November 17, 2011

By Stephen Kemble

Insurance is a system for managing financial risk. When a high percentage of a population has known risk, as the case with health insurance when so many have pre-existing conditions and risk factors, then competition does not reward better plans, it rewards avoiding covering or paying for the sick, undermining the whole purpose of health insurance.

With or without with the Affordable Care Act (ACA), the total national cost of U.S. health care is rising unsustainably, with an increasingly unaffordable share pushed onto patients.1,2 CMS projections of total national health expenditures show a rise from 17.8% of gross domestic product in 2010 to 21% in 2019 under the ACA, compared to 20.8% in 2019 under prior law, both far higher than any other country.2 Problems with access to care are widespread and increasing. Doctors and hospitals are seeing reimbursement cut while administrative burdens escalate. Unwarranted regional variations in health spending point to large amounts of money wasted on unnecessary care.3

Even with advanced planning via a health savings account, expecting individuals to pay for modern health care out of pocket is only possible for the relatively healthy and wealthy. If we are to have health care financing that can cover those with serious or chronic illnesses, we must choose between the private health insurance industry and government-funded health care. We are inclined to believe that government is always inefficient and that the solution to problems with excessive cost and waste is to use competition to bring fiscal discipline and efficiency to an otherwise dysfunctional "market." However, there are fundamental structural reasons why this assumption does not apply to U.S. health care.

Private Health Insurance Industry

The U.S. private insurance business model aligns economic incentives against providers and recipients of health care, rewarding denial of care. Accountability is first to the fiscal health of the plan, and only secondarily to quality health care.4 Medicare has obvious administrative problems, but competing private insurance plans still carry approximately six times higher administrative costs than non-privatized government health care programs.5

Risk Pooling

The core idea of insurance is risk pooling. We must have some mechanism for the younger and healthier to subsidize the cost of health care for the elderly and chronically ill. Insurance is a system to manage risk, and it works best in the case of risks that are infrequent, expensive, and unpredictable, in which case risk pooling is the primary means of risk management.

Adverse Selection and Underwriting

What happens when the risk is predictable? When those purchasing insurance know their risk is higher than average, then insurance plans are exposed to adverse selection, and they counter this with underwriting.

A high proportion of the population knows their health risk because they have pre-existing conditions. Without an individual mandate, those with health problems are highly motivated to purchase insurance, but the healthy will often decide to save their money and take their chances. This leaves a sicker than average pool of subscribers, driving the cost of insurance up. With higher cost, more of the relatively healthy will forego insurance, leaving an even sicker insured pool, and even higher costs, until almost no one can afford health insurance and the advantages of risk pooling are lost.

Underwriting is the analysis of risk for the purpose of pricing or determination of coverage. Use of underwriting strategies means denial of coverage or care, especially for those with serious or chronic illness, which runs counter to the whole purpose of health insurance. Underwriting also carries substantial administrative costs.

Competition among Health Plans

The private insurance model assumes competition among plans. No competition means an unaccountable monopoly, or a government controlled plan. However, when plans are allowed to compete for the best risk pool, then competition rewards covering the healthy and avoiding the sick, and does not work to improve health care quality or reduce its cost.

The Individual Insurance Market

Individuals often know their own health risk, so the individual health insurance market has a severe adverse selection problem. Under the ACA, an individual mandate requiring everyone to purchase insurance and restrictions on underwriting mitigate adverse selection, but since some differential pricing of risk pools is still allowed, plans still have an incentive to compete for the healthiest risk pools and to minimize covering those with chronic illnesses.

Adverse selection gives a competitive advantage to plans with poorer benefits, lower provider reimbursement, and minimal customer service. Those with chronic health conditions will choose plans based on quality of coverage and doctor recommendations, but the healthy will often choose on price alone. Bad plans therefore get the healthiest risk pool, and good plans will be stuck with a sicker risk pool and forced to raise prices. Under the ACA, they will be penalized for this. This will create a "race to the bottom" among insurance plans.

The Group Insurance Market

Employers and groups provide a basis for choice of plan based on group membership, rather than risk status. This reduces but does not eliminate adverse selection, which remains problematic for small groups or employers with older work forces. The group insurance market actually works best with an employer mandate, minimal competition, and non-profit plans, as in Hawaii, allowing maximum risk pooling and minimizing heavy-handed underwriting. However, group insurance leaves too many out, including part-time workers and the unemployed.

More competition forces plans, for their fiscal survival, to try to avoid sicker risk pools. As in the individual market, use of underwriting by health plans means smaller businesses whose employees have chronic illnesses may be priced out of the insurance market, or offered deficient plans that fail to protect against financial devastation in the event of serious or chronic illness. Individuals with chronic illness often become unemployable and are pushed into medical bankruptcy, disability, and government plans (Medicaid and Medicare), driving up the cost of these programs.

To cap it off, more competition does not bring the price of health insurance down. There is no correlation between the competitiveness of health insurance markets by state, and the average cost of health insurance by state.6,7

Privatization of Government Programs

Government already pays for over half of U.S. health care from tax revenues.8 Efforts to break up government programs into competing plans have led to higher cost (Medicare Advantage), or much more restricted benefits and provider participation (Medicaid managed care), or senseless administrative complexity (Medicare D), and have not added any actual value to health care delivery.9

Therefore, more competition among plans will not reduce total health care costs, but will push plans to exclude the sick from coverage, reduce benefits, and increase administrative burdens, all of which are destructive to health care.

References

1.      Chernew ME, Baiker K, Hsu J. The Specter of Financial Armageddon -- Health Care and Federal Debt in the United States. N Engl J Med 2010;362;13:1166-1168.

2.      Foster RS. Estimated Financial Effects of the "Patient Protection and Affordable Care Act," as Amended. Office of the Actuary, Centers for Medicare and Medicaid Services. April 22, 2010.

3.      Fisher ES, Bynum JP, Skinner JS. Slowing the Growth of Health Care Costs - Lessons from Regional Variation. N Engl J Med 2009;360;9:849-852.

4.      Kuttner R. Market-Based Failure - A Second Opinion on U.S. Health Care Costs. N Eng J Med 2008;358:549-551.

5.      Woolhandler S, Campbell T, Himmelstein D. Costs of Health Care Administration in the United States and Canada. N Engl J Med 2003;349:768-75.

6.      C. Schoen, J. L. Nicholson, and S. D. Rustgi, Paying the Price: How Health Insurance Premiums Are Eating Up Middle-Class Incomes--State Health Insurance Premium Trends and the Potential of National Reform. The Commonwealth Fund, August 2009.

7.      American Medical Association, "Competition in Health Insurance, A Comprehensive Study of US Markets: 2008 Update."

8.      Woolhandler S and Himmelstein D. Paying for National Health Insurance and Not Getting It. Health Affairs 2002;21;4:88-98.

9.      Woolhandler S and Himmelstein DU. Competition in a publicly funded healthcare system. BMJ 2007;335:1126-1129.

Stephen Kemble is a physician with a longstanding interest in single-payer health care reform. I am a graduate of Harvard Medical School and I trained in both internal medicine and psychiatry