Private Health Insurance
Insurance companies don't make anything - James Dyson
image by: David Hilowitz
Bernie Sanders wants to get rid of private health insurance. Quite a few Democrats, including a number of presidential candidates, seem to agree.
But why? What’s wrong with private health insurance?
A lot of things, it turns out. All too often, private health plans have perverse incentives to underprovide to people who get sick -- incentives that are created by unwise government regulation. However, government insurance often faces the same incentives and the results can be even worse.
Think about the television commercials you routinely see for insurance other than health insurance. The Aflac duck reminds you of all the things that can go wrong. Allstate tells you that when bad things do happen, you will be “in good hands.”
But when is the last time you saw a health insurer advertisement reminding you about everything that can go wrong with your health? Or assuring you that if you have cancer, heart disease or diabetes, their plan will be the best for you?
A health plan that is good for sick people attracts more sick people and that is not in the self-interest of anyone who is in charge. Ironically, failing to meet all the needs of people who are sick can be profit maximizing.
The source of this perversion is a federal requirement that no health plan, including employer health plans, can discriminate against enrollees on the basis of health status. “No discrimination” means that plans can’t charge the enrollees premiums that reflect the expected cost of their care. As a result, health plans make a profit on the healthy and lose money on the sick.
In contrast, health providers (hospitals, clinics, group doctor practices) exist in an entirely different legal environment. They frequently advertise – stressing their skills at solving patient problems. Hospitals make money by attracting the sick because they can do something health insurers can’t do: charge full price for their services.
Understanding perverse incentives can help explain a great many otherwise inexplicable features of our health care system. In a rational insurance world, people would pay out of pocket for inexpensive services and rely on insurance to pay for expenses that are large and rare. The typical employer plan, however, does just the opposite. Healthy employees get primary care virtually for free, while employees who enter a hospital must pay thousands of dollars.
Or consider surprise medical bills. Blue Cross (BC) might tell its enrollees that Hospital Corporation of America (HCA) facilities are in its network and HCA might say the same thing. But patients then get surprised by bills from doctors practicing in the HCA facility who aren’t in the BC network.
In a free market, it’s hard to imagine this problem even arising. BC and HCA would market a product that promises BC patients there will be no surprises at HCA facilities. Since there is no free lunch, this product might lead to slightly higher premiums or deductibles. But the tradeoff would almost certainly be worth it.
Why don’t we get this free market outcome in today’s health care system? The reason is that Blue Cross can keep its premiums down for healthy enrollees (who don’t plan to go to the hospital) by allowing the cost of out-of-network services to be imposed on sick people. That’s the tradeoff government regulation encourages.
There are other problems with private health insurance. Costly and time-consuming fights with insurance companies to get approval for a hospital admission or access to a test or a drug are not uncommon. People with individual insurance have discovered that under Obamacare, provider networks are becoming increasingly narrow – often excluding the best doctors and the best hospitals.
Some Democrats believe the culprit is the profit motive. That’s why they like the idea of non-profit coops and public sector plans. Here is what they are missing: perverse incentives lead to perverse outcomes, no matter who the decision maker is.
Would things be different if we were all in Medicare or Medicaid?
Two-thirds of Medicaid enrollees in the United States are today enrolled in private plans that enjoy economic gains when they provide less care. A year-long investigation by the Dallas Morning News found hundreds of examples of under-provision and patient neglect in the Texas Medicaid program. The worst offender was a subsidiary of Centene, the insurer of about one in every five Obamacare policy holders in the country.
It would be a mistake to put too much of the blame on Centene, however. The real reason for these abuses is that the state of Texas would rather spend money on schools and roads and other public services than on more medical care for poor people.
What about Medicare? About one in every three Medicare enrollees is participating in a private insurance plan that is similar to the health insurance most employees have.
Less well known is the fact that another 11 million Medicare enrollees are connected to an Accountable Care Organization (ACO), set up under Obamacare. ACOs are best thought of as President Obama’s attempt at stealth privatization of Medicare. Doctors in these plans receive more money if they hold down costs – just like a traditional HMO. Yet under Obama, it was illegal for doctors to explain this arrangement to their patients.
So more than half of all seniors in Medicare are being seen by doctors whose income goes up if the amount they spend on patient care goes down – under the assumption that additional care is “unnecessary.” Medicare is also involved in all kinds of bundling experiments – where provider compensation is tied to the control of costs. All told, as much as 90 percent of all Medicare spending is connected to economic incentives to hold down costs.
What I suspect the left hates most is the very idea of economic incentives affecting medical care, and they associate this with private provision. Yet they seem to be unaware of the very large extent to which government itself is using economic incentives to manipulate what kind of care you get and how you get it.
Source: John C. Goodman, What's Wrong with Private Health Insurance?, Forbes, October 2, 2019.