Tell Us Again Why We Need Young People

“This only works if young people show up,” said Bill Clinton the other day. He was explaining ObamaCare.

On the surface that’s an odd thing to say. Medicare seems to work just fine without a lot of young people. It needs taxes from young people, of course. But nobody has ever said young people need to buy into Medicare or it won’t work. What’s so special about ObamaCare?

To understand that, we need to go back to square one.

One of the strange things about the market for health insurance is that almost none of us ever sees a real price. More than 90 percent of people with private coverage get it through an employer. Employers, on the average, pay about three-fourths of the cost and the remaining share tends to be the same for every employee ― irrespective of expected health care costs.

In most states, the only people who face real premiums are in the “individual market,” where individuals and families pay for insurance out of their own pockets. Yet the Affordable Care Act (ObamaCare) will outlaw the pricing of individual risk (medical underwriting) by year’s end. Health insurance, therefore, is very different from just about every other form of insurance.

 

In other insurance markets, a person newly entering an insurance pool will be charged a premium that reflects the expected cost and risk the individual brings to the pool. With respect to life insurance, disability insurance, homeowner’s insurance and (for the most part) even auto casualty insurance, you pay for what you get.

That practice, by the way, works quite well.

When premiums reflect expected costs, people are essentially paying their own way. When that happens it really doesn’t matter very much who chooses to buy insurance and who chooses to self-insure and bear the risk themselves. With life insurance, for example, you can have pools with a lot of old people; or pools with a lot of young people. You can have pools with a lot of people at high risk of dying; or pools with a lot of low-risk enrollees. Or you can have combinations of all of these.

When is the last time you heard anyone say that life insurance won’t work unless we mandate its purchase? Or that the life insurance market will fall apart unless we convince a lot of young, healthy people to buy it? Have you ever heard of a life insurance company spending millions of dollars on rock stars and sports icons and librarians and local civic associations to beg youngsters to buy the product?

Why are things so different in the market for health insurance? Because in this market premiums are regulated and that regulation is completely dominated by the idea that it’s unfair to charge real premiums. In fact the most common belief is that everybody should pay the same premium for health insurance, even if everyone’s expected health cost is different from everyone else’s.

It’s not easy to say where this idea came from, or why it is so widely believed. The health policy community often exudes a herd mentality. Once an idea is accepted, it tends to be repeated again and again ― until a point is reached at which no one can exactly remember why the idea was ever proposed in the first place.

One reason why this issue has suddenly become a topic of discussion in the blogosphere and in the public policy community is that ObamaCare was sold to the public on deceptive terms. When he was campaigning for the presidency in 2008, Barack Obama made it sound as though his health reform was only designed to help people who couldn’t afford health insurance afford it. Everyone else was going to be left alone. (“If you like the health plan you have you can keep it.”)

Then, on the eve of passage of the legislation, the focus changed to those few people (very few, it turns out) who are denied coverage because of a pre-existing condition. At last count there are about 107,000 enrolled in newly created risk pools because of this problem.

But it has only been very recently that New York Times columnist Paul Krugman and others have been in print explaining that ObamaCare won’t work unless the government controls the premiums paid by everybody in the entire country! No one ever said that during the presidential campaign or during the congressional debate. As far as the general public is concerned, this is a brand new idea.

There is one other way in which government regulation has caused health insurance to be different. Traditional indemnity insurance basically doesn’t exist anymore. What we call health insurance is really a health plan. It is an entity that controls what care you are entitled to and who can deliver it. When you choose a health plan, you are not just choosing an entity that will pay your medical bills. You are also choosing a network of doctors and hospitals and a set of protocols that determine how medicine will be practiced.

