Published in The News Tribune November 14, 2010
Bolstered by the election, Republicans are now renewing their commitment to repeal Obama’s health care reform act. The government’s “takeover of health care” was a bad idea, they say. Courts in the meantime are reviewing the Act’s constitutionality, with many arguing that the federal government cannot legally mandate insurance.
Not being a constitutional scholar, I’ll take a pass on this legal challenge and instead say why mandating insurance is exactly what the federal government should be doing.
Aside from a moral argument that everyone should have health insurance, the reason for mandating insurance is that without universal coverage, the health insurance market is unacceptably wasteful and unfair.
When health insurance is optional rather than mandatory (and I’m using “optional” here in a very loose sense), two problems emerge. First, people who expect to remain healthy may reasonably go without – as is true of many of my students. This may not immediately seem like a problem; in fact many of my students prefer being uninsured to having to buy expensive insurance.
But the “optional” nature of insurance creates a dilemma. When someone seeks to buy insurance, insurance companies aren’t presented with a random draw from the population. Rather, they are presented with someone less healthy than average, which means companies respond by jacking up the premium.
But insurance companies also face uncertainty about exactly how unhealthy (that is, expensive) their potential client is likely to be. And such uncertainty makes it difficult to know what to charge. An auto insurance company sets premiums by using individuals’ characteristics to judge the likelihood that they’ll trash their car. It then sets the premium accordingly. Twenty-two year old male driver with past accidents, driving a red sports car? Get out the checkbook.
But health care costs are harder to foresee than are car repairs. So insurance companies spend tons of money figuring out who is likely to have high health care costs and who isn’t. In fact about 25 percent of an individual’s heath insurance premium will reflect such costs; the 14 million people who get health insurance this way spend an extra $3 billion/year on these costs.
The group market is a bit better, but insurance companies still separately assess the risk of each group that they insure. They also continue to reassess this risk so they can adjust premiums to reflect changes in the group’s risk. All told we spend tens of billions of dollars each year on such expenses.
These huge administrative costs are a good part of the reason why health insurance in the US is so expensive. It’s hard to see dollars spent figuring out exactly how much an individual or group will cost you to be anything other than a huge waste.
The second problem with optional health insurance might now seem obvious: People who are likely to chalk up high health costs – the equivalent of those 22 year old males driving red sports cars — are going to find it hard to get insurance. This is the real scandal of a system where insurance is optional: Those who need insurance the most are often the very ones denied it.
Today insurance companies are denying coverage to about one out of every seven applicants because of their pre-existing conditions – in other words, because they are too risky. It’s one thing to refuse auto insurance to someone because of their poor driving record; it’s quite another to deny them health insurance because they have cancer, a congenital condition, or are pregnant.
This denial rate isn’t the fault of insurance companies, by the way. Like every other business, they’re just trying to make a profit. Blaming it on them lets legislators and citizens alike escape their role in allowing profit to be the motive in a market that is warped by it.
It’s possible that courts will decide that the Act violates the US Constitution, and we’ll return to square one in our health insurance dilemma. But is it the right thing to seek a system of universal health insurance? You bet. And our current costly and unfair health care system is the best testament to that.