Friday, April 9, 2010

On Health-care Pt. 2: Risk Pools

Health-care reform has been a BigDeal(tm) lately, and I wanted to express some thoughts about it, the way it works and my general gripes about what is decidedly not real progress in my mind. In this series I will explore the benefits and failures of the current path of health-care reform in the United States. I will talk about insurance companies and risk pools; the difference between moral, political and economic decisions; and (in)efficiencies of scale in different levels of the industry.

Let's start with the basics.  The reforms so far cover the following problems:
  • The exclusion of individuals with "pre-existing conditions"
  • Lifetime caps on coverage
  • The availability of coverage for those who may not be able to afford it

As The Economist describes it:
Some 32m of the country’s 49m or so uninsured (most of those left out of the new scheme are undocumented aliens) would, starting in 2014, be required to take out insurance. The working poor and uninsured earning up to $88,000 a year get subsidies on a sliding scale so that they can afford to buy coverage; the poorest of all will be added to the rolls of Medicaid.

This effectively means that almost every American will have some sort of coverage, barring those who elect to forgo coverage and instead pay the fine. By my very basic calculations (34 AVG weekly hours x 22.47AVG hourly wage x 52 weeks [BLS]) there is probably a good chunk of the population that will benefit from the subsidy. I will put something more detailed together once I can get better data as to the distributions of these earners (I suspect a both a positive skew and fatter tails) and adjust for employer-provided benefits.

Insurance typically works by having covered individuals pay premiums to the insurance company, who is in charge of disbursing money to care providers for covered procedures and using their size to bargain for better deals. The care providers have an incentive to negotiate with insurers because they benefit from a single counter-party who is, in theory, more creditworthy and easier to deal with than hundreds of thousands of individuals. In addition, there may be economies of scale created by streamlining payments and the associated operational work. The cash held by insurance companies between when premiums are paid and payments for coverage are disbursed is called a "float," and insurance companies typically make money by investing the float in return-generating instruments. If aggregate premiums and the return from their investment exceed the payments made to care providers, there is an accounting profit for the insurer; therefore it is in the best interest of the insurer to make sure their policy holders are healthy, or at least healthier than the mean. This is why you often see things like gym-memberships, smoking cessation and nutritional assessment covered by health insurance. The healthier you are, the less the more profitable they are.

Unfortunately, the quest to have a healthier pool of insured participants often results in discrimination, which is what current legislation hopes to rectify. Insurance companies can be at a comparative advantage to others by improving their policy-holder pools, creating more efficient systems and negotiating harder with care providers. This too, unfortunately sometimes leads to unethical behavior. Insurers can become more profitable by finding ways to avoid disbursing monies for procedures, what is commonly known as the "pre-existing condition" problem.

Now that the risk pool is effectively the entire population, we are looking at a serious problem with this system: If the wealthy are more likely to be healthy, and the poor are more likely to be covered under the government program, private insurers are getting a comparatively better pool of participants, meaning they will inevitably be able to run a lower-cost operation than Medicaid. Not because the private sector is necessarily more efficient, although that may be the case, but because they have a healthier pool of policy-holders. What this system is effectively doing is privatizing gains and socializing losses, also known as the "heads I win, tails you lose," problem. Additionally, this will continue to reinforce the idea that the insurance companies are value creators, even if they may not be. There is no doubt in my mind that this amounts to an unequivocal give-away to the insurers. This is on top of the subsidized premiums from new policy holders that they are receiving.

Of course, this is not the only inequity in the system. Medicaid is backed by the full faith and credit of the US Government, so their cost of capital is the riskless rate. Additionally, they don't need to build a capital base since they can cover their costs from the general fund, where the additional taxes (hopefully) levied to cover these expenses will end up anyway. What this means is that private insurers must collect money ahead of expected payouts, the difference being a profit or loss. The government, on the other hand, is paying for this just-in-time, and letting the gains or losses affect the deficit/surplus. This puts them at an unfair advantage to the private operators in terms of costs of capital, which the insurers will surely whine about in an attempt to extract a tax credit.

For the following part, we will be focusing only on the federally mandated, minimum level of coverage.Of course expensive plans will cover things like private rooms while Medicaid might only covered a shared room, but let's focus on the bare-minimum care that we are all going to get. Just like schools, you always have the option of paying for a private one, but you are always allowed access to at least the same public one your neighbor's kids might go to.

You may be asking yourself, "Why is this all relevant?" The answer to that is that once the risk pool equals the population, the amount of federally-mandated coverage provided should be a constant, excluding the positive or negative effects of incentive programs from private-label insurers. This means that we are going to provide the same amount of coverage and it has to be paid for, no matter what. If the quality of care for the federally-mandated coverage is constant across the Medicaid and private-label risk-pools--which it should be since the providers are independent--the only difference is who pays for what share of the total. In the end it all must be paid for by premiums and subsidies. Following that logic, the minimum that you will pay, either through premiums or taxes, must at least equal the cost of coverage or else the insurers lose money or the government adds to the deficit, which the public taxes will eventually pay for anyway. Notice the "at least," which is important because if insurers lose money, they will simply raise rates or demand subsidies to make up for it, lest they go out of business and we all end up on the government risk pool anyways. However, if the insurers make money, they get to keep it. well, at least until we can negotiate lower premiums, but I wouldn't hold my breath. What this all amounts to is insurers taking a call option on care. If they don't make money, we make up the short-fall one way or another, if they make a profit, it's ka-ching! time for them. If you ask me, this looks less like evil socialism and more like shameless giveaways to big business.

Finally, if you were paying attention, you voiced a loud "ugh!" after reading "If the quality of care for the federally-mandated coverage is constant across the Medicaid and private-label risk-pools." Everyone knows that some coverage is better than others because some providers are better than others. The trend is toward equality, but that doesn't mean we are anywhere near it. If that is the case, it would imply multi-tiered care quality for basic care depending on your insurer. Does that sound progressive to you? Does segregating the poor and rich in the emergency room sound like that evil socialism slowly killing this great capitalist nation to you? The finer points of fairness here fall under economic, moral and ethical view points I don't feel like arguing, but I will say this:

From where I'm looking, this is definitely not progress.

On the next segment, I will cover more of the economic problems, unavoidable inefficiencies, and misalignment of interests in this system, as well elaborate on the argument for why I think is the smallest-government option for universal health-care is actually--spoiler alert!--a single risk-pool system.

No comments:

Post a Comment

Do the right thing.