Here’s why that matters. When premiums are regulated so that they cannot reflect expected costs, four things will happen:

  1. On the buyer side, people who are under-charged will over-insure and people who are over-charged will under-insure. This is basic economics. If the price you are asked to pay is artificially low, you will buy more than you otherwise would; if the price is artificially high, you will buy less. If you are sick and require a lot of medical care but can pay the premium ordinarily charged to a healthy enrollee, for example, you will likely choose the richest plan you can find.
  2. In order to avoid attracting high cost enrollees, health plans will respond by scaling back their benefits and their provider networks until the richest plans look pretty much like every other plan. In the individual market today, in most states you can buy a BlueCross plan that covers almost all doctors in your area and practically every hospital, including all the best hospitals. I predict those plans will never see the light of day inside the (ObamaCare) health insurance exchanges. See Monday’s Health Alert on the race to the bottom with respect to access to care.
  3. At the same time, health plans will seek to attract the healthy. Of course, to a certain extent they are doing that today. But with an electronic exchange in which healthy people tend to buy on price and sick people tend to buy on benefits and software that makes it easy to do those things, the insurers will be even more pressured to reconfigure their offerings to make them more attractive to the healthy and less attractive to people who need medical care.
  4. Finally, the perverse incentives do not end at the point of enrollment. They continue. Health plans will have perverse incentives to over-provide to the healthy (to keep the ones they have and attract more of them) and to under-provide to the sick (to avoid attracting more of them and encourage those they have to go elsewhere).

[BTW, risk adjustment in the ObamaCare exchanges may actually overpay for certain types of chronic illnesses ― making them more attractive to the health plans than healthy people. But any time there is non-market fixing of premiums and artificial risk adjustment, the total revenue for any particular enrollee is almost certain to be wrong ― in one direction or another.]

There is something else that tends to happen in an insurance market where no one is paying a real premium. If you have problems and need help, you are likely to discover that the insurance company is about as accommodating as the Department of Motor Vehicles. Dealing with a vendor who doesn’t want your business can be unpleasant. When you call, you are put on hold. Or you never get to talk to a real person in the first place. You are shuttled from one office to another, buried in a complex web of bureaucracy and paperwork that seems intentionally designed not to meet your needs. (See a previous post at my blog on paying for medical care.)

[I know what you're thinking. This is the way insurance companies already treat everybody! Yes, but there is a reason for that. In a world in which market forces have been completely suppressed, anyone who makes frequent calls to a health insurance company is probably someone with lot of health problems, paying a premium well below the cost of her care, who is prima facie a customer the insurer wishes it didn't have to deal with.]

So how should the market for health insurance work? It should incorporate two features:

  1. Whenever you enroll in a health plan, you want the premium paid to the plan to reflect the expected cost of your care ― especially if you have medical problems. Otherwise, your new plan will have perverse incentives to skimp on what you need.
  2. To be able to afford that premium in case you become ill, you should be able to purchase “change of health status insurance” in addition to garden variety insurance. Such insurance pays the extra premium caused by a change in your health status.

In such a world, health plans would compete for the patronage of the sick just as vigorously as they compete for the healthy. Most likely, health plans would specialize ― with plans carving out such markets as cancer care or diabetic care. Instead of running from problems, the insurers would see common, expensive illnesses as entrepreneurial opportunities ― just like we observe in other markets.

Change of health status insurance doesn’t exist today and isn’t envisioned under ObamaCare. But we need it. If the providers of medical care are to have good incentives, we need to allow such insurance and encourage it.

Comments (23)

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  1. Dewaine says:

    “One of the strange things about the market for health insurance is that almost none of us ever sees a real price. More than 90 percent of people with private coverage get it through an employer. Employers, on the average, pay about three-fourths of the cost and the remaining share tends to be the same for every employee ― irrespective of expected health care costs.”

    Important fact that those of us against ObamaCare need to be more vocal about. Employer-provided coverage isn’t good either, we need a new system.

    • JD says:

      True, we often are portrayed as defending the status quo (sometimes it is deserved). Nobody wants the status quo, it isn’t working. Let’s be vocal about giving American’s options.

  2. Dewaine says:

    “But it has only been very recently that New York Times columnist Paul Krugman and others have been in print explaining that ObamaCare won’t work unless the government controls the premiums paid by everybody in the entire country! No one ever said that during the presidential campaign or during the congressional debate. As far as the general public is concerned, this is a brand new idea.”

    They knew what they were doing all along, but nobody would take them seriously if they told you what they actually wanted.

    • JD says:

      It is scary to think about how that has worked. It makes you think that nothing is safe from a manipulative plan.

  3. JD says:

    “To be able to afford that premium in case you become ill, you should be able to purchase “change of health status insurance” in addition to garden variety insurance. Such insurance pays the extra premium caused by a change in your health status.”

