America's Ailing Health Insurance Markets

GENERIC health insurance
This column was written by J. Goodrich.

Oh no! Another economics post! And a long one! Don't fret. The next one will be as fluffy and short as I can make it. But today I want to play doctor and patient with the US health insurance markets.

How to fix the problems of health insurance is a hot topic, these days, honest, and I want to chip in before the elections are over and we forget all about its importance. While Barack Obama and Hillary Clinton are offering competing plans which would cover the forty-seven million uninsured in this country, John McCain has a proposal to cut health care costs by increasing competition in the markets. His idea is that competition would drive the price of insurance so low that most everybody could afford coverage! No need for the government to poke its nose where it is not wanted, and the conservatives surely don't want it meddling with the markets.

There's a sense of déjà vu about McCain's proposal. Haven't we been injecting competition into the health insurance markets for a very long time? Even the establishment of the government Medicare and Medicaid programs in the 1960's had a pro-competitive edge, because it removed from the commercial markets the most expensive and the poorest paying cases, leaving them with the most lucrative consumers to insure. The Health Maintenance Organization movement of the 1970's was another injection of that competitive hormone into the insurance markets in the form of prepaid group plans which combined insurance with the provision of care. What additional forms of competition has McCain invented that health economists never dreamt about?

The truth is that not all competition is helpful to consumers. I know that this is not an idea free-market conservatives like, but it's possible for competition to actually hurt some consumers.

For instance, if a product is hard to judge in quality and contents, competition in the price of that product may be meaningless for consumers who don't know what they are getting for the price. Just ask yourself how many people clearly understand the concepts of deductibles and coinsurance (the parts the patient must pay despite having insurance) or how many people clearly understand that the insurance company may refuse to pay for some of those health expenses which you thought were covered by the policy. Then ask yourself what the actual insurance is that these consumers believe they are getting when a policy advertises itself for some attractive price.

Group health insurance policies get around some of these informational problems, sure. But those policies are not available to everyone. They are usually offered by employers. This means that the group to be covered is at least healthy enough to turn up for work. What about those who are not healthy enough for that or who work for themselves or for the many small firms which can't afford to offer health insurance as a benefit?

A recent boxing match between Elizabeth Edwards and John McCain's economic expert, Douglas Holtz-Eakin, highlights one particular problem in the health insurance markets: that of covering people with pre-existing conditions:

Edwards has read McCain's health care proposal (more competition) and asks whether either she or McCain could buy individual health insurance under that plan, given that they both have potentially expensive pre-existing conditions. Mostly people with such conditions have trouble getting affordable individual coverage, because the insurers know that they are not going to be low-cost customers, which means that they are not going to be an asset to the insurance company's profit (in the case of for-profit firms) or to its residual income (which is what profit is called in non-profit firms).

Holtz-Eakin's answer to Edwards is that more competition will make coverage more affordable, even for people with pre-existing conditions. (He also mumbles something about Elizabeth not understanding these difficult health care issues; better to leave them for experts.)

But ironically it is competition itself which may force firms to reject John McCain and Elizabeth Edwards as applicants. Think about it. The ideal candidate for an insurance company is one who always pays the premium and never makes any claims at all. People with pre-existing conditions don't qualify, and a firm which collects lots of them will not win the award for the Year's Most Profitable Insurer.

What insurers would really love to do is to skim the cream off the market by only insuring the young and healthy (hence the advertisements about maternity care and sports medicine by prepaid group plans). Well, not really, but a very cynical insurer might want to do just that, and it is not impossible to imagine a market outcome where all the high-risk customers are left without insurance altogether, except for the few, such as Elizabeth Edwards and John McCain, who can pay very large sums for the necessary insurance coverage.

So what ails the health insurance markets? The answer to that question will depend on how deep you wish to dig and also on whose interests you have in mind. On the deepest level the answer might be that "insurance" is the wrong model to apply to the way we cover the costs of health care. But if we insist on using that model then we should do it within a framework which regulates the kind of competition that firms are allowed to engage in.
By J. Goodrich
Reprinted with permission from The Nation