Why Health Crisis, Not Life?
by John Goodman
Issue 139 - September 16, 2009
 Hold the insurance companies accountable. Remove them from
between you and your doctor. No discrimination for pre-existing
conditions. No dropping your coverage because you get sick. No more job
or life decisions made based on loss of coverage. No need to
change doctors or plans. No co-pays for preventive care. No
excessive out-of-pocket expenses, deductibles, or co-pays. No
yearly or lifetime cost caps on what insurance companies cover.
- Nancy Pelosi, Speaker of the House of Representatives
So, when is the last time you heard about a life insurance company
dropping someone's coverage because he got AIDS? Never happens. What
about jacking up someone's life insurance premiums after the insured has
a heart attack? Not a chance. How about dropping coverage just because a
person changes jobs or retires? No way. Ever heard of a life insurer
interfering with the doctor-patient relationship - say, pleading with
the providers to keep the patient on life support so the company can
delay paying the claim? Ridiculous.
Then why does the market for life insurance work so well while the
health insurance market seems so dysfunctional - even when the same
insurers are in both markets? Answer: because of politicians.
Politicians who think just like Nancy Pelosi thinks.
For some reason (not well understood by me) politicians have largely
left the life insurance market alone. As a result, in that market people
face real premium prices that reflect real risks. The market is
basically a free market and it works the way you would expect a real
market to work. It meets peoples' needs and does so at minimum cost.
The health insurance market, by contrast, is so heavily regulated that
it is a stretch to even call it a market. The small group market is a
complete creation of government policy. It wouldn't exist at all were it
not for government. Large companies basically can't buy health
insurance. They're all effectively self-insured, whether they realize it
or not. Basically, more than 90% of people with health insurance never
even see a real premium reflecting real risks.
The closest thing to a real market is the individual market. But because
the tax law discriminates against this type of insurance, people tend to
be in this market for short periods of time. With a small market share
to begin with and a transitory customer basis, insurers have weak
incentives to innovate and experiment. And even in this market
regulation is pervasive. (There are many mandated benefits and you can't
buy across state lines, for example.)
The absence of real prices creates perverse incentives on both sides of
the market. Buyers will tend to underinsure when they are healthy (and
don't plan on using many services) and overinsure when they are sick
(and plan on using a lot of services). On the seller side, insurers will
try to attract the healthy (on whom they make a profit) and avoid the
sick (on whom they incur losses). After enrollment, the plans will tend
to overprovide to the healthy (in order to keep the ones they have and
attract others) and underprovide to the sick (in order to encourage
their exodus and discourage any new ones).
When people pursue their own
interests in this health market they invariably impose costs on others and that
leads to innumerable social problems.
John Goodman is President and CEO/Kellye Wright Fellow at the National
Center for Policy Analysis
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