My Questions about Health Care

Setting aside whether Article 1 grants Congress the right to support health insurance for all under the "promote the general welfare" clause (I can see why people take both sides), I want to think about the financial issues related to reform of health insurance itself. What I write is not academic, but reflects my best current understanding of how things work. I have not found the debate to actually address these core issues.

I accept the following premises:
  1. That the total costs of providing health care are growing at an unacceptably high rate.
  2. That the current rate of increase of health insurance premiums, if not controlled, will lead to higher rates of individuals not carrying health insurance.
  3. Individuals with insurance are more likely to obtain less expensive services before expensive critical care services must be provided.
  4. Uninsured individuals are more likely to wait until health needs are critical, then get emergency care. These costs have a high likelihood of being pushed off onto general society.
So now, let's talk core issues.

Actuaries

Insurance is based on actuarial science. Actuaries establish probabilities that various outcomes will occur to individuals with a particular profile. These outcomes lead to claims of various amounts, which are also random because treatments are not equally effective for different individuals. An insurance company must charge a premium that will at least cover all expected claims, as well as provide a buffer for the inevitable deviation from expectation. For-profit companies also add into the mix that they need to (1) make a profit and (2) satisfy their stock holders. This increases the premium as well, although how much is unclear to me.

Insurance Limits

Most insurance that I've seen include maximum benefits. This puts a cap on the potential claims and prevents an unbounded cost of treatment. From a mathematical point of view, potential unbounded claims significantly increases the potential for variability. An insurance company would not only need to cover the added costs related to ongoing coverage but also needs to charge enough to provide that buffer for the potential deviations from average. From a business stand-point, putting a cap on coverage helps keep these challenges under control.

Pre-existing Conditions

Insurance companies accept new contracts based on the relation between the risks associated with benefits and the price of the policy (premiums). Large companies seem to be able to establish contracts that allow all employees to receive coverage, although certain pre-existing conditions may not be covered. Individuals attempting to gain coverage might be altogether denied due to pre-existing conditions or even the existence of risk factors that indicate the potential of high-cost claims.

The way the system seems to work now is that if you have coverage at the time a condition arises, so long as you maintain coverage at all times, a switch to a new insurance company can not deny coverage related to the pre-existing condition. However, if you lapse your coverage after a condition is known, then an insurance company can deny coverage of that condition. (I don't know if there is a time limit or not.) So if you lose a job with benefits and have a family member with a pre-existing condition, you must choose between purchasing health insurance yourself to maintain coverage or losing current and future coverage for that condition.

Individuals without insurance who are healthy also play a game of chance. So long as they are healthy, it might be fairly easy to gain affordable coverage. However, if a condition suddenly arose, they might have a very difficult time to obtain coverage.

Eliminating Risk Factor Considerations

One of the key points of President Obama's health care agenda is that insurance companies need to stop conditioning both acceptance of contracts and premium prices on the risk factors associated with individuals. The effect of this will be that premiums for healthy individuals will go up and the premiums for individuals with existing conditions will go down. If all pre-existing conditions must now be covered, then even group insurance policies will need to increase their premiums to cover the increases coverage.

Second, by increasing the number of individuals who have coverage (since companies will no longer be able to condition policies on individual's conditions or risk factors), new policies may lean heavier to the high-risk category. This will also have the effect of increasing premium rates.

Mandatory Coverage

So as a healthy individual, if obtaining coverage no longer depends on whether you have a pre-existing condition or not, it would make sense to stall on getting coverage until the financial incentive for having an insurance policy is worth the cost of the premium. Why get coverage while you're healthy? Just take care of yourself. If you get sick, then get coverage --- they can't deny you coverage any more.

It might cost more to get coverage later (but that is not actually clear---are insurance policies allowed to charge different rates depending on existing conditions and risk factors?) but in the big picture it might be worth it. And if the healthy individuals opt out of insurance because they are guaranteed later coverage, the average profile for the insurance company just became more costly per individual. So the premiums go up yet again to hedge for future claims.

So that an insurance companies pool of customers reflects a cross-section of both healthy and at risk/with condition individuals, a guaranteed coverage policy needs to be coupled with mandatory insurance. By attaching a financial penalty to individuals without insurance, the savings that come from opting out of insurance disappears and they enroll in a policy. However, if the penalty is not large enough, we don't benefit the insurance benefit of balancing the risks for the provider as the individual might opt for a quick slap (small penalty) instead of actually enrolling.

Actual Health Costs

So far, I would argue that if the goal is to ensure that everyone has affordable coverage independent of pre-existing conditions and risk factors, then you must make health insurance coverage mandatory. I don't see how you can separate these two items. However, this alone will not reduce the overall cost of health care.

The typical argument is that by providing basic health coverage, more individuals will seek earlier treatment. By seeking help early, less expensive visits and treatments will result. There will be fewer emergency room visits for non-emergency care. I can see that this would reduce some costs.

However, easily available and low out-of-pocket cost preventative care does not always lead to savings. (See PolitiFact fact check) There are cases where preventative tests (diagnostics) might help identify health conditions. But these early tests do not actually necessarily lead to savings. And as the number of individuals seeking these tests (often unnecessarily), the total costs go up.

Furthermore, it is my impression that many of the rising costs in medicine have to do with the modern miracles of treatment. The medicines, equipment and expertise to perform some treatments that are now possible can be incredibly expensive. And as life expectancy increases from our ability to reduce the impact of basic medical issues, terminal (but long-lasting) illnesses such as cancer run the risk of long-term, high-cost treatment.

If insurance companies also can not limit costs, what will prevent individuals from seeking expensive treatments that do not have very high chance of providing relief. This, in turn, results in higher premiums for everyone.

In addition to direct medical costs, there are costs associated with increasing rates of liability coverage for doctors. I know this is where discussions about tort reform belong, but I really know nothing about this.

So What Do I Want?

I wish that the debate would stop arguing over tangential issues like death panels, immigrants, and coverage for abortion. I wish the politicians would explain how to reign in actual costs, beyond this vague notion of covering the added cost by eliminating waste. (If the waste was so easily eliminated, why wasn't that done before? And will it really be that much of a savings?) How will long-term increases in medical costs (beyond the eliminated waste) be controlled by any plans?

And if the government creates the "public option", why will this do any better than the existing private insurance companies? Eliminating the "for-profit" motivation, premiums might be slightly lower since they only need to cover the expected claims plus the buffer. But it will be subject to the same pressures that currently drive health costs up. And any public funding (which I really don't think is in the picture right now) would give an unfair advantage, leading to a monopoly situation. (I see co-ops as a more favorable way to eliminate the profit surcharge to premiums).

So providing coverage for everyone in America might help make it easier for everyone to get coverage, but it is not clear that it will actually reign in the rising costs for medicine.

And those are my thoughts.

Links

I haven't really read these yet, but they look like the sort of discussion that I would like more of. I'll put them here in case anyone else wants to read a more rational discussion of the actual issues.

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