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As an actuary, I tend to be sympathetic to the idea that insurance companies should make a profit for their shareholders.  That is, in fact, part of my job.  (As a disclaimer, my company does not offer health insurance)

The problem with health insurance is that the natural desire of the company to make a profit conflicts with the fact that the insured can know a lot about their future health needs before deciding what policy to buy or whether to buy a policy at all.

The outcome of this is that insurance companies try to compete by insuring only the healthiest people to keep claims low, and then engage in practices like recission (h/t slinkerwink), i.e cancelling policies for people who get sick, if there is a minor technical problem with their application, to get the sick people out of their customer base.

As long as we keep thinking about this as "insurance," we will fail, and the system will continue to get worse.  

I'll add more details below the break.

Insurance is based on the concept of "risk pooling."

If a lot of people are at risk for a certain unforseeable event, they can pool their money and reimburse the person who has the loss.  Everybody pays a little to make sure they do not lose a lot.

Where insurance works, insurance companies make their money by facilitating this transaction.  If 100 people have a 1 in 100 chance of losing $1,000.  The insurance company could charge them $15 each and collect $1500, agreeing to give the loser $1,000.  The $500 extra collected would go toward the insurance company's expenses and profit.  As long as the customers agree that having $985 is better for them than having a 99% chance of having $1,000 and a 1% chance of having nothing, then everyone is happy.

There are many markets where insurance works in just this way to manage people's risk.  Why not for health.

The key concept is that people know a lot about how healthy they are.  Most health costs are based on conditions that develop over time, so predicting someone's health costs for the next year, while not an exact science, is a lot better than a blind guess.

This creates a problem in the insurance market.  If the customer knows how healthy he is and the insurer doesn't, then the customer will only buy a policy priced so that the insurer has a large chance of losing money.  The insurer counters by saying: "Show me evidence of how healthy you are, and I will decide how much to charge you."  (In group insurance, the fact that you are actively at work is enough evidence, given that the insurer is getting the chance to cover several people with one transaction)

Consequences:

  1.  If you have a history that predicts medical problems you can't get reasonably priced medical insurance unless you have a job.
  1.  There is an incentive for people to cheat on their insurance forms so that they can get insurance.
  1.  Insurers must investigate people who have claims to find out if they cheated.  
  1.  In a competitive market, the more "cheats" you find, the better you do, so the insurance companies have a strong incentive to define "cheating" downward to cover innocent technical mistakes on applications.
  1.  If government reacts by limiting the questions that insurers can ask, or by limiting their ability to rescind coverage for mistakes on applications, insurers will react by raising prices, and/or by finding other ways to keep the same sick people out of their customer base.

Similar dynamics apply to detecting and refusing to pay for claims fraud and overtreatment.

I do disagree with many of my fellow Kossacks that the insurance companies should be seen as immoral and greedy when they are trying to make a profit off of people's health, but I do agree on the bottom line.

The insurance "market" as it is set up is doomed to be a massive FAIL.  We need to think of this as "Health care financing," which is a mechanism for all of us to pay for the care we need.

What's the best way to do this?  Single payer, say I.  I think that society wants the healthy people to subsidize the sick. (we can get into policy debates about what behaviors should cost extra because they add to the likelyhood of your medical costs at another time)  Government financing for health care for all Americans eliminates the insurance market and spreads the costs.

Well, the political reality is that we will not get single payer this year.  What else would be an improvement?

  1.  Universal coverage.  If the company's can't choose who to accept and reject, then they obviously can't rescind.
  1.  A mandate to purchase coverage.  If they cannot pick and choose who they want to cover, then customers cannot choose when to sign up.  If you eliminate limits on pre-existing conditions then people can wait until they get sick to buy coverage.
  1.  A public plan to compete with the private companies, so that they cannot survive unless the additional costs they charge in order to make a profit result are offset by efficiencies they create.
  1.  Strong government regulation and oversight of the insurers to make sure that the "efficiencies" are not just denying needed care.

I'd like single-payer, but I'll work to make sure the solution that comes out of congress is as strong as possible.

Originally posted to Actuary4Change on Thu Jun 18, 2009 at 08:21 AM PDT.

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Comment Preferences

  •  Tip Jar (14+ / 0-)

    Numbers are like people . . . Torture them enough and they'll tell you anything.

    by Actuary4Change on Thu Jun 18, 2009 at 08:21:44 AM PDT

  •  NJ Small Business coverage... (3+ / 0-)
    Recommended by:
    MariaWr, DrFerbie, Actuary4Change

    is a good model...

