Risk Pools and Healthcare Reform

The fundamental challenge the health insurance, or any insurance business for that matter, faces is how to blend risk pools so that the customers who consume few services pay for those who consume many services.

In other words, my premiums will go down because healthy young people who currently get by without insurance will be forced to buy policies they may not even want. (When I was young and healthy, I got by quite happily with a bare bones Blue Cross policy that only covered catastrophic expenses). It’s a wealth transfer from the young and uninsured to the old and insured.

[From Making us old farts better off by screwing the young ‘uns – ProfessorBainbridge.com]

This concept is at the core of why health insurance has been linked to employment, it forces a blending of risk pools for what otherwise would diverge if left to market forces alone. Personally I am an advocate of decoupling employment and health insurance but am opposed to the so-called “public option” because it would fail to remedy the basic problem facing our society when it comes to health care, which is that we have removed market incentives for healthy lifestyle choices and the restrained use of health care services.

If I am a consumer of insurance for my family health care needs and my premium costs are directly related to the risk pool I can position myself in, there is great incentive to eat healthy, avoid known risk factors like excessive drinking and/or drug use and smoking, and to establish a long term relationship with an insurance provider (like life insurance… get it early and the premiums stay low).

If I can self-select the risk pools that I want to join for insurance needs I will have a great incentive to improve my risk profile. For catastrophic coverage, which is a fact of life as we get diseases and have medical emergencies that defy our risk profile, the market could offer a separate catastrophic coverage plan that spans multiple pools. If I am a young person and relatively healthy this is exactly what I would want to buy if forced to buy anything, and spanning multiple pools evens out the distortion that would occur if restrained to individual risk pools.

Americans are living longer and consume more health care services as a function of increasing longevity but also because more services are available for us to consume. We have all been sold a bill of goods with regard to the value of preventative care services, that they both make us healthier and save us money.

None other than the CBO itself has pointed out the fallacy of the cost savings argument, in an Aug. 7, 2009 letter to Rep. Nathan Deal, CBO Director Doug Elmendorf writes: “Researchers who have examined the effects of preventive care generally find that the added costs of widespread use of preventive services tend to exceed the savings from averted illness.”

More medicine isn’t necessarily better but it certainly more expensive.

In 1960 it was estimated that 47% of medical expenses were paid out of pocket while today that number is only 12% and like in any market where the consumer is not responsible for the financial payments (remember these are largely obscured by the linkage to employment as well) the consumption of services as well as the pricing of services behave in a manner far different than when the actual consumer is also responsible for the payment.

Whole Foods CEO Mackey was much maligned for his op-ed detailing how Whole Foods manages health care insurance options for it’s employees. At the core of their strategy is linking the economics of consumption to how their employees consume covered services by offering a plan with a high deductible, $2,500, but 100% of the premium covered by Whole Foods, and in addition to that they kick in dollars to personal accounts. What was lost in the ensuing brouhaha following Mackey’s op-ed piece is that Whole Foods has lower health care costs than the average employer and higher satisfaction with the plans offered… and critics also ignored that Whole Foods only offered plans that were voted on by the employees so rather than criticizing Mackey they should focused on the employees who decided what plans to offer.