    This is a great idea. The more options the better.

  4. JD says:

    Accurately charging based on value is a bedrock of efficiency. If we keep pushing a system that distorts incentives, people will continue to suffer.

  5. Sean Parnell says:

    The basic thinking of the Obama administration on the young is bordering on delusional. They apparently believe that the young will jump at the opportunity to pay double in premiums for something they currently won’t buy at half the price because they don’t see enough value in the product. I don’t expect that to play out the way they think it will…

    • DoctorSH says:

      Which will then collapse the insurance system further, followed by the bully pulpit being used to blame insurance companies. Then the single payer advocates will come out of hiding.

  6. Studebaker says:

    Young adults are the healthiest segment of the population. This group is just starting out on their own in life and has little excess cash to spend. Young adults also has a relatively low demand for health coverage. Yet, this is the segment that ObamaCare advocates hopes will sign up and agree to pay premiums far in excess of their costs in order to subsidize older, wealthier, sicker people. Moreover, there is only a small penalty for not getting coverage.

    Gosh! What could possibly go wrong with this arrangement?

  7. H. Carroll says:

    (1) health insurance is perceived as different because the change in status from “insurable” to “uninsurable” requires so much more in resources that it essentially cannot be considered an “insurance” issue anymore, it is a “finance” issue. It is not considered optional to “not” receive medical care once you are really sick, but that is exactly when a traditional insurance concept cannot work because you “don’t insure the burning house,” or if you do, it cost as much as the new house – there is no limit to price on medical services.

    (2) society should take care of the medical services for people who reach a high cost, uninsurable status through high risk pools that are subsidized by reinsurance surcharges against all “regular” health insurance programs that are allowed to shift those types of people over to the high risk pool. By the way, the “exchanges” are an excellent candidate for such high risk pools. That will allow the health plans to compete without worrying about the ongoing cost drag of, say, a hemophiliac. Also requiring market transparency/cost level competition through a non-discriminatory all payer system from the provider pricing point of view will bring about the environmental change that can mitigate the medical cost financing trend that will continue otherwise.

    (3) the above high risk pool idea is the way to accomplish the “change in status” insurance, since I doubt very much there are any private insurers willing to develop and write such a product – the long term risk consequences of such a concept are going to be nigh on impossible to consider as a potentially profitable line of business – for very good, solid, actuarial, economic, and political reasons. John, you continuously refer to insurance products and ideas as if it is as simple as describing what is needed, rather than what is feasible. Besides, government high risk programs are the only ones capable of spreading this long term medical expense risk. Don’t get me wrong, if private options for such high risk status change would be made available, then people (with a lot of money, no doubt) would be able to opt out of the government program. We are facing two or three tiered medicine no matter where we turn in the future, so we might as well embrace it.

    • Bruce W. Landes, MD says:

      “In fact the most common belief is that everybody should pay the same premium for health insurance, even if everyone’s expected health cost is different from everyone else’s. It’s not easy to say where this idea came from, or why it is so widely believed.”

      My opinion is that this is a popular cultural belief that dates back to the middle ages, when all but the elite relied on social services provided by the Church (insert denomination here) for which all paid a flat tax (tithe) of 10%. Medical care, as it was, was included in the expected bundle of social services.

      But until the early twentieth century, western medical care was largely ineffective if not dangerous and certainly not capital-intensive. It mostly consisted of empathy, nutrition, opiates for pain relief, and the ability of the “doctor” or caregiver to predict the natural course of the condition. A role easily filled by experienced priests and nuns who expected no direct compensation for their services. That is, it didn’t cost much to provide and was well worth the price charged. (sarcasm intended)

      It always amuses me to see people claim that physicians should not charge for services “because of their Hippocratic Oath” when a careful reading of the Oath will reveal that the sole person escaping physician charges was Hippocrates, his sons, and others who similarly trained physicians. (Incidentally, surgery was also forbidden in the Hippocratic Oath but that is a book in itself.)

