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)
- If you have a history that predicts medical problems you can't get reasonably priced medical insurance unless you have a job.
- There is an incentive for people to cheat on their insurance forms so that they can get insurance.
- Insurers must investigate people who have claims to find out if they cheated.
- 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.
- 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?
- Universal coverage. If the company's can't choose who to accept and reject, then they obviously can't rescind.
- 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.
- 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.
- 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.