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09/2005

 

Insurance No Longer the Model for Healthcare

G. Murray Thomas

There is a health care crisis in America!

Okay, now that I don’t have your attention, because you’ve heard that too many times already, let me try again. There is a health care crisis in America, and health insurance is the problem, not the cure.

The fact is, there are two health care crises, which are related, but not the same.  One is the number of people who cannot pay for health care. The other is actual cost of health care. Solving either of these would help solve the other, but in the end, both need to be tackled.

Obviously, getting health care costs down would help everyone to afford health care. However, almost every proposal tackles these problems from the other end. That is, they attempt to get health care costs down by providing coverage for everyone. There are a couple of reasons for this. It takes care of the most pressing problem (people without health care) first, and puts off actually solving the harder problem until later.

All of the various proposals out there to expand coverage to (nearly) everybody claim they will lower overall costs. To a certain degree, this is correct. But some go much farther to slash costs than others.

There are two health care proposals up before the California Legislature this session which help illustrate this clearly. Gov. Schwarzenegger wants to require every one to purchase health insurance. His plan would guarantee coverage for lower-income individuals through a combination of expanded Medi-Cal coverage and a subsidized insurance pool. It would also require insurance companies to cover everyone regardless of their health situation. The plan would be funded through a payroll tax on employers who do not provide insurance, and a reimbursement system for doctors and hospitals. Much of his plan is concerned with monitoring insurance companies to insure compliance, although it says nothing about what level of premiums they can charge.

At the other end of the spectrum, State Sen. Sheila Kuehl  proposes to create a state-run single payer system. Under the single payer system, the government acts as an insurer to everyone, taking over all payments for health care. This plan would be funded by means-based premiums charged to all citizens.

These two plans make clear the fundamental question about health care reform. Can we fix our health care system by tweaking the current system of private insurance, or do we need to replace it with a single-payer system?

Both Schwarzenegger and Kuehl agree that getting everybody able to pay for their health care is the first step towards getting control of health care costs. One  cost cutting benefit of covering everyone is that it would guarantee access to preventive care. Today, many people cannot (or believe they cannot) afford to go to the doctor for regular check-ups, or for the treatment of minor maladies. So they let problems go untreated, until they turn into such a severe condition that they can no longer be ignored. At which point they often end up in the emergency room. Wherever they end up for treatment, the resulting cost is far greater than it would have cost to treat the problem in its initial stages, or even prevent it altogether.  This applies to everything from the flu to cancer. It is almost always cheaper to maintain good health than to treat illness.

Making sure everyone paid their bills would also bring down the overall cost of health care. One reason for the high cost of health care these days is the number of patients unable to pay their bills. Hospitals are required to treat everyone, regardless of their ability to pay. To make up for the shortfall, they charge those who can pay a higher rate, to cover those who can’t. Even private doctors pad their bills in a similar manner. If providers were guaranteed payment for every patient they treated, they would be able to lower their overall rates. You can add to these the administrative costs of chasing down delinquent patients.

But inconsistencies in pricing don’t stop there. As most of you know, those with insurance are actually charged less than those without. If you have insurance, check the statements your insurance company sends you, outlining what they have covered. Compare the difference between what your doctor billed, and what the insurance company actually paid. It is often less than half. In return for guaranteed payment, the insurance company negotiates a lower rate for various services. If everyone was covered, we could at least get consistent rates; all patients would be charged based on the actual cost of the service. And, again, we would save the administrative costs of calculating all these different rates.

It should be noted that a single payer system would be better at negotiating consistent, fair rates for services, as there would be a single entity doing the negotiating, rather than a variety of insurance companies. Even so, it should be pointed out that this is less about lowering costs, than making them consistent from patient to patient, evening them out, in other words.

As I said, both Schwarzenegger’s and Kuehl’s plans would lower these costs of medical care. However, there is an additional area of cost which Kuehl’s plan would eliminate, while Schwarzenegger’s would only increase it. That is the cost of running insurance companies. The fact is, covering everyone would make the actual function of insurance companies obsolete.

Requiring everyone to have insurance changes the nature of the insurance game, so that it really is not traditional insurance at all. Insurance works by pooling risk. But if everyone is covered, it’s no longer pooling risk, it is merely pooling costs.

In its most fundamental form, an insurance company assesses a venture -- what are the odds of failure, and what would the cost of failure be? If either the odds or the costs of failure are too high, the company either charges a commensurably high premium, or refuses to insure the venture altogether. Assuming they’ve calculated the odds properly (and calculating odds are something insurance companies excel at), enough insured ventures will succeed for the company to cover the costs of the failures, and still turn a profit.

