The Treatment

Are Insurance Companies the Problem?

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The insurance industry is striking back. Attacked by the Democrats, harangued by activists, and reviled by the public, insurers have launched a major public relations campaign designed to make one simple point: It’s not their fault that American health care is so dysfunctional.

The proof, according to the industry, is in the numbers: Their profits account for less than 1 percent of what America spends on health care in a given year. And you know what? It’s a valid point.

If you took those profits and put them back into the health care system, the money would be enough to subsidize health insurance for a few million more people or to reduce premiums by a fraction for everybody who has insurance. But there’d still be a ton of work to do.

The issue, though, isn’t the profits that insurers make. It’s the actions insurers take to maximize those profits. While those actions surely aren’t the only problem with our health care system, they are among the most important ones--and, perhaps, the easiest to solve.

The quickest, surest way for insurers to boost profits is to avoid spending a lot of money on sick people. And, particularly in the individual insurance market, insurers can do that in any number of ways. They can charge sick people higher premiums, deny them coverage altogether, or--failing that--revoke their coverage after they start filing claims. That last part sounds pretty cruel and, potentially, illegal. As it happens, in some states it can be. But insurers have been known to do it anyway.

Even so, insurers can’t keep out all of the bad medical risks. Some people, after all, won’t get sick until after they sign on to a plan. And others will join through a large group, like an employer, making it impossible for insurers to block them or raise their rates individually. But smart insurers know how to make the most of these situations too. They can make it difficult for the chronically ill to get the care they need, by manipulating benefits and provider networks or making it more difficult to obtain authorization for treatments. And they can always jack up rates on blocks of business that have high expenses.

These practices help explain why people with serious medical problems so frequently find insurance inadequate or simply unavailable. But they don’t explain why health care generally is expensive for everybody, even the healthy--and why it’s getting expensive so much more quickly. Those problems are the result of the entire health care sector--doctors, hospitals, device makers, the drug industry--providing too much medical care or charging too high a price for it. The insurance industry likes to point this out and it is right to do so.

But, let's be clear, the insurance industry is not some random bystander to what's happening. Or, rather, it is--and that’s the problem. Insurers could spend a lot more time and money developing information systems, paying providers based on quality, promoting preventative care, and so on. While that wouldn't solve the cost problem--as Ezra Klein notes, there are some things insurers have neither the power nor legitimacy to do--it'd at least mitigate it. But taking these steps would require forgoing short-term profits: Spending money (or doing other things) today to save money tomorrow. And that's not something the insurance industry, on the whole, is inclined to do.

Why not? I don't think it's that their executives are greedy or soulless, although I'm sure a few of them are. Rather, it’s that insurers operate in a system that rewards greedy and soulless behavior. 

An insurer that offered great diabetes care would attract all the diabetics, forcing it to spend more money on care and charge higher premiums--and, in the process, lose customers. The same thing would happen to an insurer that accepted everybody with a pre-existing condition. And the insurer that spent money making sure its beneficiaries got great preventative care? Those beneficiaries would end up in great health ten years hence, at which point most would have switched carriers and taken the future savings with them.

To fix this, you could just get rid of the insurance industry altogether--or, at least, relegate it to a greatly diminished role--by creating some sort of single-payer health insurance scheme. That would be my personal preference, all else being equal.

A second-best solution would be to create a set of regulations that change the industry’s incentives, then have government make the long-term investments that the industry can't or won't. Such a solution would prohibit insurers from discriminating against the sick, impose an appeals process and other consumer protections, invest in the creation of electronic medical records, and develop scientifically based standards for medical care. In short, it would do the very things President Obama and the Democrats want to do with health care reform.

Not only could insurers survive in such a system. They might even be able to thrive. Some insurers already do innovative things with data and--once on a level playing field, with a fixed set of rules--they could use that data to benefit the sick rather than marginalize them. Who knows, insurers might even become the engine of innovation they claim to be already.

Representatives of the insurance industry have, at times, suggested they understand all of this. Even now, industry lobbyists say they support health care reform. But, notwithstanding the rhetoric, they've spent the last few months fighting the bills in Congress. That's just one more way in which they are part of the problem, rather than part of the solution.

Update: I revised the prose in a few places to clarify my meaning. Also, I want to emphasize that many insurer complaints--about both the rest of the health care industry and even the Democratic reform bills--remain perfectly legitimate, as I discussed several months ago.

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