    1. No Pre-existing conditions allowed
    1. Community rating (no individual rating of premiums)
    1. Standardized plans pre-approved by the state for consistency

    I would add sharing catastrophic coverage over like $25K per insured person shared across all insurance companies and public option equally

    Obama - Real Leadership for a Real Change

    by dvogel001 on Thu Jun 18, 2009 at 08:32:44 AM PDT

    •  many of those state plans are expensive for (3+ / 0-)
      Recommended by:
      revsue, ZenTrainer, MariaWr

      people with chronic conditions because of deductibles, co-pays and uncovered costs/bad formularies/lifetime, yearly or monthly caps. Some of them end up being very bad deals.

      There is no limit on uncovered costs!

      "Rationally, single payer is the best system","our system is the worst, most expensive and least effective." - Ex-President Bill Clinton

      by Andiamo on Thu Jun 18, 2009 at 08:52:18 AM PDT

      [ Parent ]

      •  I did not consider any plans without... (3+ / 0-)
        Recommended by:
        theran, MariaWr, DrFerbie

        an out of pocket maximum that was within my annual budget considerations...and our family (unfortunately) has had very high medical expenses...

        While there may be plans out there with an unlimited OOP costs the better plans do not have that...

        Obama - Real Leadership for a Real Change

        by dvogel001 on Thu Jun 18, 2009 at 08:57:57 AM PDT

        [ Parent ]

        •  Good! (0+ / 0-)

          That's important!

          How many people make a small business in NJ?

          Two- or is it more?

          "Rationally, single payer is the best system","our system is the worst, most expensive and least effective." - Ex-President Bill Clinton

          by Andiamo on Thu Jun 18, 2009 at 09:05:11 AM PDT

          [ Parent ]

          •  2 - 50.... (0+ / 0-)

            The way most people who only have 1 employee get to the #2 is by hiring a "spouse/significant other/child over 16" as an "office manager" for minimum wage...

            Obama - Real Leadership for a Real Change

            by dvogel001 on Thu Jun 18, 2009 at 09:07:04 AM PDT

            [ Parent ]

          •  The one hitch on the pre-existing... (2+ / 0-)
            Recommended by:
            theran, Actuary4Change

            condition waiver is that some coverage must be in place prior to the new coverage...so in other words...you cannot wait until you are really sick and sign up the day before surgery...

            http://www.state.nj.us/...

            If a covered person is subject to a pre-existing condition limitation, he or she is entitled to have the pre-existing condition limitation period reduced, or even eliminated, if he or she had prior creditable coverage. Credit for prior coverage enables both small employers and their employees to switch health benefits plans and carriers without worrying about facing new pre-existing condition limitations each time. This is what is referred to as portability.

            So basically that means that people must carry some insurance all the time in order to eliminate the pre-existing condition...in the worst case it is a 6 month lookback that health insurers can restrict coverage...

            Obama - Real Leadership for a Real Change

            by dvogel001 on Thu Jun 18, 2009 at 09:21:09 AM PDT

            [ Parent ]

    •  I wish I had this in Utah. n/t (2+ / 0-)
      Recommended by:
      dvogel001, Actuary4Change
  •  Hawaii is ending their (2+ / 0-)
    Recommended by:
    theran, Andiamo

    universal child health care

    Hawaii is dropping the only state universal child health care program in the United States just seven months after it launched.
    Gov. Linda Lingle's administration cited budget shortfalls and other available health care options for eliminating funding for the program.

    A state official said families were dropping private coverage so their children would be eligible for the subsidized plan. "People who were already able to afford health care began to stop paying for it so they could get it for free," said Dr. Kenny Fink, the administrator for Med-QUEST at the Department of Human Services. "I don't believe that was the intent of the program."

    State officials said Thursday they will stop giving health coverage to the 2,000 children enrolled by Nov. 1, but private partner Hawaii Medical Service Association will pay to extend their coverage through the end of the year without government support.

    Whatever the Repuglicans say, the opposite is the truth .

    by MariaWr on Thu Jun 18, 2009 at 08:37:31 AM PDT

    •  Exactly why I want the simplicity of single-payer (6+ / 0-)

      If all health care is paid for by tax dollars, then the fight is to keep the tax system properly progressive.  We don't have to worry about separately subsidizing health care for those who can't afford it.

      Numbers are like people . . . Torture them enough and they'll tell you anything.

      by Actuary4Change on Thu Jun 18, 2009 at 08:40:58 AM PDT

      [ Parent ]

      •  Agree, and (2+ / 0-)
        Recommended by:
        ZenTrainer, gildareed

        because the costs of healthcare are accelerating - the single payer can establish cost controls most efficiently.

