Rational Arguments

If you follow my blog at all, you know I’ve never been a big defender of the public option.  I think that a lot of people think it’s single payer lite (it’s not).  Others thing its awesome power will force prices to come down (not likely).  And some think that the fact that it should have less administrative overhead would make it so much cheaper than other options (not likely either).

But I also scoffed at opponents of the piblic option who said it would “limit competition”.  As if competition existed right now.  Quoth the AMA (not a very progressive organization):

The AMA’s most recent look at the health insurance market — “Competition in health insurance: A comprehensive study of U.S. markets,” released Feb. 23 and based on 2009 data — finds that 99% of 313 metropolitan areas tracked would be considered to have “highly concentrated” insurance markets under guidelines used by the U.S. Dept. of Justice and the Federal Trade Commission. In its 2009 version of the study, the AMA found that 94% of metropolitan areas were ranked “highly concentrated.”

Only Miami, Fort Lauderdale, Fla., and Colorado Springs, Colo., are not considered to have highly concentrated markets. But even these metropolitan areas are not deemed to have competitive markets but instead are rated as “moderately concentrated.” The Justice Dept. and the FTC would consider a highly or moderately concentrated rating as a point against a merger or acquisition of plans within the same market.

One insurer held 70% or more of the health plan market share in 24 of 43 states measured, up from 18 in 42 states in the previous year’s study. In 92% of the 313 markets in the report, one insurer held at least a 30% share.

In past releases of its survey, the AMA has noted that insurer market dominance has allowed health plans to force physicians into take-it-or-leave-it contracts. But this year the AMA — echoing other experts — noted that market dominance has allowed plans to give patients take-it-or-leave-it pricing.

Are you getting that?  Competition has gone down since last year.  Almost 100% of markets are highly concentrated, as calculated by the number of available options and their individual market share.  That means there are limited choices available, leaving people at the mercy of rate increases and coverage decreases.  Adding a public option would increase that number significantly, and therefore increase competition.

And that’s the best argument I’ve heard yet for a public option.  I still don’t think we’re going to get one right now, and I don’t think it’s worth sinking the bill over.  But if the insurance industry wanted to make sure that Democrats considered adding one in later, they sure are on the right path.

Back during the primaries, I met with a health care legislative staffer for a candidate for President.  Her candidate favored reform much as we see it now.  I asked her how we could force insurance companies to take people regardless of prior conditions.  She assured me that health care reform would take care of it.

I admit I was skeptical.  Recently, however, I was feeling a little more reassured about it.  That is, until today, and an excellent piece from the Washington Post:

If insurers are prohibited from openly rejecting people with preexisting conditions, they could try to cherry-pick through more subtle means. For example, offering free health club memberships tends to attract people who can use the equipment, says Paul Precht, director of policy at the Medicare Rights Center.

Being uncooperative on insurance claims can chase away the chronically ill. For people who have few medical bills, it is less of a factor, said Karen Pollitz, research professor at the Georgetown University Health Policy Institute.

As I’ve said before, I don’t want to demonize private insurance companies.  But there is a simple economic incentive to try and preferentially choose healthy patients.  Those who make these laws better know what they are doing.

Read the whole piece.

I was going to tackle health savings accounts next, but I realized it might be worth spending some time on the basics for those just joining us.  Let’s talk about risk pools.

If you’ve heard me (or anyone) discuss the problems of Medicare and Medicaid financing, you’re heard someone mention risk pools.  Basically, insurance companies try to manage risk pools, or the population they cover, so that they are not overloaded with unhealthy people.  That’s not immoral, it’s the only way to stay solvent.  Because if you get too many unhealthy people in your risk pool, you go broke; conversely, if you manage to eliminate unhealthy people from your risk pool, you make tons of money.

Take this example.  Let’s say there are 5000 people in Anytown, USA.  4950 of them are healthy, and spend about $500 a year on health care.  40 of them are chronically ill and spend about $10000 a year.  10 of them are really bad off, with major diseases or end-of-life care, and are going to spend $200,000.  Everyone in Anytown gets their insurance from Insurogiant or Wecare.  The plans cost about $5000 per person.  Let’s say they start pretty evenly, with the risk pools evenly divided.  That means:

1. Insurogiant covers 2475 healthy people, 20 chronically ill people, and 5 really unhealthy people.  Total premiums: $12.5 million.  Total health care costs: $2.4 million.  Total cost per person: $985. Awesome.
2. Wecare covers the same: 2475 healthy people, 20 chronically ill people, and 5 really unhealthy people.  Total premiums: $12.5 million.  Total health care costs: $2.4 million.  Total cost per person: $985.  Awesome.

And fair!  Recognizing that there are other costs to the system, that’s not all profit, but they both do fine.  But let’s say there’s some uneven circumstances.  Some sick people in Insurogiant die.  And some people in Wecare get sicker.  So next year:

1. Insurogiant covers 2475 healthy people, 10 chronically ill people, and 0 really unhealthy people.  Total premiums: $12.5 million.  Total health care costs: $1.3 million.  Total cost per person: $538. Awesomer.
2. Wecare covers 2475 healthy people, 30 chronically ill people, and 10 really unhealthy people.  Total premiums: $12.6 million.  Total health care costs: $3.5 million. Total cost per person: $1407.  Not as good.

