I guess before beginning this little screed that I ought to go on record as opposing the public option but supporting guaranteed enrollment (the no pre-existing conditions stuff) and I’m on the fence but leaning toward supporting mandatory coverage. All of this being conditioned on finding some reasonable way to pay for it. (Hint: that’s not “waste, fraud, and abuse.”)
If you guys really want to have a reasoned debate about the public option–or about anything else involving health insurance–it might be a good idea to remember how insurance companies make their money.
At the risk of ridiculously oversimplifying, what you (and, if you’re lucky, your employer) pay in yearly premiums is the insurance company’s actuarial estimate of how much people pretty much like you will consume in health services, plus some amount of profit. Since some people like you will have bad luck and incur huge medical bills this year, while most people like you will only consume a nominal amount of routine health care, the insurance company has a nice actuarial model that integrates across everybody’s expected costs and divides by the number of subscribers. Voila! A premium. Pretty simple, right?
Well, there are two terms that ought to be examined a bit more closely: “profit” and “people pretty much like you.”
Profit first: I pulled United Healthcare’s financials for 2008. They had a gross margin of 23% and a net margin of 4%. For comparison, let’s look at another evil industry: Exxon Mobil had a gross margin of 54% and net margin of 9%. Now, a couple of (currently) non-evil industries: Cisco had a gross margin of 65% and a net margin of 21%. Kroger (the supermarket chain) had a gross margin of 23% and a net margin of 2%. (I’d do more health insurance companies, but I’m lazy. When I did this little exercise before, they were all within shouting distance of one another.)
Health insurance is not an incredibly profitable business. In fact, it kinda sucks. To be sure, UNH’s stock (until recently) was skyrocketing. But that’s because their revenues were skyrocketing, which occurred because the underlying health services that they insure were going up so fast.
So, we now come to the the right’s principal non-hysterical objection to the public option, once you scrape away all the death panels and illegal aliens and socialized medicine buzzwords: They worry that a publicly offered insurance plan will so erode the margins of the private health care insurance companies that nobody will invest in them, which further erodes their margins, until they finally exit the business. As the supply of private insurance dries up, more and more people get driven into public insurance and you eventually wind up with only the 500 pound government gorilla in the room.
I’ve hopefully demonstrated that, just from a statement of income perspective, this is not an unreasonable fear. You could mitigate this fear with all kinds of restrictions on the charter for public insurance, but you’ll have a hard time convincing the right (and me, for that matter) that those restrictions can keep the camel’s nose from snuffling near the bottom of the tent flap.
But private health insurance ought to be able to be much more agile than the public plan, right? They ought to be more creative in structuring policies and taking advantage of specific market conditions, shouldn’t they?
Well, that’s where we come to the “people pretty much like you” part of the equation. Insurance companies compete with each other by offering lots of different plans, with different coverages, different deductibles, different copays, different lifetime caps, all at various different price points for their premiums. But notice that when we say, “people like you,” we really mean “people willing to pay the same premiums, assume the same risk, and running the same statistically proscribed chance of consuming health care as you.” In short, insurance companies create risk pools and offer good rates to pools that are unlikely to consume as many services as the risk pools that are likely to consume more services. The unflattering term for this is “cherry-picking” but it makes a huge amount of sense, both for the company and for the consumers that can be cherry-picked.
It does not make a lot of sense from a public policy standpoint, which has a different goal: Since we as a society have decided that sick people get treated, one way or another, it follows that we are de facto sharing risk across our entire society, and we might as well share it de jure as well. So, there’s moderately broad support for “guaranteed enrollment,” which is just a fancy way of saying, “no more cherry picking!”
So now we’ve removed the most powerful tool that an insurance company has to differentiate its products from others’. No more fancy actuarial cleverness allowed. Now you can only compete by packaging different services at different levels of deductibility and lifetime caps.
Oh, wait! Didn’t I just hear the prez say, “no more lifetime caps”? And “you’ll get all your preventative care covered, no matter what”? So, even more constraints, this time on the services offered.
In short, everybody wants to completely commoditize health insurance. That’s probably a good idea. But note that a commoditized plan will be a lot more expensive if you happen (as most of us are) to be in the ranks of the “cherry-picked”. I’m in moderately good health, for a middle-aged guy. Right now, I’m not sharing risk with the guy I know who’s 48, has already had a triple-bypass and two subsequent angioplasties, and still smokes and does the occasional line of cocaine. But with guaranteed enrollment and mandates on covered procedures, I will be. Think I’ll get as good a rate as I do now?
So, commoditized market, with a major player who doesn’t have to turn a profit and is guaranteed to get bailed out when they screw the pooch, because they are literally too big to fail. I’d say that the fear that private insurers will get crowded out is rational.
And all of the other fears flow from that. Health insurance companies are also the collective bargaining agents for their subscribers. (This is insane, but this post is already way too long…) As long as there are many of them, providers have choices about where they sell their services and nifty new gadgets and life-extending drugs. But with only one buyer, that buyer sets the price, and the seller either agrees to it, or he leaves the business.
If that single buyer (”single payer” is really kind of a tiny fig leaf, isn’t it?) always sets the prices just high enough to attract investment dollars to provide every service needed, there’s no problem. But, with no market to discover what that price should be, that’s highly unlikely, isn’t it? So, some services go under-invested. We now have shortages for some services. And, since we have no market to allocate those services, we have to allocate them via the explicit decisions of the (single) insurance provider. We call this “rationing” when we’re being honest, and the demagogues call it “death panels” or something equally inflammatory when they’re trying to whip people into a frenzy.
Personally, I like the idea that I can always pay for some service if it’s not covered but will save/improve my life. I like the idea of medical progress, even when some new treatment is too expensive to be covered by insurance and therefore available to only a few, because next year it will be cheaper and available to more people. But those new treatments/drugs/gadgets will only be provided when there are enough individual buyers to make a profitable market.
Finally, on a slightly different topic: You may disagree with my (incredibly lengthy) arguments above. You may honestly think that a single payer system is the only just solution to the problem. You might even be right; who knows? We should have that debate.
But you are a fool if the only debating tactic you can come up with is to question my motives, just as you are a fool if you question the motives of huge number of people that oppose the public option. I am not a shill for big pharma and the insurance companies. I just want to be very, very cautious about how we proceed here, because the chances of falling into a hole that will be impossible to climb out of are pretty high. I want to be (gasp!) conservative about how we proceed.
There are certainly people out there with less-than-pure motives. But please, for the sake of the rest of us who are simply trying to find a solution that will not only improve most people’s lives right now but continue to improve those of our children and our children’s children, assume that we’re not shills, idiots, or dupes. When you frame the debate like that (as Daniel did above, I’m sorry to say), the only weapon we have left is demagoguery, which is how things got as screwed up as they are now.
Friday, September 11, 2009
Why I Don't Support the Public Option
Posted this as a comment over at Cosmic Variance today: