Tuesday, March 02, 2010

Free markets can fail....

The progression of events in the individual insurance market points out one flaw in the free-market defense of our status quo in health insurance.  Like many other market activities, it is particularly brutal during economic retractions.
Braly explained that her company's premium increases on individual policies were based on several circumstances: One, people are getting older. Two, people are becoming unemployed, and if they're healthy they're dropping out of the insurance pool. Three, the cost of diagnostic testing is soaring.
Implicitly, she begged for the government to help -- put people back to work so they're eligible for cheaper group plans, and clamp down on costs. (Not even the government can stop people for growing older.) Without that help, she intimated, premiums are going to keep rising sharply and WellPoint's already meager profits are going to be hammered worse.
In delivering this appeal, Braly was forced to make an implicit admission that her industry almost never makes explicitly: The nation's health coverage system is so hopelessly broken that even the health insurance industry can't handle it anymore.
Her testimony, and other statements she and other WellPoint executives have made, suggests that insurers can't profitably manage through periods of high unemployment. They can't price policies in a way that keeps healthy young people in the same pool as older people, producing a mockery of the very point of indemnity insurance. Despite a decade of unobstructed consolidation, which was sold to regulators as a way to control healthcare costs by creating mega-insurers like hers, her industry can't control healthcare costs.
Braly's words are a reminder of the most important unasked question in the entire healthcare debate: What do we need insurance companies for, anyway?
The only way insurers can remain profitable at all is by selling healthy people on policies that don't offer much coverage at all, while squeezing older, less healthy people remorselessly so they either pay for most of their care out of pocket or get priced out of the insurance market completely (thus becoming a burden for taxpayers). [More]
This death spiral could be just beginning as COBRA coverage and subsidies for many are ending in the next few months. But what is more troubling to me is the false comfort many feel because they have group coverage.

One suggestion that many on both sides seem open to is deregulating the health insurance industry, especially freeing them from wildly different state rules.  Thus companies could offer low-priced catastrophic only coverage, enabling more to be covered while still using market forces to temper demand for goods and services.  If you have to pay for the first $5000 of medical expenses, you wait out some colds and ear infections, for example.

I agree - heck, I practice this idea. But I'm still seeing whopping increases in premiums.  By my figures I'm one of those fortunate folks who support the medical care of others who didn't win the health lottery.

But how far interstate sales could this go to addressing the growing problem of binary health care delivery?  Proponents argue it could solve most of the problem.
One thing that would not survive 50 state regulatory regime competition is guaranteed-issue and community rating in the individual market. In the six states that impose such requirements the vast majority of people who are relatively healthy are overcharged so that the small percent who are sick can be undercharged. This form of private sector socialism would quickly dissolve, as the healthy sought cheaper insurance under other regulatory regimes.
This would be a good outcome for healthy people because lower premiums would encourage the uninsured to buy insurance. But would people with pre-existing conditions (who remain in shrinking pools with rising per capita costs) be unfairly burdened? The solution that would face the least political resistance would be to exempt these six states from the proposal, unless they opt in. But a better solution would be for states to find more rational ways of subsidizing the care of high-cost patients.
Overall, University of Minnesota economists Steve Parente and Roger Feldman estimate that cross-state purchasing of health insurance would induce 12 million more people to obtain health insurance. That number would double if tax subsidies for health insurance were equalized — thus insuring 80% of the number of uninsured people the Senate (ObamaCare) health bill aims to insure — without any net cost to the federal government. [More]

There is persuasive logic behind this idea, although the idea of a completely unregulated insurance market seems far-fetched. It is not hard to imagine inexpensive, but complex products that seem to offer coverage but take advantage of the asymmetrical health cost information between consumers and insurers to cleverly limit uneconomical payouts.

Plus I don't any reason why recission would not continue to be a problem.  While it affects a tiny number of insureds, it is exactly those types of long-shots medical calamities that catastrophic insurance is designed for. So unless recission is prohibited - and it is an idea both sides seem to agree on - trying to introduce market reforms to make consumers self-ration won't work. If buyers don't believe "cat" policies will protect them, they won't buy them, at least not at the numbers suggested in the study.

But the minute recission is prohibited, the door to regulation is now open and the numbers change for all. Throwaway comments about "subsidizing high risk pools" should really have some hard costs attached to them.  I don't think they are trivial, and their existence would only encourage continued adverse selection and denial of coverage for the rapidly expanding list of pre-existing conditions.

There seems to be no good market solution for this problem. There are some people who will consume much more health care than they could ever pay for. The pure market response is to allow wealth to be the rationing mechanism. Requiring emergency rooms to treat such patients is not on any p/q chart, and while it has served as our de facto solution, I don't think it will suffice much longer.

Unless the entire population is covered in some way, the most expensive health care consumers will rapidly be shunted by such mechanisms into the uninsurable category by market forces. At some point, that remnant from the system will be unsustainably costly - which is close to where we are now.

It is legitimate and I think intellectually honest to support using this system to control costs. Capping government care costs for the sickest/poorest would accomplish that. However, this idea is almost never spoken about clearly, just left as the answer-which-cannot-be-named.

It is also certainly less attractive when your child is born with asthma, or your company folds and your COBRA runs out.  The future uncertainty even for those with gold-plated coverage is growing.  My take is we are not factoring the real costs of this lottery system of health insurance.

