Tuesday, March 9, 2010

Profits and rising insurance premiums

One of the ways this current health reform discussion has differed from the Clinton Plan discussion is that insurance premiums seem to be rising more rapidly than normal in the midst of the discussion, whereas they seemed to slow somewhat during the period 1993-94. And there has been a great deal of discussion about profitability of insurance companies and what sorts of regulations might be needed given profitability. A few brief comments.

Why are some insurance companies profitable? Because they take in more in premiums than they pay out in claims [you heard it here first]. Many find the amount of money earned in profit to be obscene, but that is of course, a normative claim. Some think it is immoral to have for-profitness in health care and I follow their logic, and their perspective. But, the reform ideas discussed this year, stick firmly with, and expand the use of private health insurance. There are nations that cover everyone using private insurance (Switzerland and the Netherlands) so it is possible to use the vehicle of private insurance for universal coverage in an affordable manner.

Keep in mind that private insurers consistently paying out more than they take in would also be bad for consumers, because the insurance company would fail because they would be insolvent. And policy holders would be left holding the bag....so there is risk aversion to this happening. When states regulate insurance they must strike a balance in protecting consumers--if premiums are too high, or too low, consumers could be harmed.

Is increasing premiums due to price gouging? I am not sure. Some of the profits seem quite high, and the rate of increase in premiums also seem quite high. But, this may simply be signalling the increasing instability of the system, with healthier persons in the individual purchase market dropping cover when the economy is bad. Either story points to the need for reform. What things would help to lower premiums:

*force/get more people into the insurance market. This is the point of the individual mandate. This is especially important because currently uninsured persons do get care, but their costs are socialized throughout the system in ways that are hard to understand and predict, and they tend to receive care in the most inefficient settings. Not to mention that they usually get care late and suffer health effects from delays.

*slow down the rate of increase in using health care. A key reason that health care costs and premiums rise is that people seem to like to use health care. There is a link between use of care and premiums. There must be. There is certainly a societal disconnect whereby many persons say they want to save money in health care (by which they mean slow the rate of growth), but any time you discuss a policy that help bring this about, people go insane talking about rationing. You can't have it both ways.

*slow down the increase in intensity of care. This means that over time how we treat disease or condition x is getting more intensive....meaning more stuff and time spent. The rate of intensity increase is going up lots faster than inflation. There is mixed evidence on whether it is worth it or not, and you would expect it to differ across condition, etc. Again, everyone says they are for this slowing down until you try and do it and then they freak out.

*you could reduce the benefits that are mandated. However, you really need to provide some definition of what is insurance so that consumers know what they are buying. If you totally deregulate or move in that direction, premiums will fall, but when people get sick they will discover premiums were low because of all sorts of back end exclusions. [if you get cancer, the first $10,000 is covered, but you pay the next $50,000....donut hole writ large]. There is of course a balance to be struck here, but I favor expansive benefit definition and allowing more options in degree of out of pocket cost that you face when you use care. When one goes up, the other goes down.

So, there could be some good that comes from adding a federal regulatory framework to the individual insurance market that has been proposed by President Obama. But, the most important way in which reform will address the issue of rising premiums in the individual purchase market is by getting more people into the risk pool in the first place.


  1. This is a very nice, lay-language-round-up of how to lower costs.

    The only example that's a bit misleading -

    "There are nations that cover everyone using private insurance (Switzerland and the Netherlands) so it is possible to use the vehicle of private insurance for universal coverage in an affordable manner."

    Tough sell. Switzerland and Netherlands have populations of 7.6 million and 16.4 million, respectively. More importantly, both are politically independent (for now) from the EU.

    Insuring 300 million people, in a politically intertwined union of states, is a different game all together. If anything, Switzerland and Netherlands example shows that it's possible to entirely cover a state with private insurance. Massachusetts is case in point - population 6.59 million, politically predictable.

  2. They are small, and Switzerland is one of the more idiosyncratic nations around. Of course advocates of health savings accounts often cite Singapore, which is a city. Your suggestion that better way to think of it is you could cover all people in all 50 states makes sense