Compromising Health Insurance

Senate group omitting Dem health goals by David Espo of the AP
Like bills drafted by Democrats, the proposal under discussion by six members on the Senate Finance Committee would bar insurance companies from denying coverage to any applicant. Nor could insurers charge higher premiums on the basis of pre-existing medical conditions.

[…]

Individuals would have a mandate to buy affordable insurance, but companies would not have a requirement to offer it.

Let's walk through what it would mean if insurers could not deny coverage to any applicant and could not charge higher premiums on the basis of preëxisting medical conditions.

The out-lays of insurers would of course increase, so the they will do one and likely both of two things:

  • Increase premiums for all subscribers: Those without preëxisting conditions would pay more than previously, to off-set the out-lays for those with preëxisting conditions.
  • Reduce coverage for all subscribers: The contractual liabilities of insurance companies would be reduced in the case of conditions that could be preëxisting, so that subscribers who developed such conditions after subscription would receive less treatment or face greater out-of-pocket expense.
So the buck-per-bang price of insurance (and probably the absolute price) would increase. This would occur regardless of whether subscription were mandatory, but I think that the consequent increase in price would be greater were coverage not mandatory.

In the absence of requiring people to purchase coverage, fewer people would buy insurance voluntarily. Those most likely to reduce their demand for insurance would be the less affluent and those who perceived themselves as relatively healthy. A significant share of the latter would indeed be relatively healthy, and their departure would mean that the average out-lay per subscriber would increase, which would push-up costs. The departure of the less affluent would tend to push-down out-lays, as the less affluent tend to lead less healthy life-styles, but it would be unreasonable to expect the less affluent to depart in sufficient numbers to restore the lower price, and I'm not aware of anyone advocating a strategy of pricing the poor out of the insurance market.

In fact, without compulsory subscription, it becomes less reasonable to subscribe until one actually needs treatment. Coverage would no longer function as insurance because it needn't be purchased on a precautionary basis. Instead, subscription would simply be a buy-in for some programme of medical care. When the expected cost of needed medical care were less than the buy-in price, one should not purchase a subscription; when the expected cost of needed care were greater, one should buy a subscription.

The proposal is to make subscription compulsory, in which case it's not clear why insurance companies should continue to be involved at all. Insurance premiums would have been replaced with a tax (regardless of whether it were called a tax or called a user fee or called a premium), and the insurance companies would be functioning as extensions of the state. Possibly a bona fide insurance could be offered to supplement coverage provided under the proposal, but it remains none-the-less unclear what legitimate reason there might be for using insurance companies to collecting a tax or to reïmburse those who provided state-mandated coverage. I'm inclined to interpret the intent in part to be to buy-off the insurance companies, giving them what will seem a guaranteed source of revenue, and in part to give a private-sector façade to a state monopsony.

Returning to the issue of the increase in buck-per-bang price, a consequence is going to be that most people who would insure in the absence of the proposed measures are going to have less coverage in their presence, unless they are required to have as much or more coverage than before, at the greater prices implied by not imposing higher fees on those with preëxisting conditions.

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