      The EMTLA of 1986 was and remained (until Obamacare) the most prominent encoding of this expectation into law. SNAP payments are based on market prices at the grocery store, the grocer is not mandated to give free or discounted food to those who are “really hungry”. Section eight housing is a lucrative business for some; apartment owners are not required to provide free housing for the “really homeless”. Federal mandates are supported by federal payment, except when it comes to medical care.

      I personally have seen many patients who espoused the belief that, even if they did not pay me, somehow I was paid anyway.

      Regardless of the etiology, the expectation that medical care should be free is highly ingrained in western culture and should be addressed in any suggestion for large scale change.

      This expectation was pandered to with the passage of Obamacare, the reality of Obamacare will be a sharp learning curve for those who expected something else entirely.

    • bart says:

      (2) society should take care of the medical services for people who reach a high cost, uninsurable status through high risk pools that are subsidized by reinsurance surcharges against all “regular” health insurance programs that are allowed to shift those types of people over to the high risk pool.

      H, what makes you think that an insurance surcharge against healthy peoples’ coverage is the best way to subsidize those who are uninsurable? If society believes it should subsidize these costs, shouldn’t it do so through the regular tax system?

  8. Ken says:

    Good post. Where’s today’s song?

  9. Billy says:

    I think any reference to Paul Krugman should include the phrase “former Enron advisor.”

  10. Jackson says:

    I’m wary of another insurance to add to the mix. Seems like just another thing I can be forced into buying.

    • Adam says:

      Agreed. It can end up being a luxurious necessity that few lower-income families can afford, which only leads to new regulations and requirements.

      It seems like a lot of this can simply be solved by the individuals working at insurance companies occasionally practicing charity and mercy.

  11. Andrew Thorby says:

    Part of the problem with gridlock in DC is those who are reflexively against “Obamacare” fail to acknowledge the elements of the ACA that are worth keeping (and there are lot of them such as ACO’s and bundled payments programs). We should be getting actionable alternatives to the elements that need fixing instead of constant whining about how bad it is.

    We are the only western nation without at least a two tiered system. Absent some form of public option (which the GOP ruled out) you either have to repeal EMTALA and let people die on the streets (not going to happen), or figure out how to reimburse private healthcare delivery organizations for the cost of uncompensated care. There is no fourth alternative if you want a functioning system which (prior to the ACA at least) we clearly did not have.

    In terms of mitigating the impact of uncompensated care the mechanism the ACA went with was to increase the percentage of the population with insurance. I wouldn’t have gone with the mechanisms they used however they didn’t exactly have a lot of wiggle room.

    It’s easy to sit on the fence and throw stones. The ACA is an incomplete and imperfect step however it is better than the train wreck we had. In my humble opinion we would be far better served complaining less and instead focusing our energies on specific ways to improve it.

  12. Bruce W. Landes, MD says:

    My previous post was not a response to H. Carroll, it just wound up there.

    Ever since I read HR 3962 back in 2009 and watched it morph into PPACA, I thought that the reality of this reform would be to create a federally subsidized High-Risk pool.

    I now believe that, not only is that the case, but in Texas, some of our most vulnerable people, lower middle class working people with disabled/high- medical-needs children, will fall into the cracks of a flawed system created by the false philanthropy of the “do-gooders”.

  13. wanda j. Jones says:

    All: This is important: As chronic disease is the main event for most of us over 50, the insurance model should reflect this. And it should be reflected in the delivery system. Neither goal is well articulated by either policy makers or providers. The key measure is age–anew chronic disease every 10 years over 50, I’m up tp 6.
    Just had a cholycysectomy. Yow!

    W Jones
    SF

  14. Ron says:

    Watch for headlines by the end of 2014 – “Uninsureds increase Under ObamaCare.” This will be the core reason to move to a single payor system. The gov’t messes it up and then gets to come to the rescue to solve the problem they created. Isn’t politics wonderful?

  15. Bob Hertz says:

    Thanks Dr Bruce Landes – your comments are very valuable.

    I have been writing for years that people unsonsciously expect medical care to be a gift relationship, not a commercial transaction. Many if not most persons find the idea of bargaining and price shopping your doctor to be emotionally repulsive. The same is true for hospital bills.

    That accounts for the resistance to using the patient as the kamikaze, so to speak, of cost control, and the preference worldwide for some type of national price regulation.

