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Health Alert | Medical Underwriting: It’s Better than the Alternatives

John_GoodmanPaul Krugman says the opposition to ObamaCare is conducting a campaign based on "blatant fear-mongering, unconstrained either by the facts or by any sense of decency." The proponents' case, by contrast, has been principled.

Hmmm.....Krugman and I must be listening to completely different sound bites. Over the past few weeks I can't recall a single TV appearance by a proponent that did not involve an anecdotal horror story in which a hapless victim is abused by a mean insurance company. Is the purpose of these anecdotes to make us feel sympathy?... To get our checkbooks and make a contribution?... Or is the purpose to make us fear that we too could be abused?... In other words, to scare us??


[Interestingly, Krugman himself wrote a column only a few days earlier in which he based the entire argument for guessed it....a fear-mongering horror story! I'll let readers decide whether the delivery was "unconstrained by facts or any sense of decency." (David Henderson gives the rest of the story here.) Meanwhile, I predict that abuse of the sick by insurance companies will become more likely, not less likely under ObamaCare - a subject I'll reserve for another day.]

Just how scared should we be? It's been illegal to rescind a person's insurance because of a change in health status since the passage of HIPAA in 1996. It's also been illegal for any employer to discriminate against employees because of their health condition over the same period of time. So it's only in the "individual market" (less than 10% of the total) that people get charged premiums which tend to reflect their expected health care costs.

Okay. So how well does the individual market work? Better than you might think. In his new book, Health Reform Without Side Effects (previously reviewed by me at the Health Affairs blog), Mark Pauly shows that the market works better than the health insurance exchanges ObamaCare would replace it with and better than the small group market that Obama would leave largely untouched. Moreover, with a few reasonable reforms, the individual market would work better still.


 On My Own 


Let's briefly review the positive side of individual insurance:

Choice of benefit packages. Whereas in most small and even medium-sized businesses, employees have little, if any, choice of health insurance coverage, in the individual market people typically have a great deal of choice. This is important. If you want to persuade people to voluntarily insure, you've got a much better chance if you give them what they want.

Guaranteed renewability. Despite some well-publicized cases that have become fodder for political debate, individual insurance has historically been guaranteed renewable in the same rate class. This means the insurer cannot single you out either for cancellation or a rate increase because you happened to get sick. As noted, this has been a nationwide requirement under federal law ever since the passage of HIPAA. And, contrary to some misinformed rhetoric, people in the individual market are always in large pools and rate increases are the same for everybody in the pool.

The same is not true of group insurance, however. A small group is a self-contained group; and in most states insurers can increase rates (sometimes a lot) just because one employee had an expensive health problem. Moreover, group insurance is never guaranteed renewable for the employee. Once you leave your job, you ultimately leave your health plan as well.

Portability. Individually owned insurance travels with you on your journey through the labor market - both from job to job and when you leave and reenter the market. Except in a few isolated industries, group insurance is never portable.

More accurate entry prices. Because of health underwriting, premiums charged to new entrants tend to reflect expected health care costs. In most discussions this is treated as a disadvantage. And for the 1% to 4% of people with an expensive-to-treat, pre-existing condition, it is bad. (More on that below.) But to the other 96% of the population, more accurate pricing is a good thing. And it's not just personally good for them. It's also socially good. Inaccurate pricing creates perverse incentives. Those who are overcharged will underinsure, and perhaps not insure at all. Those who are undercharged will overinsure.

Community rating (and guaranteed issue), Pauly argues, is comparable to imposing an excise tax on the vast majority who are healthy in order to subsidize the few who are less healthy. No matter how desirable the goal, the method is wrong. Economic theory teaches that broad-based taxes are always superior to excise taxes; and in health care this lesson is particularly important because there are adverse social consequences of the decision of healthy people to stay uninsured. (Wherever community rating is imposed, it always seems to increase the number of uninsured.)