      •  We would still have to control costs (2+ / 0-)
        Recommended by:
        DrFerbie, Actuary4Change

        and make them not grow much faster than inflation.  But the problem would get simpler.

        Certainly private insurance companies are not doing it.

        "Dream for just a second and then do it!" -- Kolmogorov

        by theran on Thu Jun 18, 2009 at 09:23:24 AM PDT

        [ Parent ]

        •  Yes (2+ / 0-)
          Recommended by:
          theran, DrFerbie

          None of this solves the problem of Health Care inflation by itself.

          Single Payer would cut costs immediately, but wouldn't automatically prevent them from rising again thereafter.  The mixed public-private health care exchange on the table does not do much without changing the incentives to reward effective treatment, rather than overtreatment (Fee based plans) or undertreatment (Capitated plans).

          Numbers are like people . . . Torture them enough and they'll tell you anything.

          by Actuary4Change on Thu Jun 18, 2009 at 09:30:26 AM PDT

          [ Parent ]

          •  The political problem (2+ / 0-)
            Recommended by:
            DrFerbie, Actuary4Change

            is that "rationing" is actually the correct approach: pay for integrated treatment plans that work, and let people gorge on expensive stuff of questionable value out of their own pocket.  However, doctors are happy with the system as it is and regular people have no basis on which to evaluate their doctor's judgement.

            With this kind of informational asymmetry, there is no hope other than some kind of external body evaluating different treatments.

            "Dream for just a second and then do it!" -- Kolmogorov

            by theran on Thu Jun 18, 2009 at 09:33:25 AM PDT

            [ Parent ]

    •  And children are far cheaper than young adults or (2+ / 0-)
      Recommended by:
      ZenTrainer, MariaWr

      especially, adults over 30 or 40.

      Thats going to be a problem for public option, and its NOT going to take long to become obvious!

      "Rationally, single payer is the best system","our system is the worst, most expensive and least effective." - Ex-President Bill Clinton

      by Andiamo on Thu Jun 18, 2009 at 08:54:07 AM PDT

      [ Parent ]

      •  No one says that Age can't be a rating factor(NT) (1+ / 0-)
        Recommended by:
        theran

        Numbers are like people . . . Torture them enough and they'll tell you anything.

        by Actuary4Change on Thu Jun 18, 2009 at 09:24:49 AM PDT

        [ Parent ]

        •  so older people will continue to get laid off? (0+ / 0-)

          because of increased insurance costs for employers?

          "Rationally, single payer is the best system","our system is the worst, most expensive and least effective." - Ex-President Bill Clinton

          by Andiamo on Thu Jun 18, 2009 at 10:25:19 AM PDT

          [ Parent ]

          •  A different political question (0+ / 0-)

            But if you eliminate age rating from all options, and have a mandate so the young, healthy people are paying into the system, it should still work.

            The mandate is really key here.  The reason that age has always been used as a rating factor (Even in systems which impose strict community rating on other variables) has been to keep premiums low enough that you would not drive all of the young people out of the system.

            Numbers are like people . . . Torture them enough and they'll tell you anything.

            by Actuary4Change on Fri Jun 19, 2009 at 06:34:52 AM PDT

            [ Parent ]

  •  Its a big problem when income goes over 2x FPL (2+ / 0-)
    Recommended by:
    gildareed, Actuary4Change

    and the subsidies end- Then, people can end up paying more than they can afford. They need to have a hard limit on uncovered costs. Just because somebody has a regular income doesn't mean they can afford to pay the huge amounts of money that often hit people without their knowledge.

    "Rationally, single payer is the best system","our system is the worst, most expensive and least effective." - Ex-President Bill Clinton

    by Andiamo on Thu Jun 18, 2009 at 09:08:35 AM PDT

  •  Free leeches for all would be an improvement. n/t (1+ / 0-)
    Recommended by:
    Actuary4Change

    My dryer has the option of "more dry" or "less dry". Personally, I like to wear my clothes "more dry".

    by ZenTrainer on Thu Jun 18, 2009 at 09:09:12 AM PDT

    •  Point taken (1+ / 0-)
      Recommended by:
      theran

      But I actually think that the McCain proposal during the campaign would have been a step backwards (Don't grill me on why, I just remember thinking that at the time)

      I also think that eliminating all limits on pre-ex without imposing a mandate would be a disaster.

      So I do think that there are things we could do to make our system even worse.