Nonetheless, some form of rationing will be, and has always been in place. The status quo is certainly not pure market action, and I think introducing more deregulation will only increase the anxiety surrounding this fact of modern life.

Capitalism works great on the way up. But even in the US we have discovered that allowing a huge and complex economy to collapse by cascading bank failures for example, should be avoided. Likewise, allowing more citizens to be ejected from an imperfect market system in health care may seem economically rational, but may simply be overlooking the greater dangers this could bring.

At the very least, I think such an outcome would utterly undermine confidence in both our government and medical system. The longer term consequences of that would be both socially and economically crippling.  

Unfortunately, there is little choice midway between free markets in medical care/insurance and significant government involvement. Any solution that is not universal simply degrades reverts back to where we are headed now.  You can't make universal acceptance work without universal coverage.  You can't prevent recission without regulation. And so on.

It seems to many of us that health care economics is less amenable to classic market solutions because we will not tolerate the solutions it produces.


Anonymous said...

"It is legitimate and I think intellectually honest to support using this system to control costs. Capping government care costs for the sickest/poorest would accomplish that. However, this idea is almost never spoken about clearly, just left as the answer-which-cannot-be-named."

John, I think you are getting at the root of both the problem and solution to this debate. The concept neither side will consider (liberal) or admit (conservative) is that those that need to sign up for "free" health coverage can only economically receive the basics. Those who are wealthy enough or better employed can afford to buy up to "cadillac" coverage.

My solution, which neither side can politically withstand, is basic (and I do mean basic)coverage for every citizen and supplemental insurance for those who want or provide maximum coverage. This means that if you don't have the financial ability to buy up, you won't receive extraordinary care.

This plan would have to be layered with cost containment schemes gallore and requirements on health service providers for X amount of community service. The basic policy would have to be paid by taxes - probably somewhat progressive - but certainly free or near-free for the poor.

In short, those receiving free or only able to pay for the basics, won't get transplants, experimental treatment, etc. without family, community, or some first-come, first-served government catastrophic pool.

This, my friends, is the hard economic reality for our desire to keep a consumer-choice, non-government run health delivery system without extreme cost control (socialism), extreme burden (uninsured), or extreme taxing system.

Anonymous said...

Our federal government has two jobs:

1. National Defense
2. Uphold the Constitution

Nowhere in their job description is to run health care, to provide farmers with as safety net, to provide never ending welfare benefits, etc.

Let's drop this health care BS and put it back in the private sector where it belongs.

John Phipps said...


You point out your solution is not readily acceptable to either side. As an intellectual exercise, I find much to agree with your proposal. But who what is the point of being "right" and unpersuasive?

What is possible? What would you settle for?


"...promote the general welfare..."

Anonymous said...

I do see moral and economic good in covering many more Americans.

The point of my comment is that without the will to transform the system in terms of access and cost (Canada, Europe) which I admit goes against the American desire for choice, I don't see incremental changes as very productive. Economic limitations (if recognized) result in bi-polar coverage of the haves and have-nots.

I would support the medicare buy-in (but not just for boomers) at true actuarial costs. I am an older Gen Y and my children and I already have to pay for the population bulge of retiring boomers and their self-promulgated excess of benefits over receipts which accelerated in the past couple of decades.

I would then desire congress and the administration to seriously deal with cost-control in the delivery and insurance/medicare/medicaid/tort areas.

Lastly, covering the remaining 15-20 million un-insured I only see being paid long term by taxes (don't you agree), which I just don't see happening any time soon.



John Phipps said...


I hear ya...and I think your last comment sums up my hope. Perhaps this is one effort where we will famously do the right thing only after exhausting all other possibilities.

Reality will continue to whittle away unhelpful ideas, and like you I think a new tax (probably consumption tax) will be needed. Actually, my favorite choice would be a carbon tax.

2 birds...one stone tax.

Thanks for your time and conversation.

Bob said...

An interesting article in Monday's WSJ by Indiana Gov. Mitch Daniels describing how Indiana helps control health care costs.


Anonymous said...

I think everyone is thinking too hard. First take a page from the car and home insurance business. Notice the first thing is that people buy insurance, not their employers. This puts the payer and payee together. Second, EVERYONE pays a tax on wages that gives a base rate. An employed person can then direct his tax to a private company to purchase greater/better insurance. Oh, and Hospitals must publich their SIC codes of cost. There is no plan that will solve everone's concern with health insurance, but this at least models a successful car and home insurance business. No, this idea does not address medicare.

buffalobill said...

567ThujygRelated...but not quite on the same lines: Cobra is not such a good deal as it sounds to those who can use something else. When I was unemployed, the Cobra premiums were More than my unemployment compensation. I was left with the choice of paying living expenses or Cobra premiums...any guess to which I chose?

While I would like to think I am in favor of some kind of government intervention on health care costs, I have to wonder if once it happens if it would be something we could use. Or would we end up having to decide between health care and the other things one has to have to survive? This answer would come sometime in the future after said health care reform takes effect. I am fearful that the answer will not be a beneficial one.

Anon 1's ideas seem to be that if you are poor you die, and if you are rich you get health care. Which is probably not very good idea, IMHO, because the difference between rich and poor is sometimes only a couple of weeks.

Ol James said...

Government run Health Care, Bailouts, Increased Taxes, Inflation are not the answer.
Instead of supporting a Global industrialised market we need to focus on a more domestic one.
Hence the saying.."You cant see the forest, for the trees." IMO