The Elephant in the Room on Health Care

Posted February 25, 2010

Today is Obama's health care summit, and there is an elephant in the room. To find it, start by identifying which of the following health care plans is or was sponsored by a Republican?

a) A 1996 plan to cover every American

b) A 1992 plan to cover 30 out of 35 million uninsured Americans

c) A 2006 plan to cover everyone in America's bluest state

d) a 2010 plan to cover 30 out of 50 million uninsured

e) a 2010 plan to cover 3 out of 50 million uninsured by 2019

OK, the last one is easy – it is the current offering by Republican leader John Boehner. But here is the surprise: Plan A was put forward by Bob Dole, Howard Baker, and Tom Daschle. B was from George H.W. Bush. C was Mitt Romney's successful plan in Massachusetts. Only plan D, hardly a revolution, is from a Democrat. It is Obama's current proposal.

Why have Republicans backed away from the uninsured? It is not because the uninsured don't vote Republican — many clearly do. Or that there are too few to count: 50 million people is a seventh of the country. The actual reason is the elephant in the room today — the health insurance industry. They are easy enough to demonize, but to see why many insurance companies are now quietly demanding that the legislators they own squash health care reform, it is worth recalling exactly what insurance is and how it works.

Insurance turns tomorrow's risk into today's cost. This is exceptionally valuable, especially for risks that are low probability but high severity. Insurance companies add value by measuring, pricing, and selecting risk.

America’s greatest polymath figured out the social value of insurance back in 1752. Benjamin Franklin founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. His company took on the financial risk of fire and invested in fire prevention. It selected risk by refusing to insure buildings where the risk of fire was too great, including any house that was made entirely of wood. Wooden houses became more expensive because the risk of fire was priced into the cost of ownership (assuming that insurance is mandatory, which it usually is if you have a mortgage). Because markets work best when all costs are reflected in the price, insurance created a powerful economic incentive to build and buy houses that were less likely to burn. Sweet.

Insurance companies select and price risk. I once knew of a small auto insurance company with an interesting strategy: they only insured first and second generation Japanese Americans. They offered attractive prices and they underwrote a lot of risk. They correctly figured that Japanese immigrants were socialized to be careful, respectful, and polite – just the kind of driver they wanted. They kept their strategy secret – a copycat could easily have done them in. For many years, they made a fortune because they could select risk better than their competitors. Franklin did the same thing by refusing to underwrite wooden houses.

Now consider health care. Can we price health care risk? Yep. With genetic profiling, we know more about which diseases you are likely to get than you probably want to know. You are a 57 year old sedentary white man who is overweight, carnivorous, non-diabetic, non-smoking, with a family history of coronary heart disease? We know what your health care is likely to cost.

Can we select good risk? Sure – just insure people who are young and healthy. Avoid male hairdressers in San Francisco (an actual underwriting guideline during the 1980s AIDS epidemic).

Today however, both Republicans and Democrats want to prohibit insurance companies from selecting risk. They want to ban genetic profiling and prohibit insurers from excluding preexisting conditions. Congress wants to require “community rating” – everyone in the same region who is the same age pays the same price (only smokers get charged more). Result? Healthy people won’t bother to buy insurance because the cost will exceed the expected benefit.

As always, Democrats have an answer: compel everyone to buy insurance. But many people cannot afford health insurance. So Dems have another answer: tax people who are better off and subsidize health insurance for low income families. It turns out that anyone who wants community rating also has to want mandates and subsidies – it falls apart any other way.

OK, we want companies to sell health insurance but not to select or price medical risk. That’s like telling publishers not to select and price books. If you want everyone to have the same book at the same price, you don’t need publishers. The fact is, once we ban exclusions based on genetic testing or preexisting condition and insist on community rating, we eliminate the need for private health insurance companies. Congress is making private insurers unnecessary, yet continuing to insist that we can’t reform health care without them.

Can we really have an insurance system with community rating and universal access without private insurers? We have one: it’s known as Medicare. Medicare turns out to be the Great Exception. Private companies almost always do a much better job of managing costs and providing services than government does. But over the past decade, Medicare has delivered better care at lower cost than have private insurers. So to make health care available to everyone, regardless of risk, the most sensible solution would be to expand Medicare to everyone.

But we are not going to do that. Tea baggers have put the fear of "government-run health care" into the heart of America. Insurance companies own huge chunks of Congress and will not die quietly. A single-payer solution is a bridge too far even for Barrack Obama. So the current plan is to try to neuter the insurance companies – to make them into public utilities. Holland, Germany, and Switzerland do this in different ways, and the results are fine.

We might even find a way for heavily regulated insurance companies to add value. Perhaps they can document effective medical practices, a complex but critical task that many carriers are becoming good at. Or as companies that make bundles of risk into products: one plan may cover alternative medicine or chiropractic care, for example (Germany has regional plans that are 95% standardized but differ at the edges. It works in part because it has the backing of a serious federal program. Among other things, Germany noticed that a US innovation known as disease management produced strong and cost effective clinical results, so they introduced it comprehensively).

Health care has become for Obama what the invasion of Iraq was to Bush: consumed by ideological fury and fact-free debate and stymied by an opposition more determined and successful than anticipated. Public support for federal reform efforts is now lower than it was when Clinton gave up in 1994. Whatever Obama manages to salvage, he can at least claim this: Americans now agree that we do not want private parties selecting and pricing medical risk. Unlike insurance companies, we have yet to confront the implication of this preference, namely that health care is now a market where insurance companies cannot add much value.