Archive for October 20th, 2009

Colorado Insurers Weight In – Finally

Possibly too late, Colorado insurers are finally pointing out some of the economic fallacies inherent in the propose federal takeover of health care.  Unfortunately, the insurers don’t go far enough in their condemnation.  Fortunately, their opponents are simply reflexively trying to demonize them, and in the process, saying some really stupid things.

First, the insurers:

At issue are what insurance companies consider absurdly low penalties for people who choose not to buy health insurance.

Their concern: People will buy insurance only when they desperately need it, such as after they’re diagnosed with cancer or heart disease.

Healthy people might choose to pay the penalty, now proposed at a few hundred dollars per year, because it is far less expensive than buying insurance.

This is is true as far as it goes, but it’s not clear that even universal coverage would alleviate this problem.  Still, the insurance companies have put their finger on a problem: if you’re not actually required to buy insurance until you’re sick, then that’s when you will buy insurance.

Naturally, this has led to howls on indignation from those defending the President’s and Congress’s proposals:

“They are assuming that people would game the system,” said Denise de Percin, executive director of the Colorado Consumer Health Initiative.

“They are looking at the worst-case scenario. People aren’t stupid — they are not going to pay a penalty and get nothing,” de Percin said. (emphasis added -ed.)

Guaranteed issue is, in and of itself, only part of the problem.  Colorado has, in effect, a government guaranteed issue for a high-risk pool.  The reason that this is unacceptable to those pushing reform is that by lumping the high-risk (or, already-established-risk) patients together, it creates a pool whose premiums are higher. They therefore argue for the concurrent requirement of “community rating.” which in effect pools the entire community – usually the state – together into one large pool where everyone gets charged the same amount.  The various Democratic bills all contain some sort of community rating proposal as well.

In fact, we’ve already run this experiment in several states.  The result is universally higher premiums, and it’s not hard to see why.  Because now, as a healthy, premium-paying insured, I also need to cover the actual costs of people who waited until the diagnosis to get insurance, and the estimated costs of new people likely to enter the system who haven’t been diagnosed yet.

De Percin is right; people aren’t stupid, which is why they’d rather pay a penalty than pay for insurance they don’t need.  They could take the difference and save it, invest it, or buy catastrophic insurance, which doesn’t qualify as “insurance” under the plan, even though it comes much closer to the ideal of insurance.  The penalty is just the cost of participating in the system in the way they think is most to their benefit.  The insurance companies’ argument, that the penalty for not playing has to be bigger than the overall cost of playing – is perfectly sound.

There are two fundamental flaws with how we think of insurance, and the way  they interact is complicated by the fact that they’re mutually incompatible: 1) we think we’re spending other people’s money, and 2) we think of insurance as pre-paid medical expenses.  One of these is a shell game, and the other is counter to the notion of insurance.  The “guaranteed-issue/community-rating” combination just plays to the worst of both assumptions.

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