Political pain and the economics of insurance companies

A previous post looked at the problem of health insurance from the point of view of sick people who need coverage. There are legitimate concerns with getting everyone covered, since we achieve the lowest costs when the broadest possible pool (i.e., everyone) is included. The problem is that nobody wants to pay until they get sick, so broad coverage can only be achieved by making participation automatic (e.g., as single payer systems do by funding themselves through tax system a la Medicare) or by some sort of enforcement mechanism (a la Max Baucus, who wants to fine people who don’t join up). But there are also some pretty obvious problems with the incentives facing the insurance companies themselves.

Just as individuals don’t want insurance until they get sick, companies don’t want people to have insurance unless they don’t get sick. Insurance companies can make more money by some combination of not covering people likely to become sick (if they can identify them somehow before signing them up) and/or jacking up rates for people who DO become sick. This last part is particularly problematical because once you become sick you have entered the ranks of “those with pre-existing conditions,” and will have difficulty ever getting a new health insurance policy again. That means your current insurer has a de facto monopoly, and can charge you monopoly prices to keep you covered. How to deal with these problems? Other countries have come up with two solutions:

1. Regulate the health insurance companies to make sure they don’t abuse people. This works well in other countries, but runs a major risk in the USA, since one political party takes it as an article of faith that regulations are bad. That means as soon as Republicans get back in power, we can say goodbye to our regulatory oversight.

2. Offer public insurance to anyone who is shut out of the private system, or who doesn’t want private insurance. This is the so-called “public option,” and is the standard economic answer to a monopoly – open up the market to competition and watch the monopoly rents melt away. Note that the idea of opening up competition across state lines tries to achieve the goal of adding competition, but has an inherent problem. Once you get sick, you once again are facing a monopolist since you can’t switch companies with a preexisting condition – unless they are regulated, and forced to accept you, and then we are back to point 1 above, the political problem. It is worth saying that I have no problem with such interstate competition, and think it might have some limited benefits, but it can’t solve the basic problem you have without a public option.

So here is the question. Why are people so scared of the idea of publicly-run insurance? After all, everyone is already eligible for Medicare if they live long enough. There is a very real fear underlying this, and after the last 30 years it should be pretty clear to everyone. For the past three decades of Republican dominance we have seen countless federal programs either starved of the funding they need to operate properly, or run by people who clearly don’t believe in the desirability of the very agency or program they were appointed to run. If a public option health insurance program were run the way FEMA was run during the Katrina debacle, then nobody would be happy.

This also makes it clear why it has been so important to the Republican naysayers to whip up this fear as much as they can -- nobody loves their insurance company (at least I haven’t met them yet), so insurers would make a very inviting political target. So, the Republicans have to make the alternative to insurance companies even more unloved than the insurance companies themselves.

On the other hand, suppose a public system were funded adequately (e.g., suppose we forced Senators and Representatives to get THEIR insurance through this system, or better yet, that it was funded through a dedicated tax like Medicare or Social Security). We would quickly see the public system growing and operating with lower costs than the private system. Why? A whole list of reasons, but among the most important:

- It really is cheaper just to cure someone’s broken arm (or whatever ails them) than to put in place multiple layers of bureaucracy to try NOT to cure it. (Estimates are that around 30% of private insurance costs go to this purpose)

- We ALREADY are paying for the sickest segment of the population (those over 65) on a public system – Medicare. It can only be cheaper to pay for younger and healthier slices of the population.

- We ALREADY are paying for the “uninsured” on the public dime because the law says everyone has to be treated when they show up at the emergency room. Catching them earlier can only be cheaper.

This is why we know we can bring costs down. It isn’t magic or BS or rocket science. But incrementalism wont get us there. The insurance companies themselves are the enemies here because if they behave like capitalists and do their best to maximize profits – which is what they are supposed to do – then they are going to have a built in incentive to try not to cover sick people. But there is the rub – society as a whole is going to pay the cost one way or the other. By admitting this to ourselves and bringing everyone into the system we can avoid all the expense resulting from companies trying to push costs onto somebody else’s budget.

So what the hell is wrong with our Democratic Senators and Congressmen? Can it be that they are so myopic they can’t see that public health insurance is the biggest political winner since Social Security? (Yes, yes, I know the answer to that, many of them can’t see beyond the ends of their noses but I resist admitting it to myself). Message to my own rep, blue dog Mike Arcuri: “Hey Mike! Your constituents will LOVE this if you ever would do it. I know because I have talked to many of them, Dems and Republicans alike, at countless school events, sports events, concerts, parks, etc. Yes, they are afraid that it will only cost them and provide nothing, but it is up to YOU to make sure that the reform is real so that doesn’t happen.”

Finally, there is a very simple plain vanilla economic response to the problem of high cost health care. Increase the supply of health care providers! We should be giving away scholarships to medical students and nurses, as well as allowing qualified immigrants to come here to practice medicine. It can only bring costs down if there is increased competition at the “grass roots” level of medicine. It may not be a silver bullet to control costs but it sure could make a difference.