but that’s the point. If the bill passes, insurance companies won’t be able to deny insurance for pre-existing conditions, but they will be able to raise the premiums for them as much as they like. There will be no limit on what insurance companies can charge for insurance that actually pays when you get sick, or sick again. So there will be no limit on their profit. Insurance companies are laughing all the way to the bank.

Economics 1A tells us that price rises with demand. Demand will certainly go up as 37 million new customers enter the market, so premiums will rise in any event. And insurers will offer “new products”—namely, insurance that actually covers people who get sick—but will have complete freedom how much to charge for them. If you think premiums won’t go up substantially for everyone under these conditions, you need a course in basic economics.

What stands alone against the law of supply and demand and the freedom of private insurers to charge whatever they want for “new” policies that actually provide real insurance? Nothing but those co-ops.

That’s why health-insurance “reform” is on life support. It’s survival depends on the devil in the co-ops’ details. If only people who don’t already have insurance can buy from the co-ops, then the rest of us will pay substantially more, and more yet if we’ve ever been sick. The same sad result will follow if only the poor can buy from the co-ops. And if the government picks or allows incompetent political cronies to run the things, the co-ops will fail to provide any effective competition at all, and the whole idea of containing insurance premiums will collapse.

So there’s not much “reform” here for the average consumer.

Who’s responsible for “reform” being in the ICU? It’s easy to name names. Five Democrats voted against one amendment for a public option. But that amendment would have imposed a form of price control, reimbursing care providers only at Medicare rates. So let’s give them a pass.

The second amendment would have provided a public option without any price control. Still three Democrats voted against it, effectively killing it: Max Baucus of Montana (the Committee Chair), Kent Conrad of North Dakota, and Blanche Lincoln of Arkansas. Together their three states account for 1.4 percent of the nation’s population and 1.1 % of its GDP.

We might get lucky. The President might exert his influence and the public option might magically re-emerge from the House-Senate conference. The devil in the co-ops’ details might relent and allow real competition. But if not, maybe the rest of us can find some way to repay these miserable little states and their senators for selling us all out to the insurance companies.

Coda: Why the Baucus Plan Won’t Even Produce “Insurance”

Unless the proposed co-ops are nationwide, extremely well run, and able to sell health insurance to anyone who wants to buy, the Baucus plan will inevitably produce dramatically rising insurance-company profits and higher premiums for everyone. In fact, it will create a system that barely deserves the name “insurance.”

Remember the basic idea of insurance? It’s to broaden the pool of people covered as much as possible and thereby spread the risk of high health-care costs as broadly as possible, so as to make the average premium as low as possible. The original theory of health-insurance reform was to reach that goal by putting up to 47 million uninsured people in the same risk pool with everyone else.

But that’s not going to happen under the Baucus plan, because nothing in the bill requires it to happen. Nothing would force any insurance company to put the new customers who must buy insurance or pay a fine in the same pool with everybody else.

So here’s what will happen. Insurance companies will treat the 37 million new, mandated customers as a separate pool and will sell them new policies of “bare bones” insurance, probably covering just preventative and catastrophic care. Because the new customers will be younger and healthier than the general population, and because their insurance will provide minimal coverage, their premiums will be low. But the fact they are in a separate pool will mean their premiums won’t help reduce premiums for the rest of the population.

The rest of the population will fall into two categories: (1) those who have insurance now because they (a) have no pre-existing conditions or (b) do have them and are waiting for the axe to fall, and (2) those who can’t get insurance now because they have pre-existing conditions. The insurance industry will treat groups (1) and (2)—and maybe groups (1)(a) and (1)(b)—as separate pools and separate profit centers. Why? Because the industry can price insurance for these separate pools separately and so reduce its risk and increase its profits, and because nothing in the Baucus plan says it can’t.

So the end result of the Baucus bill will be a health-insurance market that is not only balkanized by state, insurance company and employer (as it is at present), but also balkanized into separate pools of customers who can be milked for exorbitant premiums separately, rather than being combined into a single pool as the basic notion of “insurance” suggests.

Having been prohibited from cherry-picking individuals by the mandate to ignore pre-existing conditions, the industry will do the next best thing. It will cherry-pick by groups. Among many other things, the result will be that people having significant pre-existing conditions will no longer be denied insurance entirely; they just won’t be able to afford it.

Once again, our lovely private insurance system will offer “insurance” in name only, not in fact. And the insurance industry will continue to make out like bandits at our, the people’s, expense.

If we, the people, get wind of these truths before it’s too late, the present attempt to reform our health-insurance system will die under an avalanche of well-justified public protest. Maybe that’s what the “Blue Dog” Democrats really want. It’s certainly the Republicans’ primary goal.

Our constitutional system makes all this possible but putting us in the thrall of small minds from small states, who appear not even to understand the problem, let alone a good solution. Or maybe the small minds understand full well and just don’t care. Maybe they value the parochial interests of their tiny states over the national welfare. Maybe they like using their disproportionate power to thwart the will of the vast majority in population and productivity, who want a public option.

If so, we in the majority are going to have to find some serious ways of fighting back, including economic boycotts. We might start by boycotting Wal-Mart Stores and Tyson Foods, Arkansas’ two biggest employers. (It’s probably no coincidence that a physicians’ group practice and a hospital rank next, right after an intervening trucking company.)


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  • At Wed Sep 30, 03:48:00 PM EDT, Anonymous Anonymous said…

    In what media accounts are casting as a serious setback for President Barack Obama and lawmakers who back the "public option," the Senate Finance Committee Tuesday voted against including the provision in the bill. Reports also remark on GOP unity against the provision, which they compare to the Democratic split apparent in Tuesday's committee votes. Where I am a health insurance agent with www.benefitsmanager.net/SelectHealth.html . I find this frustrating somewhat. I don’t agree with the design of the “public option” where it works against a health system in place now and causes a financial burden on tax payers. But, I think we need one out there. I need the ability to get my clients a insurance policy that won’t decline them for pre-existing medical conditions. See Utah’s response to health care reform and health insurance reform. www.prweb.com/releases/utah_health_insurance/health_care_reform/prweb2614544.htm.
    Perhaps the feds should look at the only second state case attempt for reform as a model. What about TORT reform? That honestly impacts doctor insurance costs as well as health insurance premiums by 13% See study in prior link.


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