The market for health insurance is different from other markets. Government is heavily involved and would become more so under reform plans now being debated. Information often is shielded from participants, whose behavior can be far from transparent. Experts agree that health insurance markets need to be closely watched, as health care reform assumes a place on the national agenda after a new President and Congress are elected in November.
"The insurance industry of today has really gotten out of the business of insurance," contends John Rivers, President and Chief Executive Officer of the Arizona Hospital and Healthcare Association. "They are in the business of risk selection. They do not cover a broad population, sick and healthy, and then spread the cost of that over the entire group. "
Mark V. Pauly, professor of health care systems at the University of Pennsylvania's Wharton School, said that designing a market that meets the needs of high-risk individuals is a major challenge for health care reform in the United States.
"Unregulated private firms that sell insurance to individuals will do what an economist would expect: if you are out of shape or have a chronic condition and are sure to incur high costs, the insurance company will quote you a higher premium than if you are in excellent health," Pauly said. "So a serious question is how to design your reformed insurance so high-risk people can afford to obtain coverage."
Government and health insurance markets
In the weeks leading up to the November 4 U.S. election, Knowledge@W. P Carey is exploring issues related to health care reform. On the issue of markets for health insurance, insights were sought from members of the advisory board of the School of Health Management and Policy at the W. P. Carey School of Business, school faculty, and Professor Pauly, who presented his perspective on health care reform in a major policy briefing delivered at the W. P. Carey School of Business last year.
Providing coverage for high-risk individuals is only one of a number of key issues related to insurance markets that have come to the fore in the debate over health care reform. Others include how to cover the uninsured without undermining the market for private health insurance and how to design insurance subsidies so they reach the people who are the target of the program.
When government gets involved, either by offering its own plan -- as Senator Barack Obama has suggested, or by offering tax credits to all taxpayers -- as Senator John McCain has proposed, the market for private health insurance changes, experts agree.
Expanded coverage and unintended consequences
One basic problem, according to Pauly, is that when the government offers health insurance, it often finds that its program attracts not only the uninsured, but also some people who already have private insurance. These individuals find it to their advantage to drop their private insurance and sign up for the government backed program.
"Depending on the design of the thing, it's hard to keep these two groups separate," Pauly said. "The buzzword here is target efficiency. That means you are not getting public money to the people whose behavior you most need to change."
Bradford Kirkman-Liff, professor in the School of Health Management and Policy at W. P. Carey, said employers are often the ones who respond to the presence of a government subsidized program.
"Any program that covers more of the uninsured may motivate employers to stop providing health insurance to their employees because they know the employees can get it through another program," Kirkman-Liff said.
Few choices for policymakers
The options for making subsidized health insurance more target efficient are limited, according to Pauly. "You either make it unattractive or hard to sign up for, which are things you wouldn't ordinarily want to do," he said.
According to Rivers, another strategy is not to allow people access to subsidized insurance unless they have been uninsured for a set time period, usually six months to a year. This requirement that people "go bare," as it is called, is used by some state Medicaid programs according to Rivers.
Paulina Vasquez-Morris, chairman of the Maricopa Health District Board, contends that as a matter of fairness, people who have been paying for private health insurance, usually through an employer, should not be barred from government subsidized insurance.
"To have a plan that achieves equality, you have to give them that option," Vasquez-Morris said.
Risks to individuals and markets
Pauly calls the problem of high-risk individuals the "Excedrin headache topic in health care." In an unregulated market, people in poor health or with chronic conditions are vulnerable to being priced out of health insurance.
On the other hand, if government requires private insurers to take everyone, then the companies face what economists call "adverse selection."
Adverse selection occurs when one party to a transaction has more information than the other: In this case, the individual is aware of his or her health risk, but the insurer is not. Pauly cites the example of a person being taken to the hospital by ambulance and calling on a cell phone to say, "Now is the time I really want to sign up for health insurance."
Marjorie Baldwin, director of the School of Health Management and Policy, said, "In the worst case scenario, adverse selection can just wipe out a health insurance market, as premiums keep going up and people who are well drop out. It becomes unaffordable for anyone."
Large pools and subsidies
The typical solution for adverse selection is to have insurance pools that are large enough to carry the cost of care for high-risk individuals, according to Baldwin. She said that McCain's idea of having a national market for non-group insurance -- effectively ending state licensing of insurers -- would be a step toward creating such a large pool.
Pauly suggests a different approach: offering subsidies to high-risk people and allowing insurers to charge higher premiums. "Then insurers would be eager to sign up high-risk persons, instead of trying to avoid them or being forced by the government to take on the risk at a community rate," he said.
Benton Davis, chief executive officer of United Health Care, agrees that government needs to step in to deal with high-risk people. There are individuals who would incur such high costs that if "you put them in any pool and they would use way too many resources," Davis said. "Those are the ones, I think, that we need to find a broader solution for that everyone needs to participate in."
A role for government
Baldwin said that government subsidies for high-risk people are essential if health reform includes a mandate that insurers cover everyone. Mandated coverage would be a huge burden on insurers and would result in very high premiums for everyone, she said.
"If you mandate that you have to take everyone, then you have to have some way of subsidizing sick people," Baldwin said.
Davis is skeptical about Obama's plan to have a government-sponsored agency that would offer insurance to people who would have difficulty attaining it from the private market.
"I think there is a role for improved governmental leadership in health care," said Davis. "I do not think that role is to become the marketplace. I think the role is to facilitate the market and to remove obstacles and to do things only the government can do."
Similarly, Davis does not support McCain's proposal to abolish the tax exclusion individuals now get for employer-paid health insurance and replace it with a tax credit for those who purchase insurance.
"We need to create ways to stimulate the purchase of health insurance from any source," said Davis. "We need to find a number of ways to incent people to buy health care and make it painful for those who don't."
- Actions of government affect the market for health insurance. Effective health care reform needs to take into consideration the consequences policies will have on the functioning of health insurance markets.
- Deciding how to provide coverage for high-risk individuals is a major challenge for health care reform. Options include placing high-risk individuals in a pool that is large enough to absorb the burden or providing direct subsidies that would allow them to purchase insurance.
- An unintended consequence of offering subsidized coverage to the uninsured is that people who already have private insurance might drop their coverage to join the subsidized program.
- The options for discouraging insured people from dropping their coverage to join a subsidized program are limited. One way would be to make enrollment difficult, while another would be to design a program that is so unattractive that people would not want to join.