Philadelphia Reflections

The musings of a physician who has served the community for over six decades

Related Topics

Obamacare: Examination and Response
An appraisal of the Affordable Care Act and-- with some guesswork-- its tricky politics. Then, a way to capture major new revenue, even paying down existing Medicare debt, without raising premiums or harming quality care. Then, an offering of reforms even more basic, but more incremental. Finally, the briefest of statements about the basic premise.

Redesigning Electronic Insurance Exchanges

Having sniggered at Obamacare's Electronic Insurance Exchange mess like everyone else, it has been admitted here there were some good ideas buried in it. Indeed, a politician of the highest rank ought to be able to fish out these good ideas, call them something else, and reconstitute them. The good ideas would seem to be:

Interstate Health Insurance The U.S. Constitution's Tenth Amendment makes it clear the Federal Government should confine itself to a short list of necessary activities; E everything else is to be regulated by the various state governments. At the other extreme, actuaries have determined that a health insurance company cannot possibly survive an occasional catastrophic illness unless it has two thousand subscribers. Five thousand would be better. And the size of the groups is conditioned on being able to limit the insurance coverage to one year, with other limitations like pre-existing illness and non-renewable clauses, which protect the small new company from attracting too many people who are sick. These are limitations since if you admit ten or twenty subscribers with very expensive conditions, you must then admit several hundred perfectly well people to cover the costs of the entire group. Looking at it in reverse, most insurance executives would say they are uncomfortable with any group smaller than ten or twenty thousand subscribers, particularly if politics are going to force the acceptance of expensive sick people. Even then, they are thinking in terms of annual, or term, insurance. To ensure a lifetime of health costs as a unit, as we are about to contemplate here, requires a subscriber group which is possibly larger than the present population of many small states. Somewhere along the line, the required customer base will block implementation of the concept of lifetime health insurance for individuals, by provoking the excluded states to demand a level playing field. On the other hand, if interstate sales could somehow be permitted, the small states would become its greatest supporters. Summing it all up, interstate sales of health insurance are the key to exploiting the potential for lifetime health insurance, whose attractions will be discussed later.

Add to this the biggest hazard of them all, the tendency of large groups to demand discounts. The Blue Cross plans started this in the 1930s, and competitive health insurers were loud and bitter about the "Blue Cross Discount", which they quickly matched by seeking to negotiate special discounts for large employer groups, themselves. Eventually, we got to the present uproar about uninsured people, because the whole process had concentrated expensive sickness into about 5% of the American public. Governments and business enterprises complained about burying the costs of uninsured people into the premiums of large groups; ultimately, they showed their real feelings by demanding that individual (that is, non-group) policies be eliminated entirely from the insurance pool. The very largest groups sought to eliminate themselves from pooling with small businesses, by retreating to ERISA plans or other routes to group self-insurance. This is a mess largely hidden from the public, waiting for the Electronic Exchange uproar to die down. The point here is merely to emphasize the almost irresistible forces pulling in the opposite direction. To summarize: the requirement for single-state regulation, added to the need for comparatively large groups to be viable, has eventually led to fifty monopolies plus a great deal of dissatisfaction. How in the world can we transform this environment into twenty or thirty, or even fifty, interstate insurance companies? The uneven geographical distribution of the population might allow an expansion of the marketplace to more than a hundred viable companies. Increasing the available market for small insurance companies, easing the entry problems for new companies and allowing the marketplace, not the Tenth Amendment, to determine the best size for viability, might all be regarded by everyone as a good thing -- because small companies reduce the cost of failure, hence encourage innovation, mergers and all those other good things into a somewhat fossilized industry.

