Health Care Reform: Getting Our Language Right

The headline has changed from “health care reform” to “health insurance reform” because politicians can’t go wrong politically by firing salvos at health insurance companies. People aren’t fond of the institutions that handle the majority of the money paid for health services even if they are happy with the care itself. Unfortunately, calling the leading proposals in Congress insurance reform is false advertising. The basic flaw is that insurance for medical expenses will no longer exist.

If the Commissioner of Baseball announced “baseball reform” that included elimination of pitching, batting and fielding, we would no longer have baseball even if there was a ball and bases involved. Similarly, the leading Congressional proposals violate key principles of insurance by prohibiting underwriting, pricing, and product design based on risk assessment.

Why does this matter? Because the absence of a true insurance product and the lack of a private, competitive insurance market will mean that the program will not work as intended to provide improvements in affordability and availability of medical expense reimbursement.

The essence of insurance is the transfer of risk and individual risk assessment for losses that for any given individual are unexpected and unpredictable. As Sherlock Holmes explained to Dr. Watson in The Sign of the Four:

while the individual man is an insoluble puzzle, in the aggregate he becomes a mathematical certainty. You can, for example, never foretell what any one man will do, but you can say with precision what an average number will be up to. Individuals vary, but percentages remain constant.

Legislation that ignores the great detective’s words cannot rightly be called insurance.

A healthy person with no known medical condition is not a similarly situated individual to a person already diagnosed with diabetes. Loss data from a large group of healthy people tells us very little about losses related to a large group of diabetics. That is not a moral argument, just a statistical verity. Under various proposals, insurers would be barred from denying coverage for those with “pre-existing medical conditions” or charging any more than twice as much for one person versus another with the same coverage. So if a young healthy person with no known medical conditions actually costs $500 a year to insure and an elderly person with diabetes costs $7,000 a year, all other things being equal the first person would have to be charged $2,500 and the second would pay only $5,000. Younger, healthier individuals are going to be vastly overcharged under the proposed legislation providing a very large incentive for them not to participate or to drop out. This type of system, if it somehow works at all, necessitates large wealth transfers from young, healthy people to older, sick individuals irrespective of their financial need.

Additionally, insurance is designed to address larger unexpected or accidental types of loss, not the normal, ongoing expenses of life that are under the control of the individual. No one would think about buying insurance for a burger and fries in the event he might get hungry. Yet, we have come to expect medical insurance to pay for such totally controllable expenses as inoculations and birth control. Many proponents of “insurance reform” want to go so far as to eliminate co-pays, deductibles and other forms of cost sharing for routine medical services.

All of the foregoing negates the very notion of insurance in the realm of medical care.

The type of government program which prohibits individual risk assessment and covers expected expenses can and has worked in private employer group settings and government sponsored social programs where individuals cannot opt out. It has never worked in the type of private commercial market involving the sale of an insurance product to individuals by multiple insurers contemplated by Congress, even if all people are “legally compelled” to purchase over priced coverage and insurers are “legally compelled” to sell to all comers without regard to the risk they present.

If we get our language straight maybe our thinking will follow. If the intention is to promote a competitive insurance market, insurers must be allowed to apply their underwriting and actuarial skills to individual risks in principled ways. Then government can provide financial support to those for whom the premiums would be unaffordable. This would address the problems of pre-existing conditions and portability of coverage in both the individual and employer based segments. We must also eliminate extensive mandated coverages so that people can design benefit packages that suits them and which they can afford. Finally, medical insurance must be reoriented toward major expenses with a combination of tax credits or deductions and direct public assistance to low income people for out-of-pocket routine services.

On the other hand, if we want a medical payment regime without risk assessment and competition then we should adopt a government health reimbursement plan without semantic camouflage or disinformation.