If, however, the insurance company is required to insure everyone, regardless of their odds of failure, this whole model goes out the window. As I said, they are no longer pooling risks (and all their talents at calculating odds of failure are worthless). They are merely pooling costs.

But wait, I hear you say, we’re all required to have auto insurance, and that system seems to work. But there are significant differences between auto insurance and health insurance.

First off, everybody, except for those few who die young and healthy from accident or violence, will need health care at some point in their life. Not everybody is ever going to be in an auto accident. Imagine that your chances of getting in an accident increased exponentially with the age of your car, and further, that you got one car when you got your license, and were stuck with it for the rest of your life.

Further, the auto insurance companies are able to determine, with a high degree of accuracy, the chances of any individual driver being in an accident, based on previous performance (ie: their driving record), and can charge them accordingly. Health insurance companies can also do this (and they currently flat out deny coverage to the riskiest patrons). The difference is that the primary factors for the auto insurance companies are behavioral, while the primary factors for health insurance are genetic. It would be grossly unfair to charge those unlucky enough to be born with a predisposition to disease more for their health coverage.

Schwarzenegger’s plan does require health insurance companies to insure everyone, regardless of previous conditions or genetic dispositions. However, it says nothing about how much the insurance companies can charge. In order to make health insurance affordable for all, his plan would either have to place caps on the premiums the insurance companies can charge, cutting into their profits, or it would have to provide government subsidies for those hardest to insure. We could easily end up with two systems of health care, one of private insurance covering the healthiest individuals, and a government subsidized system taking care of the rest. If the government’s going to end up subsidizing the insurance for the highest risk patients, we might as well go for the single payer system, where the government could balance those costs with the lower health care costs of the healthiest among us.

Further, reading through the Governor’s plan, much of it is dedicated to regulating the insurance companies, to make sure they do provide coverage for all. This adds another layer of bureaucracy, and therefore more costs, to the whole plan. It creates a new layer of bureaucracy to regulate insurance companies, which are no longer even necessary. If you’re going to create a new bureaucracy, why not just create one to handle paying for health care.

You may find I keep emphasizing the insurance companies profits. Insurance companies are  for-profit entities. To continue to include insurance companies in our health care system is to continue to include their profits. But, under a system in which they insure everybody, for what are they being rewarded with their profits? Under the old system, their profits were their reward for taking on the risks of uncertain ventures (and for correctly calculating said risks). But if they are no longer taking on risk, but are merely acting to pool the costs of health care, the rationale for that reward disappears. Their profits merely become another cost added to the pool.

Profits aren’t the only area in which insurance companies end up more expensive than a single payer system. Administrative costs for private insurance companies run at 15-20%, depending on the type of insurance (according to a Kaiser study in 2003).  On the other hand, Medicare, the current government run insurance, runs administrative costs of less than 2% (Center for Medicare and Medicaid Services, 2004).

Clearly, insurance companies consistently have higher administrative costs than a government run system. Much of this administrative cost is due to trying to maintain their profits. (Think of all the paperwork which currently goes into denying coverage to their customers). Multiple insurance companies also means the duplication of administrative costs, as a number of separate insurance companies maintain separate but redundant bookkeeping systems.

Add to this the advertising budgets of the insurance companies. You can be sure that those would only go up under a mandated insurance system, as the different companies attempt to attract the low risk customers.

And then there are insurance agent commissions. Did you know that an insurance agent receives a 10% commission on every policy he or she sells, for the lifetime of the policy, even after they leave the employ of the insurance company?

A single payer system would eliminate all these costs of insurance companies, enabling it to pay for the same level of health care at a much lower overall cost.

I will give Schwarzenegger the benefit of the doubt, and assume that he wants to preserve the role of insurance companies in paying for health care because of his philosophical beliefs, not because of their contributions to his campaign. Like all Republicans, he believes that private industry can do anything government can do better. For years, the right wing and their corporate sponsors have promoted this idea that the “marketplace” will solve all our problems. They have pushed this so relentlessly that it has become accepted wisdom. The notion that there are problems the marketplace cannot solve is considered almost treasonous.

But I think this is clearly a case where that philosophy is wrong. A single-payer system would actually provide universal health care cheaper, and with less bureaucracy than any system which continues to rely on health insurance companies. A single-payer system would do more to solve both health care crisis than any other proposal out there.

Senator Kuehl’s bill, SB 840, is currently up before the California Legislature. This same bill passed last year, only to be vetoed by the Governor. Those of you in California can write to your State Senators and Assemblymen in support of it. Those of you elsewhere can write your support to Senator Kuehl. All of us can write to Gov. Schwarzenegger encouraging him to sign it this time. If California can adopt a single-payer system of health care, that will go a long way to encouraging similar systems elsewhere in the country. Maybe even, eventually, a national single-payer system.