Direct Marketing Replaces the Employer Middlemen. Dismissing the possibility of repealing the Tenth Amendment, the stock markets provide the easiest model. The central element is to confine the exchange to trading a single essential component, encouraging that market to reduce its transactional costs to commodity levels, serving everyone at costs so low that competitive prices are not much of a worry. Health insurance companies have grown comfortable with playing footsie with state legislatures and Insurance Commissioners, so there is ample room to reduce transaction costs to the point where the total price of health insurance is not seriously affected by them. At that point the real competition is between states, attempting to devise good laws and good regulation. The stock exchange model suggests that any insurance company would be happy to pick its own home state (currently Delaware is the corporation favorite). Meanwhile, direct consumer marketing of the exchange's product can be national in scope, satisfying the Constitution although probably not the McCarran Ferguson Act. If you please, we substitute the model of Amazon for interstate marketing of many products directly to the subscriber. And by the way, invite Amazon and similar to bid on running the privatized system.

Niche Marketing Blue Cross owes its initial success to supplanting "Polio Insurance" and "Cancer Insurance" with broader-base "Hospital insurance", in the 1920s. Its resistance to niche insurance in the Medicare Advantage plans may, therefore, be merely a knee-jerk reaction, or an effort to be consistent over the decades. Or The Blues may have more substantive issues with niche marketing, which amounts to choosing the particular disease you fear most, rather than the annual cost of the hospitals you choose. As soon as you lose confidence in the fairness of hospital prices, you become willing to re-examine whether something else might be more difficult to manipulate. In any event, the most major flaw in Obamacare is to try to stretch what is satisfactory for 95% of the population, into covering the last 5%. In this, it seems to have encountered serious difficulties. Starting with roughly 40 million uninsured as a goal, after major upheavals it still has been estimated by the CBO to leave 30 million uninsureds, and cost a trillion dollars over ten years. It is possible to account for most of thirty million as belonging to one of three groups: 8 million prison inmates, 8 million mentally impaired, and 11 to 20 million (estimates vary) illegal immigrants. These people have considerable group similarity but differ so much from the rest of the population that it seems more appropriate to design three special programs, rather than tinker with existing populations which lack their special needs, probably making more people dissatisfied in the process. On a national basis, there are enough in each group to satisfy actuarial requirements for insurability. If one or more of these niche products is a failure, however, it can be modified or even dropped without disrupting the rest of a functioning system. Niche products are niche products. For example, mentally defective people often have epilepsy, which leads to a legitimate need for football helmets; who else could claim helmets as a medical expense?. Illegal aliens need translators, prison inmates need detoxification centers. Any social worker could quickly list the "special needs" of these three patient categories. If this is what we need, let's provide it rather than disrupt the rest of the population.

Special Discounts. In an environment which is accustomed to cross-subsidy treated like a virtue, scarcely any recognition is made for people who cannot possibly have a particular risk. Males and post-menopausal women are occasionally mentioned as unable to have children, but here the problem is complicated by the issue of child support. But if you have had your appendix, and/or gall bladder removed, it can't be removed a second time. Doesn't it seem fair to reduce the premium for those who cannot have the risk? How about someone who has had two cataracts removed? If we have the concept of reducing auto insurance premiums for a certain number of years of "safe driving", why can't we use our computer capability to reduce the costs for those who can be shown to have less risk? At least, we ought to be able to put this data to some use, rather than treating it as a social blunder even to mention such a thing. Ultimately, we can consider lifetime health insurance with a level premium. That is, you subsidize yourself at one age by taxing yourself at another age.

Who would be hurt by all these changes? Quite obviously, the subscriber would benefit from choosing his own policy rather than letting the local insurance monopoly and the Human Resources departments choose the insurance on behalf of all employees collectively. The employers would benefit from eliminating middle-man costs. The benefits for Union Health plans are not so clear-cut, so they might resist until they actually came into competition with minimal exchange prices. And the government would benefit from opening the exchange operation to competitive bidding, thereby privatizing the system. By doing so, they might even make a profit, rather than sustain continuing costs, including political costs, trying to do it themselves.

Originally published: Sunday, December 29, 2013; most-recently modified: Monday, June 03, 2019