    The American system is an outlier when it comes to hospital charges and drug prices especially. Leaving these vital areas as a kind of Wild West is, once again, emotionally repulsive to many Americans (including those millions of Republicans who are on Medicare.)

    As Dr Landes suggests, there is a great challenge in that even people who provide gifts have to get paid. Still, I think the issue is more complex than Dr Goodman suggests with his frequent wish for more ‘real prices.’ I think what the public wants is more ‘real compassion’, and that is not a bad thing.

    Bob Hertz, The Health Care Crusade

    • Al J. says:

      NCPA already has published an analysis of the competitive plan used by Galveston, Texas. Worth reviewing. The Galveston County Plan. Much better than Social Security, and etc.

      Second, there should be NO exemptions from ObamaCare … [especially for highly paid Federal employees!] If ObamaCare is good enough for us, it is good enough for Congress and government employees. No implementation delays.

      Third, we only need three things:

      1) Catastrophic medical insurance … very similar to the Umbrella policy you have on your house and car … very inexpensive … with layered coverages with very high deductibles. Works great. Eliminates bankruptcies owing to extremely high costs.

      2) The Indiana Plan … just google that … but it’s basically a variety of HSA type plans

      3) “The Amish Plan” … where I live there are a lot of Amish and they pay cash. But basically, you get a steep discount from your doctor or hospital for cash (or credit cards). Discount for cash is as high as 90%. A lot of these plans are already on-line.

      In fact, there is even a company in Texas that offers a card system tied in to a cash discount program. Here is the Web site for New Benefits.

      http://www.newbenefits.com.

      http://www.newbenefits.com/benefits_health.aspx

      typical plan … just an example of what is possible:

      http://www.delaware.coop/our-co-op/co-op-connections-card

      it merely demonstrates what is possible … but the cash pay/ self-insurance [included by the way, in ObamaCare] is often merely the “co-pay” amount anyway.

      You show your card and pay the cash-self-pay amount by cash, check or credit card.

      http://www.mymemberportal.com/
      Welcome to MyMemberPortal.com! This site allows our members to search for participating providers in each of the networks available through your membership …

      Disclosures: Discount Medical Plan Organization: New Benefits, Ltd. Attn: Compliance Department PO Box 671309. Dallas, TX 75367-1309 800-800-7616.

      So, we need to let everyone know about these three aspects that anyone can participate in, without getting the Feds involved.

      P.S. for people with genetic or very unusual ailments such as mentioned by NORD, there are charitable funds that can be established … there are already some in existence.

  16. Paul Nelson says:

    It is likely that the “same price for health insurance” came from the original HMO development legislation of the mid-1970s. “Community rating” was the term, I think.

    I offer a simple idea for understanding “health insurance.” Basic Healthcare Needs are not insurable from an acturarial sense. They represent a pre-paid expense. They are most efficiently utilized when capitated and paired with a gain-sharing arrangement for the utilization of Complex Healhcare Needs. Importantly, the benefit definition for Basic Healthcare Needs should be uniform for all payers, since it would be unethical for a Primary Physician to arrange preventive and early-detection services based on alternate payor “Certificate of Benefit” definitions for the citizens served by a given Primary Physician. (as is the case now).

    No matter how “univeral health insurance” is implemented, I propose that the fundamental,root-cause for the inefficiency of our nation’s healthcare industry is not about Complex Healthcare Needs or its economics. The the absence of a means to assure equitably accessible and culturally acceptable Primary Health Care for each citizen, community by community, is the fundamental root-cause. We are in the midst of Paradigm Paralysis by ignoring local needs and thinking that a centralized, authoritarian effort will fix both the financing and delivery flaws of our nation’s healthcare industry. Remember, the excess cost of our nation’s healthcare over the last 5 years has been the most signicant contributer to deficits of the federal government. No amount if tinkering with payment systems will fix this problem without a “mission to the moon” level of renewal for Primary Health Care, community by community.

    So, what known industry could be a model? I propose agriculture. Our nation’s agriculutre industry produces more food given resources applied than any other nation, by a wide margin. The Smith Lever Act of 1914 established the Cooperative Extension Service to connect the local farmer with the Regional Land- Grant, University Agricultural College. Think about it!