Only a few short years ago, insurance executives were lining up in support of the Affordable Care Act in the form of public and vocal support as well as through lobbying efforts. The Faustian bargain these insurance companies were making with the government was that in exchange for more price and product offering controls they would receive a massive influx of young and healthy customers, who by virtue of the individual mandate and tax penalties for not purchasing coverage would be forced into the market. Fast forward to the predictable unintended consequences of such a government intervention, and the cascading ills and errors (that I also attempted to capture in another blog post) are creating the problem of adverse selection for insurance companies in which the preponderance of those rushing to the exchanges are those most in need of coverage and usage of medical services while the healthy people are largely simply deciding to pay the penalty. UnitedHealthcare is but one of many in days to come that will resign themselves to the challenge of coverage for those that are the relatively few that actually opted for insurance on the exchanges. Ah, beware of the Faustian bargain in which the devil will come to receive the payback, which in this case will ultimately be a growing crescendo that this is more evidence of the need for a single payer health system and that insurance companies should be abolished altogether. Of course, the only thing this course of action might solve is government price controls that may serve as a temporary palliative, but access, choice, and quality would inevitably suffer in such a system.
I should add that I am certainly no fan of the way health insurance market works in America, either now or the decades preceding the Affordable Care Act, so this post is not a defense of the industry. Insurance should serve as place for catastrophic coverage. Much of the bloat and cost in the industry is a direct result of insurance coverage that covers everything we do, in much the same way oil changes would spike in cost and usage if auto insurance was forced to cover these mundane and routine services. It is true that insurance companies are more about administration of claims and processing of paperwork than they are about value added services and counseling. I would argue that these are the behemoths that are the direct consequence of the system that has been created with government intervention, not due to the lack of intervention. What is it that ails the health industry? I believe economist John Cochrane lays out as concise and effective view as anyone in a recent essay published out of the Hoover Institution. The excerpt on health insurance and healthcare is below:
The ACA, thousands of pages of law, tens of thousands of pages of regulations, and even more decision-making power by newly empowered regulators, such as the thousands of waivers given to individual companies, represents an enormous increase in Federal intervention in the market for healthcare and health insurance. Like finance, health was already highly regulated. And like finance, most of the ACA simply doubled down on the same basic regulatory structure that had caused so many pathologies before.
The central problem of preexisting conditions was an artifact of regulation. In the ideal form of health insurance, you buy cheap catastrophic insurance when young, but the insurance policy can follow you as you age, change jobs, and move from state to state, and does not radically increase premiums if you get sick.
Why don’t we have that ideal insurance? Because previous rounds of regulation outlawed it. In the 1940s the US government allowed tax deductions for employer-provided group insurance, but not employer contributions to individual insurance or individuals’ contributions to such insurance. By laws, insurance is not portable across state lines. Thus, there is no reason for anyone who might get a job or move to buy long-term individual insurance that protects against the emergence of pre-existing conditions. In response to the preexisting conditions problem, the ACA forces community rating — everyone pays the same price—tries to mandate healthy people to buy insurance, and steps up pressure on employer provided group plans, which are the source of the problem.
Similarly, once insurance was tax deductible, there was an incentive to salt it up. You would not buy car insurance that “paid for” oil changes — especially if you had to deal with insurance paperwork each time. But with a tax deduction it’s worth buying health insurance that “pays for” routine small expenses. Then the government (state and local too) instituted mandates that insurance must “pay for”—and, of course, charge premiums to cover—all sorts of additional procedures, which makes insurance too expensive.
We need to allow simple, portable, largely catastrophic, lifelong, guaranteed-renewable health insurance to emerge. Right now it’s illegal. To the extent that the government wishes to subsidize health insurance—and it should—then it should give straightforward vouchers, which people can use to buy insurance, or to fund health savings accounts. Such vouchers should take the place of Obamacare, Medicaid, and Medicare.
Healthcare and insurance is not just distorted from the demand side—too many people paying with someone else’s money. The supply side is ossifyingly restricted as well. New hospitals, new clinics that specialize in cheaply providing one service well, new doctors, new nurses, new insurance companies, all find a wall of laws, regulations, and officials blocking their path. For a reason: To maintain the profits of and cross-subsidies provided by the existing incumbents. Non-profit status itself blocks efficiency: you can’t take over an inefficient non-profit, and non-profits can’t issue equity to make important investments. In reducing the cost and improving the quality of healthcare, efficiency is far more important than trying to avoid a competitive rate of return to owners.
Alas, the offshoot of all of this will inevitably be more government intrusion to cure the ills that government in fact created.