And now we have a problem.  Insurogiant shows record profits and lowers their rates to $4000.  Conversely, Wecare is forced to increase theirs to $7500 because care is now costing so much more per person. Massive numbers of healthy people defect to Insurogiant.  Sick people (with prior conditions ) can’t change insurance.  Now:

1. Insurogiant covers 4000 healthy people, 10 chronically ill people, and 0 really unhealthy people.  Total premiums: $16 million.  Total health care costs: $2.1 million.  Total cost per person: $523. Awesomest.
2. Wecare covers 1000 healthy people, 30 chronically ill people, and 10 really unhealthy people.  Total premiums: $7.8 million.  Total health care costs: $2.8 million. Total cost per person: $2692.  Horrific.

Wecare goes bankrupt.  All the healthy people go to Insurogiant for even better rates.  The sick people from Wecare are now uninsured.

But what if Wecare was a government program and couldn’t go out of business?  It’s costs per person are WAY higher.  It starts reimbursing less.  It’s going bankrupt.  That’s Medicare.  But it’s not Wecare’s fault!  The risk pool was bad.  And small pools are almost always bad, because small changes in health have huge effects.  Big risk pools, on the order of hundreds of thousands, are really needed for stability.  A single-payer plan (for instance) avoids this problem by having one very large and fair risk pool.

Private insurance gets to cover cheap, healthy people primarily.  Public systems cover the poor, the elderly, and soldiers – all of whom are expensive.  The situation above (which resembes the current landscape) leads to fractured and inequitable risk pools, a situation where private insurance gets to cover two-thirds of people and only pays for one-third of care.

A reader writes:

How is it that Health Insurance Companies are able to make such huge profits while the system is in such a mess?

Another writes:

When will everyone open up their eyes and see that the true enemy is the private insurance industry?  Those blood-sucking leeches have bought off our democracy!

Let’s all take a deep breath.  If you’ve heard me on the radio, you know that I do not want to demonize the insurance industry.  Many, if not most, of the people who work for the insurance industry are good people who care about others.  I talk to doctors about health care reform all the time, and I’m careful never to demonize those that disagree with me.  They’ve all drunk the kool-aid.  They want to do good, make people better.  If they really just wanted to make money there are other, easier, quicker ways to do it.

As to the first question, it’s important to note that the profits of the insurance companies, while significant, should not be overblown:

Overall, the profit margin for health insurance companies was a modest 3.4 percent over the past year, according to data provided by Morningstar. That ranks 87th out of 215 industries and slightly above the median of 2.2 percent. By this measure, the most profitable industry over the past year has been beverages, with a 25.9 percent profit margin. Right behind that were healthcare real-estate trusts (firms that are basically the landlords for hospitals and healthcare facilities) and application-software (think Windows). The worst performer was copper, with a profit margin of minus 56.6 percent.

If you’re wondering about Exxon, with its history of gargantuan profits, its profit margin was 9 percent over the past 12 months, according to the research firm Capital IQ. The average for the oil and gas industry overall was 10.2 percent, three times the margin in the health insurance industry. And that’s nothing compared with high-fliers like Google—which had a 20.6 percent margin—and Microsoft, at 24.9 percent.

Yes, they make money.  But that’s not the real issue.  It’s how they make money.  The simple economic forces (not the morals) of private insurance mean that they make money by (1) preferentially covering healthy people and (2) not paying for care.  That’s really it.  So when private insurance “competes” and gets better at what it does, it’s getting better at (1) not covering sick people and (2) not paying for care.  That’s… not good for a health care system.  That’s the real problem.  It’s the amount spent on underwriting, claims review, advertising, and – yes – executive salaries that we could do without.

As to how they still make money in these difficult times?  Well, it turns out that many people are delaying care because they can’t afford the co-pays or co-insurance.  Insurance companies run on such tight margins that even small delays like this can result in pretty impressive increases in revenues, which can compensate for lost customers and premiums as people lose their jobs and insurance.

Another question I can’t seem to answer enough:

Tonight you had Dr Carroll on talking about health care reform. I have a question for him. I work in health care, specifically the pharmaceutical industry…. I also want to comment on the fact that insurance companies are being vilified on every talk show out there. I have worked for insurance companies and they have been for the most part very concerned with their patients well being and follow evidence based medicine when making coverage decisions. There is not an endless supply of money, something has to give…

Let me start by saying that I don’t think that the people who work for insurance companies, nor the companies themselves, are evil. Granted – SOME are, but most are not.

But let’s face facts. Health insurance companies can only make money in certain ways. That’s by covering more healthy people than the next company, and by trying not to pay claims. That’s really it. And both of those things run contrary to what we want out of a health care system. It’s not a moral judgment. It’s just that the business model runs counter to what we consider the best thing to do. I’m not running for office, so I get to be honest and say I agree with you that there is not an endless supply of money and that everything can’t be covered. But we ration is horrible ways now, and can do a much better job.  Read more…