Wednesday, January 13, 2010

More on health care: Why the insurance industry hates it edition

Two notes before I get into this post. First, if you haven't heard about the earthquake in Haiti, it is really, really terrible. According to a few different blogs, Peter Hallward (who would be the guy to ask) suggests making contributions to Partners in Health . I know most of you are poor grad students, but just in case someone following this blog wants to contribute something, there you go.

Second note is that maybe whining and complaining about minor things in H&N's new book isn't the best use of my time or energy. However, I still am not sure what real comments on the book will or won't make the review cut, so I'll just post more stuff when I finish writing the review (which, Peter, it should be done by the end of this weekend if you are curious).


Now, as I suggested before, many of those on the left who are in the kill the bill crowd are more motivated by hatred of insurance companies than they are by wanting to help people. This view, whereby dramatic reforms are measured not by the amount of good they will do, but by the amount of harm to the insurance companies is just about as backwards of a way to judge a bill as I could possibly come up with. I'm not a fan of insurance companies in this country, I'd love to see some harm fall on their heads. But at the same time, it isn't a zero sum game (indeed a recent post by Reinhardt on community ratings reveals how central insurance is in Switzerland, Netherlands, and Germany). But what has really shocked me in these discussions is that the current health care bill is not an unmitigated give away to the insurance companies that many people keep arguing it is. Yes, insurance companies got their way with getting rid of the public option, and that is not good news. But, here is a list of things that insurance companies don't want that will be in the current bill.

(1) Community ratings: Right now people on the individual market are charged rates, well, individually. This basically means that if you seem to cost insurance companies at all, either you just will not be allowed insurance or will be able to get insurance at absurdly high prices (frequently meaning you still don't get insurance). Community ratings mean you can't charge people different rates out of the exchange (except for some controlled differences in age and smoking habits). This is obviously both the key to expansion of coverage and at the same time something insurance companies really don't want.

(2) Actually paying for people who get sick: Right now one of the main ways that insurance companies make money is by, frankly, not spending money on actually sick people. Now one way is to allow sick people into insurance, but what happens when people get sick or injured that they are covering? We all know the answer, try to find ways to kick them off their insurance rolls and put caps on annual and lifetime expenditures on these people. All of these practices are expected to be banned in the final bill (though there could end up being some annual caps, but I hope not).

(3) No, you can't cheat: Obviously insurance companies are going to want to cheat at all of this. What is good news is that the exchanges will act as prudential purchasers (I covered this in the first health care post). This means the exchanges will not be a come one come all to insurers, but will be able to regulate who can join. If it seems that insurance companies are trying to get over, they can be kicked out. This not only is a good penalty, but provides a fiscal incentive to behave in the first place.

(4) Insurance companies really do want to have to compete with each other. In the status quo, they basically don't. Not only are there many geographical locations where there is only one or two insurance companies to choose from, but the insurance companies do everything in their power to remain opaque to the buyer. That means, in Braudelian terms, the insurance market isn't a market, it is an antimarket. Prices are not set by any market forces, but by command. There are a lot of things in the bill to change all of that. Not only will the exchanges have several insurers to choose from, but the information cost for finding out things about insurance companies will be lowered. We are talking about the amazon-ification of insurance purchasing, where you can find reviews from other people about goods and services. Also, insurance companies will be forced to post information online in ways that are accessible to purchasers.

(5) Competition from non-profit insurers: As I've said elsewhere, several systems in the world don't depend on competition from a public insurance option, but from competition between non-profit and for-profit private insurance companies. In every exchange there will be at least one non-profit private insurance company.

(6) Actually have to spend money on medical care: 85% of every premium dollar has to be spent on medical care, or they have to cut you a rebate check. (In some cases only 80%, but those will the minority cases, not the majority). This is pretty huge in and of itself.

So, let's recap. Currently we have a system where insurance companies don't have to take you if you are sick, and they come up with ways not to pay for your medical care if get sick. They are able to insulate themselves from market pressures, and can use your premium dollars for anything they damn well please. And there is zero fiscal reasons or market reasons for insurance companies not to act as evil as they can. Indeed, all the pressure goes in the opposite direction. All of this changes under the health care bill being considered. That doesn't sound like a great deal, even with a larger customer base, for the insurance companies to me. I'm sure they would prefer the status quo. And indeed, their recent behavior to fund a campaign against the health care bill that won't even include a public option means I'm probably right on this one. Now, does this mean the bill is only bad news for the insurance companies? No, it isn't. Does it go as far as I would like? Duh, of course not. But the status quo is much better for insurance companies and much, much worse for everyone one else.

However, I hear that things are not looking good in the (unofficial) conference. It looks like Democrats might not be able to overcome what Freud referred to as "the narcissism of minor differences."