Okay, so what's the downside of individual insurance? The complaints most often heard are that people with pre-existing conditions may face exclusions, waiting periods and even denial of coverage altogether. While Pauly acknowledges that individual families may find themselves in tragic circumstances (the kind President Obama has encouraged everyone to write to the White House about so they could be publicized), the dimensions of the problem are actually quite small.

For example, Pauly finds that "exclusions affect very few people and often have modest effects when they do." Also, "in unregulated markets, waiting periods are rare and brief (if coverage is delayed, it is usually for only a month or so), but exclusions are common, though usually limited to two years or less." As for denial of coverage, this is also overblown. According to one study, "Almost every potential buyer, even with a chronic condition, was eventually able to get an insurance offer if [he/she] persisted in searching among companies despite being rejected at the first application."

What about the oft-heard complaint that high-cost patients get trapped in pools with escalating premiums? Turns out that "only about 15% of the higher cost of a chronic condition actually shows up in the higher premiums paid by people with such conditions in the individual market." Individual insurance is not only portable across jobs; it appears to also be portable across health conditions as well.

Moreover, what problems there are in the individual market are more often than not exported from the group market because of the lack of portability there. It is probably fair to say that the defects of the group market get shifted to the individual market far more often than the other way around.

Another complaint is high administrative costs in the individual market, where only 65% to 75% of premiums are actually paid out in claims. By contrast, the comparable figure would be 95% for very large groups (10,000 employees or more).

One reason for high administrative costs is selling expenses - persuading people to buy. But where insurance is highly subsidized, selling expenses go down. With employer-provided insurance, for example, where the typical employee pays only 25% of costs, the takeup rate is about 90%. Pauly even raises the possibility that generous subsidies could pay for themselves (in terms of overall social cost) - which means that the decline in selling costs could more than offset the expense of the subsidy.

So what can be done to make the individual market work better? The most common proposals are disappointing:

  • Online buying (touted by some on the political right) has lowered administrative costs and increased competition for some kinds of insurance, but for health insurance the gains appear very modest. (Underwriting and the exchange of information appear to be done largely offline on a personal basis.)
  • Another idea often pushed by Republicans is voluntary buying associations; but these never last because healthier members eventually find they can do better by leaving the group.
  • Health insurance exchanges (favored by the Obama Administration) usually come with price controls and regulations that undermine any potential benefits. Also, there is no evidence that administrative savings in Massachusetts are any lower than would have been produced by the subsidies alone.

Pauly has three suggestions that will have positive impact. First, individual insurance should be subsidized through the tax system. At a minimum, people buying their own insurance should get the same tax break employees get. A better approach is a fixed sum tax credit, along the lines suggested by Pauly and me some years ago in Health Affairs. Second, we need better functioning risk pools, and the need for such pools would be lessened if more insurance were guaranteed renewable (as it would be, for example, if employers could buy individually-owned insurance for their employees).

Finally, health insurance would be more attractive if people had more choices. One way to achieve that is to repeal mandated benefit laws, requiring insurers to cover providers, ranging from chiropractors to naturopaths, and services, ranging from in vitro fertilization to acupuncture. Alternatively (and although Pauly doesn't advocate it), we could give people a choice of regulatory regimes by allowing them to buy insurance licensed in any of the 50 states

John C. Goodman is president and CEO of the National Center for Policy Analysis. The Wall Street Journal and the National Journal, among other publications, have called him the "Father of Health Savings Accounts," and the Media Research Center credits him, along with former Sen. Phil Gramm and columnist Bill Kristol with playing the pivotal role in the defeat of the Clinton Administration's plan to overhaul the U.S. health care system. He is also the Kellye Wright Fellow in health care. The mission of the Wright Fellowship is to promote a more patient-centered, consumer-driven health care system.

Dr. Goodman's health policy blog is the only right-of-center health care blog on the Internet. It is the only place where pro-free enterprise, private sector solutions to health care problems are routinely examined and debated by top health policy experts throughout the country-conservative, moderate and liberal.




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