Health Care 101

By Roosevelt Institute |

sick-pig-200A few thoughts on the health care debate:

Currently, private health insurance companies can cherry pick the healthiest members of our population – effectively disenfranchising the balance. Insuring the entire population without screening would be economically efficient because it would eliminate resources now going to screening, thereby facilitating a greater amount going into the provision of health care itself.

Also, as Paul Krugman has argued, it’s very difficult for the private sector to provide insurance, because of the problem of adverse selection.  Adverse selection can happen when an insurer offer policies to everyone and price them to reflect the average person’s health care expenses. High prices necessary to cover the groups’ needs will cause healthy people leave the pool, leaving unhealthy people who need insurance and driving up the cost of premiums.

Paul Krugman and Robin Wells illustrate (“The Health Care Crisis and What to Do About It”, New York Review of Books, March 23, 2006):

“Imagine an insurer who offered policies to anyone, with the annual premium set to cover the average person’s health care expenses, plus the administrative costs of running the insurance company. Who would sign up? The answer, unfortunately, is that the insurer’s customers wouldn’t be a representative sample of the population. Healthy people, with little reason to expect high medical bills, would probably shun policies priced to reflect the average person’s health costs. On the other hand, unhealthy people would find the policies very attractive.

You can see where this is going. The insurance company would quickly find that because its clientele was tilted toward those with high medical costs, its actual costs per customer were much higher than those of the average member of the population. So it would have to raise premiums to cover those higher costs. However, this would disproportionately drive off its healthier customers, leaving it with an even less healthy customer base, requiring a further rise in premiums, and so on.

Insurance companies deal with these problems, to some extent, by carefully screening applicants to identify those with a high risk of needing expensive treatment, and either rejecting such applicants or charging them higher premiums. But such screening is itself expensive. Furthermore, it tends to screen out exactly those who most need insurance.”

Government sponsored insurance would offset the effect of “adverse selection,” something we already do through Medicare and Medicaid. Of course, the David Walkers of this world will argue that government sponsored insurance is simply another expensive government entitlement program that will bankrupt us. But Harvard medical economists David Himmelstein and Steffie Woolhander  note the waste imposed by our embrace of the current private sector led health insurance (“I am NOT a Health Reform”, NY Times, Dec. 15, 2007):

“The “mandate model” for reform rests on impeccable political logic: avoid challenging insurance firms’ stranglehold on health care. But it is economic nonsense. The reliance on private insurers makes universal coverage unaffordable.

With the exception of Dennis Kucinich, the Democratic presidential hopefuls sidestep an inconvenient truth: only a single-payer system of national health care can save what we estimate is the $350 billion wasted annually on medical bureaucracy and redirect those funds to expanded coverage.”

The experience of Massachusetts, where mandates were simply grafted on to the existing private insurance dominated structure, has shown to be totally ineffective in terms of reining in costs, as Dr. Suzanne King noted earlier this year (“Mass. healthcare reform is failing us” The Boston Globe, March 2, 2009):

“The prestigious Institute of Medicine, part of the National Academy of Sciences, has defined five criteria for healthcare reform. Coverage should be: universal, not tied to a job, affordable for individuals and families, affordable for society, and it should provide access to high-quality care for everyone.

The state’s plan flunks on all counts.

First, it has not achieved universal healthcare, although the reform has been a boon to the private insurance industry. The state has more than 200,000 without coverage, and the count can only go up with rising unemployment.

Second, the reform does not address the problem of insurance being connected to jobs. For individuals, this means their insurance is not continuous if they change or lose jobs. For employers, especially small businesses, health insurance is an expense they can ill afford.

Third, the program is not affordable for many individuals and families. For middle-income people not qualifying for state-subsidized health insurance, costs are too high for even skimpy coverage. For an individual earning $31,213, the cheapest plan can cost $9,872 in premiums and out-of-pocket payments. Low-income residents, previously eligible for free care, have insurance policies requiring unaffordable copayments for office visits and medications.

Fourth, the costs of the reform for the state have been formidable. Spending for the Commonwealth Care subsidized program has doubled, from $630 million in 2007 to an estimated $1.3 billion for 2009, which is not sustainable.

Fifth, reform does not assure access to care. High-deductible plans that have additional out-of-pocket expenses can result in many people not using their insurance when they are sick.”

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