      Numbers are like people . . . Torture them enough and they'll tell you anything.

      by Actuary4Change on Thu Jun 18, 2009 at 09:27:01 AM PDT

      [ Parent ]

  •  I appreciate the rational analysis! (0+ / 0-)

    I agree with you on single payer, including, unfortunately, that it isn't going to happen politically any time soon!

    However, my experience in the workers' compensation insurance system (also as an actuary) tells me that the "competitive State Fund" model is a pretty good indicator of how a "public option" might work pretty well at expanding availablility of coverage and stabilizing rates, while achieving an equilibrium with private insurers.

    My company also doesn't offer heath insurance and I realize that there are significant differences between the two types of coverage, but the economics of both types involve finding ways to effectively deal with runaway medical inflation and a "residual market" that private insurers do not want to touch because of a low probablility of being "profitable."

    A public "not for profit" option, ensures that someone maintains a primary focus on keeping rates affordable and ensuring that everyone can get coverage.

    I would not be surprised if Dick Cheney loves International House of Pancakes!

    by seenos on Thu Jun 18, 2009 at 09:52:31 AM PDT

    •  Didn't know that. (0+ / 0-)

      I think a diary titled "The public option works" might catch peoples' eyes and give them the talking point about how it is being used in the WC system.

      Numbers are like people . . . Torture them enough and they'll tell you anything.

      by Actuary4Change on Fri Jun 19, 2009 at 06:36:56 AM PDT

      [ Parent ]

  •  This recission story is APPALLING (1+ / 0-)
    Recommended by:
    gildareed

    Health insurers refuse to limit rescission of coverage

    I find it telling that they claim that THEY COULD NOT BE PROFITABLE if they ARE NOT ALLOWED TO DUMP PATIENTS THEY THOUGHT WERE HEALTHY WHO TURN OUT TO BE SICK.

    "An investigation by the House Subcommittee on Oversight and Investigations showed that health insurers WellPoint Inc., UnitedHealth Group and Assurant Inc. canceled the coverage of more than 20,000 people, allowing the companies to avoid paying more than $300 million in medical claims over a five-year period. It also found that policyholders with breast cancer, lymphoma and more than 1,000 other conditions were targeted for rescission and that employees were praised in performance reviews for terminating the policies of customers with expensive illnesses.

    "No one can defend, and I certainly cannot defend, the practice of canceling coverage after the fact," said Rep. Michael C. Burgess (R-Tex.), a member of the committee. "There is no acceptable minimum to denying coverage after the fact." The executives -- Richard A. Collins, chief executive of UnitedHealth's Golden Rule Insurance Co.; Don Hamm, chief executive of Assurant Health and Brian Sassi, president of consumer business for WellPoint Inc., parent of Blue Cross of California -- were courteous and matter-of-fact in their testimony.

    But they would not commit to limiting rescissions to only policyholders who intentionally lie or commit fraud to obtain coverage, a refusal that met with dismay from legislators on both sides of the political aisle. Experts said it could undermine the industry's efforts to influence healthcare-overhaul plans working their way toward the White House. "Talk about tone deaf," said Robert Laszewski, a former health insurance executive who now counsels companies as a consultant."

    .... etc, etc...

    So, one has to wonder, how could a government plan that can't do cost control be profitable if it accepts all comers, UNLESS it either charges EVERYBODY far more, or LEAVES important benefits OUT?

    That's WHY we NEED single payer! We need every bit of cost control that doesn't come at a cost in patient care- that we can get - SO we can AVOID things like dumping the sick!

    "Rationally, single payer is the best system","our system is the worst, most expensive and least effective." - Ex-President Bill Clinton

    by Andiamo on Thu Jun 18, 2009 at 10:16:01 AM PDT

    •  If we eliminate pre-ex limits (0+ / 0-)

      we eliminate recission.

      One thing to remember is that there is always a gray area.

      From the insurance company point of view, if they can't kick someone off for a "mistake" on their application, then they have a strong burden trying to prove intentional fraud, which would severely limit their ability to deal with people who are gaming the system.

      Of course some of the stories do sound as if it is currently the insurers who are gaming the system by kicking people out for mistakes that had nothing to do with their subsequent costs.

      Regulation might be able to find a happy medium here, but I think it would be tough to define what mistakes were really relevant to future costs.

      I do agree with you that single payer is best, but this problem does go away if we eliminate the ability to exclude (or rate) for pre-existing conditions, which is in the proposals I have see talked about so far.

      Numbers are like people . . . Torture them enough and they'll tell you anything.

      by Actuary4Change on Fri Jun 19, 2009 at 06:42:33 AM PDT

      [ Parent ]

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