Wednesday, September 16, 2009

Health care: a modest proposal

First, let me start out by stating that health care policy at the federal level is an unconstitutional violation of Article I, Section 8 of the U.S. Constitution, and of the Ninth and Tenth Amendments. Therefore, this conversation should not be held at the federal level. Because there are some large-scale issues relating to physicians, hospitals, and insurance companies, health care is best addressed at the state level. In addition, the State of Ohio (and other states) already regulate insurance, and pay out Medicaid, so the state level is a natural fit.

That said, most of us would agree that the health care insurance system suffers from two major problems: (1) some people are, frankly, uninsurable due to health conditions, and (2) some people and many small businesses cannot afford health care insurance.


The basic principle behind insurance of any kind is that it is designed to collectively spread risks that, at the individual level are unlikely to occur, but would be devastating if they did. Uninsurabilty occurs because a risk has become a certainty. The simplest way to explain this concept is with life insurance. Premiums for a $100,000 policy are very low for newborns, because the purpose of life insurance is to pay the insured's beneficiary when the insured dies. The likelihood of any newborn dying within the term of the policy (or before the whole-life policy has accumulated enough interest to pay the benefit) is very small. On the other hand, the premium on a policy on an 85-year-old insured will nearly match the death benefit. Human nature resists buying insurance until they perceive the risk to themselves -- thus, young adults are likely to resist buying individual health insurance, because they don't think they need it -- and quite often, they are right. They change their mind when they get sick, which then either makes them uninsurable, or requires (not allows, requires) the insurance company to charge a higher premium.

I have been told by those in the insurance industry, that health insurance itself is rarely profitable. That is, the benefits paid usually exceed the premiums received. The company will make its profit by investing premium dollars until they are needed to pay the claims.

Thus, an insurance company, when accepting a new insured, has to weigh the potential cost of paying out the benefits against the amount of premium it is likely to collect. Refusing a potential insured is simply stating that the pre-existing condition is so likely to result in expensive treatment, that the insurance company cannot afford to accept the risk. It's a business judgment, because if at all possible, the insurance company would have liked to have accepted the premium dollars.

The reason some insurance companies will accept risks that others do not, is that they can find profit with a different combination of risks from that of another insurance company.

However, it is clear that a few people will be uninsurable by any insurance company; and here is where the state government can step in. The state, through its Department of Insurance, and medical insurers should make an agreement. In exchange for the state reinsuring the insurance companies against high-risk individuals, the insurance companies will agree not to turn anyone down on the basis of medical risk. Part of the due diligence for the state will be to identify any insurance companies that will accept the risk; but the state will reimburse an insurance company for claims arising from an uninsurable condition.

The advantages of reinsurance are: (1) It does not erect a large bureaucracy to manage a program in competition with the insurance companies. (2) It allows individuals and businesses to select the insurance company and physician network that they choose. (3) It places the burden on the insurance company to manage claims.

The bureaucracy in the Department of Insurance* would consist of a few actuaries (the mathematicians who calculate the risks), a few underwriters, a few investigators, and some clerical staff. A division, perhaps, but much, much, less than a department.


The solution to this problem is even simpler. Provide tax incentives for small businesses to purchase group health insurance for its employees. If the small business still cannot afford the insurance, then its employees will be allowed to take tax deductions for purchasing individual policies. Unemployed individuals can do the same; or perhaps the state could introduce a temporary major medical program as part of unemployment compensation.

Everyone who wants coverage will thus be covered. Problem (mostly) solved.

There are at least two wrinkles that this "simple" proposal has not considered -- profiteering by the insurance companies or medical providers at state expense -- and the cost of the tax incentives.

I am not worried about profiteering, because the Department of Job & Family Services has had extensive experience dealing with profiteering risks among Medicaid providers. That knowledge can be brought to bear in setting policy for the reinsurance program.

I am suggesting that tax incentives and state reinsurance payments be used for major medical coverage only -- say, 80% of that which exceeds a $1,000 annual deductible (less for low-income families) for illnesses likely to require hospitalization, nursing care, expensive therapy, or expensive prescription drugs. It would not automatically pay for every office visit, every prescription, or items not related to critical illness. This will not please everyone (maybe not anyone), but it will keep the program manageable and fiscally responsible.

At least it is something to be considered in the debate.

* While the Department of Job & Family Services has experience with Medicaid, my proposal is of a technical nature, which the Department of Insurance is better equipped to handle.

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